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. 1-11453
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1422526
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-6600
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 52,746,611 shares of the Registrant's Common
Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 22
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
June 30, December 31,
1995 1994
Assets
Cash and short-term investments $ 209,603 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $6,130,900 and $4,336,700) 5,977,292 4,629,633
Available for sale - at market
(amortized cost - $2,963,759 and $1,938,853) 3,079,459 1,862,653
Other stocks - principally at market
(cost - $132,008 and $137,106) 206,408 208,706
Investment in investee corporations 333,821 832,637
Loans receivable 681,030 641,964
Real estate and other investments 203,961 154,262
10,481,971 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 891,972 902,063
Agents' balances and premiums receivable 707,233 363,156
Deferred policy acquisition costs 336,129 231,343
Other receivables 272,771 197,119
Deferred tax asset 249,055 -
Prepaid expenses, deferred charges and other assets 374,712 179,314
Cost in excess of net assets acquired 304,250 175,866
$13,827,696 $10,550,051
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - continued
(Dollars In Thousands)
June 30, December 31,
1995 1994
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,123,030 $ 2,916,985
Unearned premiums 1,281,215 824,691
Annuity policyholders' funds accumulated 4,787,658 4,618,108
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 355,042 490,065
American Premier Underwriters (parent only) 438,703 -
Great American Holding Corporation 199,321 359,185
American Annuity Group, Inc. 168,093 183,242
Other subsidiaries 73,739 74,255
Accounts payable, accrued expenses and other
liabilities 1,119,396 579,151
Minority interest 294,442 105,506
12,840,639 10,151,188
AFC Mandatory Redeemable Preferred Stock (at
redemption value) - 2,880
Other AFC Preferred Stock (redemption
value - $278,719) - 168,484
AFC Common Stock without par value - 904
Common Stock, $1 par value
- 200,000,000 shares authorized
- 52,738,805 shares outstanding 52,739 - -
Capital surplus 546,006 -
Retained earnings 273,112 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 115,200 3,500
$13,827,696 $10,550,051
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Income:
Property and casualty insurance
premiums $ 753,658 $ 338,814 $1,102,791 $ 651,863
Investment income 201,829 143,614 354,163 284,684
Realized gains on sales of
securities 7,856 8,187 11,332 23,143
Equity in net earnings (losses) of
investee corporations 15,099 (9,472) 38,000 12,222
Gains on sales of investee
corporations - 1,683 - 1,694
Other income 27,488 25,178 52,836 58,045
1,005,930 508,004 1,559,122 1,031,651
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment
expenses 578,351 226,360 821,994 457,377
Commissions and other underwriting
expenses 204,384 107,721 323,995 213,389
Benefits to annuity policyholders 64,259 60,201 128,521 119,424
Interest charges on borrowed money 35,709 26,563 64,838 58,856
Other operating and general
expenses 77,277 55,132 134,722 115,566
959,980 475,977 1,474,070 964,612
Earnings before income taxes and
extraordinary items 45,950 32,027 85,052 67,039
Provision for income taxes 12,982 8,768 22,219 17,087
Earnings before extraordinary items 32,968 23,259 62,833 49,952
Extraordinary items, net of income
taxes 532 (744) 532 (16,437)
Net Earnings $ 33,500 $ 22,515 $ 63,365 $ 33,515
Preferred dividend requirement - 6,402 6,349 12,913
Net earnings available to Common
Shares $ 33,500 $ 16,113 $ 57,016 $ 20,602
Earnings per Common Share:
Before extraordinary items $ .63 $ .60 $ 1.39 $ 1.31
Extraordinary items .01 (.03) .01 (.58)
Net earnings $ .64 $ .57 $ 1.40 $ .73
Average number of Common Shares 52,714 28,324 40,586 28,324
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended June 30,
1995 1994
Operating Activities:
Net earnings $ 63,365 $ 33,515
Adjustments:
Extraordinary losses (gains) from
retirement of debt (532) 16,437
Depreciation and amortization 18,685 15,567
Benefits to annuity policyholders 128,521 119,424
Equity in net earnings of investee corporations (38,000) (12,222)
Changes in reserves on assets (670) 10,517
Realized gains on investing activities (11,248) (32,281)
Decrease (increase) in reinsurance and other
receivables 65,942 (113,536)
Increase in other assets (41,004) (59,635)
Increase in insurance claims and reserves 59,169 159,583
Increase (decrease) in other liabilities (109,991) 704
Increase (decrease) in minority interest (1,868) 2,611
Dividends from investees 6,964 10,502
Other, net (11,969) (1,641)
127,364 149,545
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (887,074) (980,800)
Equity securities (298) (1,946)
Investees and subsidiaries (13,400) (23,852)
Real estate, property and equipment (22,706) (14,612)
Maturities and redemptions of fixed maturity
investments 137,421 238,761
Sales of:
Fixed maturity investments 666,502 504,144
Equity securities 13,208 69,592
Investee and subsidiaries - 27,621
Real estate, property and equipment 3,811 2,422
Cash and short-term investments of acquired
subsidiary 392,100 -
Decrease (increase) in other investments (3,641) 10,424
285,923 (168,246)
Financing Activities:
Annuity receipts 245,111 210,630
Annuity benefits and withdrawals (214,603) (172,493)
Additional long-term borrowings 80,590 163,397
Reductions of long-term debt (482,319) (138,738)
Exercise of stock options 9,550 -
Repurchases of capital stock - (4,466)
Cash dividends paid (13,348) (16,708)
(375,019) 41,622
Net Increase in Cash and Short-term Investments 38,268 22,921
Cash and short-term investments at beginning of
period 171,335 167,950
Cash and short-term investments at end of period $ 209,603 $190,871
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Merger American Premier Group, Inc. was formed in December 1994 for the
purpose of acquiring American Financial Corporation ("AFC") and American
Premier Underwriters, Inc. ("American Premier"). In mergers completed on
April 3, 1995, American Premier Group issued 71.4 million shares of its
Common Stock in exchange for all of the outstanding common stock of AFC
and American Premier. The 18.7 million shares held by AFC and its
subsidiaries are accounted for herein as retired. In June 1995, American
Premier Group, Inc. changed its name to American Financial Group, Inc.
("AFG"), to better reflect its core property and casualty insurance and
annuity businesses.
For financial reporting purposes, because the former shareholders of AFC
own more than 50% of AFG following the mergers, the mergers were accounted
for as a reverse acquisition whereby AFC was deemed to have acquired
American Premier. Financial statements for periods prior to the mergers
are those of AFC. The operations of American Premier are included in
AFG's financial statements from the date of acquisition.
The valuation of American Premier's net assets was determined based on the
fair market value of the AFG shares issued to shareholders other than AFC
and was allocated to American Premier's assets and liabilities based on
their fair values at the date of acquisition. The following pro forma
data is presented as if the mergers occurred on January 1 of each year (in
millions, except per share data).
Six months ended June 30,
1995 1994
Revenues $1,978 $1,858
Earnings before
Extraordinary Items 86 19
Extraordinary Items 1 (16)
Net Earnings 87 3
Earnings per Share $ 1.65 $ .05
B. Accounting Policies
Basis of Presentation The accompanying consolidated financial statements for
AFG 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.
Changes in ownership levels of subsidiaries and investees have resulted in
certain differences in the financial statements and have affected
comparability between years. 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.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG's ownership of subsidiaries and significant investees with publicly
traded common shares was as follows:
June 30, December 31,
1995 1994 1993
American Annuity Group, Inc. ("AAG") 81% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) 42% 41%
Chiquita Brands International, Inc. 45% 46% 46%
Citicasters Inc. 37% 37% 20%
General Cable Corporation - (b) 45%
(a) Became a 100%-owned subsidiary on April 3, 1995.
(b) Sold in June 1994.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AFG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as (i)
"trading" and 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 Investee Corporations Investments in securities of 20%- to
50%-owned companies are carried at cost, adjusted for AFG'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, AFG can exercise significant influence over
operating and financial policies of the investee.
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries and
investees (purchased subsequent to October 1970) over AFG's equity in the
underlying net assets ("goodwill") is being amortized over 40 years. The
excess of AFG's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative goodwill")
has been allocated to AFG's basis in these companies' fixed assets,
goodwill and other long-term assets and is amortized on a 10- to 40-year
basis.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, AFG'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, AFG'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. AFG'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. AFG's insurance subsidiaries
also assume reinsurance from other companies. Income on reinsurance
assumed is recognized based on reports received from ceding reinsurers.
Deferred Policy Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related to the
production of new business are deferred. 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 term 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) estimates 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.
Policyholder Dividends Dividends payable to policyholders are included in
"Accounts payable, accrued expenses and other liabilities" and represent
estimates of amounts payable on participating policies which share in
favorable underwriting results. The estimate is accrued during the period
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
in which the related premium is earned. Changes in estimates are included
in income in the period determined. Policyholder dividends do not become
legal liabilities unless and until declared by the boards of directors of
the insurance companies.
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 AFG files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries. Because voting rights
aggregating 21% were extended to holders of AFC Series F and G Preferred
Stock in connection with the mergers, AFC will continue to file a separate
consolidated return. 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 AFG provides retirement benefits to qualified employees of
participating companies. Contributions to benefit plans are charged
against earnings in the year for which they are declared.
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. American Premier provides retirement benefits, primarily
through contributory and noncontributory defined contribution plans. In
addition, American Premier sponsors employee savings plans under which
American Premier matches a specified portion of contributions made by
eligible employees.
AFG and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. AFG 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 mergers, 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 amortized over the lives of
respective borrowings, generally on the interest method.
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries and
includes AFC preferred stock for periods subsequent to the mergers. For
income statement purposes, minority interest (included in other expenses)
represents those shareholders' interest in the earnings of AFG
subsidiaries and includes AFC preferred dividends following the mergers.
Earnings Per Share Earnings per share are calculated on the basis of the
weighted average number of shares of common stock outstanding during the
period and the dilutive effect, if material, of assumed conversion of
common stock equivalents (stock options and Career Shares). The weighted
average number of shares used for periods prior to April 3, 1995, is based
upon the 28.3 million shares issued in exchange for AFC common shares in
the mergers discussed in Note A.
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. Segments of Operations Through subsidiaries, AFG is engaged in several
financial businesses, including property and casualty insurance, annuities
and portfolio investing. AFG also owns significant portions of the voting
equity securities of certain companies (investee corporations - see
Note D). The following table (in thousands) shows AFG's revenues by
significant business segment. Intersegment transactions are not
significant.
Six months ended June 30,
1995 1994
Revenues
Property and casualty insurance:
Underwriting $1,102,791 $ 651,863
Investment and other income 191,951 158,938
1,294,742 810,801
Annuities (*) 197,656 186,590
Other 28,724 22,038
1,521,122 1,019,429
Equity in net earnings
of investee corporations 38,000 12,222
$1,559,122 $1,031,651
(*) Represents primarily investment income and realized gains.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investee Corporations Investment in investee corporations represents AFG'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 $475 million and
$890 million at June 30, 1995 and December 31, 1994, respectively. AFG's
investment (and common stock ownership percentage) in these investees was
as follows (dollars in thousands):
Investment (Ownership %)
June 30, December 31,
1995 1994
Chiquita $261,977 (45%) $237,015 (46%)
Citicasters 71,844 (37%) 69,695 (37%)
American Premier (*) 525,927 (42%)
$333,821 $832,637
(*) Became a 100%-owned subsidiary on April 3, 1995.
Chiquita is a leading international marketer, processor and producer of
quality food products. Citicasters owns and operates radio and
television stations.
Summarized financial information for AFG's investees follows (in
millions):
Six months ended June 30,
Chiquita 1995 1994(*)
Net Sales $2,114 $2,063
Operating Income 153 152
Income before Extraordinary Item 72 67
Extraordinary Item (5) (23)
Net Income 67 44
(*) Amounts for 1994 were reclassified by Chiquita to reflect the
reconsolidation of its Meat Division.
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.
Quarter Six months
ended ended
American Premier March 31, 1995June 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.
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Long-Term Debt In furtherance of the previously announced plan to use
American Premier cash following the mergers to retire debt, AFC (i)
repaid $187 million of borrowings under a subsidiary's bank credit
agreement in April 1995 and (ii) redeemed all $185 million of its 12% and
12-1/4% Debentures in May 1995, using funds borrowed under a line of
credit with American Premier. Included in Extraordinary Items is a loss
of $1.7 million realized as a result of the repurchases.
In May 1995, rating agencies downgraded American Premier's subordinated
notes. As a result of the mergers and the subsequent ratings downgrade,
the holders of the notes had the right (which has since expired) to
require American Premier to purchase all or any portion of the notes on
August 10, 1995 at par plus accrued interest (the "Put Right"). The Put
Right was exercised for approximately $44 million of the notes.
During the second quarter of 1995, American Premier repurchased
$26 million of its 10-5/8% subordinated notes and $59.5 million of its
10-7/8% subordinated notes for an average of approximately 104% of
principal amount. Included in Extraordinary Items is a gain of
$3.8 million as a result of these purchases. During the third quarter,
American Premier repurchased an additional $9.3 million of its 10-7/8%
subordinated notes.
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):
American
Premier AFC
(Parent) (Parent) Subsidiaries Total
1995 $ - $ - $ 50,926 $ 50,926
1996 - - 2,551 2,551
1997 - 5,620 17,766 23,386
1998 - - 170,228 170,228
1999 200,000 93,895 2,313 296,208
2000 124,000 - 8,571 132,571
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.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Capital Stock In connection with the merger discussed in Note A, AFG issued
51.3 million shares (net of 18.7 million shares held by AFC and its
subsidiaries, which are shown herein as retired) of Common Stock on
April 3, 1995. In addition, approximately 1.4 million shares of AFG
Common Stock are held by American Premier for issuance to certain
creditors and other claimants pursuant to a plan of reorganization
relating to American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting Preferred Stock
and 12.5 million shares of Nonvoting Preferred Stock, each without par
value. At June 30, 1995, AFG had 212,698 shares of convertible preferred
stock outstanding with a stated value of $469,000 (included in Capital
Surplus, net of related notes receivable). There are 500,000 shares of
AFG Common Stock reserved for issuance upon conversion of the Preferred
Stock.
AFG's stock option plan allows for the grant of up to 5.1 million options
at a price not less than the fair market value of the underlying AFG
Common Stock at the date of grant. Options granted to officers and key
employees become exercisable at the rate of 20% per year commencing one
year after grant; those granted to non-employee directors of AFG are
generally fully exercisable upon grant. All options expire ten years
after the date of grant.
G. Extraordinary Items Extraordinary items consisted of the following (in
thousands):
1995 1994
Gain (loss) on subsidiaries' prepayment of debt
(net of minority interest of ($5) and $142) $2,124 ($7,401)
Share of loss on investee's prepayment of debt
(net of minority interest of $24 and $139
and income tax benefit of $65 and $374) (1,592) (9,036)
$ 532 ($16,437)
H. Cash Flows - Fixed Maturity Investments "Investing activities" related to
fixed maturity investments in AFG's Statement of Cash Flows consisted of
the following (in thousands):
Held to Available
1995 Maturity For Sale Total
Purchases $420,193 $466,881 $887,074
Maturities and paydowns 88,786 48,635 137,421
Sales 9,040 657,462 666,502
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.
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Commitments and Contingencies Loss accruals have been recorded for certain
matters arising out of the railroad operations disposed of by American
Premier's predecessor, Penn Central Transportation Company, prior to its
bankruptcy reorganization in 1978. Accordingly, any ultimate liability
arising therefrom in excess of previously established loss accruals would
be attributable to pre-reorganization events and circumstances and
accounted for as a reduction in American Premier's capital surplus. Under
purchase accounting, however, any such ultimate liability will be charged
to earnings in AFG's financial statements.
AFG's subsidiaries are parties in a number of proceedings involving
environmental claims. In management's opinion, the outcome of these
claims and contingencies will not, individually or in the aggregate, have
a material adverse effect on AFG's financial condition or results of
operations. In making this assessment, management has taken into account
previously established loss accruals in its financial statements and
probable recoveries from third parties.
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
As discussed in Note A, financial statements for periods prior to the
April 3, 1995 mergers are those of AFC. Since many of its businesses are
financial in nature, AFG does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
AFG as well as its two subsidiaries, American Premier and AFC, are organized
as holding companies with almost all of their operations being conducted by
subsidiaries and investees of American Premier and AFC. The parent
corporations, however, have continuing expenditures for administrative
expenses and corporate services and, most importantly, for the payment of
principal and interest on borrowings and dividends to shareholders.
Ratio of Earnings to Fixed Charges AFG's ratio of earnings to fixed charges
on a total enterprise basis was 2.01 for the first six months of 1995
compared to 1.69 for the entire year of 1994. Assuming the mergers and
related transactions discussed in Note A occurred at the beginning of each
of these periods, these ratios would have been 2.67 and 2.50, respectively.
Sources of Funds As a holding company, AFG relies on dividends and tax
payments from subsidiaries to meet cash requirements for corporate expenses
and dividends. Likewise, AFC, and to a lesser extent American Premier, rely
on such payments from their subsidiaries to meet cash needs for corporate
expenses, and most importantly, to meet debt service requirements and to pay
dividends.
Prior to the merger, American Premier had substantial cash and short-term
investments at the parent company level. At June 30, 1995, AFC had borrowed
$513 million under a new line of credit with American Premier which it used
for debt retirements, capital contributions to subsidiaries, and other
corporate purposes.
A wholly-owned subsidiary of AFC 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
advanced to AFC. At June 30, 1995, AFC had no outstanding borrowings under
the agreement; $160 million was outstanding at December 31, 1994.
During the second and third quarters of 1995, American Premier repurchased
approximately $139 million principal amount of its notes for
$143 million, including $44 million which were "put" to American Premier at
par.
15
AMERICAN FINANCIAL GROUP, INC. 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 AFG
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 The operations of American Premier are included in AFG's financial
statements from the date of acquisition. Accordingly, 1995 second quarter
and six-month operating results are not comparable to prior periods. Results
of interim periods are not necessarily indicative of future results of
operations.
Excluding net realized gains of $7.3 million and an extraordinary credit of
$.5 million, earnings were $25.7 million, or $.49 per share for the second
quarter of 1995. Second quarter results include $25.2 million of losses due
to weather-related catastrophe losses, principally from hailstorms in Texas.
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. Prior year comparisons are made in the
following discussion of AFG's insurance operations even though American
Premier's insurance operations were not consolidated in the financial
statements prior to the mergers.
Net written premiums of AFG's property and casualty subsidiaries totaled $778
million for the 1995 second quarter compared with $776 million for the 1994
period. For the first half of 1995, AFG's property and casualty subsidiaries
net written premiums increased to $1,537 million from $1,497 million for the
same period of 1994. The combined ratio of AFG's property and casualty
insurance operations, based on generally accepted accounting principles, was
104.0% for the second quarter of 1995 compared to 97.5% for the 1994 second
quarter. The combined ratio for the first half of 1995 was 102.8% compared
to 99.4% in the 1994 period. The increase in the combined ratio for the
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
quarter was due largely to the hailstorm losses in Texas. The increase in
the combined ratio for the six-month period was due primarily to these storms
and a decline in the underwriting results of the non-standard automobile
operations.
AFG manages and operates its property and casualty business as three major
sectors. The non-standard automobile insurance companies (the "NSA Group")
insure risks not typically accepted for standard automobile coverage because
of the applicant's driving record, type of vehicle, age or other criteria.
The specialty lines are a diversified group of over twenty-five business
lines that offer a wide variety of specialty insurance products. Some of the
more significant areas are California workers' compensation, executive
liability, inland and ocean marine, U.S.-based operations of Japanese
companies, agricultural-related coverages, excess and surplus lines and
fidelity and surety bonds. The mainstreet commercial and personal lines
provide coverages in commercial multi-peril, workers' compensation, umbrella
and commercial automobile, standard private passenger automobile and
homeowners insurance.
Net written premiums for the NSA Group grew approximately 12% during the
first six months of 1995 over the comparable 1994 period due to increased
penetration within existing states and limited expansion into new states.
The combined ratio for the NSA Group was 107.3% and 104.2%, respectively, for
the 1995 second quarter and first six months as compared to 99.2% and 98.3%
for the same periods in 1994. The increase in the combined ratio was due
largely to weather-related losses principally from hailstorms in Texas as
well as inadequate rate levels in certain markets somewhat offset by a
reduction in the expense ratio from ongoing cost control measures. Premium
rate increases were effected during 1994 and the NSA Group has continued to
increase rates in 1995. The average rate increase in 1995 across the NSA
Group's entire book of business was approximately 11%.
Net written premiums for the specialty operations declined 8% during the
first six months of 1995 over the comparable 1994 period due to a decrease in
the California workers' compensation writings, partially offset by increases
in other specialty niche lines. The combined ratio for the specialty
operations was 97.6% and 98.5%, respectively, for the 1995 second quarter and
first six months as compared to 93.1% and 94.9% for the same periods in 1994.
The 1995 combined ratio was also impacted by weather-related losses during
the second quarter of 1995.
Net written premiums for the commercial/personal operations increased 9% for
the first six months of 1995 over the comparable 1994 period due principally
to increased writings in several of the company's commercial lines. The
combined ratio for the commercial/personal operations was 102.1% and 100.9%,
respectively, for the second quarter and first six months of 1995 compared to
99.9% and 105.0% for the same periods in 1994. The increase in the second
quarter ratio reflects the impact of the Texas hailstorm losses. The
decrease in the six months ratio reflects the impact of the California
earthquake on 1994's results and improved underwriting results in several
lines of business.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investment Income AFC's investment income increased $28 million (10%) from
1994 due to an increase in investments held. Investment income for the first
six months of 1995 includes $42 million attributable to American Premier in
the second quarter. Investment income of American Premier's insurance
operations rose $5.1 million (16%) due to higher average investments but was
offset by a $5.3 million decline (excluding intercompany interest) in parent
company investment income. The decline in parent company investment income
reflects the sale of investments used to fund advances to AFC and to retire
American Premier equity securities.
Realized Gains Realized capital gains have been an important part of the return
on 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.
Investee Corporations Equity in net earnings of investee corporations
(companies in which AFG owns a significant portion of the voting stock)
represents AFG's proportionate share of the investees' earnings and losses.
AFG's equity in net earnings (losses) of investee corporations in 1994 and
in the first quarter of 1995 includes AFC's share of American Premier's
earnings prior to the mergers. Results for the first six months of 1994
include AFC's share ($28.4 million) of American Premier's loss on the sale
of securities of General Cable.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased
approximately 7% over those of 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 Excluding American Premier's interest expense
($12.1 million), interest expense decreased by $6.1 million (10%) for the
six months ended June 30, 1995. The decrease is due primarily to the
repayments of borrowings by AFC and certain subsidiaries and the AFC debt
exchange in 1994.
Other Operating and General Expenses Included in operating and general expenses
in the first six months of 1995 and 1994 are charges of $12.9 million and
$3.1 million, respectively, for minority interest. Beginning in April 1995,
minority interest includes AFC's quarterly preferred dividend requirement of
$6.4 million.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
Reference is made to Item 3 - "Legal Proceedings" of the Annual Report on
Form 10-K for 1994 of AFG's wholly-owned subsidiary, American Premier
Underwriters, Inc. (SEC File No. 1-1569), for a description of two
misdemeanor charges by the U.S. Government that were pending against a
subsidiary of American Premier, Buckeye Pipe Line Company ("Buckeye"),
arising out of a pipeline rupture that occurred in 1990. In May 1995,
Buckeye paid a fine of $125,000 in respect of one of the charges, the alleged
violation of the strict liability provisions of the Rivers and Harbors Act,
and reimbursed the U.S. Government $100,000 towards its costs of the
investigation of the incident. The U.S. Government dismissed the other
charge, which alleged a violation of the Clean Water Act. This matter is not
considered material to AFG's financial condition or results of operations,
but is included herein to comply with Securities and Exchange Commission
rules requiring disclosure of environmental proceedings brought by
governmental entities involving potential sanctions exceeding $100,000.
Reference is made to Item 3 - "Legal Proceedings" of the Annual Report on
Form 10-K for 1994 of AFG's wholly-owned subsidiary, American Financial
Corporation (SEC File No. 1-7361), for a description of an action filed
against American Premier by USX Corporation ("USX") and one of its former
subsidiaries, Bessemer and Lake Erie Railroad Company ("B&LE").
In May 1994, lawsuits were filed against American Premier by USX and B&LE
seeking contribution by American Premier, as the successor to the railroad
business conducted by its predecessor Penn Central Transportation Company
("PCTC") prior to 1976, for all or a portion of the approximately $600
million that USX paid in satisfaction of a judgment against B&LE for its
participation in an unlawful antitrust conspiracy among certain railroads
commencing in the 1950's and continuing through the 1970's. The lawsuits
argue that USX's liability for that payment was attributable to PCTC's
alleged activities in furtherance of the conspiracy. On October 13, 1994,
the U.S. District Court for the Eastern District of Pennsylvania enjoined USX
and B&LE from continuing their lawsuits against American Premier, ruling that
their claims are barred by the 1978 consummation order issued by that Court
in PCTC's bankruptcy reorganization proceedings. USX and B&LE have appealed
the District Court's ruling to the U.S. Court of Appeals for the Third
Circuit. Briefing of the appeal has been completed, the case was orally
argued on July 24, 1995 and the parties are awaiting the Court of Appeal's
decision. If the Court of Appeals were to reverse the District Court and
allow these lawsuits to proceed in spite of the bankruptcy consummation
order, management believes that the defenses described in American Premier's
prior filings would enable it to prevail on the merits.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
Item 4
Submission of Matters to a Vote of Security Holders
AFG's Annual Meeting of Shareholders was held on June 6, 1995, and there
were four matters voted upon: (Item 1) election of nine directors, (Item 2)
amendment of the Articles of Incorporation to change the company's name to
American Financial Group, Inc., (Item 3) approval of the Stock Option Plan
and certain amendments thereto, and (Item 4) approval of the Employee Stock
Purchase Plan.
The votes cast for, against, withheld and the number of abstentions as to
each matter voted on at the 1995 Annual Meeting is set forth below:
Name For Against Withheld Abstain
Election of Directors:
Theodore H. Emmerich 46,147,909 NA 206,172 NA
James E. Evans 46,160,928 NA 193,153 NA
Thomas M. Hunt 46,131,193 NA 222,888 NA
Carl H. Lindner 46,098,231 NA 255,850 NA
Carl H. Lindner III 46,123,603 NA 230,478 NA
Keith E. Lindner 46,117,452 NA 236,629 NA
S. Craig Lindner 46,127,511 NA 226,570 NA
William R. Martin 46,144,983 NA 209,098 NA
Alfred W. Martinelli 46,137,473 NA 216,608 NA
Item 2 46,207,931 114,033 NA 32,117
Item 3 41,640,200 4,625,799 NA 88,082
Item 4 45,300,385 977,754 NA 75,942
Item 5
Other Information
The following information relating to environmental matters has been
derived from the June 30, 1995, Form 10-Q of American Premier Underwriters,
Inc., a 100%-owned subsidiary of AFG.
American Premier is a party or named as a potentially responsible party in
a number of proceedings and claims by regulatory agencies and private parties
under various environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), seeking to
impose responsibility on American Premier for hazardous waste remediation
costs at certain railroad sites formerly owned by PCTC and at certain other
sites where hazardous waste allegedly generated by PCTC's railroad operations
is present. It is difficult to estimate American Premier's liability for
remediation costs at these sites for a number of reasons, including the
number and financial resources of other potentially responsible parties
involved at a given site, the varying availability of evidence by which to
allocate responsibility among such parties, the wide range of costs for
possible remediation alternatives, changing technology and the period of time
over which these matters develop. Nevertheless, American Premier believes
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
that its previously established loss accruals for potential pre-reorganization
environmental liabilities at such sites are adequate to cover the probable
amount of such liabilities, based on its estimates of remediation costs and
related expenses at such sites and its estimates of the portions of such
costs that will be borne by other parties. Such estimates are based on
information currently available to American Premier and are subject to future
change as additional information becomes available. Such estimates do not
assume any recovery from American Premier's insurance carriers, although
American Premier does intend to seek reimbursement from certain insurers for
such remediation costs as American Premier incurs.
In terms of potential liability to American Premier, management believes
that the most significant such site is the railyard at Paoli, Pennsylvania
("Paoli Yard") which PCTC transferred to Consolidated Rail Corporation
("Conrail") in 1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial action for
clean-up of polychlorinated biphenyls ("PCB's") at Paoli Yard having an
estimated cost of approximately $28 million. American Premier has accrued a
substantial portion of such estimated clean-up costs in its financial
statements (in addition to related expenses) but has not accrued the entire
amount because it believes it is probable that other parties, including
Conrail, will be responsible for substantial percentages of the clean-up
costs by virtue of their operation of electrified railroad cars at Paoli Yard
that discharged PCB's at higher levels than discharged by cars operated by
PCTC.
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 - none
21
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Group, Inc. has duly caused this Report to be signed on its behalf
by the undersigned duly authorized.
American Financial Group, Inc.
August 11, 1995 BY:/s/ Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
22