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
September 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 November 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
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
September 30, December 31,
1995 1994
Assets
Cash and short-term investments $ 178,966 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $5,054,700 and $4,336,700) 4,933,152 4,629,633
Available for sale - at market
(amortized cost - $2,189,194 and $1,938,853) 2,265,494 1,862,653
Other stocks - principally at market
(cost - $131,855 and $137,106) 223,555 208,706
Investment in affiliates 831,761 832,637
Loans receivable 650,405 641,964
Real estate and other investments 176,372 154,262
9,080,739 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 886,448 902,063
Agents' balances and premiums receivable 409,931 363,156
Other receivables 208,643 197,119
Prepaid expenses, deferred charges and other assets 457,862 410,657
Cost in excess of net assets acquired 173,697 175,866
$11,396,286 $10,550,051
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 2,948,330 $ 2,916,985
Unearned premiums 911,911 824,691
Annuity policyholders' funds accumulated 4,857,576 4,618,108
Long-term debt:
Direct obligations of AFC Parent Company 375,252 490,065
Obligations of AFC subsidiaries:
Great American Holding Corporation 149,389 359,185
American Annuity Group, Inc. 149,725 183,242
Other subsidiaries 75,050 74,255
Payable to American Premier Underwriters, Inc. 574,756 -
Accounts payable, accrued expenses and other
liabilities 646,858 579,151
Minority interest 135,495 105,506
10,824,342 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 290,055 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 100,900 3,500
$11,396,286 $10,550,051
2
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
Income:
Property and casualty insurance premiums $381,850 $361,728 $1,107,141 $1,013,591
Investment income 160,034 149,449 472,322 434,133
Realized gains on sales of securities 17,787 19,961 22,219 43,104
Equity in net earnings (losses) of
affiliates 1,422 (21,066) 43,998 (8,844)
Other income 27,335 27,408 77,110 87,147
588,428 537,480 1,722,790 1,569,131
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 262,256 253,201 775,550 710,578
Commissions and other underwriting
expenses 114,590 108,815 359,085 322,204
Benefits to annuity policyholders 65,631 61,277 194,152 180,701
Interest charges on borrowed money 36,928 28,285 103,037 87,141
Other operating and general expenses 60,978 70,465 176,919 186,031
540,383 522,043 1,608,743 1,486,655
Earnings before income taxes and
extraordinary items 48,045 15,437 114,047 82,476
Provision for income taxes 12,275 7,991 31,149 25,078
Earnings before extraordinary items 35,770 7,446 82,898 57,398
Extraordinary items, net of income taxes - (501) (3,048) (16,938)
Net Earnings $ 35,770 $ 6,945 $ 79,850 $ 40,460
3
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended
September 30,
1995 1994
Operating Activities:
Net earnings $ 79,850 $ 40,460
Adjustments:
Extraordinary losses from retirement of debt 3,048 16,938
Depreciation and amortization 23,362 16,178
Benefits to annuity policyholders 194,152 180,701
Equity in net (earnings) losses of affiliates (43,998) 8,844
Changes in reserves on assets 2,932 7,482
Realized gains on investing activities (22,921) (52,471)
Increase in reinsurance and other receivables (41,283) (252,345)
Increase in prepaid expenses, deferred charges
and other assets (80,826) (62,368)
Increase in insurance claims and reserves 116,692 300,359
Increase (decrease) in other liabilities (18,625) 55,943
Increase in minority interest 16,961 5,456
Dividends from affiliates 17,124 15,753
Other, net (4,765) (1,956)
241,703 278,974
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,352,959) (1,296,238)
Equity securities (3,749) (2,574)
Affiliates and subsidiaries (13,327) (23,852)
Real estate, property and equipment (23,600) (18,988)
Maturities and redemptions of fixed maturity
investments 193,451 310,472
Sales of:
Fixed maturity investments 672,221 543,939
Equity securities 15,258 111,522
Affiliates and subsidiaries 43,697 27,621
Real estate, property and equipment 5,040 2,619
Decrease (increase) in other investments (11,030) 11,441
Other - (12,536)
(474,998) (346,574)
Financing Activities:
Annuity receipts 338,353 313,077
Annuity surrenders, benefits and withdrawals (302,486) (244,175)
Additional long-term borrowings 145,128 198,271
Reductions of long-term debt (494,753) (173,354)
Borrowings from American Premier 639,000 -
Repayments of borrowings from American Premier (80,000) -
Repurchases of preferred stock (147) (4,466)
Exercise of stock options 8,721 -
Cash dividends paid (12,890) (16,900)
240,926 72,453
Net Increase in Cash and Short-term Investments 7,631 4,853
Cash and short-term investments at beginning of period 171,335 167,950
Cash and short-term investments at end of period $ 178,966 $ 172,803
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:
September 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") 25% - -
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 affiliates (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
affiliates 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). The loss on the sale of Chiquita and gain on the sale of General
Cable are included in "Other income."
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.
Nine months ended September 30,
1995 1994
Revenues
Property and casualty insurance:
Underwriting $1,107,141 $1,013,591
Investment and other income 231,272 245,146
1,338,413 1,258,737
Annuities (*) 308,818 283,244
Other 31,561 35,994
1,678,792 1,577,975
Equity in net earnings (losses)
of affiliates 43,998 (8,844)
$1,722,790 $1,569,131
<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 $1.1 billion and
$890 million at September 30, 1995 and December 31, 1994, respectively.
AFC's investment (and common stock ownership percentage) in these
affiliates was as follows (dollars in thousands):
September 30, 1995 December 31, 1994
American Financial Group $548,169 (25%) $ -
American Premier - 525,927 (42%)
Chiquita 210,764 (39%) 237,015 (46%)
Citicasters 72,828 (37%) 69,695 (37%)
$831,761 $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 in major markets throughout the
country.
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):
Six months ended
American Financial Group September 30, 1995
Revenues $2,009
Income before Extraordinary Item 84
Extraordinary Item 3
Net Earnings 87
Three months ended Nine months ended
American Premier March 31, 1995 September 30, 1994
Revenues $433 $1,304
Income (Loss) from Continuing
Operations 16 (14)
Discontinued Operations - (1)
Net Earnings (Loss) 16 (15)
American Premier's results for the 1994 period included a $75.8 million
loss on the sale of securities of General Cable.
Nine months ended September 30,
1995 1994
Chiquita
Net Sales $3,065 $2,964
Operating Income 176 108
Income (Loss) before Extraordinary Item 61 (14)
Extraordinary Item (5) (23)
Net Income (Loss) 56 (37)
Chiquita's 1994 results included charges and losses aggregating
$57 million recorded in the third quarter resulting from the shutdown of
non-productive banana farms in Honduras and a scaling back of Japanese
operations. 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
Nine months ended September 30,
1995 1994
Citicasters
Net Revenues $100 $160
Operating Income 25 39
Net Earnings 10 48
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. Included in Citicasters' net
earnings for the 1994 period is a net gain of $41.7 million from the sale
of three of these stations.
F. Long-Term Debt Long-term debt of American Financial Corporation (Parent
Company) consisted of the following (in thousands):
September 30, December 31,
1995 1994
9-3/4% Debentures due 2004 $272,685 $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 12,947 24,667
$375,252 $490,065
In the second, third and fourth (through November 10) quarters of 1995,
respectively, AFC issued $50 million, $20 million and $30 million
principal amount of 9-3/4% debentures in private offerings.
In September 1995, Great American Holding Corporation ("GAHC"), a wholly-
owned subsidiary of AFC, retired all $50 million principal amount of its
floating rate notes at par and in October 1995, redeemed all $150 million
principal amount of its 11% notes at par. The funds for these repayments
were derived from (i) borrowings under GAHC's bank credit line, (ii) AFC's
issuance of 9-3/4% debentures, and (iii) borrowings under AFC's line of
credit with American Premier.
At September 30, 1995, sinking fund and other scheduled principal payments
on debt for the balance of 1995 and the subsequent five years, adjusted to
reflect the redemption of the GAHC 11% notes and borrowings under GAHC's
bank lines, were as follows (in thousands):
Parent Other
Company Subsidiaries Total
1995 $ - $ 278 $ 278
1996 - 1,831 1,831
1997 5,900 43,779 49,679
1998 - 25,868 25,868
1999 93,895 25,953 119,848
2000 - 55,074 55,074
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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 September 30, 1995,
AFC had borrowed $559.6 million under the credit agreement. Accrued
interest of $15.2 million at September 30, 1995, was paid in October 1995.
H. Mandatory Redeemable Preferred Stock At September 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 September 30, 1995, the outstanding shares
of other preferred stock consisted of the following:
September 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
September 30, 1995, American Financial Group owned all 53.0 million
outstanding shares of AFC's Common Stock.
11
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $216) 30 (1,448)
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) ($16,938)
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 $424,915 $928,044 $1,352,959
Maturities and redemptions 118,469 74,982 193,451
Sales 9,040 663,181 672,221
1994
Purchases $897,460 $398,778 $1,296,238
Maturities and redemptions 142,561 167,911 310,472
Sales 7,781 536,158 543,939
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 issuers' 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.
LIQUIDITY AND CAPITAL RESOURCES
Ratios The ratio of AFC's (parent only) long-term debt to equity (excluding
Mandatory Redeemable Preferred Stock) was .66 at September 30, 1995, compared
to 1.24 at December 31, 1994. AFC's ratio of earnings to fixed charges on a
total enterprise basis was 1.90 for the first nine months of 1995 compared to
1.69 for the entire year of 1994; ratios of earnings to fixed charges and
preferred dividends were 1.62 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. At September 30, 1995, AFC had borrowed
$559.6 million under the credit agreement.
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 generally 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 September 30, 1995, and $160 million outstanding at
December 31, 1994. During October 1995, GAHC borrowed $120 million under the
line; it is anticipated that $75 million of the borrowing will be repaid in
mid-November.
In September 1995, GAHC retired all $50 million principal amount of its
floating rate notes at par and in October 1995, redeemed all $150 million
principal amount of its 11% notes at par. The funds for these repayments were
derived from (i) borrowings under GAHC's credit line in October 1995, (ii)
AFC's issuance of 9-3/4% debentures in September and October 1995, and (iii)
borrowings under AFC's line of credit with American Premier.
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 September 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 for the three months ended September 30, 1995 were
$48 million, an increase of $32.6 million over the comparable 1994 period.
The increase is attributable to an $11 million increase in investment income,
the absence of charges for AFC's share ($26 million) of certain nonrecurring
losses recorded by an affiliate in 1994 and a 1994 charge of $26 million for
Proposition 103, an insurance reform measure passed by California voters.
Partially offsetting these items were a $9 million increase in interest on
borrowed money, a $4 million increase in benefits to annuity policyholders and
a $5 million credit in 1994 for AFC's Book Value Incentive Plan.
Pretax earnings were $114 million in the first nine months of 1995, an
increase of 38% over the $82.5 million in the comparable 1994 period. The
$32 million increase is attributable to an increase of $38 million in
investment income, the absence of charges for AFC's share ($54 million) of
certain nonrecurring losses recorded by affiliates in 1994 and a 1994 charge
of $26 million for Proposition 103. These items were partially offset by (i)
an $8 million decrease in underwriting results of the property and casualty
insurance segment, (ii) a $30 million decrease in realized gains from sales of
securities, affiliates and other investments, (iii) an increase of $13 million
in benefits to annuity policyholders, (iv) an increase of $16 million in
interest on borrowed money and (v) a $9 million credit in 1994 for AFC's Book
Value Incentive Plan.
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
98.8% and 102.4% for the third quarter and nine months of 1995; comparable
ratios for the same periods of 1994 were 99.8% and 101.6%. The deterioration
in the nine-month
14
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
underwriting results was due primarily to losses from hailstorms in Texas and
Great American's participation in a voluntary pool. These losses were
partially offset by favorable reserve development in Great American's niche
products in the third quarter of 1995. Great American will significantly
reduce its participation in voluntary pools beginning in December 1995.
The 1994 ratio does not reflect Great American's third quarter charge for
Proposition 103.
Earned premiums increased $94 million (9%) and insurance expenses increased
$102 million (10%) during the first nine 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 $10.6 million (7%) in the third
quarter and $38 million (9%) in the nine months of 1995 compared to 1994 due
to an increase in the average amount of 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 first
nine months of 1994 includes its share ($28 million) of American Premier's
loss on the sale of securities of General Cable and its share ($26 million) of
charges and losses recorded by Chiquita pertaining to the shutdown of banana
farms in Honduras and a scaling back of operations in Japan.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased
approximately 7% over the comparable three and nine 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
$8.6 million (31%) and $16 million (18%) from the third quarter and first nine
months 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 other operating and general
expenses in the first nine months of 1995 and 1994 are charges of
$10.8 million and $5.9 million, respectively, for minority interest. Also
included in other operating and general expenses are (i) a third quarter
charge of $26 million in 1994 for Proposition 103 and (ii) a credit of
$9.1 million in the first nine months of 1994 for an adjustment to the
liability for units outstanding under AFC's Book Value Incentive Plan.
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
August 29, 1995 Change in Parent's Independent Auditors
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
November 13, 1995 BY: FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
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