SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 1995 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 1, 1995, there were 53,000,000 shares of the Registrant's Common
Stock outstanding, all of which were owned by American Financial Group, Inc.
Page 1 of 16
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 30, December 31,
1995 1994
Assets
Cash and short-term investments $ 130,998 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $5,037,800 and $4,336,700) 4,929,560 4,629,633
Available for sale - at market
(amortized cost - $2,123,959 and $1,938,853) 2,205,559 1,862,653
Other stocks - principally at market
(cost - $130,808 and $137,106) 205,208 208,706
Investment in affiliates 836,523 832,637
Loans receivable 633,314 641,964
Real estate and other investments 163,761 154,262
8,973,925 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 945,884 902,063
Agents' balances and premiums receivable 351,293 363,156
Other receivables 201,988 197,119
Prepaid expenses, deferred charges and other assets 450,823 410,657
Cost in excess of net assets acquired 175,353 175,866
$11,230,264 $10,550,051
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 3,008,442 $ 2,916,985
Unearned premiums 873,932 824,691
Annuity policyholders' funds accumulated 4,787,658 4,618,108
Long-term debt:
Direct obligations of AFC Parent Company 355,042 490,065
Obligations of AFC subsidiaries:
Great American Holding Corporation 199,321 359,185
American Annuity Group, Inc. 168,093 183,242
Other subsidiaries 64,339 74,255
Payable to American Premier Underwriters, Inc. 526,381 -
Accounts payable, accrued expenses and other
liabilities 593,257 579,151
Minority interest 124,734 105,506
10,701,199 10,151,188
Mandatory Redeemable Preferred Stock (at
redemption value) 2,880 2,880
Other Preferred Stock (redemption value - $278,719) 168,484 168,484
Common Stock without par value 9,625 904
Retained earnings 254,476 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 93,600 3,500
$11,230,264 $10,550,051
2
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Income:
Property and casualty insurance premiums $376,158 $338,814 $ 725,291 $ 651,863
Investment income 159,954 143,614 312,288 284,684
Realized gains on sales of securities 956 8,187 4,432 23,143
Equity in net earnings (losses) of
affiliates 19,675 (9,472) 42,576 12,222
Gains (losses) on sales of affiliates (442) 1,683 (442) 1,694
Other income 24,869 25,178 50,217 58,045
581,170 508,004 1,134,362 1,031,651
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 269,651 226,360 513,294 457,377
Commissions and other underwriting
expenses 124,884 107,721 244,495 213,389
Benefits to annuity policyholders 64,259 60,201 128,521 119,424
Interest charges on borrowed money 36,980 26,563 66,109 58,856
Other operating and general expenses 58,496 55,132 115,941 115,566
554,270 475,977 1,068,360 964,612
Earnings before income taxes and
extraordinary items 26,900 32,027 66,002 67,039
Provision for income taxes 9,637 8,768 18,874 17,087
Earnings before extraordinary items 17,263 23,259 47,128 49,952
Extraordinary items, net of income taxes (3,048) (744) (3,048) (16,437)
Net Earnings $ 14,215 $ 22,515 $ 44,080 $ 33,515
3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended June 30,
1995 1994
Operating Activities:
Net earnings $ 44,080 $ 33,515
Adjustments:
Extraordinary losses from retirement of debt 3,048 16,437
Depreciation and amortization 15,028 15,567
Benefits to annuity policyholders 128,521 119,424
Equity in net earnings of affiliates (42,576) (12,222)
Changes in reserves on assets (670) 10,517
Realized gains on investing activities (3,906) (32,281)
Increase in reinsurance and other receivables (37,864) (113,536)
Increase in prepaid expenses, deferred charges
and other assets (56,811) (59,635)
Increase in insurance claims and reserves 138,825 159,583
Increase (decrease) in other liabilities (77,379) 704
Increase in minority interest 5,947 2,611
Dividends from investees 11,469 10,502
Other, net (4,570) (1,641)
123,142 149,545
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (758,905) (980,800)
Equity securities (298) (1,946)
Investees and subsidiaries (13,327) (23,852)
Real estate, property and equipment (18,206) (14,612)
Maturities and redemptions of fixed maturity
investments 114,737 238,761
Sales of:
Fixed maturity investments 232,710 504,144
Equity securities 11,064 69,592
Investee and subsidiaries 43,697 27,621
Real estate, property and equipment 3,166 2,422
Decrease (increase) in other investments (5,541) 10,424
(390,903) (168,246)
Financing Activities:
Annuity receipts 245,111 210,630
Annuity surrenders, benefits and withdrawals (214,603) (172,493)
Additional long-term borrowings 80,590 163,397
Reductions of long-term debt (392,549) (138,738)
Borrowings from American Premier 549,000 -
Reductions of payable to American Premier (36,000) -
Repurchases of capital stock (147) (4,466)
Exercise of stock options 8,721 -
Cash dividends paid (12,699) (16,708)
227,424 41,622
Net Increase (Decrease) in Cash and Short-term Investments (40,337) 22,921
Cash and short-term investments at beginning of period 171,335 167,950
Cash and short-term investments at end of period $130,998 $190,871
4
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Merger On April 3, 1995, American Financial Corporation ("AFC") merged
with a newly formed subsidiary of American Premier Group, Inc., another
new company formed to own 100% of the common stock of both AFC and
American Premier Underwriters, Inc. ("American Premier"). Subsequently,
American Premier Group changed its name to American Financial Group, Inc.
to reflect its core property and casualty insurance and annuity
businesses. In the transaction, Carl H. Lindner and members of his
family, who owned 100% of the Common Stock of AFC, exchanged their AFC
Common Stock for approximately 55% of American Financial Group voting
common stock. Former shareholders of American Premier, including AFC and
its subsidiaries, received shares of American Financial Group stock on a
one-for-one basis. No gain or loss was recorded on the exchange of
shares.
AFC will continue to be a separate SEC reporting company with publicly
traded debentures and preferred stock. Holders of AFC Series F and G
Preferred Stock were granted voting rights equal to approximately 21% of
the total voting power of AFC shareholders immediately prior to the
merger.
B. Accounting Policies
Basis of Presentation The accompanying consolidated financial statements
for American Financial Corporation and subsidiaries are unaudited;
however, management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein) necessary for
fair presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation
or acquisition are included in the consolidated financial statements.
AFC's ownership of subsidiaries and significant affiliates with publicly
traded shares was as follows:
June 30, December 31,
1995 1994 1993
American Annuity Group, Inc. ("AAG") 80% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Financial Group, Inc. ("AFG") 26% - -
American Premier Underwriters, Inc. (a) 42% 41%
Chiquita Brands International, Inc. 39% 46% 46%
Citicasters Inc. 37% 37% 20%
General Cable Corporation - (b) 45%
<FN>
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in June 1994.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AFC has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as (i)
"trading" and
5
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
reported at fair value with unrealized gains and losses included in
earnings if the securities are bought and held principally for selling in
the near term and (ii) as "available for sale" and reported at fair value,
with unrealized gains or losses reported as a separate component of
shareholders' equity if the debt or equity securities are not classified
as held to maturity or trading. Only in certain limited circumstances,
such as significant issuer credit deterioration or if required by
insurance or other regulators, may a company change its intent to hold a
certain security to maturity without calling into question its intent to
hold other debt securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized over
their expected average lives using the interest method. Gains or losses
on sales of securities are recognized at the time of disposition with the
amount of gain or loss determined on the specific identification basis.
When a decline in the value of a specific investment is considered to be
other than temporary, a provision for impairment is charged to earnings
and the carrying value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are stated
primarily at the aggregate unpaid balance.
Investment in Affiliates Investments in securities of 20%- to 50%-owned
companies are carried at cost, adjusted for AFC's proportionate share of
their undistributed earnings or losses. Investments in less than
20%-owned companies are accounted for by the equity method when, in the
opinion of management, AFC can exercise significant influence over
operating and financial policies of the affiliate.
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries
and investees (purchased subsequent to October 1970) over AFC's equity in
the underlying net assets ("goodwill") is being amortized over 40 years.
The excess of AFC's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative goodwill")
has been allocated to AFC's basis in these companies' fixed assets,
goodwill and other long-term assets and is amortized on a 10- to 40-year
basis.
Insurance As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
Reinsurance In the normal course of business, AFC's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFC's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsurance
policies. AFC's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. AFC's insurance subsidiaries
also assume reinsurance from other companies. Income on reinsurance
assumed is recognized based on reports received from ceding reinsurers.
6
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Policy Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related to the
production of new business are deferred and included in "Prepaid expenses,
deferred charges and other assets". For the property and casualty
companies, the deferral of acquisition costs is limited based upon their
recoverability without any consideration for anticipated investment
income. Deferred policy acquisition costs ("DPAC") are charged against
income ratably over the terms of the related policies. For the annuity
company, DPAC is amortized, with interest, in relation to the present
value of expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for
unpaid claims and for expenses of investigation and adjustment of unpaid
claims are based upon (a) the accumulation of case estimates for losses
reported prior to the close of the accounting period on the direct
business written; (b) esti-mates received from ceding reinsurers and
insurance pools and associations; (c) estimates of unreported losses based
on past experience and (d) estimates based on experience of expenses for
investigating and adjusting claims. These liabilities are subject to the
impact of changes in claim amounts and frequency and other factors. In
spite of the variability inherent in such estimates, management believes
that the liabilities for unpaid losses and loss adjustment expenses are
adequate. Changes in estimates of the liabilities for losses and loss
adjustment expenses are reflected in the Statement of Earnings in the
period in which determined.
Premium Recognition Premiums are earned over the terms of the policies on
a pro rata basis. Unearned premiums represent that portion of premiums
written which is applicable to the unexpired terms of policies in force.
On reinsurance assumed from other insurance companies or written through
various underwriting organizations, unearned premiums are based on reports
received from such companies and organizations.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in "annuity
policyholders' funds accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to expense
and decreases for surrender charges are credited to other income.
Income Taxes AFC files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries. Deferred income taxes are
calculated using the liability method. Under this method, deferred income
tax assets and liabilities are determined based on differences between
financial reporting and tax bases and are measured using enacted tax
rates. Deferred tax assets are recognized if it is more likely than not
that a benefit will be realized.
Benefit Plans AFC's Employee Stock Ownership Retirement Plan ("ESORP") is
a noncontributory, trusteed plan which invests in securities of AFC and
affiliates for the benefit of the employees of AFC and certain of its
subsidiaries. The ESORP covers all employees of participating companies
who are qualified as to age and length of service. Contributions are
discretionary by the directors of participating companies and are charged
against earnings in the year for which they are declared.
7
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. AFC also provides postemployment benefits
to former or inactive employees (primarily those on disability) who were
not deemed retired under other company plans. The projected future cost
of providing these benefits is expensed over the period the employees
qualify for such benefits.
In connection with the 1995 merger, full vesting was granted to holders of
units under AFC's Book Value Incentive Plan and the plan was terminated.
Cash payments, which were made in April to holders of the units, were
accrued at December 31, 1994.
Debt Discount Debt discount and expenses are being amortized over the
lives of respective borrowings, generally on the interest method.
Statement of Cash Flows For cash flow purposes, "investing activities"
are defined as making and collecting loans and acquiring and disposing of
debt or equity instruments and property and equipment. "Financing
activities" include obtaining resources from owners and providing them
with a return on their investments, borrowing money and repaying amounts
borrowed. Annuity receipts, benefits and withdrawals are also reflected
as financing activities. All other activities are considered
"operating". Short-term investments having original maturities of three
months or less when purchased are considered to be cash equivalents for
purposes of the financial statements.
C. Sales of Affiliates In April 1995, AFC sold 3.2 million shares of
Chiquita common stock to American Premier for $43.7 million, realizing a
$442,000 loss on the sale.
In June 1994, AFC sold its investment in General Cable common stock to an
unaffiliated company for $27.6 million in cash. AFC realized a
$1.7 million pretax gain on the sale (excluding its share of American
Premier's loss on its sale of securities of General Cable).
D. Segments of Operations Through subsidiaries, AFC is engaged in several
financial businesses, including property and casualty insurance, annuities
and portfolio investing. AFC also owns significant portions of the voting
equity securities of certain companies (affiliate corporations - see Note
E). The following table (in thousands) shows AFC's revenues by
significant business segment. Intersegment transactions are not
significant.
Six months ended June 30,
1995 1994
Revenues
Property and casualty insurance:
Underwriting $ 725,291 $ 651,863
Investment and other income 148,231 158,938
873,522 810,801
Annuities (*) 197,656 186,590
Other 20,608 22,038
1,091,786 1,019,429
Equity in net earnings of affiliates 42,576 12,222
$1,134,362 $1,031,651
<FN>
(*) Represents primarily investment income and realized gains.
8
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Affiliates Investment in affiliates represents AFC's
ownership of securities of certain companies. All of the companies named
in the following table are subject to the rules and regulations of the
SEC. Market value of the investments was approximately $915 million and
$890 million at June 30, 1995 and December 31, 1994, respectively. AFC's
investment (and common stock ownership percentage) in these affiliates was
as follows (dollars in thousands):
Investment (Ownership %)
June 30, December 31,
1995 1994
American Financial Group $548,233 (26%) $ -
American Premier - 525,927 (42%)
Chiquita 216,446 (39%) 237,015 (46%)
Citicasters 71,844 (37%) 69,695 (37%)
$836,523 $832,637
In addition to owning the common stock of AFC, American Financial Group
owns all of the common stock of American Premier, a specialty property and
casualty insurance company. Chiquita is a leading international marketer,
processor and producer of quality food products. Citicasters owns and
operates radio and television stations.
As discussed in Note A, AFC received shares of American Financial Group in
exchange for its American Premier stock on a one-for-one basis in April
1995.
Summarized financial information for AFC's affiliates follows (in
millions):
Three months
ended
American Financial Group June 30, 1995
Revenues $1,006
Income before Extraordinary Item 33
Extraordinary Item 1
Net Earnings 34
Three months Six months
ended ended
American Premier March 31, 1995 June 30, 1994
Revenues $433 $828
Income (Loss) from Continuing Operations 16 (39)
Discontinued Operations - (2)
Net Earnings (Loss) 16 (41)
American Premier's 1994 results included a $73.5 million loss on the sale
of securities of General Cable.
Six months ended June 30,
Chiquita 1995 1995(*)
Net Sales $2,114 $2,063
Operating Income 153 152
Income before Extraordinary Item 72 67
Extraordinary Item (5) (23)
Net Income 67 44
<FN>
(*) Amounts for 1994 were reclassified by Chiquita to reflect the
reconsolidation of its Meat Division.
9
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six months ended June 30,
Citicasters 1995 1994
Net Revenues $66 $109
Operating Income 16 26
Net Earnings 7 3
In the third and fourth quarters of 1994, Citicasters sold four network-
affiliated television stations for $355 million in cash and a warrant to
purchase common stock of the purchaser. The proceeds were used to reduce
debt and repurchase shares of common stock.
F. Long-Term Debt Long-term debt of American Financial Corporation (Parent
Company) consisted of the following (in thousands):
June 30, December 31,
1995 1994
9-3/4% Debentures due 2004 $252,765 $203,759
10% Debentures due 1999
(including Series A) 89,620 89,620
12% Debentures due 1999
(including Series A and B) - 120,463
12-1/4% Debentures due 2003 - 51,556
Other 12,657 24,667
$355,042 $490,065
In May 1995, AFC issued $50 million of 9-3/4% Debentures in a private
placement offering.
At June 30, 1995, sinking fund and other scheduled principal payments on
debt for the balance of 1995 and the subsequent five years were as follows
(in thousands):
Parent
Company Subsidiaries Total
1995 $ - $ 50,575 $ 50,575
1996 - 1,800 1,800
1997 5,620 16,946 22,566
1998 - 169,334 169,334
1999 93,895 1,917 95,812
2000 - 7,036 7,036
Debentures purchased in excess of scheduled payments may be applied to
satisfy any sinking fund requirement. The scheduled principal payments
shown above assume that debentures purchased are applied to the earliest
scheduled retirements.
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Payable to American Premier Underwriters, Inc. In furtherance of the
previously announced plan to use American Premier cash following the
merger to retire debt, AFC (i) repaid $187 million of borrowings under its
bank credit agreement in April 1995 and (ii) redeemed all of its
outstanding 12% and 12-1/4% Debentures in May 1995, using funds borrowed
under a new $675 million subordinated line of credit with American
Premier. Borrowings under the credit line bear interest at 11-5/8% and
convert to a four-year term loan in March 2005. At June 30, 1995, AFC had
borrowed $513 million under the credit agreement. Accrued interest of
$13.4 million at June 30, 1995, was paid in July 1995.
H. Mandatory Redeemable Preferred Stock At June 30, 1995 and December 31,
1994, there were 274,242 shares of $10.50 par value Series E Preferred
Stock outstanding. These shares are nonvoting, cumulative and are
required to be retired, at par, in December 1995.
I. Other Preferred Stock Under provisions of both the Nonvoting
(21.1 million shares authorized, including the Mandatory Redeemable
Preferred Stock) and Voting (17.0 million shares authorized, 14.1 million
shares outstanding) Cumulative Preferred Stock, the Board of Directors may
divide the authorized stock into series and set specific terms and
conditions of each series. At June 30, 1995, the outstanding shares of
other preferred stock consisted of the following:
June 30, December 31,
1995 1994
Series F - $20.00 liquidation value per share;
annual dividends per share $1.80; 10% may
be retired annually at AFC's option in
1995 and 1996. 13,744,754 13,744,754
Series G - $10.50 liquidation value per share;
annual dividends per share $1.05; may be
retired at AFC's option. 364,158 364,158
J. Common Stock In connection with the April 1995 merger discussed in Note
A, AFC issued 762,500 common shares upon exercise of stock options and
increased the number of authorized common shares to 53.5 million. At June
30, 1995, American Financial Group owned all 53.0 million outstanding
shares of AFC's Common Stock.
K. Extraordinary Items Extraordinary items consisted of the following (in
thousands):
1995 1994
Loss on AFC's prepayment of debt ($1,713) $ -
Premium paid on AFC debentures retired in
exchange offer - (6,454)
Gain (loss) on subsidiary's prepayment of debt
(net of minority interest of ($5) and $142) 30 (947)
Share of loss on affiliate's prepayment of debt
(net of minority interest of $24 and $139
and income tax benefit of $65 and $374) (1,365) (9,036)
($3,048) ($16,437)
11
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Cash Flows - Fixed Maturity Investments "Investing activities" related to
fixed maturity investments in AFC's Statement of Cash Flows consisted of
the following (in thousands):
Held to Available
1995 Maturity For Sale Total
Purchases $327,946 $430,959 $758,905
Maturities and paydowns 68,814 45,923 114,737
Sales 9,040 223,670 232,710
1994
Purchases $645,767 $335,033 $980,800
Maturities and paydowns 107,100 131,661 238,761
Sales 7,781 496,363 504,144
Securities classified as "held to maturity" having an amortized cost of
$9.0 million and $8.5 million were sold in 1995 and 1994, respectively,
due primarily to deterioration in the issuer's creditworthiness.
M. Pending Legal Proceedings Counsel has advised AFC that there is little
likelihood of any substantial liability being incurred from any litigation
pending against AFC and subsidiaries.
12
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC is organized as a holding company with almost all of its operations being
conducted by subsidiaries and affiliates. The parent corporation, however,
has continuing expenditures for administrative expenses and corporate services
and, most importantly, for the payment of principal and interest on borrowings
and dividends on AFC Preferred Stock. Therefore, certain analyses are best
done on a parent only basis while others are best done on a total enterprise
basis. In addition, since most of its businesses are financial in nature, AFC
does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional ratios and
financial analysis tests are not meaningful.
MERGER
As discussed in Note A to the financial statements, on April 3, 1995, AFC
merged with a newly formed subsidiary of American Financial Group, Inc.,
another new company formed to own both AFC and American Premier. Following
the merger, AFC borrowed funds from American Premier to retire $187 million of
its bank debt and $185 million of its publicly traded debt. (See "Sources of
Funds" below).
LIQUIDITY AND CAPITAL RESOURCES
Ratios The ratio of AFC's (parent only) long-term debt to equity (excluding
Mandatory Redeemable Preferred Stock) was .67 at June 30, 1995, compared to
1.24 at December 31, 1994. AFC's ratio of earnings to fixed charges on a
total enterprise basis was 1.58 for the first six months of 1995 compared to
1.69 for the entire year of 1994; ratios of earnings to fixed charges and
preferred dividends were 1.34 and 1.40 for the same periods.
Sources of Funds In April 1995, AFC entered into a subordinated credit
agreement with American Premier under which it can borrow up to $675 million.
The credit line bears interest at 11-5/8% and converts to a four-year term
loan in March 2005 with scheduled principal payments to begin in April 2005.
During April and May 1995, AFC borrowed $549 million under the agreement using
the proceeds for debt retirements, capital contributions to subsidiaries and
other corporate purposes. In June 1995, AFC repaid $36 million under the
agreement using proceeds from $50 million of 9-3/4% Debentures issued during
the second quarter in a private placement offering.
A wholly-owned subsidiary, Great American Holding Corporation ("GAHC"), has a
revolving credit agreement with several banks under which it can borrow up to
$300 million. The credit line converts to a four-year term loan in December
1996 with scheduled principal payments to begin in March 1997. Borrowings
under the credit line are made by GAHC and are advanced to AFC. The line is
guaranteed by AFC and secured by 50% of the stock of Great American Insurance
Company ("GAI"). AFC had no outstanding borrowings under the agreement at
June 30, 1995, and $160 million outstanding at December 31, 1994.
13
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments Significant portions of equity and, to a lesser extent, fixed
income investments are concentrated in a relatively limited number of major
positions. This approach allows management to more closely monitor these
companies and the industries in which they operate. Some of the investments,
because of their size, may not be as readily marketable as the typical small
investment position. Alternatively, a large equity position may be attractive
to persons seeking to control or influence the policies of a company. While
management believes this investment philosophy will produce higher overall
returns, such concentrations subject the portfolio to greater risk in the
event one of the companies invested in becomes financially distressed.
Approximately 95% of the bonds and redeemable preferred stocks held by AFC
were rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at June 30, 1995. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated and non-investment grade.
RESULTS OF OPERATIONS
General Pretax earnings in the first six months of 1995 were slightly lower
than the comparable 1994 period, as several changes offset each other,
including (i) a $14 million decrease in underwriting results of the property
and casualty insurance segment resulting from weather-related catastrophe
losses, principally from hail storms in Texas, in the second quarter of 1995,
(ii) a $28 million decrease in realized gains from the sales of securities,
affiliates and other investments and (iii) increases of $9 million in benefits
to annuity policyholders and $7 million in interest on borrowed money due
primarily to an increase in the average outstanding liabilities. These items
were substantially offset by a $28 million increase in investment income and a
$28 million loss in the second quarter of 1994 representing AFC's share of
American Premier's loss on the sale of securities of General Cable.
Pretax earnings in the second quarter of 1995 decreased $5.1 million (16%)
from the second quarter of 1994. Major items contributing to the decline
include (i) a $23 million decrease in underwriting results of the property and
casualty insurance segment resulting from hail storms in Texas, (ii) increases
of $4 million in benefits to annuity policyholders and $10 million in interest
on borrowed money due primarily to an increase in the average outstanding
liabilities and (iii) a $9 million decrease in realized gains from the sales
of securities, affiliates and other investments. These items were
substantially offset by an increase of $29 million in equity in earnings of
affiliates and a $16 million increase in investment income.
Property and Casualty Insurance Underwriting profitability is measured by the
combined ratio which is a sum of the ratios of underwriting expenses, losses,
and loss adjustment expenses to premiums. When the combined ratio is under
100%, underwriting results are generally considered profitable; when the ratio
is over 100%, underwriting results are generally considered unprofitable. The
combined ratio does not reflect investment income, other income or federal
income taxes.
The combined underwriting ratio (based on generally accepted accounting
principles) of GAI and its property and casualty insurance subsidiaries was
104.5% and 105.2% for the six months and second quarter of 1995; comparable
ratios for the same
14
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
periods of 1994 were 102.6% and 98.2%. The deterioration in underwriting
results was primarily due to losses of $15.3 million ($15.8 before
reinsurance) from hail storms in Texas in the second quarter of 1995. This
loss represented 2.1% and 4.1% of Great American's combined ratio for the six
months and second quarter of 1995, respectively.
Earned premiums increased $73 million (11%) and insurance expenses increased
$87 million (13%) during the first six months of 1995. The increase in
premiums was due to an increase in sales of specialized niche products and
workers' compensation insurance.
Investment Income Investment income increased $28 million (10%) from 1994 due
to an increase in average investments held.
Realized Gains Realized capital gains have been an important part of AFC's
return on its investments in marketable securities. Individual securities are
sold creating gains and losses from time to time as investment strategies
change or as market opportunities appear to present optimal conditions.
Affiliate Corporations Equity in net earnings of affiliate corporations
(companies in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the affiliates' earnings and losses.
AFC's equity in net earnings (losses) of affiliate corporations in the second
quarter of 1994 includes its share ($28 million) of American Premier's loss on
the sale of securities of General Cable.
Gain (Losses) on Sales of Affiliates The loss on sale of affiliates in 1995
represents a pretax loss on the sale of Chiquita common stock. The gain in
1994 represents a pretax gain on the sale of General Cable common stock.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased
approximately 7% over the comparable three and six month periods in 1994 due
primarily to an increase in average annuity policyholder funds accumulated.
The rate at which interest is credited on annuity policyholders' funds is
subject to change based on management's judgment of market conditions.
Interest on Borrowed Money Interest expense on borrowed money increased
$7.3 million (12%) and $10.4 million (39%) from the first six months and
second quarter of 1994, respectively, due primarily to an increase in average
borrowings. In the second quarter of 1995, AFC borrowed $549 million under
its new credit agreement with American Premier using the proceeds to retire
$372 million of debt and for other corporate purposes.
Other Operating and General Expenses Included in operating and general
expenses in the first six months of 1995 and 1994 are charges of $6.4 million
and $3.1 million, respectively, for minority interest.
15
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Report on Form 8-K:
Date of Report Item Reported
April 7, 1995 Acquisition of American Financial
Corporation by American Premier Group, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Corporation has duly caused this Report to be signed on its behalf
by the undersigned duly authorized.
American Financial Corporation
August 11, 1995 BY: FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
16