SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Voting Cumulative Preferred Stock:
Series F and G Pacific
9-3/4% Debentures due April 20, 2004 Pacific
Securities Registered Pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and need not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 1996, there were 53,000,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc. At that date there were
13,744,754 shares of Series F Voting Preferred Stock and 364,158
shares of Series G Voting Preferred Stock outstanding (all of
which were owned by non-affiliates). All shares of Common and
Preferred Stock are entitled to one vote per share and generally
vote as a single class. The aggregate market value of Preferred
Stock at that date was $275 million (based on a market price of
$19.75 per share for Series F and $10.625 per share for Series G.)
________________
Documents Incorporated by Reference:
Proxy Statement for the 1996 Annual Meeting of Shareholders
(portions of which are incorporated by reference into Part III
hereof).
AMERICAN FINANCIAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Great American Insurance Group 3
American Annuity Group and Great American
Life Insurance Company 14
Equity Investments in Affiliates 17
Other Companies 22
Investment Portfolio 23
Regulation 25
Item 2 - Properties 26
Item 3 - Legal Proceedings 27
Item 4 - Submission of Matters to a Vote of Security
Holders *
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 28
Item 6 - Selected Financial Data 28
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 8 - Financial Statements and Supplementary Data 38
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Part III
Item 10 - Directors and Executive Officers of the Registrant 38
Item 11 - Executive Compensation 38
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 38
Item 13 - Certain Relationships and Related Transactions 38
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
* The response to this Item is "none".
PART I
ITEM 1
Business
Introduction
American Financial Corporation ("AFC") was incorporated as an
Ohio Corporation in 1955. Its address is One East Fourth Street,
Cincinnati, Ohio, 45202; its phone number is (513) 579-2121. At
December 31, 1995, American Financial Group, Inc. ("AFG") owned
all of the outstanding Common Stock of AFC (See "Mergers" below).
AFC is a holding company operating through wholly-owned and
majority-owned subsidiaries and other companies in which it holds
significant minority ownership interests. These companies
operate in a variety of financial businesses, including property
and casualty insurance, annuities, and portfolio investing. In
non-financial areas, these companies have substantial operations
in the food products industry and radio and television station
operations.
Mergers
On April 3, 1995, AFC merged with a newly formed subsidiary
of American Premier Group, Inc., a 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 AFG voting common
stock. Former shareholders of American Premier, including AFC
and its subsidiaries, received shares of AFG stock on a one-for-
one basis. AFC receives dividends paid on AFG common stock;
however, its shares generally will not be eligible to be voted as
long as AFC is owned by AFG. No gain or loss was recorded on the
exchange of shares.
AFC continues 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 Mergers.
1
General
Generally, companies have been included in AFC's
consolidated financial statements when AFC's ownership of voting
securities has exceeded 50%; for investments below that level but
above 20%, AFC has accounted for the investments as investees.
(See Note F to AFC's financial statements.) The following table
shows AFC's percentage ownership of voting securities of its
significant affiliates over the past several years:
Ownership at December 31,
1995 1994 1993 1992 1991
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 80% 80% 80% 82% 39%
Great American Life Insurance Company (a) (a) (a) (a) 100%
American Financial Enterprises 83% 83% 83% 83% 82%
American Financial Group 24% n/a n/a n/a n/a
American Premier Underwriters (b) 42% 41% 51% 50%
Chiquita Brands International 38% 46% 46% 46% 48%
Citicasters 38% 37% 20% 40% 40%
General Cable - (c) 45% 45% -
<FN>
(a) Sold to American Annuity Group in December 1992.
(b) Exchanged for shares of American Financial Group in April
1995.
(c) Sold in June 1994. 100%-owned by American Premier prior to
spin-off in July 1992. Ownership percentage excludes shares
held by American Premier for future distribution aggregating
12%.
</FN>
The following summarizes the more significant changes in
ownership percentages shown in the above table.
American Annuity Group On December 31, 1992, American
Annuity purchased Great American Life Insurance Company ("GALIC")
from Great American Insurance Company ("GAI"). In connection
with the acquisition, GAI purchased 5.1 million shares of
American Annuity's common stock pursuant to a cash tender offer
and 17.1 million additional shares directly from American
Annuity.
American Premier Underwriters In 1993, American Financial
Enterprises, Inc. ("AFEI") sold 4.5 million shares of American
Premier common stock in a secondary public offering. In April
1995, American Premier became a subsidiary of AFG as a result of
the Mergers.
Chiquita Brands International In 1995, AFC sold 3.2 million
shares of Chiquita common stock to American Premier.
Citicasters In December 1993, Great American Communications
Company ("GACC") completed a prepackaged plan of reorganization.
In the restructuring, AFC's previous holdings of GACC stock and
debt were exchanged for 20% of the new common stock. GACC
changed its name to Citicasters to reflect the nature of its
business. In June 1994, AFEI purchased approximately 10% of
Citicasters common stock. In the second half of 1994,
Citicasters repurchased and retired approximately 21% of its
common stock.
In February 1996, Citicasters entered into a merger agreement
with Jacor Communications, Inc. Under the agreement, each
Citicasters shareholder, including AFC and its subsidiaries, will
receive cash and warrants to purchase Jacor common stock.
Consummation of the transaction is subject to regulatory
approvals, and certain adjustments to the price will be made if
the transaction does not close by September 30, 1996.
2
General Cable In 1992, American Premier distributed to its
shareholders approximately 88% of the stock of General Cable,
which was formed to own certain of American Premier's
manufacturing businesses. AFC and its subsidiaries received
approximately 45% of General Cable in the spin-off. In 1994, an
unaffiliated company acquired all of the common stock of General
Cable including AFC's and the 12% which had been retained by
American Premier.
The following discussion concerning AFC's businesses is
organized along the lines of the major company investments as shown
in the table above. Reference to the table and to AFC's
consolidated financial statements is recommended for a better
understanding of this section and Item 6 - "Selected Financial
Data".
Great American Insurance Group
AFC's primary insurance business is multi-line property and
casualty insurance, headed by GAI. Hereafter, GAI and its property
and casualty insurance subsidiaries will be referred to collectively
as "Great American". They employ approximately 3,900 persons.
According to the most recent ranking published in "Best's
Review", Great American was the 37th largest among all property and
casualty insurance groups operating in the United States on the
basis of total net premiums written in 1994. GAI is rated "A"
(Excellent) by A.M. Best Company, Inc. This rating is given to
companies that "have a strong ability to meet their obligations to
policyholders over a long period of time".
Great American manages and operates its property and casualty
business in two major business segments: Specialty Lines and
Commercial and Personal Lines. Each segment is comprised of
multiple business units which operate autonomously but with strong
central financial controls and full accountability. Decentralized
control allows each unit the autonomy necessary to respond to local
and specialty market conditions while capitalizing on the
efficiencies of centralized investment, actuarial, financial and
legal support functions.
The primary objective of the property and casualty insurance
operations is to achieve underwriting profitability. 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.
Management's focus on underwriting performance has resulted in a
statutory combined ratio averaging 102.9% for the period 1991 to
1995, as compared to 109.3% for the property and casualty industry
over the same period (Source: "Best's Review - Property/Casualty"
January 1996 Edition). Management's philosophy is to refrain from
writing business that is not expected to produce an underwriting
profit even if it is necessary to limit premium growth to do so.
For 1995, net written premiums were $1.6 billion, compared to
$1.5 billion in 1994. The increase in net written premiums was due
to increases in specialty niche lines, workers' compensation and
commercial umbrella insurance.
3
The following table shows (in millions) the performance of Great
American in various categories. While financial data is reported on
a statutory basis for insurance regulatory purposes, it is reported
in accordance with generally accepted accounting principles ("GAAP")
for shareholder and other investment purposes. In general,
statutory accounting results in lower capital surplus and net
earnings than result from application of GAAP. Major differences
include charging policy acquisition costs to expense as incurred
rather than spreading the costs over the periods covered by the
policies; netting of reinsurance recoverables and prepaid
reinsurance premiums against the corresponding liability; requiring
additional loss reserves; and charging to surplus certain assets,
such as furniture and fixtures and agents' balances over 90 days
old.
Unless indicated otherwise, the financial information presented for
Great American is presented on a GAAP basis.
1995 1994 1993 1992 1991
Statutory Basis
Premiums Earned $1,533 $1,376 $1,243 $1,220 $1,214
Admitted Assets 4,441 4,139 3,884 3,760 3,893
Unearned Premiums 737 668 562 517 514
Loss and Loss Adjustment
Expense ("LAE") Reserves 2,278 2,206 2,144 2,151 2,194
Capital and Surplus 966 943 887 851 840
GAAP Basis
Premiums Earned $1,535 $1,379 $1,241 $1,220 $1,197
Total Assets(*) 6,150 5,819 5,385 5,299 4,518
Unearned Premiums(*) 921 825 675 595 506
Loss and LAE Reserves(*) 2,966 2,917 2,724 2,670 2,129
Shareholder's Equity 1,730 1,548 1,464 1,439 1,261
<FN>
(*) Data for periods subsequent to 1991 has been grossed up for reinsurance
recoverables in accordance with a change in accounting rules.
</FN>
The following table presents certain information with respect to
Great American's property and casualty insurance operations (dollars
in millions).
1995 1994 1993
Net written premiums $1,600 $1,489 $1,288
Net earned premiums $1,535 $1,387 $1,243
Loss and LAE 1,066 987 877
Underwriting expenses 461 424 407
Policyholder dividends(a) 13 8 2
Underwriting loss ($ 5) ($ 32) ($ 43)
GAAP ratios:
Loss and LAE ratio 69.4% 71.2% 70.6%
Underwriting expense ratio 30.0 30.6 32.8
Policyholder dividend ratio .8 .6 .1
Combined ratio 100.2% 102.4% 103.5%
Statutory ratios:
Loss and LAE ratio 69.7% 72.2% 70.8%
Underwriting expense ratio 29.7 30.8 33.1
Policyholder dividend ratio .3 .6 -
Combined ratio 99.7% 103.6% 103.9%
Industry statutory combined ratio(b) 107.2% 108.5% 106.9%
(a) Policyholder dividends may be treated as a reduction of earned
premiums elsewhere in this document.
(b) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
4
As shown in the table above, Great American's underwriting
results have been significantly better than the industry's. Great
American's results reflect an emphasis on writing commercial lines
coverages of specialized niche products where company personnel are
experts in particular lines of business.
Great American operates in a highly competitive industry that is
affected by many factors which can cause significant fluctuations in
their results of operations. The property and casualty insurance
industry has historically been subject to pricing cycles
characterized by periods of intense competition and lower premium
rates (a "downcycle") followed by periods of reduced competition,
reduced underwriting capacity due to lower policyholders' surplus
and higher premium rates (an "upcycle"). The property and casualty
insurance industry is currently in an extended downcycle, which has
lasted approximately eight years. Great American's underwriting
results have been adversely affected by this downcycle, particularly
in unfavorable pricing in certain standard commercial lines of
business.
As with other property and casualty insurers, Great American's
operating results can be adversely affected by unpredictable
catastrophe losses. Certain natural disasters (hurricanes, torna
does, floods, forest fires, etc.) and other incidents of major loss
(explosions, civil disorder, fires, etc.) are classified as
catastrophes by industry associations. Losses from these incidents
are usually tracked separately from other business of insurers
because of their sizable effects on overall operations. Great
American generally seeks to reduce its exposure to such events
through individual risk selection and the purchase of reinsurance.
Major catastrophes in recent years included the Texas hailstorms in
1995; the Northridge, California earthquake and winter storms in
1994; flooding in the Midwest in 1993; Hurricanes Andrew and Iniki,
Chicago flooding, and Los Angeles civil disorder in 1992 and Oakland
fires in 1991. Total net losses to AFC's insurance operations from
catastrophes were $48 million in 1995; $51 million in 1994;
$26 million in 1993; $42 million in 1992; and $22 million in 1991.
These amounts are included in the tables herein.
Specialty Lines
General. The Specialty Lines segment emphasizes the writing of
specialized insurance coverage where Great American personnel are
experts in particular lines of business or customer groups including
workers' compensation, executive liability, ocean and inland marine,
agricultural-related coverages (allied lines), non-profit liability,
umbrella and excess and surplus lines. The Specialty Lines workers'
compensation operations write coverage for statutorily prescribed
benefits payable to employees who are injured on the job. The
executive and professional liability divisions market liability
coverage for lawyers and corporate directors and officers. Ocean
and inland marine businesses provide such coverage as marine cargo,
boat dealers, marina operators/dealers, excursion vessels, builder's
risk, contractor's equipment, excess property and transportation
cargo. The agricultural-related businesses provide multi-peril crop
insurance covering all weather and disease perils as well as
coverage for full-time operating farms/ranches and agribusiness
operations on a nationwide basis through independent agents who
specialize in the rural market. The non-profit liability business
provides property, general/professional liability, automobile,
trustee liability, umbrella and crime coverage for a wide range of
non-profit organizations. These operations also provide excess and
surplus commercial property and casualty insurance in a variety of
industries.
Specialization is the key element to the underwriting success of
these business units. Each unit has independent management with
significant operating autonomy to oversee the important operational
functions of its business such as underwriting, pricing, marketing,
policy processing and claims service. These specialty lines are
opportunistic and their premium volume will vary based on current
market conditions. Great American continually evaluates new
specialty markets.
5
The U.S. geographic distribution of the Specialty Lines
statutory direct written premiums in 1995 compared to 1991, was as
follows:
State 1995 1991 State 1995 1991
Texas(a) 19.7% 6.1% Oklahoma 3.7% 11.7%
California 13.8 19.6 New Jersey 2.9 3.4
Pennsylvania 6.4 3.9 Ohio 2.3 3.3
New York 5.8 7.6 Michigan 2.2 3.1
Massachusetts 4.7 3.1 Kentucky * 2.6
Florida 4.2 3.3 Other 30.5 27.6
Illinois 3.8 4.7 100.0% 100.0%
______________
* less than 2%
(a) Approximately half of the Texas business in 1995 was ceded to
the NSA Group in American Premier.
The following table sets forth a distribution of statutory net
written premiums for Great American's Specialty Lines by NAIC annual
statement line for 1995 compared to 1991:
1995 1991
Other liability 25.3% 27.2%
Auto liability 15.3 16.4
Commercial multi-peril 10.6 5.4
Allied lines 10.5 7.6
Inland marine 9.9 10.4
Ocean marine 5.6 5.6
Auto physical damage 5.2 5.1
Workers' compensation 4.5 8.9
Surety 3.7 4.8
Fire 3.1 2.7
Other 6.3 5.9
100.0% 100.0%
The following table presents certain information with respect to
Great American's Specialty Lines insurance operations (dollars in
millions):
1995 1994 1993
Net written premiums $882 $801 $616
Net earned premiums $836 $724 $574
Loss and LAE 568 528 392
Underwriting expenses 245 211 167
Policyholder dividends 2 - -
Underwriting profit (loss) $ 21 ($ 15) $ 15
GAAP ratios:
Loss and LAE ratio 67.9% 72.9% 68.2%
Underwriting expense ratio 29.4 29.2 29.1
Policyholder dividend ratio .2 - -
Combined ratio 97.5% 102.1% 97.3%
Statutory ratios:
Loss and LAE ratio 68.1% 73.5% 68.7%
Underwriting expense ratio 29.4 29.5 29.8
Policyholder dividend ratio .1 .2 (.1)
Combined ratio 97.6% 103.2% 98.4%
Industry statutory combined ratio (a) 107.2% 108.5% 106.9%
(a) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
6
Marketing. The Specialty Lines operations direct their sales
efforts primarily toward independent property and casualty insurance
agents and brokers. These businesses write insurance through more
than 7,500 agents and have more than 250,000 policies in force.
Competition. Because of the specialty nature of these
coverages, competition is based primarily on service to
policyholders and agents, specific characteristics of products
offered and reputation for claims handling. Price, commissions and
profit sharing terms are also important factors. Competitors
include individual insurers and insurance groups of varying sizes,
some of which are mutual insurance companies possessing competitive
advantages in that all their profits inure to their policyholders.
Management believes that sophisticated data analysis for refinement
of risk profiles, extensive specialized knowledge and loss
prevention service have helped these businesses compete
successfully.
Commercial and Personal Lines
General. Major commercial lines of business are workers'
compensation, commercial multi-peril, umbrella (including primary
and excess layers) and general liability insurance. The workers'
compensation business has experienced solid growth and profitability
due to improved rate structures and favorable trends in medical care
costs and the success of its Drug-Free Workplace program.
Great American's Drug-Free Workplace program for workers'
compensation customers assists insureds in setting up drug testing
programs (as permitted by law), drug and alcohol education programs
and work safety programs. At December 31, 1995, there were more
than 650 insureds in 16 states with such programs producing
approximately $55 million in annual net written premiums.
Commercial business is written in 25 states where management
believes adequate rates can be obtained and where assigned risk
costs are not excessive. Great American's approach focuses on
specific customer groups, such as fine restaurants, light
manufacturers, high rise living units, hotels/motels and insureds
with large umbrella coverages. The approach also emphasizes site
visits at prospective customers to ensure underwriter familiarity
with risk factors relating to each insured and to avoid those risks
which have unacceptable frequency or severity exposures.
Personal lines of business consist primarily of standard
private passenger auto and homeowners' insurance and are written in
38 states. Great American's approach is to develop tailored rates
for its personal automobile customers based on a wide variety of
factors, including make and model of the insured automobile and the
driving record of the insureds. The approach to homeowners business
is to limit writings in locations with catastrophic exposures such
as windstorms, earthquakes and hurricanes.
7
The U.S. geographic distribution of the Commercial and Personal
Lines statutory direct written premiums in 1995 compared to 1991,
was as follows:
State 1995 1991 State 1995 1991
Connecticut 14.1% 12.0% Florida 3.2% 2.8%
New York 11.9 7.7 California 2.3 9.1
North Carolina 10.6 11.7 Massachusetts 2.2 2.6
New Jersey 9.7 7.6 Illinois 2.2 3.2
Pennsylvania 6.5 2.5 Washington * 2.7
Texas 5.0 * Oregon * 2.5
Michigan 4.0 3.5 Virginia * 2.3
Maryland 3.8 3.5 Minnesota * 2.1
Ohio 3.8 4.5 Other 20.7 19.7
100.0% 100.0%
______________
* less than 2%
The following table sets forth a distribution of statutory net
written premiums for Great American's Commercial and Personal Lines
by NAIC annual statement line for 1995 compared to 1991:
1995 1991
Auto liability 28.8% 23.9%
Workers' compensation 18.0 13.3
Commercial multi-peril 17.2 24.7
Auto physical damage 12.3 12.0
Homeowners 11.1 12.1
Other liability 7.3 9.1
Inland marine 1.7 1.8
Other 3.6 3.1
100.0% 100.0%
The following table presents certain information with respect
to Great American's Commercial and Personal Lines insurance
operations (dollars in millions):
1995 1994 1993
Net written premiums $717 $683 $666
Net earned premiums $698 $656 $664
Loss and LAE 468 430 430
Underwriting expenses 214 211 238
Policyholder dividends 11 8 2
Underwriting profit (loss) $ 5 $ 7 ($ 6)
GAAP ratios:
Loss and LAE ratio 66.9% 65.5% 64.8%
Underwriting expense ratio 30.6 32.2 35.9
Policyholder dividend ratio 1.6 1.2 .3
Combined ratio 99.1% 98.9% 101.0%
Statutory ratios:
Loss and LAE ratio 67.2% 67.0% 65.0%
Underwriting expense ratio 29.9 32.4 36.0
Policyholder dividend ratio .6 1.0 -
Combined ratio 97.7% 100.4% 101.0%
Industry statutory combined ratio (a) 107.2% 108.5% 106.9%
(a) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
8
Marketing. The Commercial and Personal Lines business units
direct their sales efforts primarily toward independent agents and
brokers. These businesses write insurance through more than 4,000
agents and have more than 515,000 policies in force.
Competition. These businesses compete with other insurers,
primarily on the basis of price (including differentiation on policy
limits, coverages offered and deductibles), agent commissions and
profit sharing terms. Customer service, loss prevention and
reputation for claims handling are also important factors.
Competitors include individual insurers and insurance groups of
varying sizes, some of which are mutual insurance companies
possessing competitive advantages in that all their profits inure to
their policyholders. Management believes that sophisticated data
analysis for refinement of risk profiles, disciplined underwriting
practices and aggressive loss prevention procedures have enabled
these businesses to compete successfully on the basis of price
without negatively affecting underwriting profitability.
Reinsurance
Consistent with standard practice of most insurance companies,
Great American reinsures a portion of its business with other
reinsurance companies and assumes a relatively small amount of
business from other insurers. Ceding reinsurance permits
diversification of risks and limits the maximum loss arising from
large or unusually hazardous risks or catastrophic events. AFC's
insurance companies enter into separate reinsurance programs due to
their differing exposures. The availability and cost of reinsurance
are subject to prevailing market conditions which may affect the
volume and profitability of business that is written. Although
reinsurance does not legally discharge the original insurer from
primary liability, risks that are reinsured are, in practice,
treated as though they were transferred to the reinsurers.
Reinsurance is provided on one of two bases: the facultative
basis or the treaty basis. Facultative reinsurance is generally
provided on a risk by risk basis. Individual risks are ceded and
assumed based on an offer and acceptance of risk by each party to
the transaction. Treaty reinsurance provides for risks to be
automatically ceded and assumed according to contract provisions.
GAI currently has treaty reinsurance programs which generally
provide reinsurance coverage above specified retention maximums.
For workers' compensation policies, the retention maximum is
$1 million per loss occurrence with reinsurance coverage for the
next $49 million. For all other casualty policies, the retention
maximum is $5 million per loss occurrence with reinsurance coverage
for the next $15 million. For property coverages, a property per
risk excess of loss treaty is maintained with a retention maximum of
$5 million per risk and reinsurance coverage for the next
$25 million; for catastrophe coverage on property risks, the
retention is $20 million with reinsurance covering 95% of the next
$130 million in losses with an additional layer of reinsurance
providing coverage for 76% of the next $50 million for the peril of
wind only. Contracts relating to reinsurance are subject to
periodic renegotiation.
9
Included in the balance sheet caption "recoverables from
reinsurers and prepaid reinsurance premiums" were $82 million on
paid losses and LAE and $709 million on unpaid losses and LAE at
December 31, 1995. The collectibility of a reinsurance balance
is based upon the financial condition of a reinsurer as well as
individual claim considerations. Market conditions over the
past few years have forced many reinsurers into financial
difficulties or liquidation proceedings. At December 31, 1995,
Great American had an allowance of approximately $79 million for
doubtful collection of reinsurance recoverables. Great American
regularly monitors the financial strength of its reinsurers.
This process periodically results in the transfer of risks to
more financially secure reinsurers. Great American's major
reinsurers include American Re-Insurance Company, Employers
Reinsurance Corporation, NAC Reinsurance Corporation, Mitsui
Marine and Fire Insurance Company, Ltd. and Taisho Marine & Fire
Insurance Company. Management believes that this present group
of reinsurers is financially sound.
Premiums written for reinsurance ceded and assumed are
presented in the following table (in millions):
1995 1994 1993
Reinsurance ceded to:
Non-affiliates $466 $402 $333
Affiliates 144 161 89
Reinsurance assumed - including
involuntary pools and associations 75 83 61
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of Great American. This
liability represents estimates of the ultimate net cost of all
unpaid losses and LAE and is determined by using case-basis
evaluations and actuarial projections. These estimates are subject
to the effects of changes in claim amounts and frequency and are
periodically reviewed and adjusted as additional information becomes
known. In accordance with industry practices, such adjustments are
reflected in current year operations.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy provisions,
the anticipated effect of inflation and general economic trends.
These anticipated trends are monitored based on actual development
and are reflected in estimates of ultimate claim costs.
Generally, reserves for reinsurance and involuntary pools and
associations are reflected in Great American's results at the
amounts reported by those entities.
See Note S to the Financial Statements for an analysis of changes
in Great American's estimated liability for losses and LAE, net of
reinsurance (and grossed up), over the past three years on a GAAP
basis.
10
The following table presents the development of Great American's
liability for losses and LAE, net of reinsurance, on a GAAP basis
for the last ten years. The top line of the table shows the
estimated liability (in millions) for unpaid losses and LAE recorded
at the balance sheet date for the indicated years. The second line
shows the re-estimated liability as of December 31, 1995. The
remainder of the table presents development as percentages of the
estimated liability. The development results from additional
information and experience in subsequent years. The middle line
shows a cumulative deficiency (redundancy) which represents the
aggregate percentage increase (decrease) in the liability initially
estimated. The lower portion of the table indicates the cumulative
amounts paid as of successive periods as a percentage of the
original loss reserve liability.
1985 1986 1987 1988 1989
LIABILITY FOR UNPAID LOSSES
AND LOSS ADJUSTMENT EXPENSES:
AS ORIGINALLY ESTIMATED $1,605 $1,843 $2,024 $2,209 $2,246
AS RE-ESTIMATED AT
DECEMBER 31, 1995 2,385 2,258 2,222 2,275 2,271
LIABILITY RE-ESTIMATED AS OF:
ONE YEAR LATER ............. 109.2% 102.7% 102.5% 99.8% 100.4%
TWO YEARS LATER ............ 116.7% 107.3% 103.6% 100.0% 99.3%
THREE YEARS LATER .......... 123.4% 109.7% 103.1% 99.7% 98.4%
FOUR YEARS LATER ........... 129.9% 110.8% 102.5% 98.7% 98.2%
FIVE YEARS LATER ........... 132.3% 111.8% 102.6% 99.1% 101.1%
SIX YEARS LATER ............ 134.8% 112.7% 103.5% 103.0% 101.1%
SEVEN YEARS LATER .......... 136.6% 115.3% 109.4% 103.0%
EIGHT YEARS LATER .......... 140.7% 122.1% 109.8%
NINE YEARS LATER ........... 148.2% 122.5%
TEN YEARS LATER ............ 148.6%
CUMULATIVE DEFICIENCY
(REDUNDANCY) 48.6% 22.5% 9.8% 3.0% 1.1%
1990 1991 1992 1993 1994 1995
LIABILITY FOR UNPAID LOSSES
AND LOSS ADJUSTMENT EXPENSES:
AS ORIGINALLY ESTIMATED $2,137 $2,129 $2,123 $2,113 $2,187 $2,257
AS RE-ESTIMATED AT
DECEMBER 31, 1995 2,103 2,040 1,985 1,959 2,080 n/a
LIABILITY RE-ESTIMATED AS OF:
ONE YEAR LATER ............. 98.6% 99.3% 99.9% 98.1% 95.1%
TWO YEARS LATER ............ 97.7% 98.7% 98.2% 92.7%
THREE YEARS LATER .......... 97.4% 98.0% 93.5%
FOUR YEARS LATER ........... 99.2% 95.8%
FIVE YEARS LATER ........... 98.4%
SIX YEARS LATER ............
SEVEN YEARS LATER ..........
EIGHT YEARS LATER ..........
NINE YEARS LATER ...........
TEN YEARS LATER ............
CUMULATIVE DEFICIENCY
(REDUNDANCY) (1.6%) (4.2%) (6.5%) (7.3%) (4.9%) n/a
1985 1986 1987 1988 1989
CUMULATIVE PAID AS OF:
ONE YEAR LATER ............. 45.5% 33.0% 29.2% 29.4% 32.3%
TWO YEARS LATER ............ 69.0% 52.5% 49.0% 48.6% 48.2%
THREE YEARS LATER .......... 84.6% 67.7% 63.5% 59.8% 59.2%
FOUR YEARS LATER ........... 96.6% 79.3% 72.2% 67.9% 67.6%
FIVE YEARS LATER ........... 106.4% 86.4% 78.5% 74.0% 74.3%
SIX YEARS LATER ............ 112.4% 91.9% 83.6% 79.5% 78.1%
SEVEN YEARS LATER .......... 117.3% 96.1% 87.7% 82.4%
EIGHT YEARS LATER .......... 121.3% 100.0% 90.3%
NINE YEARS LATER ........... 125.2% 102.7%
TEN YEARS LATER ............ 128.0%
1990 1991 1992 1993 1994 1995
CUMULATIVE PAID AS OF:
ONE YEAR LATER ............. 26.1% 26.4% 26.7% 25.2% 26.5%
TWO YEARS LATER ............ 43.2% 43.0% 43.7% 40.1%
THREE YEARS LATER .......... 55.3% 55.4% 53.6%
FOUR YEARS LATER ........... 64.8% 62.6%
FIVE YEARS LATER ........... 70.4%
SIX YEARS LATER ............
SEVEN YEARS LATER ..........
EIGHT YEARS LATER ..........
NINE YEARS LATER ...........
TEN YEARS LATER ............
This table does not present accident or policy year development
data. Furthermore, in evaluating the re-estimated liability and
cumulative deficiency (redundancy), it should be noted that each
percentage includes the effects of changes in amounts for prior
periods. For example, a deficiency (redundancy) related to
losses settled in 1995, but incurred in 1985, would be included
in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the years 1985 through 1994.
Conditions and trends that have affected development of the
liability in the past may not necessarily exist in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
The adverse development in earlier years in the table above was
caused partially by the effect of higher than projected
inflation on medical, hospitalization, material, repair and
replacement costs. Additionally, changes in the legal
environment have influenced the development patterns over the
past ten years. Two significant changes in the early to mid-
1980s were the trend towards an adverse litigious climate and
the change from contributory to comparative negligence.
11
The adverse litigious climate is evidenced by an increase in
lawsuits and damage awards, changes in judicial interpretation
of legal liability and of the scope of policy coverage, and a
lengthening of time it takes to settle cases. In addition, a
trend has developed in the manner and timeliness of first claim
notices. Historically, the first notification of claim came
directly from the claimant; in recent years, however, there has
been a gradual increase in the number of notifications in the
form of direct legal action. Not only has this notification
been less timely, it has been more adversarial in nature.
The change in rules of negligence governing tort claims has
also influenced the loss development trend. During the early to
mid-1980s, most states changed from contributory to comparative
negligence rules. Under contributory negligence rules, a
plaintiff seeking damages is barred from recovering damages for
a loss if it can be demonstrated that the plaintiff's own
negligence contributed in any way to the cause of the injury.
Under comparative negligence rules, a plaintiff's negligence is
no longer a bar to recovery. Instead, the degree of plaintiff's
negligence is compared to the negligence of any other party.
Generally, if the plaintiff's negligence is 50% or less of the
cause of the injury, the plaintiff can recover damages, but in
an amount reduced by the portion of damage attributable to the
plaintiff's own negligence. Many claims which would have been
successfully defended under contributory negligence rules now
result in an award of damages or a settlement during suit under
the comparative negligence rules.
The differences between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
("SAP") and that reported in the accompanying consolidated
financial statements in accordance with GAAP at December 31,
1995, are as follows (in millions):
Liability reported on a SAP basis $2,278
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (21)
Reinsurance recoverables 709
Liability reported on a GAAP basis $2,966
Asbestos and Environmental Reserves The insurance industry
typically includes only claims relating to polluted waste sites
and asbestos in defining environmental exposures. Great
American extends this definition to include claims relating to
breast implants, repetitive stress on keyboards, DES (a drug
used in pregnancies years ago alleged to cause cancer and birth
defects) and other latent injuries ("A&E").
Establishing reserves for A&E claims is subject to
uncertainties that are greater than those presented by other types
of claims. Factors contributing to those uncertainties include a
lack of sufficiently detailed historical data, long reporting
delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy
coverage, and the extent and timing of any such contractual
liability. Courts have reached different and sometimes
inconsistent conclusions as to when a loss is deemed to have
occurred, what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined and other policy provisions. Management
believes these issues are not likely to be resolved in the near
future.
Prior to the fourth quarter of 1994, Great American
maintained reserves only on its reported A&E claims; reserves for
claims incurred but not reported ("IBNR") were not allocated to
A&E claims. Following completion of a detailed analysis in the
fourth quarter, Great American allocated a specific portion of
its IBNR reserves to A&E claims. Based on known facts, current
law, and current industry practices, management believes that its
reserves for such claims are appropriate.
12
The following table (in millions) is a progression of reserves
for A&E exposures for which Great American has been held liable
under general liability policies written years ago where
environmental coverage was not intended and, in many cases, was
specifically excluded.
1995 1994 1993
Reserves at beginning of year $226.8 $141.5 $142.6
Incurred losses and LAE (a) 25.6 118.3 36.4
Paid losses and LAE (32.1) (33.0) (37.5)
Reserves at end of year, net of
reinsurance recoverable 220.3 226.8 141.5
Reinsurance recoverable 163.5 155.0 106.9
Gross reserves at end of year $383.8 $381.8 $248.4
<FN>
(a) Amounts in 1994 reflect an allocation of a specific portion of IBNR reserves
to A&E claims as described above.
</FN>
Since the mid-1980's, Great American has also written certain
environmental coverages (asbestos abatement and underground
storage tank liability) in which the premium charged is intended
to provide coverage for the specific environmental exposures
inherent in these policies. The business has been profitable
since its inception. To date, approximately $174 million of
premiums has been written and reserves for unpaid losses and LAE
aggregated $48 million at December 31, 1995 (not included in the above
table).
Investment Results
The following table, prepared on a GAAP basis, shows the
performance of Great American's investment portfolio, excluding
equity investments in affiliates (dollars in millions):
1995 1994 1993 1992 1991
Average Cash and Investments at Cost $2,892 $2,614 $2,475 $2,326 $2,220
Investment Income 222 205 202 203 186
Net Realized Gains 39 45 43 58 3
Percentage Earned:
Excluding Net Realized Gains 7.7% 7.8% 8.2% 8.7% 8.4%
Including Net Realized Gains 9.1% 9.6% 9.9% 11.2% 8.5%
Increase (Decrease) in Unrealized
Gains on Marketable Securities
(Net of Realized Gains and Losses) $114 ($105) $84 $61 ($110)
___________________________________
13
American Annuity Group and Great American Life Insurance Company
Data in this section relating to the period following the
sale of GALIC to American Annuity generally has been derived
from American Annuity's 1995 Form 10-K.
General
American Annuity Group ("AAG") is a holding company whose
primary asset is the capital stock of GALIC which it acquired
from GAI on December 31, 1992. GALIC sells annuities primarily
to employees of qualified not-for-profit organizations. GALIC
is currently rated "A" (Excellent) by A.M. Best. AAG and its
subsidiaries employ approximately 850 persons.
The following table (in millions) presents information
concerning GALIC.
1995 1994 1993
Statutory Accounting Principles Basis
Total Assets $5,414 $5,057 $4,758
Insurance Reserves:
Annuities $4,974 $4,655 $4,299
Life 22 21 22
Accident and Health - 1 1
$4,996 $4,677 $4,322
Capital and Surplus $ 273 $ 256 $ 251
Asset Valuation Reserve (a) 90 80 70
Interest Maintenance Reserve (a) 32 28 36
Annuity Receipts:
Flexible Premium:
First Year $ 42 $ 39 $ 47
Renewal 196 208 223
238 247 270
Single Premium 219 196 130
Total Annuity Receipts $ 457 $ 443 $ 400
Generally Accepted Accounting Principles Basis
Total Assets $5,631 $5,044 $4,883
Annuity Benefits Accumulated 4,917 4,596 4,257
Stockholder's Equity 645 449 520
(a) Allocation of surplus.
Annuity Products
Annuities are long-term retirement savings plans that
benefit from interest accruing on a tax-deferred basis.
Employees of qualified not-for-profit organizations are eligible
to save for retirement through contributions made on a before
tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free
"rollovers" of funds. Federal income taxes are not payable on
contributions or earnings until amounts are withdrawn.
14
GALIC's principal products are "FPDAs" and "SPDAs". FPDAs
are characterized by premium payments that are flexible in
amount and timing as determined by the policyholder. SPDAs are
issued in exchange for a one-time lump-sum premium payment.
Over the last five years, approximately three-fourths of GALIC's
SPDA receipts have resulted from rollovers of tax-deferred funds
previously maintained by policyholders with other insurers.
All annuity products issued by GALIC itself have been fixed
rate annuities. With a fixed rate annuity, an interest
crediting rate is initially set by the issuer, and thereafter
changed from time to time by the issuer based on market
conditions, subject to any guaranteed interest crediting rates
in the policy. At December 31, 1995, approximately 95% of
GALIC's annuity policyholder benefit reserves consisted of fixed
rate annuities which offered a minimum interest rate guarantee
of 4%. The balance of the liabilities had a minimum guaranteed
rate of 3%. In determining the frequency and extent of changes
in the crediting rate, GALIC takes into account the
profitability of its annuity business and the relative
competitive position of its products.
A GALIC subsidiary began marketing variable annuities in the
fourth quarter of 1995. With a variable annuity, the earnings
credited to the policy varies based on the investment results of
the underlying investment options chosen by the policyholder.
Policyholders may also choose to direct all or a portion of
their premiums to various fixed rate options. For these annuity
products, all premiums directed to the variable options are
placed in funds managed by third party investment advisers.
GALIC seeks to maintain a desired spread between the yield
on its investment portfolio and the rate it credits to its
policies. GALIC accomplishes this by (i) offering crediting
rates which it has the option to change, (ii) designing annuity
products that encourage persistency and (iii) maintaining an
appropriate matching of assets and liabilities. GALIC imposes
certain surrender charges and front-end fees during the first
five to ten years of a policy to discourage customers from
surrendering or withdrawing funds in those early years. Partly
due to these features, annuity surrender payments have averaged
approximately 8% of related statutory reserves over the past
five years. At December 31, 1995, GALIC had over 250,000
annuity policies in force, nearly all of which were individual
contracts.
Marketing
GALIC markets its tax-deferred annuities principally to
employees of educational institutions in the kindergarten
through high school segment. GALIC's management believes that
this market segment is attractive because of its size and growth
potential, and the persistency rate it has demonstrated. In
1995, written premiums from this market segment represented
approximately three-fourths of GALIC's total tax-qualified
premiums.
GALIC distributes its annuity products through over 80
managing general agents ("MGAs") who, in turn, direct
approximately 1,000 actively producing independent agents.
GALIC has developed its business on the basis of its
relationships with MGAs and independent agents primarily through
a consistent marketing approach and responsive service.
15
GALIC is licensed to sell its products in all states (except
New York) and in the District of Columbia. The following table
reflects the geographical distribution of GALIC's annuity
premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
California 19.4% 20.1% New Jersey 4.1% 6.3%
Florida 7.8 9.8 Minnesota 3.8 *
Massachusetts 6.5 9.1 Connecticut 3.4 6.2
Ohio 6.4 5.1 Illinois 2.9 3.3
Michigan 6.2 9.4 Iowa 2.1 *
Washington 5.4 * Rhode Island * 2.8
North Carolina 4.8 2.9 Other 22.6 20.0
Texas 4.6 5.0 100.0% 100.0%
______________
* less than 2%
Sales of annuities are affected by many factors, including:
(i) competitive rates and products; (ii) the general level of
interest rates; (iii) the favorable tax treatment of annuities;
(iv) commissions paid to agents; (v) services offered; (vi)
ratings from independent insurance rating agencies; (vii)
alternative investment products and (viii) general economic
conditions.
Acquisition of Laurentian
In November 1995, AAG completed the acquisition of
Laurentian Capital Corporation, a life insurance holding
company, for $151 million. Laurentian's principal insurance
subsidiaries are Loyal American Life Insurance Company and
Prairie States Life Insurance Company.
Loyal offers a variety of life and supplemental health
insurance products through payroll deduction plans and credit
unions. Loyal's products are marketed with the endorsement or
consent of the employer or the credit union management. In 1995
and 1994, Loyal collected $41 million and $43 million,
respectively, in life, accident and health premiums. At
December 31, 1995, Loyal had total statutory assets of
approximately $252 million, reserves for future policy benefits
of approximately $201 million, and capital and surplus of
approximately $35 million.
Prairie offers a variety of life insurance and annuity
products to finance pre-arranged funerals. Prairie markets its
products with the sponsorship of state associations of funeral
directors as well as individual funeral directors. At year-end
1995, Prairie had relationships with more than 2,000 funeral
homes nationwide. In 1995 and 1994, Prairie collected $80
million and $53 million, respectively, in life and annuity
premiums. At December 31, 1995, Prairie had total statutory
assets of approximately $359 million, reserves for future policy
benefits of approximately $320 million and capital and surplus
of approximately $24 million. In March 1996, AAG changed
Prairie's name to American Memorial Life Insurance Company.
Competition
AAG's insurance companies operate in highly competitive
markets. They compete with other insurers and financial
institutions based on many factors, including (i) ratings, (ii)
financial strength, (iii) reputation, (iv) service to
policyholders, (v) product design (including interest rates
credited), (vi) commissions and (vii) service to agents. Since
policies are marketed and distributed primarily through
independent agents, the insurance companies must also compete
for agents. Management believes that consistently targeting the
same market and emphasizing service to agents and policyholders
provides a competitive advantage.
16
More than 100 insurance companies offer tax-deferred
annuities. No single insurer dominates the marketplace.
Competitors include (i) individual insurers and insurance
groups, (ii) mutual funds and (iii) other financial institutions
of varying sizes. Some of these are mutual insurance companies
possessing competitive advantages in that all of their profits
inure to their policyholders, and many of which possess
financial resources substantially in excess of those available
to AAG's insurance companies. In a broader sense, AAG's
insurance companies compete for retirement savings with a
variety of financial institutions offering a full range of
financial services. Financial institutions have demonstrated a
growing interest in marketing investment and savings products
other than traditional deposit accounts. In addition, recent
judicial and regulatory decisions have expanded powers of
financial institutions in this regard. It is too early to
predict what impact, if any, these developments will have on
AAG's insurance companies.
Investment Results
AAG's annuity products are structured to generate a stable
flow of investable funds. AAG earns a spread by investing these
funds at an investment earnings rate in excess of the crediting
rate payable to its policyholders.
Investments comprise approximately 90% of AAG's assets and
are the principal source of its income. The following table
shows the performance of AAG's investment portfolio, excluding
equity investments in affiliates (dollars in millions):
1995 1994 1993 1992 1991
Average Cash and Investments at Cost $5,220 $4,750 $4,455 $4,078 $3,828
Gross Investment Income 411 377 358 334 340
Realized Gains 16 - 35 27 4
Percentage Earned:
Excluding Realized Gains 7.9% 7.9% 8.0% 8.2% 8.9%
Including Realized Gains 8.2% 7.9% 8.8% 8.9% 9.0%
Equity Investments in Affiliates
American Premier
Data in this section generally has been derived from
American Premier's 1995 Form 10-K.
American Premier's principal operations are conducted by a
group of insurance subsidiaries which write nonstandard
automobile insurance and workers' compensation coverage.
American Premier employs approximately 3,700 persons.
Insurance
American Premier purchased Great American's nonstandard
automobile insurance companies on December 31, 1990, and Leader
National Insurance Company in May 1993. These companies
(collectively the "NSA Group") write auto insurance coverage for
physical damage and personal liability for
(i) individuals perceived to be higher than normal risks due to
factors such as age, prior driving record, occupation or type of
vehicle driven, or (ii) those who have been cancelled or rejected
by another insurance company. Premium rates for nonstandard risks are
generally higher than for standard risks.
17
American Premier acquired Republic Indemnity Company of
America in 1989. Republic sells workers' compensation and
employer's liability insurance principally in California. The
workers' compensation portion of the coverage provides for
statutorily prescribed benefits that employers are required to
pay to employees who are injured in the course of employment.
The employer's liability portion of the coverage provides
protection to an employer for its liability for losses suffered
by its employees which are not included within the statutorily
prescribed workers' compensation coverage.
In November 1995, A.M. Best downgraded its rating of
Republic and two of the NSA Group companies from "A+" (Superior)
to "A" (Excellent) and affirmed its ratings for the remaining
NSA Group companies (substantially all "A"). In announcing
these ratings adjustments, A.M. Best expressed its opinion that
each of these ratings reflects primarily the "significant
financial leverage" of AFG. At the time of the Mergers, AFG's
debt to total capital ratio was nearly 60%; at December 31,
1995, the ratio had improved to approximately 30%.
Unless otherwise indicated, data in this section is
presented on a GAAP basis.
The profitability of a property and casualty insurance
company depends on both the underwriting of insurance and
investment of assets. When the combined ratio is under 100%,
underwriting results are generally considered profitable. The
statutory ratios for the major classes of business written by
American Premier's Insurance Group are as follows.
1995 1994 1993
Nonstandard Automobile
Loss and LAE ratio 83.7% 76.0% 72.5%
Underwriting expense ratio 21.4% 23.7% 24.4%
Combined ratio 105.1% 99.7% 96.9%
Industry combined ratio(a)(b) 102.3% 101.3% 101.7%
Workers' Compensation
Loss and LAE ratio 66.8% 57.2% 59.0%
Underwriting expense ratio 23.1% 18.3% 15.4%
Policyholder dividend ratio 14.8% 20.4% 13.7%
Combined ratio 104.7% 95.9% 88.1%
Industry combined ratio(a) 103.0% 101.4% 109.1%
<FN>
(a) Source: "Best's Review - Property/Casualty" (January 1996 Edition).
(b) The comparison shown is to the private passenger automobile insurance
industry. Although American Premier believes that there is no reliable
regularly published combined ratio data for the nonstandard automobile
industry, it believes such a ratio would be lower than the private
passenger automobile industry average shown above.
</FN>
Management believes that the NSA Group's underwriting
success as compared to the automobile insurance industry as a
whole has been due, in part, to the refinement of various risk
profiles, thereby dividing the consumer market into more defined
segments which can be underwritten or priced properly. The NSA
Group also generally writes policies of short duration, which
allow more frequent evaluations of individual risks, providing
management greater flexibility in the ongoing assessment of the
business. In addition, cost control measures have been
implemented in the underwriting and claims handling areas.
18
Republic's workers' compensation insurance operations are
highly regulated by California state authorities. In 1993,
California enacted significant changes in the workers'
compensation insurance system (the "Reform Legislation"). The
Reform Legislation has had a significant effect on competition
within the California workers' compensation market. Prior to
the repeal of the minimum rate law, competition was based
primarily on an insurer's reputation for paying dividends to
policyholders as a refund of premiums paid when experience with
such policyholders was more favorable than certain specified
levels. Management believes that Republic's record and
reputation for paying relatively high policyholder dividends had
enhanced its competitive position. With the Reform Legislation,
the premium rate levels offered by an insurer, rather than its
reputation for paying policyholder dividends, has become the
most important factor affecting competition. As a result,
Republic has modified its rate levels to reflect a change in its
mix of business toward non-participating policies which are not
subject to payment of policyholder dividends.
The NSA Group writes business in 41 states and holds
licenses to write policies in 48 states and the District of
Columbia. The U.S. geographical distribution of statutory
written premiums in 1995 compared to 1991, is presented below.
All business written in Texas and included in the table below
was assumed from a subsidiary of GAI. In addition, the NSA
Group writes approximately $50 million (4%) of its net premiums
annually in the United Kingdom.
1995 1991
Nonstandard Automobile(*)
Texas 11.6% - %
Florida 11.0 21.5
Georgia 9.9 20.5
California 8.1 -
Connecticut 5.4 5.6
Arizona 4.4 2.7
Tennessee 4.1 5.6
Pennsylvania 3.8 -
Oklahoma 3.8 1.7
Indiana 3.6 4.2
Mississippi 3.4 4.3
Alabama 3.1 4.0
Other 27.8 29.9
100.0% 100.0%
Workers' Compensation
California 96.4% 100.0%
Arizona 3.6 -
100.0% 100.0%
The NSA Group attributes its premium growth in recent years
primarily to entry into additional states, increased market
penetration in its existing states, overall growth in the
nonstandard market, premium rate increases and its purchase of
Leader National. The nonstandard market has experienced growth
in recent years as standard insurers have become more
restrictive in the types of risks they will write.
19
Loss and Loss Adjustment Expense Reserves
The following table presents the development of American
Premier's liability for losses and LAE (in millions), net of
reinsurance, on a GAAP basis since 1989 (the year American Premier
acquired its first insurance subsidiary).
1989 1990 1991 1992 1993 1994 1995
Liability for Unpaid Losses
and Loss Adjustment Expenses:
As originally estimated $369 $602 $664 $764 $916 $1,080 $1,136
As re-estimated at December 31, 1995 $308 $539 $607 $669 $832 $1,030 n/a
Liability Re-estimated as of:
One year later 97.0% 96.5% 97.0% 92.4% 91.4% 95.4%
Two years later 89.7% 93.0% 93.4% 87.9% 90.8%
Three years later 85.7% 91.0% 90.4% 87.6%
Four years later 85.5% 89.6% 91.4%
Five years later 84.7% 89.6%
Six years later 83.5%
Cumulative Redundancy 16.5% 10.4% 8.6% 12.4% 9.2% 4.6% n/a
Cumulative Paid as of:
One year later 19.5% 43.0% 44.1% 40.6% 40.9% 44.5%
Two years later 49.1% 64.4% 64.5% 59.3% 61.3%
Three years later 64.6% 75.2% 74.2% 72.0%
Four years later 71.4% 79.8% 80.7%
Five years later 75.1% 82.3%
Six years later 76.0%
Other
In 1994, American Premier sold its investment in General
Cable common stock and notes for $177 million. During 1995,
American Premier completed the divestiture of its last
industrial subsidiary for approximately $13 million. In March
1996, American Premier sold its interest in an independent
pipeline common carrier of refined petroleum products for
approximately $63 million.
Chiquita Brands International
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed food
products. In addition to bananas, these products include tropical
fruit and other fresh produce; fruit and vegetable juices and
beverages; processed fruits and vegetables; salads; and edible oil-
based consumer products. Sales of bananas accounted for
approximately 60% of Chiquita's net sales in each of the last three
years. In 1995, Chiquita sold approximately one-half of its total
banana volumes in Europe and over 40% of its banana volumes in North
America. Chiquita has generally been able to obtain a premium price
for its bananas due to its reputation for quality and its innovative
marketing techniques.
Banana marketing is highly competitive. Selling prices
which importers receive for bananas depend on the available
supplies of bananas and other fresh fruit in each market and on
the relative quality and wholesaler and retailer acceptance of
bananas offered by competing importers. Excess supplies may
result in increased price competition. Although production of
bananas tends to be relatively stable throughout the year,
competition comes not only from bananas sold by others, but also
from other fresh fruit which may be seasonal in nature. The
resulting seasonal variations in demand cause banana pricing to
be seasonal. As a result, quarterly results of Chiquita, and
therefore AFG's equity in Chiquita's earnings, are subject to
significant seasonal variations with stronger quarterly results
occurring in the first six months of the calendar year.
20
A significant portion of Chiquita's operations are conducted in
foreign countries, and are subject to risks that are inherent in
operating in such foreign countries, including government
regulation, fluctuations in exchange rates, currency restrictions
and other restraints, risks of expropriation and burdensome taxes.
In 1993, the European Union ("EU") implemented a new quota
restricting the volume of Latin American bananas imported into the
EU, which had the effect of decreasing Chiquita's volume and market
share in Europe. The quota grants preferred status to producers and
importers within the EU and its former colonies, while imposing
quotas and tariffs on bananas imported from other sources, including
Latin America, which is Chiquita's primary source of fruit. In
March 1994, four of the countries which had previously filed actions
against the EU banana policy (Costa Rica, Colombia, Nicaragua and
Venezuela) reached a settlement with the EU by signing a "Framework
Agreement." The Framework Agreement authorizes the imposition of
additional restrictive and discriminatory quotas and export licenses
on U.S. banana marketing firms, while leaving EU firms exempt.
Costa Rica and Colombia implemented this agreement in 1995,
significantly increasing Chiquita's cost to export bananas from
these sources.
In September 1995, based on a finding by the Office of the U.S.
Trade Representative ("USTR") that the EU regime unfairly
discriminates against U.S. banana marketing firms, the United
States, joined by Guatemala, Honduras and Mexico (and, in February
1996, by Ecuador), commenced an international trade challenge
against the EU regime using the procedures of the World Trade
Organization. In January 1996, the USTR announced that it had found
the Framework Agreement export policies of Costa Rica and Columbia to be
unfair and further announced that it was not imposing sanctions
at that time, pending further consultations with those countries
to eliminate harm to U.S. commerce. There can be no assurance
as to the outcome of these proceedings or their impact, if any,
on the EU quota regime or the Framework Agreement.
Citicasters
Citicasters owns and operates two network-affiliated
television stations, 14 FM radio stations and five AM radio
stations. Substantially all of Citicasters' broadcast revenues
come from the sale of advertising time to local and national
advertisers. Local advertisements are sold by each stations'
sales personnel and national spots are sold by independent
national sales representatives.
Citicasters' AM radio stations offer their listeners a wide
range of programs including news, music, discussion, commentary
and sports. Citicasters' FM radio stations offer programming
more focused on music. Citicasters' television stations receive
a significant portion of their programming from their respective
networks; the networks sell commercial advertising time within
such programming. The competitive position of the stations is
directly affected by viewer acceptance of network programs.
Citicasters currently has one CBS affiliated television station
and one ABC affiliated station. The ABC affiliate is scheduled
to switch its affiliation to CBS in June 1996. The non-network
programs broadcast by the stations are either produced by the
stations or acquired from other sources. Locally originated
programs include a wide range of show types such as news,
entertainment, sports, public affairs and religious programs.
In February 1996, AFG announced that it had entered into an
agreement to sell its common stock investment in Citicasters to
Jacor Communications, Inc. for $220 million in cash plus
warrants to purchase Jacor common stock.
______________________________________
21
Other Companies
AFEI is a holding company with assets consisting primarily of
investments in the common stock of American Financial Group,
American Annuity and Citicasters.
Through subsidiaries, AFC is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and
tennis facility) and Provident Travel Agency, both in the Greater
Cincinnati area; commercial real estate operations in Cincinnati
(office buildings and The Cincinnatian Hotel), Louisiana (Le
Pavillon Hotel), Massachusetts (Chatham Bars Inn), Texas (Driskill
Hotel) and apartments in Florida, Kentucky, Louisiana, Minnesota,
Oklahoma, Pennsylvania, Texas and Wisconsin. These operations
employ approximately 700 full-time employees.
In June 1994, AFC sold its investment in General Cable common
stock to an unaffiliated company for $27.6 million in cash. General
Cable was formed in 1992 to hold American Premier's wire and cable
and heavy equipment manufacturing businesses.
AFC was engaged in the distribution and production of filmed
entertainment programming through Spelling Entertainment Group. In
1993, AFC sold its common stock investment in Spelling to
Blockbuster Entertainment in exchange for $151 million in
Blockbuster securities.
In 1993, AFC sold its insurance brokerage operation, American
Business Insurance, Inc., to Acordia, Inc., an Indianapolis-based
insurance broker for $82 million in cash and Acordia securities.
22
Investment Portfolio
General
A breakdown of AFC's December 31, 1995, investment portfolio
by business segment follows (excluding investment in equity
securities of affiliates) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and Short-term Investments $ 155 $ 169 $ 8 $ 332 $ 332
Bonds and Redeemable
Preferred Stocks 2,398 5,272 - 7,670 7,799
Other Stocks, Options
and Warrants 216 33 - 249 249
Loans Receivable 122 464 5 591 591(*)
Real Estate and Other Investments 140 40 18 198 198(*)
$3,031 $5,978 $31 $9,040 $9,169
<FN>
(*) Carrying value used since market values are not readily
available.
</FN>
The following tables present the percentage distribution and
yields of AFC's investment portfolio (excluding investment in
equity securities of affiliates) as reflected in its financial
statements.
1995 1994 1993 1992 1991
Cash and Short-term Investments 3.7% 2.2% 2.3% 9.3% 15.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 3.7 4.0 2.8 5.7 5.3
State and Municipal .7 .8 .8 .6 .6
Public Utilities 9.4 9.1 9.3 8.5 10.7
Mortgage-Backed Securities 23.7 21.8 24.7 22.9 20.8
Corporate and Other 44.0 48.6 42.0 33.9 31.8
Redeemable Preferred Stocks 1.1 1.4 1.3 .8 .3
82.6 85.7 80.9 72.4 69.5
Net Unrealized Gain (Loss) on
Bonds and Redeemable Preferred
Stock held Available for Sale 2.2 (1.0) 1.8 .8 -
84.8 84.7 82.7 73.2 69.5
Other Stocks, Options and Warrants 2.8 2.7 4.6 2.6 3.2
Loans Receivable 6.5 8.4 8.5 12.9 9.9
Real Estate and Other Investments 2.2 2.0 1.9 2.0 2.1
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 8.0% 8.1% 8.0% 8.8% 9.5%
Including realized gains and losses 8.7% 8.1% 8.7% 9.8% 9.0%
Yield on Stocks:
Excluding realized gains and losses 4.2% 5.1% 4.4% 6.4% 2.2%
Including realized gains and losses 8.7% 35.4% 16.9% 15.5% 29.7%
Yield on Investments (a):
Excluding realized gains and losses 8.0% 8.1% 7.9% 8.7% 9.2%
Including realized gains and losses 8.7% 8.8% 9.0% 10.0% 10.0%
<FN>
(a) Excludes "Real Estate and Other Investments".
</FN>
23
Fixed Maturity Investments
Unlike most insurance groups which have portfolios that are
invested heavily in tax-exempt bonds, AFC's bond portfolio is
invested primarily in taxable bonds. The National Association
of Insurance Commissioners ("NAIC") assigns quality ratings
which range from Class 1 (highest quality) to Class 6 (lowest
quality). The following table shows AFC's bonds and mandatory
redeemable preferred stocks, by NAIC designation (and comparable
Standard & Poor's Corporation rating) as of December 31, 1995
(dollars in millions):
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $4,889 $5,102 65%
2 BBB 2,138 2,235 29
Total investment grade 7,027 7,337 94
3 BB 263 271 3%
4 B 179 184 2
5 CCC, CC, C - 1 *
6 D - 6 1
Total non-investment grade 442 462 6
Total $7,469 $7,799 100%
<FN>
_______________
(*)less than 1%
</FN>
Risks inherent in connection with fixed income securities
include loss upon default and market price volatility. Factors
which can affect the market price of securities include:
creditworthiness, changes in interest rates, the number of
market makers and investors, defaults by major issuers of
securities and public concern about concentrations in certain
types of securities by institutions.
AFC's primary investment objective for bonds and mandatory
redeemable preferred stocks is to receive interest and dividend
income rather than to realize capital gains. AFC invests in
bonds and mandatory redeemable preferred stocks that have
primarily short-term and intermediate-term maturities. This
practice allows flexibility in reacting to fluctuations of
interest rates.
Equity Investments
AFC's equity investment practice permits concentration of
attention on a relatively limited number of companies. Some of
the equity 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 and AFC's concentration in a relatively small number of
companies may permit it to identify investments with above
average potential to increase in value.
24
Regulation
AFC's insurance companies are regulated under the insurance
and insurance holding company laws of their states of domicile
and other states in which they operate. These laws, in general,
require approval of the particular insurance regulators prior to
certain actions by the insurance companies, such as the payment
of dividends in excess of statutory limitations, continuing
service arrangements with affiliates and certain other
transactions. Regulation and supervision of each insurance
subsidiary is administered by a state insurance commissioner who
has broad statutory powers with respect to the granting and
revoking of licenses, approvals of premium rates, forms of
insurance contracts and types and amounts of business which may
be conducted in light of the policyholders' surplus of the
particular company. AFC's largest insurance subsidiaries, GAI
and GALIC, are Ohio domiciled insurers. State insurance
departments conduct periodic financial examinations of insurance
companies, with GAI's and GALIC's most recent such examinations
being as of December 31, 1993. Insurance departments also
perform market conduct examinations to determine compliance with
rate and form filings and to monitor treatment of policyholders
and claimants. State insurance laws also regulate the character
of each insurance company's investments, reinsurance and
security deposits. The statutes of most states provide for the
filing of premium rate schedules and other information with the
insurance commissioner, either directly or through rating
organizations, and the commissioner generally has powers to
disapprove such filings or make changes to the rates if they are
found to be excessive, inadequate or unfairly discriminatory.
The determination of rates is based on various factors,
including loss and loss adjustment expense experience. The
failure to obtain, or delay in obtaining, the required approvals
could have an adverse impact on the operations of AFC's
insurance subsidiaries.
The NAIC is an organization which is comprised of the chief
insurance regulator for each of the 50 states and the District
of Columbia. In 1990, the NAIC began an accreditation program
to ensure that states have adequate procedures in place for
effective insurance regulation, especially with respect to
financial solvency. The accreditation program requires that a
state meet specific minimum standards in over 15 regulatory
areas to be considered for accreditation. The accreditation
program is an ongoing process and once accredited, a state must
enact any new or modified standards approved by the NAIC within
two years following adoption. As of December 1995, the District
of Columbia and 46 states were accredited including states which
regulate AFC's largest insurance subsidiaries.
The NAIC model law for Risk Based Capital applies to both
life and property and casualty companies. The risk-based
capital formulas determine the amount of capital that an
insurance company needs to ensure that it has an acceptably low
expectation of becoming financially impaired. The model law
provides for increasing levels of regulatory intervention as the
ratio of an insurer's total adjusted capital and surplus
decreases relative to its risk-based capital, culminating with
mandatory control of the operations of the insurer by the
domiciliary insurance department at the so-called "mandatory
control level". The risk-based capital formulas became
effective in 1993 for life companies and in 1995 for property
and casualty companies. Based on the 1995 results of AFC's
insurance companies, all such companies are adequately
capitalized.
The NAIC's state accreditation criteria require that a state
adopt the NAIC model law governing extraordinary dividends or a
law substantially similar to the model. In Ohio, the maximum
amount of dividends which may be paid without (i) prior approval
or (ii) expiration of a 30 day waiting period
without disapproval is the greater of statutory net income or
10% of policyholders' surplus as of the preceding December 31,
but only to the extent of earned surplus as of the preceding
December 31. The Ohio Insurance Department has broad discretion
to limit the payment of dividends by insurance companies
domiciled in Ohio.
25
The NAIC has been considering the adoption of a model
investment law for several years. The current projection for a
new model investment law is 1996, at the earliest. It is not
yet determined whether the model investment law would be added
to the NAIC accreditation standards so that adoption of the
model would be required for the achievement or continuation of
any state's accreditation. It is not possible to predict the
impact of these activities on AFC's insurance subsidiaries.
In 1994, the California Supreme Court upheld Proposition 103,
an insurance reform measure passed by California voters in 1988.
In addition to increasing rate regulation, Proposition 103 gives
the California Insurance Commissioner power to mandate rate
rollbacks for most lines of property and casualty insurance. By
its terms, Proposition 103 does not affect workers' compensation
insurance. During 1995, GAI finalized a settlement agreement
setting its refund obligation at $19 million.
ITEM 2
Properties
AFC and subsidiaries own several buildings in downtown
Cincinnati. AFC and its affiliates occupy about three-fifths of
the aggregate 580,000 square feet of commercial and office
space.
GAI, its subsidiaries, and American Premier's insurance
subsidiaries lease the majority of their office and storage
facilities in numerous cities throughout the United States,
including GAI's and AAG's home offices in Cincinnati. Two of
AAG's subsidiaries own home office buildings in Mobile, Alabama
and Rapid City, South Dakota. These companies occupy
approximately two-thirds of the 133,000 square feet and lease
the remaining space to unaffiliated tenants.
26
ITEM 3
Legal Proceedings
AFC and its subsidiaries are involved in various litigation,
most of which arose in the ordinary course of business. Except
for the following, management believes that none of the
litigation meets the threshold for disclosure under this Item.
The following information has been summarized from "Legal
Proceedings" of American Premier's 1995 Form 10-K. In May 1994,
lawsuits were filed against American Premier by USX Corporation
("USX") and its former subsidiary, Bessemer and Lake Erie
Railroad Company ("B&LE"), seeking contribution by American
Premier, as the successor to the railroad business conducted by
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 appealed the District Court's ruling to the U.S. Court
of Appeals for the Third Circuit. On December 12, 1995, the
Court of Appeals reversed the U.S. District Court decision. In
its opinion, the Court of Appeals only addressed American
Premier's procedural argument that the claims of USX could not
proceed because they are barred by the Consummation Order. The
Third Circuit expressly recognized in its opinion that it was
not deciding any of American Premier's defenses on the merits.
On January 8, 1996, American Premier filed a petition for
rehearing en banc, requesting all of the judges of the Third
Circuit to review the three-judge panel's decision. That
petition was denied on February 16, 1996. As a result, American
Premier will petition the U.S. Supreme Court to review the
bankruptcy bar issue. In the event that subsequent reviews do
not reinstate the District Court's injunction and USX's lawsuits
are eventually permitted to go forward, American Premier and its
outside counsel believe that American Premier has substantial
defenses to these lawsuits and should not suffer a material loss
as a result of this litigation.
27
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matt
ers
Not applicable - Registrant's Common Stock is owned by
American Financial Group, Inc. See the Consolidated Financial
Statements for information regarding dividends.
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods
indicated (dollars in millions).
1995 1994 1993 1992 1991
Earnings Statement Data:
Total Revenues $ 2,384 $ 2,103 $ 2,721 $ 3,929 $ 5,219
Earnings (Loss) From
Continuing Operations
Before Income Taxes 183 44 262 (145) 119
Earnings (Loss) From:
Continuing Operations 143 19 225 (162) 56
Discontinued Operations - - - - 16
Extraordinary Items (5) (17) (5) - -
Cumulative Effect of
Accounting Change - - - 85 -
Net Earnings (Loss) 138 2 220 (77) 72
Ratio of Earnings to
Fixed Charges (a) 2.23 1.69 2.62 2.15 1.54
Ratio of Earnings to
Fixed Charges and
Preferred Dividends (a) 1.90 1.40 2.26 1.94 1.42
Balance Sheet Data:
Total Assets $12,414 $10,593 $10,077 $12,389 $12,057
Long-term Debt:
Parent Company 311 490 572 557 559
American Premier (parent only) - - - 650 650
Great American Holding Corp. - 359 199 299 448
Other Subsidiaries 224 258 283 503 451
Capital Subject to
Mandatory Redemption - 3 49 28 82
Other Capital 700 396 537 280 262
<FN>
(a) Fixed charges are computed on a "total enterprise" basis.
For purposes of calculating the ratios, "earnings" have been
computed by adding to pretax earnings (excluding
discontinued operations) fixed charges and the minority
interest in earnings of subsidiaries having fixed charges
and deducting (adding) the undistributed equity in earnings
(losses) of investees. Fixed charges include interest
(excluding interest on annuity benefits), amortization of
debt discount and expense, preferred dividend requirements
of subsidiaries and a portion of rental expense deemed to be
representative of the interest factor.
</FN>
28
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial
statements and other statistical data that management believes
will enhance the understanding of AFC's financial condition and
results of operations. This discussion should be read in
conjunction with the financial statements beginning on page F-1.
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 cash needs for
administrative expenses, 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 many of its businesses are financial in nature, AFC does
not prepare its balance sheet using a current-concurrent format.
Consequently, certain traditional ratios and financial analysis
tests are not meaningful.
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 following ratios may be considered relevant
indicators of AFC's liquidity and are typically presented by AFC
in its prospectuses and similar documents. Management believes
that balance sheet ratios (debt to total capital) are more
meaningful on a parent only basis. On the other hand, earnings
statement ratios (fixed charges) are more meaningful on a total
enterprise basis since the parent only ratio is dependent, to a
great degree, on the discretionary nature of dividend payments
from subsidiaries.
AFC's ratio of debt to total capital at the holding company
level (excluding amounts due to affiliates) was .31, .68 and .57
at December 31, 1995, 1994 and 1993, respectively. Including
the note payable to American Premier, the ratio changes to .57.
at December 31, 1995. Ratios of earnings to fixed charges,
excluding and including preferred dividends, for the three
years ended December 31, 1995, are shown below.
1995 1994 1993
Earnings to fixed charges 2.23 1.69 2.62
Earnings to fixed charges plus preferred
dividends 1.90 1.40 2.26
The National Association of Insurance Commissioners' model law
for risk based capital ("RBC") applies to both life and property
and casualty companies. RBC formulas determine the amount of
capital that an insurance company needs to ensure that it has an
acceptable expectation of not becoming financially impaired. At
December 31, 1995, the capital ratios of all AFC insurance
companies substantially exceeded the RBC requirements.
29
Sources of Funds Management believes AFC has sufficient resources
to meet its liquidity requirements through operations in the short-
term and long-term future. If funds generated from operations,
including dividends from subsidiaries, are insufficient to meet
fixed charges in any period, AFC would be required to generate
cash through borrowings, sales of securities or other assets, or
similar transactions.
Bank credit lines at several subsidiary holding companies
provide ample liquidity which can be used to obtain funds for the
operating subsidiaries or, if necessary, for the parent company.
Agreements with the banks generally run for three to seven years
and are renewed before maturity. While it is highly unlikely that
all such amounts would ever be borrowed at one time, up to $395
million is available under these bank facilities.
In the past, funds have been borrowed under certain of these
bank facilities and used for working capital, capital infusions
into subsidiaries, and to retire other issues of short-term or
high-rate debt. Also, while little was drawn on the bank lines at
December 31, 1995, AFC believes it may be prudent and advisable to
borrow up to $200 million of bank debt in the normal course and
use the proceeds to retire additional amounts of public or
privately held fixed rate debt over the next year or two.
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 1995, AFC
borrowed $623 million under the agreement using the proceeds for
debt retirements, capital contributions to subsidiaries and
other corporate purposes. Borrowings, repayments and interest
payments on the line are included in "net advances from (to)
affiliates" in the following table.
30
Funds to meet the parent company's expenditures have been
provided from a variety of sources within the holding company,
from subsidiaries and directly from outside sources, as detailed
in the following table (in millions):
Cash provided by: 1995 1994 1993
Operations:
Dividends from subsidiaries $165.3 $ 17.3 $128.2
Tax allocation payments from subsidiaries 73.9 65.9 72.2
Interest and dividends from others 7.1 4.4 5.4
Federal income tax refunds 9.5 0.3 -
From operations 255.8 87.9 205.8
Other transactions:
Net advances from affiliates 162.0 135.8 -
Sales of assets to non-affiliates 3.1 15.0 107.1
Sales of assets to affiliates 43.7 - 17.3
Sales of affiliates - 6.0 1.8
Exercise of stock options 8.7 - -
Additional borrowings 98.8 0.7 10.0
Other 8.6 10.7 21.8
Total cash provided 580.7 256.1 363.8
Cash utilized for:
Operations:
Interest payments 47.9 61.8 66.7
Dividend payments 25.3 29.5 28.0
Federal income tax payments 23.0 28.6 48.3
BVIP payments 48.9 0.7 0.6
Other holding company costs 29.3 35.3 41.1
For operations 174.4 155.9 184.7
Other transactions:
Net advances to affiliates - - 138.6
Purchases of affiliates and other investments 149.4 - 29.5
Principal payments on debt 252.9 89.9 9.1
Repurchases of Preferred Stock 2.9 6.7 2.6
Other 0.9 1.4 5.4
Total cash utilized 580.5 253.9 369.9
Net increase (decrease) in cash and
short-term investments 0.2 2.2 (6.1)
Cash and short-term investments at beginning
of period 4.9 2.7 8.8
Cash and short-term investments at end
of period $ 5.1 $ 4.9 $ 2.7
Generally, over 90% of the dividends (including non-cash
dividends) received from subsidiaries have been from GAI.
Payments of dividends by GAI are subject to various laws and
regulations which limit the amount of dividends that can be paid
without regulatory approval. Under Ohio law, the maximum amount
of dividends which may be paid without (i) prior approval or
(ii) expiration of a 30 day waiting period without disapproval
is the greater of statutory net income or 10% of policyholders'
surplus as of the preceding December 31, but only to the extent
of earned surplus as of the preceding December 31. The maximum
amount of dividends payable (without prior approval) in 1996
from GAI based on its 1995 statutory net income is approximately
$129 million.
For statutory accounting purposes, equity securities are
generally carried at market value. At December 31, 1995, AFC's
insurance companies owned publicly traded equity securities with
a market value of $1.2 billion, including equity securities of
AFC affiliates (including subsidiaries) of $960 million. Since
significant amounts of these are concentrated in a relatively
small number of companies, decreases in the market prices could
adversely affect the insurance group's capital, potentially
impacting the amount of dividends available or necessitating a
capital contribution. Conversely, increases in the market
prices could have a favorable impact on the group's dividend-
paying capability.
31
Under tax allocation agreements with AFC, its 80%-owned U.S.
subsidiaries generally compute tax provisions as if filing
separate returns based on book taxable income computed in
accordance with generally accepted accounting principles. The
resulting provision (or credit) is currently payable to (or
receivable from) AFC. Following the Mergers, AFC and American
Premier will each continue to file separate consolidated tax
returns.
Uncertainties Great American's liability for unpaid losses and
loss adjustment expenses includes amounts for various liability
coverages related to environmental and hazardous product claims.
The insurance industry typically includes only claims relating
to polluted waste sites and asbestos in defining environmental
exposures, whereas Great American extends this definition to
include claims relating to breast implants, repetitive stress on
keyboards, DES (a drug used in pregnancies years ago alleged to
cause cancer and birth defects), and other latent injuries. At
December 31, 1995, Great American had recorded $220 million (net
of reinsurance recoverables of $164 million) for environmental
pollution and hazardous products claims on policies written many
years ago where, in most cases, coverage was never intended.
Due to inconsistent court decisions on many coverage issues and
the difficulty in determining standards acceptable for cleaning
up pollution sites, significant uncertainties exist which are
not likely to be resolved in the near future.
In exchange for $5 million, AFC has agreed to indemnify a
former subsidiary for up to $35 million in excess of a threshold
amount of $25 million of the costs it may incur in the 12 years
beginning April 1, 1993 to resolve environmental matters,
bankruptcy claims and certain other matters. Additionally,
another AFC subsidiary has accrued $10.3 million at December 31,
1995 for environmental costs associated with the sales of former
manufacturing properties.
While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts, circumstances
and applicable laws, management believes that sufficient
reserves have been provided.
Investments Approximately two-thirds of AFC's consolidated
assets are invested in marketable securities. A diverse
portfolio of bonds and redeemable preferred stocks accounts for
over 95% of these securities. AFC attempts to optimize
investment income while building the value of its portfolio,
placing emphasis upon long-term performance. AFC's goal is to
maximize return on an ongoing basis rather than focusing on
short-term performance.
Fixed income investment funds are generally invested in
securities with short-term and intermediate-term maturities with
an objective of optimizing total return while allowing
flexibility to react to changes in market conditions. At
December 31, 1995, the average life of AFC's bonds and
redeemable preferred stocks was approximately 6 years.
Approximately 94% 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
December 31, 1995. Investment grade securities generally bear
lower yields and lower degrees of risk than those that are
unrated and non-investment grade. Management believes that the
high quality investment portfolio should generate a stable and
predictable investment return.
32
Investments in mortgage-backed securities ("MBSs")
represented approximately 30% of AFC's bonds and redeemable
preferred stocks at
December 31, 1995. AFC invests primarily in MBSs which have a
reduced risk of prepayment. Interest only (I/Os), principal
only (P/Os) and other "high risk" MBSs represented approximately
two percent of AFC's total mortgage-backed securities portfolio.
In addition, the majority of MBSs held by AFC were purchased at
a discount. Management believes that the structure and
discounted nature of the MBSs will minimize the effect of
prepayments on earnings over the anticipated life of the MBSs
portfolio. More than 90% of AFC's MBSs are rated "AAA" with
substantially all being of investment grade quality. The
majority are collateralized by GNMA, FNMA and FHLMC single-
family residential pass-through certificates. The market in
which these securities trade is highly liquid. Aside from
interest rate risk, AFC does not believe a material risk
(relative to earnings and liquidity) is inherent in holding such
investments.
Because most income of the property and casualty insurance
subsidiaries is currently sheltered from income taxes, non-
taxable municipal bonds represent only a small portion (less
than 1%) of the portfolio.
AFC's equity securities are concentrated in a relatively
limited number of major positions. This approach allows
management to more closely monitor the companies and industries
in which they operate.
The realization of capital gains, primarily through sales of
equity securities, was an integral part of AFC's investment
program. Individual securities are sold creating gains or
losses as market opportunities exist. Pretax capital gains
recognized upon disposition of securities, including affiliates,
during the past five years have been: 1995 - $57 million; 1994
- - $50 million; 1993 - $165 million; 1992 - $104 million and 1991
- - $38 million. At December 31, 1995, the net unrealized gain on
AFC's bonds and redeemable preferred stocks was $330 million;
the net unrealized gain on equity securities was $115 million.
33
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1995
General AFC had accounted for American Premier as a subsidiary
in 1992 and the first quarter of 1993 and as an investee from
the second quarter of 1993 through the first quarter of 1995.
AFC began accounting for American Financial Group as an investee
in April 1995. As a result of these changes, current year
income statement components are not comparable to prior years
and are not indicative of future years.
Pretax earnings were $183 million in 1995 compared to
$44 million in 1994 and $262 million in 1993.
Results for 1995 include an improvement of $32 million in
underwriting results of the property and casualty insurance
segment, a $50 million increase in investment income and the
absence of nonrecurring charges recorded in 1994. These
items were partially offset by increases of $13 million in
annuity benefits and $23 million in interest on borrowed
money.
Results for 1994 include AFC's share ($28 million) of
American Premier's loss on the sale of General Cable
securities, GAI's $19 million charge relating to a rate
rollback liability in California and a $35 million charge
related to payments under AFC's Book Value Incentive Plan.
These items were partially offset by a $42 million decrease
in interest expense.
Results for 1993 include (i) $155 million in gains from the
sales of AFC's insurance agency operations, Spelling
Entertainment Group and 4.5 million shares of American
Premier and additional proceeds received on the 1990 sale of
the NSA Group to American Premier, and (ii) AFC's share
($52 million) of a tax benefit recorded by American Premier
in the second, third and fourth quarters of 1993. These
items were partially offset by a write-off of debt discount
and expenses of $24 million.
Property and Casualty Insurance - Underwriting Great American
(GAI and its property and casualty insurance subsidiaries)
manages and operates its property and casualty business as two
major sectors. 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 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 commercial and personal lines provide coverages in
commercial multi-peril, workers' compensation, umbrella and
commercial automobile, standard private passenger automobile and
homeowners insurance.
To understand the overall profitability of particular lines,
timing of claims payments and the related impact of investment
income must be considered. Certain "short-tail" lines of
business (primarily property coverages) have quick loss payouts
which reduce the time funds are held, thereby limiting
investment income earned thereon. On the other hand, "long-
tail" lines of business (primarily liability coverages and
workers' compensation) have payouts that are either structured
over many years or take many years to settle, thereby
significantly increasing investment income earned on related
premiums received.
34
Underwriting profitability is measured by the combined ratio
which is a sum of the ratio 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.
While Great American desires and seeks to earn an
underwriting profit on all of its business, it is not always
possible to do so. As a result, the company attempts to expand
in the most profitable areas and control growth or even reduce
its involvement in the least profitable ones.
Results for Great American's property and casualty insurance
subsidiaries are as follows (dollars in millions):
1995 1994 1993
Net Written Premiums (GAAP)
Specialty Operations $ 882 $ 801 $ 616
Commercial and Personal Operations 717 683 666
Other Lines 1 5 6
Aggregate $1,600 $1,489 $1,288
Combined Ratios (GAAP)
Specialty Operations 97.5% 102.1% 97.3%
Commercial and Personal Operations 99.1 98.9 101.0
Aggregate 100.2 102.4 103.5
In 1995, Great American's underwriting results significantly
outperformed the industry average for the tenth consecutive
year. Great American has been able to exceed the industry's
results by focusing on highly specialized niche products,
supplemented by commercial lines coverages and personal
automobile products.
Specialty Operations Net written premiums for the specialty
operations increased 10% during 1995 over 1994 due to increases
in specialty niche lines (primarily crop hail, excess and
surplus and executive liability). The combined ratio of the
specialty operations in 1995 reflects improved results
experienced in the crop hail and farm lines as well as coverages
of U.S. operations of Japanese companies. The 1995 combined
ratio also includes losses resulting from participation in a
voluntary pool from which Great American withdrew in 1995.
Commercial and Personal Operations Net written premiums for
the commercial and personal operations increased 5% in 1995 due
primarily to increased writing of workers' compensation and
commercial umbrella insurance. The profitability of both of
these lines improved in 1995. Workers' compensation improved
due to favorable rate action by rating bureaus, health care cost
containment programs, marketing emphasis on profitable states
and implementation of a Drug-Free Workplace program. Commercial
umbrella results improved due to a focus on low hazard risks and
more favorable pricing in the higher umbrella layers. In
addition, cost control measures reduced the underwriting expense
ratio. These improved results were offset by an increase in the
combined ratio of the personal lines operations due primarily to
weather-related losses, start-up costs from its direct-to-
consumer operation and deteriorating automobile loss experience
for accident years 1994 and 1995.
35
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested
assets.
1995 compared to 1994 Investment income increased $50
million (9%) in 1995 due to an increase in average investments
held.
1994 compared to 1993 Excluding American Premier, which was
included as a subsidiary for the first three months of 1993,
investment income increased $20 million (4%) due to an increase
in average investments held.
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFC owns a significant portion
of the voting stock) represents AFC's proportionate share of the
investees' earnings and losses.
1995 compared to 1994 AFC's equity in net earnings of
investee corporations increased $53 million in 1995. Chiquita
reported a $105 million improvement in operating income due
primarily to the absence on certain nonrecurring charges, net
gains from the sale of non-core assets, cost reductions in its
core business and higher banana prices outside the European
Union.
1994 compared to 1993 AFC's equity in net earnings (losses)
of investee corporations in 1994 includes its share ($28
million) of American Premier's loss on the sale of securities of
General Cable and its share ($52 million) of American Premier's
tax benefit in 1993. Chiquita's loss before extraordinary items
was comparable in 1994 and 1993 as improvements in Meat Division
operations and banana pricing were offset by charges and losses
relating to farm closings and banana cultivation write-downs in
Honduras and a substantial reduction of Chiquita's Japanese
banana trading operations.
Gains (Losses) on Sales of Investees The loss on sale of
investees in 1995 primarily represents a pretax loss on the sale
of Chiquita to American Premier.
The gain on sale of investees in 1994 represents a pretax
gain on the sale of General Cable common stock.
The gains on sales of investees in 1993 include (i) a pretax
gain of $52 million on the sale of Spelling Entertainment and
(ii) a pretax gain of $28 million on the public sale by AFEI of
4.5 million shares of American Premier common stock.
Gains on Sales of Subsidiaries The gains on sales of
subsidiaries in 1993 include pretax gains of (i) $44 million
from the sale of American Business Insurance, Inc. and (ii) $31
million representing an adjustment on AFC's 1990 sale of the
nonstandard automobile insurance group to American Premier.
Sales of Other Products and Services Sales of other products
and services represent American Premier's revenues from systems
and software engineering services and the manufacture and supply
of industrial products and services during the first quarter of
1993.
Annuity Benefits For GAAP financial reporting purposes,
annuity receipts are generally accounted for as interest-bearing
deposits ("annuity benefits accumulated") rather than as
revenues. Under these contracts, policyholders' funds are
credited with interest on a tax-deferred basis until withdrawn
by the policyholder. Annuity benefits represent primarily
interest related to annuity policyholders' funds held. The rate
at which GALIC credits interest on annuity policyholders' funds
is subject to change based on management's judgment of market
conditions.
36
Annuity receipts totaled approximately $460 million in 1995,
$440 million in 1994 and $400 million in 1993. Annuity receipts
have increased in 1995, 1994 and 1993 due primarily to sales of
newly introduced single premium products and, in 1995, the
development of new single premium distribution channels.
Annuity surrender payments have averaged approximately 8% of
statutory reserves over the past three years.
Annuity benefits increased $13 million (5%) in 1995 and $13
million (6%) in 1994 due primarily to an increase in average
annuity benefits accumulated.
Interest on Borrowed Money Changes in interest expense result
from fluctuations in market rates as well as changes in
borrowings. AFC has generally financed its borrowings on a long-
term basis which has resulted in higher current costs.
Interest expense included in AFC's consolidated Statement of
Earnings was comprised of (in millions):
1995 1994 1993
AFC Parent $ 86.7 $ 56.9 $ 71.1
Great American Holding 20.2 24.7 23.4
American Annuity 17.3 20.9 21.2
Great American Insurance 13.0 11.9 14.0
American Premier - - 17.2
Other Companies 1.0 .8 10.3
$138.2 $115.2 $157.2
AFC Parent's interest expense increased in 1995 due 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. AFC Parent's interest
expense decreased in 1994 due to (i) the issuance of $204
million of 9-3/4% debentures in exchange for higher rate debt
and (ii) the repurchase of $79 million principal amount of
debentures. GAHC's interest expense decreased in 1995 due to a
decrease in bank borrowings and the retirement of its floating
rate notes and 11% notes in the third and fourth quarters,
respectively. The decrease in other companies' interest expense
in 1994 is due primarily to the repayments of borrowings in
1993.
Other Operating and General Expenses Operating and general
expenses included the following charges (in millions):
1995 1994 1993
Minority interest $15 $ 9 $35
Proposition 103 - 19 -
Allowance for bad debts - 18 10
Writeoff of debt discount
and issue costs - - 24
Relocation expenses - - 8
Allowance for bad debts includes charges for possible losses
on agents' balances, reinsurance recoverables and other
receivables. Relocation expenses represent the estimated costs
of moving GALIC's operations from Los Angeles to Cincinnati.
Income Taxes See Note M to the Financial Statements for an
analysis of items affecting AFC's effective tax rate.
37
ITEM 8
Financial Statements and Supplementary Data
Page
Reports of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1995 and 1994 F-4
Consolidated Statement of Earnings:
Years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statement of Changes in Capital Accounts:
Years ended December 31, 1995, 1994 and 1993 F-6
Consolidated Statement of Cash Flows:
Years ended December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8
"Selected Quarterly Financial Data" has been included in Note Q
to the Consolidated Financial Statements.
ITEM 9
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
AFC filed a report on Form 8-K on August 29, 1995, reporting
a change in independent accountants of American Premier
Underwriters, Inc., an AFC investee. The report is incorporated
herein by reference.
PART III
The information required by the following Items will be included
in AFC's definitive Proxy Statement which will be filed with the
Securities and Exchange Commission in connection with the 1996
Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
ITEM 13 Certain Relationships and Related Transactions
38
REPORTS OF INDEPENDENT AUDITORS
Board of Directors
American Financial Corporation
We have audited the accompanying consolidated balance sheets of
American Financial Corporation and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of earnings,
changes in capital accounts, and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the
responsibility of the Corporation's management. Our responsibility
is to express an opinion on these financial statements and schedules
based on our audits. The financial statements of American Premier
Underwriters, Inc. (1994 and 1993) and General Cable Corporation
(1993) have been audited by other auditors whose reports have been
furnished to us; insofar as our opinion on the consolidated
financial statements and schedules relates to data included for
those corporations, it is based solely on the reports of other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Financial Corporation and subsidiaries at
December 31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 15, 1996
F-1
REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc.
We have audited the financial statements and the financial
statement schedules of American Premier Underwriters, Inc.
and Consolidated Subsidiaries listed in the Index to
Financial Statements and Financial Statement Schedules of
American Premier Underwriters, Inc.'s Form 10-K for the year
ended December 31, 1994 (not presented separately herein).
These financial statements and the financial statement
schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on
the financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of American
Premier Underwriters, Inc. and Consolidated Subsidiaries at
December 31, 1994 and the results of its operations and its
cash flows for each of the two years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly
in all material respects the information shown therein.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 15, 1995
(March 23, 1995 with respect to the
acquisition of American Financial
Corporation as discussed in Note B to
American Premier's financial statements)
F-2
REPORT OF GENERAL CABLE'S INDEPENDENT AUDITORS
General Cable Corporation:
We have audited the consolidated financial statements and
related schedules of General Cable Corporation and
subsidiaries listed in Item 14(a) of the Annual Report on
Form 10-K of General Cable Corporation for the year ended
December 31, 1993 (not presented separately herein). These
consolidated financial statements and related schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements and related schedules
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of General Cable Corporation and subsidiaries at
December 31, 1993 and the results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information shown therein.
DELOITTE & TOUCHE
Cincinnati, Ohio
February 18, 1994
F-3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
December 31,
1995 1994
Assets
Cash and short-term investments $ 331,825 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,386,600 and $4,336,700) 3,257,204 4,629,633
Available for sale - at market
(amortized cost - $4,211,883 and $1,938,853) 4,412,483 1,862,653
Other stocks - principally at market
(cost - $133,665 and $137,106) 248,665 208,706
Investment in investees 833,886 832,637
Loans receivable 591,105 641,964
Real estate and other investments 198,120 154,262
9,541,463 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 984,500 902,063
Agents' balances and premiums receivable 376,330 363,156
Deferred acquisition costs 330,353 231,343
Other receivables 202,099 197,119
Assets held in separate accounts 238,524 -
Prepaid expenses, deferred charges and other assets 224,858 221,914
Cost in excess of net assets acquired 183,639 175,866
$12,413,591 $10,592,651
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 2,965,700 $ 2,916,985
Unearned premiums 920,641 824,691
Annuity benefits accumulated 5,051,959 4,618,108
Life, accident and health benefit reserves 538,274 19,879
Payable to American Premier Underwriters, Inc. 639,455 -
Other long-term debt:
Direct obligations of AFC Parent Company 311,202 490,065
Obligations of AFC subsidiaries:
Great American Holding Corporation - 359,185
American Annuity Group 167,734 183,242
Other subsidiaries 56,705 74,255
Liabilities related to separate accounts 238,524 -
Accounts payable, accrued expenses and other
liabilities 675,052 601,872
Minority interest 148,338 105,506
11,713,584 10,193,788
Mandatory Redeemable Preferred Stock
(at redemption value) - 2,880
Other Preferred Stock (redemption value - $278,719) 168,484 168,484
Common Stock without par value 9,625 904
Retained earnings 335,798 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 186,100 3,500
$12,413,591 $10,592,651
See notes to consolidated financial statements.
F-4
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Year ended December 31,
1995 1994 1993
Income:
Property and casualty insurance premiums $1,535,249 $1,378,628 $1,494,796
Investment income 632,597 582,931 601,900
Realized gains on sales of securities 56,611 48,342 82,265
Equity in net earnings (losses) of
investees 36,924 (16,573) 69,862
Gains (losses) on sales of investees (107) 1,694 83,211
Gains on sales of subsidiaries - - 75,309
Sales of other products and services - - 152,100
Other income 122,259 107,758 161,260
2,383,533 2,102,780 2,720,703
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,065,945 986,996 1,064,108
Commissions and other underwriting
expenses 474,249 428,590 467,293
Annuity benefits 254,650 241,811 228,609
Interest charges on borrowed money 138,240 115,162 157,219
Cost of sales - - 134,900
Book Value Incentive Plan - 34,740 991
Other operating and general expenses 267,169 251,913 405,598
2,200,253 2,059,212 2,458,718
Earnings before income taxes and
extraordinary items 183,280 43,568 261,985
Provision for income taxes 40,121 24,650 37,296
Earnings before extraordinary items 143,159 18,918 224,689
Extraordinary items, net of income taxes (5,059) (16,818) (4,559)
Net Earnings $ 138,100 $ 2,100 $ 220,130
See notes to consolidated financial statements.
F-5
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS
(In Thousands)
Year ended December 31,
1995 1994 1993
Capital Subject to Mandatory Redemption, Including
Mandatory Redeemable Preferred Stock:
Balance at beginning of period $ 2,880 $ 49,232 $ 27,683
Purchases and redemptions (2,880) (6,625 (2,103)
Increase (decrease) in capital subject
to put option - (7,225) 23,652
Transfer to Retained Earnings - (32,502) -
Balance at End of Period $ - $ 2,880 $ 49,232
Other Preferred Stock:
Balance at beginning of period $168,484 $168,588 $168,588
Purchase - (104) -
Balance at End of Period $168,484 $168,484 $168,588
Common Stock:
Balance at beginning of period $ 904 $ 904 $ 904
Exercise of stock options 8,721 - -
Balance at End of Period $ 9,625 $ 904 $ 904
Retained Earnings:
Balance at beginning of period $223,095 $210,846 $ 42,402
Net earnings 138,100 2,100 220,130
Purchase of Preferred Stock - (56) -
Deduct cash dividends paid or declared on:
Preferred Stock (25,397) (25,728) (26,137)
Common Stock - (3,794) (1,897)
Decrease (increase) in capital subject
to put option - 7,225 (23,652)
Transfer from Capital Subject to
Mandatory Redemption - 32,502 -
Balance at End of Period $335,798 $223,095 $210,846
Net Unrealized Gain on Marketable Securities,
Net of Deferred Income Taxes:
Balance at beginning of period $ 3,500 $156,900 $ 68,100
Change during period 182,600 (153,400) 88,800
Balance at End of Period $186,100 $ 3,500 $156,900
See notes to consolidated financial statements.
F-6
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Year ended December 31
1995 1994 1993
Operating Activities:
Net earnings $ 138,100 $ 2,100 $ 220,130
Adjustments:
Extraordinary losses from retirement of debt 5,059 16,818 4,559
Depreciation and amortization 36,523 30,729 52,117
Annuity benefits 254,650 241,811 228,609
Equity in net (earnings) losses of
investees (36,924) 16,573 (69,862)
Changes in reserves on assets 1,908 17,094 11,440
Realized gains on investing activities (54,522) (59,609) (242,529)
Writeoff of debt discount and issue costs - - 30,054
Increase in reinsurance and other
receivables (29,018) (223,113) (238,166)
Increase in other assets (60,145) (96,596) (90,022)
Increase in insurance claims and reserves 142,792 345,542 241,704
Increase (decrease) in other liabilities (97,645) 67,799 50,479
Increase in minority interest 19,889 6,773 37,057
Dividends from investees 18,415 21,567 25,575
Other, net (720) (1,488) (37,062)
338,362 386,000 224,083
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,964,992) (1,726,318) (3,062,435)
Equity securities (1,034) (7,315) (20,224)
Investees and subsidiaries (68,563) (29,306) (27,578)
Real estate, property and equipment (48,794) (27,185) (41,762)
Maturities and redemptions of fixed maturity
investments 253,885 420,945 757,473
Sales of:
Fixed maturity investments 1,482,613 694,947 1,498,432
Equity securities 15,319 127,181 221,467
Investees and subsidiaries 43,697 27,621 255,517
Real estate, property and equipment 5,327 6,151 65,782
Cash and short-term investments of former
subsidiaries - - (310,225)
Decrease (increase) in other investments (6,711) (5,571) 1,435
(289,253) (518,850) (662,118)
Financing Activities:
Annuity receipts 457,525 442,703 400,141
Annuity payments (412,854) (321,038) (337,878)
Additional long-term borrowings 337,076 244,311 338,010
Reductions of long-term debt (873,489) (193,481) (601,040)
Borrowings from American Premier 716,876 - -
Repayments of borrowings from American
Premier (94,197) - -
Repurchases of preferred stock (2,880) (6,738) (2,643)
Exercise of stock options 8,721 - -
Cash dividends paid (25,397) (29,522) (28,034)
111,381 136,235 (231,444)
Net Increase (Decrease) in Cash
and Short-term Investments 160,490 3,385 (669,479)
Cash and short-term investments at beginning
of period 171,335 167,950 837,429
Cash and short-term investments at end of
period $ 331,825 $ 171,335 $ 167,950
See notes to consolidated financial statements.
F-7
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________________________________________________________________
INDEX TO NOTES
A. Mergers J. Capital Subject to Mandatory
B. Accounting Policies Redemptions
C. Acquisitions and Sales of Subsidiaries K. Other Preferred Stock
and Investees L. Common Stock
D. Segments of Operations M. Income Taxes
E. Investments N. Extraordinary Items
F. Investment in Investees O. Pending Legal Proceedings
G. Cost in Excess of Net Assets Acquired P. Benefit Plans
H. Payable to American Premier Q. Transactions with Affiliates
Underwriters, Inc. R. Quarterly Operating Results
I. Other Long-Term Debt S. Insurance
T. Additional Information
____________________________________________________________________________
A. Mergers 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. 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 continues 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 Mergers.
B. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of AFC and its subsidiaries. Changes in
ownership levels of subsidiaries and affiliates 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.
The preparation of the financial statements in conformity wi
th generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Changes in circumstances could cause actual results
to differ materially from those estimates.
F-8
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's ownership of subsidiaries and significant affiliates
with publicly traded shares at December 31, was as follows:
1995 1994 1993
American Annuity Group, Inc. ("AAG") 80% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Financial Group, Inc. ("AFG") 24% - -
American Premier Underwriters, Inc. (a) 42% 41%
Chiquita Brands International, Inc. 38% 46% 46%
Citicasters Inc. (formerly GACC) 38% 37% 20%
General Cable Corporation - (b) 45%
<FN>
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in June 1994.
</FN>
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 "available for sale"
and reported at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity if
the debt or equity securities are not classified as held to
maturity or bought and held principally for selling in the
near term. 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.
In accordance with guidance issued by the Financial
Accounting Standards Board in November 1995, AFC reassessed
the classifications of its investments and transferred fixed
maturity securities with an amortized cost of approximately
$2.0 billion to "available for sale." This "one-time"
reclassification resulted in an increase of $104 million in
the carrying value of fixed maturity investments and an
increase of $67 million in shareholders' equity. The
transfer had no effect on net earnings.
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 Investees 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 investee.
F-9
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees 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") is 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.
Deferred Acquisition Costs Policy acquisition costs
(principally commissions, premium taxes and other
underwriting expenses) related to the production of new
business are deferred ("DPAC"). For the property and
casualty companies, the deferral of acquisition costs is
limited based upon their recoverability without any
consideration for anticipated investment income. DPAC is
charged against income ratably over the terms of the related
policies. For the annuity companies, 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; (d)
estimates based on experience of expenses for investigating
and adjusting claims and (e) the current state of the law and
coverage litigation. 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.
F-10
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Annuity Benefits Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in
"annuity benefits 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.
Life, Accident and Health Benefits Reserves Liabilities for
future policy benefits under traditional ordinary life,
accident and health policies are computed using a net level
premium method. Computations are based on anticipated
investment yields (primarily 7%), mortality, morbidity and
surrenders and include provisions for unfavorable deviations.
Reserves are modified as necessary to reflect actual
experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
deposits maintained by several banks under a previously
offered tax deferred annuity program. AAG receives an annual
fee from each bank for sponsoring the program; depositors can
elect to purchase an annuity from AAG with funds in their
account.
Income Taxes AFC files consolidated federal income tax
returns which include all 80%-owned U.S. subsidiaries, except
for certain life insurance 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 provides retirement benefits, through
contributory and noncontributory defined contribution plans,
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, qualified plan which invests in securities
of AFG and affiliates for the benefit of their employees.
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 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 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
F-11
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Fair Value of Financial Instruments Methods and assumptions
used in estimating fair values are described in Note T to the
financial statements. These fair values represent point-in-
time estimates of value that might not be particularly
relevant in predicting AFC's future earnings or cash flows.
C. Acquisitions and Sales of Subsidiaries and Investees
Chiquita In April 1995, AFC sold 3.2 million shares of
Chiquita common stock to American Premier for $43.7 million
in cash. AFC realized a pretax loss of $442,000 on the sale.
General Cable 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 General Cable securities).
American Business Insurance In 1993, AFC sold its insurance
brokerage operation, American Business Insurance, Inc., to
Acordia, Inc., an Indianapolis-based insurance broker, for
cash and Acordia common stock and warrants. AFC recognized a
pretax gain of approximately $44 million on the sale.
American Premier In 1993, AFEI, whose assets consisted
primarily of investments in American Premier, General Cable
and AAG, sold 4.5 million shares of American Premier common
stock in a secondary public offering. AFC recognized a
pretax gain of $28.3 million, before minority interest, on
the sale, including recognition of a portion of previously
deferred gains related to sales of assets to American Premier
from AFC subsidiaries. In anticipation of the reduction of
AFC's ownership of American Premier below 50%, AFC ceased
accounting for it as a subsidiary and began accounting for it
as an investee in April 1993.
In 1993, American Premier paid AFC $52.8 million (including
$12.8 million in interest) representing an adjustment on the
1990 sale of AFC's non-standard automobile group to American
Premier. AFC recorded an additional pretax gain of
$31.4 million on this transaction after deferring
$21.4 million based on its then current ownership of American
Premier.
Citicasters In December 1993, GACC completed a plan of
reorganization under which AFC received approximately 20% of
new common stock in exchange for its previous holdings of
GACC stock and debt. In connection with the plan, AFC also
invested an additional $7.5 million in GACC common stock and
debt securities.
In June 1994, AFEI purchased approximately 10% of Citicasters
common stock from a third party for $23.9 million in cash.
In February 1996, Citicasters entered into a merger agreement
with Jacor Communications, Inc. providing for the acquisition
of Citicasters by Jacor. Under the agreement, AFC and its
subsidiaries would receive approximately $220 million in cash
plus warrants to buy approximately 1.5 million shares of
Jacor common stock at $28 per share. AFC expects to
F-12
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
realize a pretax gain of approximately $150 million on the
sale. Consummation of the transaction is subject to
regulatory approvals, and certain adjustments to the price
will be made if the transaction does not close by September
30, 1996.
Spelling In 1993, AFC sold its common stock investment in
Spelling to Blockbuster Entertainment in exchange for
Blockbuster common stock and warrants. AFC realized a
$52 million pretax gain on the sale.
D. Segments of Operations AFC operates its property and
casualty insurance business in two major segments: specialty
lines and commercial and personal lines. AFC's annuity
business sells tax-deferred annuities principally to
employees of primary and secondary educational institutions
and hospitals. These insurance businesses operate throughout
the United States. AFC also owns significant portions of the
voting equity securities of certain companies (investee
corporations - see Note F).
The following tables (in thousands) show AFC's assets, revenues
and operating profit (loss) by significant business segment.
Capital expenditures, depreciation and amortization are not
significant. Operating profit (loss) represents total revenues
less operating expenses. Goodwill and its amortization have
been allocated to the various segments to which they apply.
General corporate assets and expenses have not been identified
or allocated by segment.
1995 1994 1993
Assets
Property and casualty insurance (a) $ 4,919,505 $ 4,576,591 $ 4,192,908
Annuities 6,600,377 5,078,928 4,898,419
Other 59,823 104,495 86,361
11,579,705 9,760,014 9,177,688
Investment in investee corporations 833,886 832,637 899,800
$12,413,591 $10,592,651 $10,077,488
Revenues (b)(c)
Property and casualty insurance:
Premiums earned:
Specialty lines $ 836,284 $ 723,339 $ 826,882
Commercial and personal lines 697,512 648,222 661,910
Other lines (d) 1,453 7,067 6,004
1,535,249 1,378,628 1,494,796
Investment and other income 324,368 314,731 481,548
1,859,617 1,693,359 1,976,344
Annuities (e) 444,082 378,010 395,871
Other 42,910 47,984 278,626
2,346,609 2,119,353 2,650,841
Equity in net earnings (losses)
of investee corporations 36,924 (16,573) 69,862
$ 2,383,533 $ 2,102,780 $ 2,720,703
F-13
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1995 1994 1993
Operating Profit (Loss) (c)
Property and casualty insurance:
Underwriting:
Specialty lines $ 21,461 ($ 15,678) $ 23,492
Commercial and personal lines 5,315 7,087 (6,493)
Other lines (d) (31,721) (24,914) (51,100)
(4,945) (33,505) (34,101)
Investment and other income 247,494 199,292 321,701
242,549 165,787 287,600
Annuities 79,387 58,748 63,388
Other (f) (175,580) (164,394) (158,865)
146,356 60,141 192,123
Equity in net earnings (losses) of
investee corporations 36,924 (16,573) 69,862
$183,280 $ 43,568 $261,985
<FN>
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other income
earned by the respective segments.
(c) Includes American Premier's results of operations for the three months
ended March 31, 1993.
(d) Includes discontinued insurance lines.
(e) Represents primarily investment income and realized gains.
(f) Includes holding company expenses.
</FN>
E. Investments Bonds, redeemable preferred stocks and other stocks
at December 31, consisted of the following (in millions):
1995
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 46.1 47.6 1.6 (.1)
Foreign government 13.1 12.8 1.0 (1.3)
Public utilities 510.3 526.2 17.0 (1.1)
Mortgage-backed securities 865.3 897.4 32.8 (.7)
All other corporate 1,819.2 1,899.2 80.0 -
Redeemable preferred stocks 3.2 3.4 .2 -
$3,257.2 $3,386.6 $132.6 ($ 3.2)
1995
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 331.5 $ 344.8 $ 13.3 $ -
States, municipalities and
political subdivisions 18.1 17.7 .2 (.6)
Foreign government 45.1 46.5 1.4 -
Public utilities 341.1 355.2 16.7 (2.6)
Mortgage-backed securities 1,277.7 1,307.4 35.7 (6.0)
All other corporate 2,099.0 2,241.4 144.0 (1.6)
Redeemable preferred stocks 99.4 99.5 1.8 (1.7)
$4,211.9 $4,412.5 $213.1 ($12.5)
Other stocks $ 133.7 $ 248.7 $115.6 ($ .6)
1994
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 23.4 23.2 .7 (.9)
Foreign government 16.0 14.0 - (2.0)
Public utilities 614.9 566.4 .8 (49.3)
Mortgage-backed securities 952.7 872.3 .1 (80.5)
All other corporate 2,917.7 2,761.6 5.7 (161.8)
Redeemable preferred stocks 104.9 99.2 .4 (6.1)
$4,629.6 $4,336.7 $ 7.7 ($300.6)
1994
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 306.9 $ 293.0 $ .4 ($14.3)
States, municipalities and
political subdivisions 36.8 36.3 1.4 (1.9)
Foreign government 44.0 42.4 .1 (1.7)
Public utilities 84.1 79.3 .2 (5.0)
Mortgage-backed securities 721.4 671.5 .6 (50.5)
All other corporate 745.7 740.2 2.9 (8.4)
Redeemable preferred stocks - - - -
$1,938.9 $1,862.7 $ 5.6 ($81.8)
Other stocks $ 137.1 $ 208.7 $ 72.0 ($ .4)
F-14
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1995. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 7 years at December 31, 1995.
Held to Available
Maturity Matutity for Sale
One year or less 2% 1%
After one year through five years 30 17
After five years through ten years 37 39
After ten years 4 13
73 70
Mortgage-backed securities 27 30
100% 100%
Certain risks are inherent in connection with fixed maturity
securities, including loss upon default, price volatility in
reaction to changes in interest rates and general market
factors and risks associated with reinvestment of proceeds
due to prepayments or redemptions in a period of declining
interest rates.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments
are summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1995
Realized $ 50,591 $ 6,020 ($ 5,510) $ 51,101
Change in Unrealized 699,129 43,400 (259,885) 482,644
1994
Realized (1,107) 49,449 30 48,372
Change in Unrealized (673,001) (60,500) 256,725 (476,776)
1993
Realized 52,915 29,350 (12,348) 69,917
Change in Unrealized 125,112 83,700 (73,084) 135,728
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
1995 1994
Held to Available Held to Available
Maturity for Sale Total Maturity for Sale Total
Purchases $575.6 $1,389.4 $ 1,965.0 $1,090.0 $636.3 $1,726.3
Maturities and redemptions 143.2 110.7 253.9 216.0 204.9 420.9
Sales 12.9 1,469.7 1,482.6 8.0 686.9 694.9
Gross Gains 1.3 61.0 62.3 3.3 9.4 12.7
Gross Losses (2.3) (9.4) (11.7) (2.5) (11.3) (13.8)
Securities classified as "held to maturity" having an amortized
cost of $14.7 million and $8.7 million were sold for a loss of $1.8
million and $712,000 in 1995 and 1994, respectively, due to
significant deterioration in the issuers' creditworthiness.
Gross gains of $69.4 million and gross losses of $16.5 were
realized on sales of fixed maturity investments during 1993.
F-15
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investees Investment in investees 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 $1.0 billion and $890 million
at December 31, 1995 and 1994, respectively.
AFC's investment (and common stock ownership percentage) and
equity in net earnings and losses of investees are stated
below (dollars in thousands):
Investment (Ownership %) Equity in Net Earnings (Losses)
12/31/95 12/31/94 1995 1994 1993
American Financial
Group (a) $568,781 (24%) $ - $19,895 $ - $ -
American Premier(a) - 525,927 (42%) 6,907 1,147 91,700
Chiquita (b) 191,026 (38%) 237,015 (46%) 5,420 (26,670) (24,038)
Citicasters (c) 74,079 (38%) 69,695 (37%) 4,702 8,950 -
Other - - - - 2,200
$833,886 $832,637 $36,924 ($16,573) $69,862
<FN>
(a) 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; accordingly, AFC began accounting for AFG as an
investee in the second quarter of 1995. AFC's earnings are excluded
from AFG's in calculating AFC's equity in AFG's earnings.
(b) Excludes AFC's share of Chiquita's extraordinary losses on prepayment
of debt in 1995 and 1994.
(c) AFC resumed equity accounting for its investment in GACC following
GACC's reorganization at the end of 1993. See Note C concerning
agreement to sell Citicasters.
</FN>
In addition to owning the common stock of AFC, American
Financial Group owns all 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.
Included in AFC's consolidated retained earnings at
December 31, 1995, was approximately $290 million applicable
to equity in undistributed net earnings of investees.
Unamortized goodwill in investees totaled $187 million at
December 31, 1995.
Summarized financial information for AFC's investees at
December 31, 1995, is shown below (in millions). See
"Investee Corporations" in Management's Discussion and
Analysis.
American Financial Group, Inc.
Nine
months
ended
12/31/95
Cash and Investments $11,493
Other Assets 3,461
Insurance Claims and Reserves 10,981
Debt 882
Minority Interest 314
Shareholders' Equity 1,440
Revenues $ 3,076
Income before Extraordinary Items 160
Extraordinary Items 1
Net Earnings 161
F-16
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
American Premier Underwriters, Inc.
1995
1st Qtr 1994 1993
Cash and Investments $2,751
Other Assets 1,446
Insurance Claims and Reserves 1,674
Debt 510
Minority Interest 6
Shareholders' Equity 1,549
Revenues $ 433 $1,759 $1,736
Income from Continuing Operations 16 1 243
Discontinued Operations - (1) (11)
Net Income 16 - 232
Chiquita Brands International, Inc. (*)
1995 1994 1993
Current Assets $ 877 $ 804
Non-current Assets 1,747 1,970
Current Liabilities 510 574
Non-current Liabilities 1,442 1,555
Shareholders' Equity 672 645
Net Sales of Continuing Operations $2,566 $2,506 $2,533
Operating Income 176 71 104
Income (Loss) from Continuing Operations 28 (84) (51)
Discontinued Operations (11) 35 -
Extraordinary Item (8) (23) -
Net Income (Loss) 9 (72) (51)
<FN>
(*) Amounts for 1994 and 1993 were reclassified by Chiquita in 1995
to reflect discontinued operations.
Citicasters
Inc.
1995 1994 1993
Contracts, Broadcasting Licenses
and Other Intangibles $313 $275
Other Assets 103 128
Long-term Debt 132 122
Shareholders' Equity 160 151
Net Revenues $136 $197 $205
Operating Income 37 52 40
Earnings (Loss) before Extraordinary Items 14 63 (67)
Extraordinary Items - - 408(**)
Net Earnings 14 63 341
<FN>
(**) Extraordinary items include a $414 million gain on debt discharged
in the reorganization of Citicasters' predecessor.
</FN>
F-17
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1995 and
1994, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately
$107 million and $100 million, respectively. Amortization expense
was $6.2 million in 1995, $6.1 million in 1994 and $15.0 million
in 1993.
H. Payable to American Premier Underwriters, Inc. Following the
Mergers, American Premier agreed to lend up to $675 million
to AFC under a line of credit, and subsequently advanced
funds which, along with other funds available, were used by
AFC to redeem $279 million of its various debentures, repay
$187 million of Great American Holding Corporation's
("GAHC's") bank debt, and redeem $200 million of GAHC's
Notes. Borrowings under the credit line bear interest at 11-
5/8% and convert to a four-year term loan in March 2005. At
December 31, 1995, AFC had borrowed $623.2 million under the
credit agreement. Accrued interest of $16.2 million at
December 31, 1995, was paid in January 1996.
I. Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1995 1994
American Financial Corporation (Parent Company):
9-3/4% Debentures due April 2004, less discount of
$1,249 and $0 (imputed interest rate - 9.8%) $302,510 $203,759
12% Debentures due September 1999 - 120,463
10% Debentures due October 1999 - 89,620
12-1/4% Debentures due September 2003 - 51,556
Other, less discount of $0 and $456 8,692 24,667
$311,202 $490,065
Great American Holding Corporation:
Notes payable to banks $ - $160,000
11% Notes due 1998, less discount of $737 - 149,263
Floating Rate Notes due 1995, less discount of $78 - 49,922
$ - $359,185
American Annuity Group, Inc.:
11-1/8% Senior Subordinated Notes due February 2003 $101,443 $103,868
9-1/2% Senior Notes due August 2001 41,490 43,990
Notes payable to banks due September 1999 20,500 30,000
Other 4,301 5,384
$167,734 $183,242
Other Subsidiaries:
Notes payable secured by real estate $ 53,066 $ 45,354
Notes payable to banks due December 1997 - 16,000
Other 3,639 12,901
$ 56,705 $ 74,255
F-18
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1995, sinking fund and other scheduled principal
payments on debt for the subsequent five years were as follows (in
thousands):
Parent
Company Other Total
1996 $ - $ 1,788 $ 1,788
1997 5,910 1,678 7,588
1998 - 1,867 1,867
1999 - 22,452 22,452
2000 - 7,073 7,073
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.
GAHC, a wholly-owned subsidiary of AFC, has a revolving loan
agreement with groups of banks under which it can borrow up
to $300 million. Borrowings bear interest at floating rates
based on prime or LIBOR and are collateralized by stock of an
operating subsidiary. The facility is guaranteed by AFC.
AAG and AFEI have revolving credit agreements with banks
under which they can borrow up to $75 million and $20
million, respectively. Borrowings bear interest at floating
rates based on prime or LIBOR and are collateralized.
During 1995, AFC sold an aggregate of $100 million of its 9-
3/4% debentures due in 2004 for cash. In a 1994 exchange
offer, AFC issued $204 million of its 9-3/4% debentures for a
like amount of its various other debenture issues. The
related unamortized original issue discount and debt issue
costs ($24.3 million) were written off in 1993. In
connection with the offer, all of AFC's 13-1/2% debentures
not tendered for exchange were redeemed for $63.2 million in
cash.
In connection with its acquisition of GALIC in 1992, AAG
borrowed $230 million from several banks. In 1993, AAG sold
$225 million of Notes to the public and repaid the bank
loans. During 1994, AAG repurchased $77.1 million of the
Notes in exchange for $69 million in cash plus 810,000 shares
of its common stock. During 1995, AAG repurchased $4.9
million of the Notes for $5.0 million in cash.
In the first two months of 1996, AFC repurchased $48.3
million of its debentures for $52.4 million; and AAG
repurchased $22.1 million of its Notes for $24.1 million.
Cash interest payments of $98 million, $115 million and $133
million were made on long-term debt in 1995, 1994 and 1993,
respectively.
J. Capital Subject to Mandatory Redemption Capital subject to
mandatory redemption includes AFC's Mandatory Redeemable
Preferred Stock at December 31, 1994 and 1993 and, at
December 31, 1993, capital subject to a put option.
Mandatory Redeemable Preferred Stock At December 31, 1994,
there were 274,242 shares of $10.50 par value Series E
Preferred Stock outstanding. These shares were retired, at
par, in December 1995. During 1994, AFC redeemed all 150,212
outstanding shares of Series I Preferred Stock and 230,469
shares of Series E Preferred Stock for approximately
$6.6 million. During 1993, AFC purchased 75,106 shares of
Series I Preferred Stock for approximately $2.1 million.
F-19
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Capital Subject to Put Option Under a 1983 agreement,
certain members of the Lindner family (the "Group") had the
right to "put" to AFC their shares of AFC Common Stock or
options at a defined value. In anticipation of the
extinguishment of the Group's rights due to the Mergers, the
allocation of capital equal to that value ($32.5 million) was
reclassified to Retained Earnings at December 31, 1994.
K. 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. The outstanding shares of
preferred stock consisted of the following:
Series F, $1 par value - authorized 15,000,000
shares; annual dividends per share $1.80; 10% may be
retired at AFC's option at $20 per share in 1996;
13,744,754 shares (stated value - $167.9 million)
outstanding at December 31, 1995 and 1994.
Series G, $1 par value - authorized 2,000,000
shares; annual dividends per share $1.05; may be retired
at AFC's option at $10.50 per share; 364,158 shares
(stated value - $600,000) outstanding at December 31,
1995 and 1994.
In 1994, AFC purchased 8,500 shares of Series F Preferred
Stock from a subsidiary's profit sharing plan for $159,000.
L. Common Stock At December 31, 1994, there were 18,971,217
shares of AFC Common Stock outstanding. Prior to the Mergers
discussed in Note A, AFC issued 762,500 common shares upon
exercise of stock options. In connection with the Mergers,
the number of authorized common shares was increased to 53.5
million and the number of outstanding shares was increased to
53.0 million. At December 31, 1995, American Financial Group
owned all 53.0 million outstanding shares of AFC's Common
Stock.
F-20
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Income Taxes The following is a reconciliation of income
taxes at the statutory rate of 35% and income taxes as shown
in the Statement of Earnings (in thousands):
1995 1994 1993
Earnings before income taxes and
extraordinary items $183,280 $ 43,568 $261,985
Extraordinary items before income taxes (5,180) (17,192) (4,559)
Adjusted earnings before income taxes $178,100 $ 26,376 $257,426
Income taxes at statutory rate $ 62,335 $ 9,232 $ 90,099
Effect of:
Losses (utilized) not utilized (22,129) 19,267 (59,141)
Dividends received deduction (7,533) (8,528) (8,336)
Minority interest 5,166 2,998 12,082
Amortization of intangibles 2,048 1,987 2,658
Tax exempt interest (640) (689) (659)
Foreign income taxes 359 6 76
State income taxes 81 149 820
Other 313 (146) (303)
Total provision 40,000 24,276 37,296
Amounts applicable to
extraordinary items 121 374 -
Provision for income taxes as shown
on the Statement of Earnings $ 40,121 $ 24,650 $ 37,296
Adjusted earnings (loss) before income taxes consisted of the following
(in thousands):
1995 1994 1993
Subject to tax in:
United States $178,100 $ 28,422 $255,682
Foreign jurisdictions - (2,046) 1,744
$178,100 $ 26,376 $257,426
The total income tax provision consists of (in thousands):
1995 1994 1993
Current taxes:
Federal $ 38,704 $ 21,028 $ 43,592
Foreign - - 503
State 124 226 1,843
Deferred taxes (credits):
Federal 620 3,012 (8,256)
Foreign 552 10 (386)
$ 40,000 $ 24,276 $ 37,296
For income tax purposes, certain members of the AFC
consolidated tax group had approximately $268 million of
operating loss carryforwards available at December 31, 1995.
The carryforwards are scheduled to expire as follows: $1 million
in 1996, $21 million in 1997 through 2001, $143 million
in 2002 through 2006 and $103 million in 2007 through 2010.
F-21
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes reflect the impact of temporary
differences between the carrying amounts of assets and
liabilities recognized for financial reporting purposes and
the amounts recognized for tax purposes. The significant
components of deferred tax assets and liabilities for AFC's
tax group included in the Balance Sheet at December 31, were
as follows (in millions):
1995 1994
Deferred tax assets:
Net operating loss carryforwards $ 93.8 $ 80.0
Insurance claims and reserves 195.9 202.1
Other, net 41.2 53.5
330.9 335.6
Valuation allowance for deferred
tax assets (91.9) (111.1)
239.0 224.5
Deferred tax liabilities:
Deferred acquisition costs (89.8) (78.3)
Investment securities (210.8) (103.6)
(300.6) (181.9)
Net deferred tax asset (liability) ($ 61.6) $ 42.6
The gross deferred tax asset has been reduced by a valuation
allowance based on an analysis of the likelihood of
realization. Factors considered in assessing the need for a
valuation allowance include: (i) recent tax returns, which
show neither a history of large amounts of taxable income nor
cumulative losses in recent years, (ii) opportunities to
generate taxable income from sales of appreciated assets, and
(iii) the likelihood of generating larger amounts of taxable
income in the future. The likelihood of realizing this asset
will be reviewed periodically; any adjustments required to
the valuation allowance will be made in the period in which
the developments on which they are based become known.
Cash payments for income taxes, net of refunds, were
$12.9 million, $30.0 million and $49.6 million for 1995, 1994
and 1993, respectively.
N. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses recorded by the following
companies from their debt retirements. Amounts shown are net
of minority interest and income tax benefits (in thousands):
1995 1994 1993
AFC (parent) ($1,713) ($ 6,454) $ -
Subsidiaries:
GAHC (611) - -
AAG (201) (1,328) (4,559)
Investee:
Chiquita (2,534) (9,036) -
($5,059) ($16,818) ($4,559)
O. 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.
P. Benefit Plans AFC expensed ESORP contributions of
$11.0 million in 1995, $6.2 million in 1994 and $9.4 million
in 1993. AFC expensed postretirement benefits of $2.9
million in 1995, $2.4 million in 1994 and $3.1 million in
1993.
F-22
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Q. Transactions With Affiliates In 1993, AFC sold stock of
an affiliate to certain of its officers and employees for
$1.8 million in cash and $270,000 in 5.25% unsecured notes
due in five equal annual installments beginning in 1996.
At December 31, 1993, an AFC real estate subsidiary owed
$452,000 to The Provident Bank under a loan purchased by
Provident in 1991 from an unrelated bank. The loan was
repaid in 1994. Members of the Lindner family are majority
owners of Provident's parent. In 1995, a subsidiary of AFC
sold a house to its Chairman for $1.8 million. Also during
1995, AFC purchased from American Premier (i) certain
properties for $15.9 million; (ii) a small reinsurance
subsidiary for $13.7 million; and (iii) shares of AAG for
$553,000. All of the above transactions have taken place at
approximate market rates or values and, in the opinion of
management, all amounts receivable are fully collectible.
R. Quarterly Operating Results (Unaudited) The operations of
certain of AFC's business segments are seasonal in nature.
While insurance premiums are recognized on a relatively level
basis, claim losses related to adverse weather (snow, hail,
hurricanes, tornadoes, etc.) may be seasonal. Quarterly
results necessarily rely heavily on estimates. These
estimates and certain other factors, such as the nature of
affiliates' operations and discretionary sales of assets,
cause the quarterly results not to be necessarily indicative
of results for longer periods of time. See Notes A and C for
changes in ownership of companies whose revenues are included
in the consolidated operating results and for the effects of
gains on sales of subsidiaries and affiliates in individual
quarters. The following are quarterly results of
consolidated operations for the two years ended December 31,
1995 (in millions).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1995
Revenues $553.2 $581.2 $588.4 $660.7 $2,383.5
Earnings before
extraordinary items 29.9 17.3 35.8 60.2 143.2
Extraordinary items - (3.1) - (2.0) (5.1)
Net earnings 29.9 14.2 35.8 58.2 138.1
1994
Revenues $523.6 $508.0 $537.5 $533.7 $2,102.8
Earnings (loss) before
extraordinary items 26.7 23.2 7.5 (38.5) 18.9
Extraordinary items (15.7) (.7) (.5) .1 (16.8)
Net earnings (loss) 11.0 22.5 7.0 (38.4) 2.1
Results for 1994 included credits of $3.9 million and
$5.3 million in the second and third quarters and a fourth
quarter charge of $43.9 million for units outstanding under
AFC's Book Value Incentive Plan.
Realized gains on sales of securities amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1995 $ 3.5 $ .9 $17.8 $34.4 $56.6
1994 14.9 8.2 20.0 5.2 48.3
F-23
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
S. Insurance Securities owned by insurance subsidiaries having
a carrying value of approximately $808 million at
December 31, 1995, were on deposit as required by regulatory
authorities.
Other income includes life, accident and health premiums of
$15.7 million in 1995, $2.2 million in 1994 and $2.4 million
in 1993.
During the third quarter of 1994, the California Supreme
Court upheld Proposition 103, an insurance reform measure
passed by California voters in 1988. In addition to
increasing rate regulation, Proposition 103 gives the
California insurance commissioner power to mandate rate
rollbacks for most lines of property and casualty insurance.
GAI recorded a charge of $26 million (included in "Other
operating and general expenses") in the third quarter of 1994
in response to the California court decision. This charge
was revised at December 31, 1994 to reflect a settlement
agreement signed in March 1995 setting GAI's refund
obligation at $19 million. The agreement was finalized in
1995 following a required waiting period.
Several proposals have been made in recent years to change
the federal income tax system. Some proposals included
changes in the method of treating investment income and tax
deferred income. To the extent a new tax law reduces or
eliminates the tax deferred status of AFC's annuity products,
that segment could be materially affected.
Insurance Reserves The liability for losses and loss
adjustment expenses for certain long-term scheduled payments
under workers' compensation, auto liability and other
liability insurance has been discounted at rates ranging from
4% to 8%. As a result, the total liability for losses and
loss adjustment expenses at December 31, 1995, has been
reduced by $67 million.
The following table provides an analysis of changes in the
liability for losses and loss adjustment expenses, net of
reinsurance (and grossed up), over the past three years on a
GAAP basis (in millions):
1995 1994 1993
Balance at beginning of period $2,187 $2,113 $2,886
Reserves of American Premier at date
of deconsolidation - - (785)
Provision for losses and loss adjustment
expenses occurring in the current year 1,174 1,027 1,103
Net decrease in provision for claims
occurring in prior years (108) (40) (39)
1,066 987 1,064
Payments for losses and loss adjustment
expenses occurring during:
Current year (416) (381) (363)
Prior years (580) (532) (689)
(996) (913) (1,052)
Balance at end of period $2,257 $2,187 $2,113
Add back reinsurance recoverables 709 730 611
Unpaid losses and LAE included in
Balance Sheet, gross of reinsurance $2,966 $2,917 $2,724
F-24
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by
AFC's insurance companies.
1995 1994 1993
Insurance group investment income:
Fixed maturities $614.1 $560.6 $566.2
Equity securities 5.5 8.3 9.9
Other 7.9 6.7 4.7
627.5 575.6 580.8
Insurance group investment expenses (*) (31.3) (32.0) (38.9)
$596.2 $543.6 $541.9
<FN>
(*)Included primarily in "Other operating and general
expenses" in the Statement of Earnings.
</FN>
Statutory Information AFC's insurance subsidiaries are required
to file financial statements with state insurance regulatory
authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Net earnings and
policyholders' surplus on a statutory basis for the insurance
subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
1995 1994 1993 1995 1994
Property and casualty
companies $139 $63 $179 $966 $943
Life insurance companies 76 54 44 273 256
Reinsurance In the normal course of business, AFC's
insurance subsidiaries assume and cede reinsurance with other
insurance companies. The following table shows (in millions)
(i) amounts deducted from property and casualty premium
income accounts in connection with reinsurance ceded, (ii)
amounts included in income for reinsurance assumed and (iii)
reinsurance recoveries deducted from losses and loss
adjustment expenses.
1995 1994 1993
Reinsurance ceded to:
Non-affiliates $466 $402 $333
Affiliates 144 161 89
Reinsurance assumed - including
involuntary pools and associations 75 83 61
Reinsurance recoveries 259 429 343
T. Additional Information Total rental expense for various
leases of railroad rolling stock, office space and data
processing equipment was $25 million, $22 million and
$24 million for 1995, 1994 and 1993, respectively. Sublease
rental income related to these leases totaled $6.2 million in
1995, $6.4 million in 1994 and $6.6 million in 1993.
Future minimum rentals, related principally to office space
and railroad rolling stock, required under operating leases
having initial or remaining noncancelable lease terms in
excess of one year at December 31, 1995, were as follows:
1996 - $32 million, 1997 - $25 million, 1998 - $18 million,
1999 - $11 million, 2000 - $5 million and $7 million
thereafter. At December 31, 1995, minimum sublease rentals
to be received through the expiration of the leases
aggregated $27 million.
F-25
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other operating and general expenses included charges for
possible losses on agents' balances, reinsurance recoverables
and other receivables in the following amounts: 1995 - $0,
1994 - $18 million and 1993 - $10 million. The aggregate
allowance for such losses amounted to approximately
$125 million and $109 million at December 31, 1995 and 1994,
respectively.
Fair Value of Financial Instruments The following table
presents (in millions) the carrying value and estimated fair
value of AFC's financial instruments at December 31.
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $7,670 $7,799 $6,492 $6,199
Other stocks 249 249 209 209
Liabilities:
Annuity benefits
accumulated $5,052 $4,887 $4,618 $4,510
Long-term debt:
Parent company 311 325 490 473
Subsidiaries 224 234 617 618
When available, fair values are based on prices quoted in the
most active market for each security. If quoted prices are
not available, fair value is estimated based on present
values, discounted cash flows, fair value of comparable
securities, or similar methods. The fair value of the
liability for annuities in the payout phase is assumed to be
the present value of the anticipated cash flows, discounted
at current interest rates. Fair value of annuities in the
accumulation phase is assumed to be the policyholders' cash
surrender amount.
Financial Instruments with Off-Balance-Sheet Risk On
occasion, AFC and its subsidiaries have entered into
financial instrument transactions which may present off-
balance-sheet risks of both credit and market risk nature.
These transactions include commitments to fund loans, loan
guarantees and commitments to purchase and sell securities or
loans. At December 31, 1995, AFC and its subsidiaries had
commitments to fund credit facilities and contribute limited
partnership capital totaling $17 million.
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by AFC's
subsidiaries are subject to various state laws, federal
regulations and debt covenants which limit the amount of
dividends, loans and advances that can be paid. The maximum
amount of dividends payable (without prior approval from
state insurance regulators) in 1996 from GAI based on net
income is approximately $129 million. Total "restrictions"
on intercompany transfers from AFC's subsidiaries cannot be
quantified due to the discretionary nature of the
restrictions.
F-26
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note R to
the Consolidated Financial Statements.
B. Schedules filed herewith for 1995, 1994 and 1993:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable,
not required, or the information required thereby is set
forth in the Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Reports Items Reported
December 13, 1995 Court of Appeals Ruling - USX
Litigation
February 14, 1996 Agreement to sell Citicasters
Common Stock
S-1
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
December 31,
1995 1994
Assets:
Cash and short-term investments $ 5,098 $ 4,896
Investment in securities 417 1,786
Receivables from affiliates 679,659 288,271
Investment in subsidiaries 1,259,304 976,151
Investment in investees 298,634 233,908
Other assets 10,622 49,747
$2,253,734 $1,554,759
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 60,899 $ 83,783
Payable to affiliates 1,181,626 582,048
Long-term debt 311,202 490,065
Mandatory redeemable preferred stock - 2,880
Other capital 700,007 395,983
$2,253,734 $1,554,759
Condensed Statement of Earnings
Year ended December 31,
1995 1994 1993
Income:
Dividends from:
Subsidiaries $165,723 $ 25,571 $248,168
Investees 5,368 3,514 4,035
171,091 29,085 252,203
Equity in undistributed earnings
of subsidiaries and investees 111,227 113,631 65,435
Realized gains (losses) on sales of:
Securities 2,389 7,477 (1,743)
Investees (5,034) (5,555) 59,182
Investment and other income 35,226 26,546 21,370
314,899 171,184 396,447
Costs and Expenses:
Interest charges on intercompany borrowings 4,198 3,494 3,736
Interest charges on other borrowings 86,655 56,945 71,057
Book Value Incentive Plan - 44,166 596
Other operating and general expenses 40,766 23,011 59,073
131,619 127,616 134,462
Earnings before income taxes and
extraordinary items 183,280 43,568 261,985
Provision for income taxes 40,121 24,650 37,296
Earnings before extraordinary items 143,159 18,918 224,689
Extraordinary items, net of income taxes (5,059) (16,818) (4,559)
Net Earnings $138,100 $ 2,100 $220,130
S-2
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
Year ended December 31
1995 1994 1993
Operating Activities:
Net earnings $138,100 $ 2,100 $220,130
Adjustments:
Extraordinary losses from retirement
of debt 5,059 16,818 4,559
Equity in earnings of subsidiaries (172,079) (88,060) (172,803)
Equity in net earnings of investees (15,331) (2,872) (1,963)
Depreciation and amortization 492 612 3,778
Realized losses (gains) on sales of
subsidiaries and investments 2,797 (1,929) (57,421)
Writeoff of debt discount and issue costs - - 24,814
Change in receivables from and payables
to affiliates (463,634) 125,427 (196,338)
Increase (decrease) in payables (50,797) 37,051 (13,146)
Dividends from subsidiaries and investees 170,693 20,504 131,914
Other 38,421 (2,194) (16,943)
(346,279) 107,457 (73,419)
Investing Activities:
Purchases of subsidiaries and other
investments (149,427) - (29,501)
Sales of subsidiaries and other investments 46,831 20,975 126,196
Other, net (73) (788) 344
(102,669) 20,187 97,039
Financing Activities:
Additional long-term borrowings 98,828 732 9,984
Reductions of long-term debt (252,880) (89,901) (9,062)
Borrowings from American Premier 716,876 - -
Repayments of borrowings from American
Premier (94,197) - -
Repurchases of preferred stock (2,880) (6,738) (2,643)
Exercise of stock options 8,721 - -
Cash dividends paid (25,318) (29,522) (28,034)
449,150 (125,429) (29,755)
Net Increase (Decrease) in Cash
and Short-term Investments 202 2,215 (6,135)
Cash and short-term investments at beginning
of period 4,896 2,681 8,816
Cash and short-term investments at end
of period $ 5,098 $ 4,896 $ 2,681
S-3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1995
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
(a)
AFFILIATION DEFERRED RESERVES FOR
WITH POLICY UNPAID CLAIMS (b)
REGISTRANT ACQUISITION AND CLAIM DISCOUNT (c)
COSTS ADJUSTMENT DEDUCTED IN UNEARNED EARNED
EXPENSES COLUMN C PREMIUMS PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1995 $181 $2,966 $67 $921 $1,535
1994 $166 $2,917 $71 $825 $1,379
1993(d) $1,495
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
CLAIMS AND CLAIM AMORTIZATION PAID
NET ADJUSTMENT EXPENSES OF DEFERRED CLAIMS PREMIUMS
INVESTMENT CURRENT PRIOR POLICY AND CLAIM WRITTEN
INCOME YEAR YEARS ACQUISITION ADJUSTMENT
COSTS EXPENSES
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1995 $197 $1,174 ($108) $356 $ 996 $1,600
1994 $177 $1,027 ($ 40) $329 $ 913 $1,481
1993(d) $206 $1,103 ($ 39) $345 $1,052 $1,587
(a) Grossed up for reinsurance recoverables of $709 and $730 at
December 31, 1995 and 1994, respectively.
(b) Discounted at rates ranging from 4% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $201 and $172 at
December 31, 1995 and 1994, respectively.
(d) Includes American Premier's Insurance Group through March 31, 1993.
AMERICAN FINANCIAL GROUP, INC.
Information for American Financial Group is not included since that company
files such information with the Commission as a registrant in its own right.
S-4
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3 Articles of Incorporation and Code
of Regulations, filed as Exhibit 3
to AFC's Form 10-K for 1994. (*)
4 Instruments defining the The rights of holders of
rights of security holders. Registrant's Preferred Stock are
defined in the Articles of Incor-
poration. Registrant has no out-
standing debt issues exceeding
10% of the assets of Registrant
and consolidated subsidiaries.
10(a) Nonqualified ESORP Plan, filed as
Exhibit 10(c) to AFC's Form 10-K
for 1994. (*)
10(b) Bonus Plan for 1996. ____
12 Computation of ratios of earnings
to fixed charges and fixed charges
and preferred dividends. ____
16 Letter from Deloitte & Touche LLP
included in AFC's Form 8-K filed
on August 29, 1995. (*)
21 Subsidiaries of the Registrant. ____
23 Consents of independent auditors ____
27 Financial data schedule (**)
28 Information from reports furnished to
state insurance regulatory authorities. ____
<FN>
(*) Incorporated herein by reference
(**) Copy included in Report filed electronically with the Securities
and Exchange Commission.
</FN>
E-1
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in Thousands)
Year Ended December 31,
1995 1994 1993 1992 1991
Pretax income (loss) excluding
discontinued operations $178,100 $ 26,376 $257,426 ($144,854) $118,710
Minority interest in
subsidiaries having
fixed charges(*) 14,757 8,565 34,800 37,685 44,369
Less undistributed equity in
losses (earnings) of investee (14,820) 49,010 (25,067) 376,020 5,817
Fixed charges:
Interest expense 137,953 114,803 153,836 212,150 245,757
Debt discount and expense 1,078 1,240 5,273 4,698 6,961
One-third of rentals 6,162 5,119 5,801 16,341 45,286
EARNINGS $323,230 $205,113 $432,069 $502,040 $466,900
Fixed charges:
Interest expense $137,953 $114,803 $153,836 $212,150 $245,757
Debt discount and expense 1,078 1,240 5,273 4,698 6,961
One-third of rentals 6,162 5,119 5,801 16,341 45,286
Pretax preferred dividend
requirements of subsidiaries - - - - 598
Capitalized interest - - - - 5,495
FIXED CHARGES $145,193 $121,162 $164,910 $233,189 $304,097
Fixed charges and
preferred dividends:
Fixed charges - per above $145,193 $121,162 $164,910 $233,189 $304,097
Preferred dividends 25,376 25,709 26,122 26,218 24,899
FIXED CHARGES AND
PREFERRED DIVIDENDS $170,569 $146,871 $191,032 $259,407 $328,996
Ratio of Earnings to
Fixed Charges 2.23 1.69 2.62 2.15 1.54
Earnings in excess of
Fixed Charges $178,037 $ 83,951 $267,159 $268,851 $162,803
Ratio of Earnings to Fixed
Charges and Preferred Dividends 1.90 1.40 2.26 1.94 1.42
Earnings in excess of Fixed
Charges and Preferred Dividends $152,661 $ 58,242 $241,037 $242,633 $137,904
<FN>
(*) Amounts include preferred dividends of subsidiaries.
</FN>
E-2
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1995.
All corporations are subsidiaries of AFC and, if indented, subsidiaries
of the company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
American Financial Enterprises, Inc. Connecticut 83%
Great American Holding Corporation Ohio 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 80
Great American Life Insurance Company Ohio 100
American Empire Surplus Lines Insurance
Company Delaware 100
American National Fire Insurance Company New York 100
Great American Management Services, Inc. Ohio 100
Mid-Continent Casualty Company Oklahoma 100
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AFC owns a significant portion and accounts for
under the equity method.
E-3
AMERICAN FINANCIAL CORPORATION
EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED
TO STATE INSURANCE REGULATORY AUTHORITIES
Schedule P of Annual Statements
A. CONSOLIDATED PROPERTY AND CASUALTY ENTITIES - See Attached
Schedules
Schedule P (prepared in accordance with the rules prescribed by
the National Association of Insurance Commissioners) includes the
reserves of AFC's consolidated property and casualty subsidiaries.
The following is a summary of Schedule P reserves (in millions):
Schedule P - Part 1 Summary - col. 33 $1,912
- col. 34 366
Statutory Loss and Loss Adjustment Expense Reserves $2,278
B. UNCONSOLIDATED SUBSIDIARIES None
C. 50% OR LESS OWNED PROPERTY AND CASUALTY AFFILIATES
Not Included
Information for American Financial Group, Inc. for 1995 is not
included since that company files such information with the
Commission as a registrant in its own right.
E-4
AMERICAN FINANCIAL CORPORATION
EXHIBIT 23 - CONSENTS OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement
No. 33-59989 on Form S-3 and Registration Statement No. 33-
63441 on Form S-3 of our report dated March 15, 1996, with
respect to the consolidated financial statements and
schedules of American Financial Corporation included in the
Annual Report on Form 10-K for the year ended December 31,
1995.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 27, 1996
____________________________________________________________
We consent to the incorporation by reference in Registration
Statement
No. 33-59989 on Form S-3 and Registration Statement No. 33-
63441 on Form S-3 of our report dated February 15, 1996
(March 23, 1995 with respect to the acquisition of American
Financial Corporation as discussed in Note B to the
financial statements), appearing in the Annual Report on
Form 10-K of American Financial Corporation for the year
ended December 31, 1995.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 27, 1996
E-5
Signatures
Pursuant to the requirements of Section 13 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
Signed: March 27, 1996 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 27, 1996
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director (*) March 27, 1996
Theodore H. Emmerich
s/JAMES E. EVANS Director March 27, 1996
James E. Evans
s/CARL H. LINDNER III Director March 27, 1996
Carl H. Lindner III
s/WILLIAM R. MARTIN Director (*) March 27, 1996
William R. Martin
s/FRED J. RUNK Vice President and March 27, 1996
Fred J. Runk Treasurer (principal
financial and accounting
officer)
(*) Member of the Audit Committee