SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 1996 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
As of May 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.
Page 1 of 15
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1996 1995
Assets
Cash and short-term investments $ 180,461 $ 331,825
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,339,300 and $3,386,000) 3,306,636 3,257,204
Available for sale - at market
(amortized cost - $4,523,570 and $4,211,883) 4,587,770 4,412,483
Other stocks - principally at market
(cost - $134,429 and $133,665) 250,029 248,665
Investment in investees 838,179 833,886
Loans receivable 595,854 591,105
Real estate and other investments 200,654 198,120
Total investments 9,779,122 9,541,463
Recoverables from reinsurers and prepaid
reinsurance premiums 949,057 984,500
Agents' balances and premiums receivable 370,437 376,330
Deferred acquisition costs 341,095 330,353
Other receivables 267,143 202,099
Assets held in separate accounts 240,551 238,524
Prepaid expenses, deferred charges and other assets 227,012 224,858
Cost in excess of net assets acquired 183,503 183,639
$12,538,381 $12,413,591
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 2,953,561 $ 2,965,700
Unearned premiums 872,109 920,641
Annuity benefits accumulated 5,130,239 5,051,959
Life, accident and health reserves 544,181 538,274
Payable to American Premier Underwriters 802,578 639,455
Other long-term debt:
Direct obligations of AFC Parent Company 261,806 311,202
Obligations of AFC subsidiaries:
American Annuity Group 166,053 167,734
Other subsidiaries 55,975 56,705
Liabilities related to separate accounts 240,551 238,524
Accounts payable, accrued expenses and other
liabilities 712,465 675,052
Minority interest 134,472 148,338
Total liabilities 11,873,990 11,713,584
Shareholders' Equity:
Preferred Stock (redemption value - $278,719) 168,484 168,484
Common Stock without par value 9,625 9,625
Retained earnings 375,282 335,798
Net unrealized gain on marketable securities,
net of deferred income taxes 111,000 186,100
Total shareholders' equity 664,391 700,007
$12,538,381 $12,413,591
2
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended
March 31,
1996 1995
Income:
Property and casualty insurance premiums $373,615 $349,133
Life, accident and health premiums 24,253 739
Investment income 166,682 152,334
Realized gains on sales of securities 12,669 3,476
Equity in net earnings of investees 18,662 22,901
Other income 26,082 25,024
621,963 553,607
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 247,112 243,643
Commissions and other underwriting expenses 121,187 119,611
Annuity benefits 68,015 64,262
Life, accident and health benefits 21,593 415
Interest charges on borrowed money 35,121 29,129
Other operating and general expenses 71,825 57,445
564,853 514,505
Earnings before income taxes and extraordinary
items 57,110 39,102
Provision for income taxes 11,059 9,237
Earnings before extraordinary items 46,051 29,865
Extraordinary items - loss on prepayment of debt (6,376) -
Net Earnings $ 39,675 $ 29,865
3
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
1996 1995
Operating Activities:
Net earnings $ 39,675 $ 29,865
Adjustments:
Extraordinary losses from retirement of debt 6,376 -
Depreciation and amortization 10,879 7,723
Annuity benefits 68,015 64,262
Equity in net earnings of investees (18,662) (22,901)
Changes in reserves on assets 3,610 (1,154)
Realized gains on investing activities (11,708) (3,568)
Decrease in reinsurance and other receivables 5,193 8,641
Increase in other assets (13,728) (49,619)
Increase (decrease) in insurance claims
and reserves (54,764) 71,072
Decrease in other liabilities (4,987) (13,960)
Increase in minority interest 3,809 3,102
Dividends from investees 5,704 5,815
Other, net (2,479) (1,197)
36,933 98,081
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (602,006) (254,863)
Equity securities (8,420) -
Investees and subsidiaries (2,236) -
Real estate, property and equipment (6,153) (5,331)
Maturities and redemption's of fixed maturity
investments 134,922 49,019
Sales of:
Fixed maturity investments 159,570 54,732
Equity securities 19,829 9,007
Real estate, property and equipment 412 2,079
Increase in other investments (3,179) (3,574)
(307,261) (148,931)
Financing Activities:
Annuity receipts 137,241 119,420
Annuity payments (113,852) (99,374)
Additional long-term borrowings 100,200 29,750
Reductions of long-term debt (159,470) (13,176)
Borrowings from American Premier 188,600 -
Repayments of borrowings from American Premier (33,564) -
Repurchases of preferred stock - (147)
Cash dividends paid (191) (191)
118,964 36,282
Net Decrease in Cash and Short-term Investments (151,364) (14,568)
Cash and short-term investments at beginning
of period 331,825 171,335
Cash and short-term investments at end of period $180,461 $156,767
4
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Mergers On April 3, 1995, American Financial Corporation ("AFC")
merged with a subsidiary of American Financial Group, Inc.
("AFG"), a new company formed to own 100% of the common stock of
both AFC and American Premier Underwriters, Inc. ("American
Premier"). 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 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 accompanying consolidated financial
statements for AFC and subsidiaries are unaudited; however,
management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein)
necessary for fair presentation have been made. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the year. The financial statements
have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted
accounting principles.
Certain reclassifications have been made to prior years to conform
to the current year's presentation. All significant intercompany
balances and transactions have been eliminated. All acquisitions
have been treated as purchases. The results of operations of
companies since their formation or acquisition are included in the
consolidated financial statements.
The preparation of the financial statements 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.
AFC's ownership of subsidiaries and significant affiliates with
publicly traded shares was as follows:
March 31, December 31,
1996 1995 1994
American Annuity Group, Inc. ("AAG") 81% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Financial Group, Inc. 23% 24% -
American Premier Underwriters, Inc. (a) (a) 42%
Chiquita Brands International, Inc. 38% 38% 46%
Citicasters Inc. 38% 38% 37%
<FN>
(a) Exchanged for shares of AFG in April 1995.
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 securities are not classified as held to
maturity or bought and held principally for selling in the near term.
5
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Only in certain limited circumstances, such as significant issuer credit
deterioration or if required by insurance or other regulators, may
a company change its intent to hold a certain security to maturity
without calling into question its intent to hold other debt
securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized
over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are
stated primarily at the aggregate unpaid balance.
Investment in 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.
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 businesses 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.
6
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period on the direct business written; (b) esti-mates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience; (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.
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 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,
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.
Premium Recognition Property and casualty premiums are earned
over the terms of the policies on a pro rata basis. Unearned
premiums represent that portion of premiums written which is app
licable 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.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from policyholders.
For interest-sensitive life and universal life products, premiums
are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against
the policyholder account for mortality coverage and contract
expenses.
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.
7
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Debt Discount Debt discount and expenses are being amortized over
the lives of respective borrowings, generally on the interest
method.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and property
and equipment. "Financing activities" include obtaining resources
from owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating".
Short-term investments having original maturities of three months
or less when purchased are considered to be cash equivalents for
purposes of the financial statements.
C. 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 D). The following
table (in thousands) shows AFC's revenues by significant business
segment. Intersegment transactions are not significant.
Three months ended March 31,
Revenues 1996 1995
Property and casualty insurance:
Premiums earned:
Specialty lines $193,910 $181,348
Commercial and personal lines 179,547 167,369
Other lines 158 416
373,615 349,133
Investment and other income 79,595 71,485
453,210 420,618
Annuities and life (*) 139,414 97,922
Other 10,677 12,166
603,301 530,706
Equity in net earnings of investees 18,662 22,901
$621,963 $553,607
(*) Represents primarily investment income.
8
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investees Investment in investees represents AFC's
ownership of securities of certain companies. The companies named
in the following table are subject to the rules and regulations of
the SEC. Market value of the investments was approximately
$1.1 billion and $1.0 billion at March 31, 1996 and December 31,
1995, respectively. AFC's investment (and common stock ownership
percentage) in these investees was as follows (dollars in
thousands):
March 31, 1996 December 31, 1995
American Financial Group $566,795 (23%) $568,781 (24%)
Chiquita 197,635 (38%) 191,026 (38%)
Citicasters 73,749 (38%) 74,079 (38%)
$838,179 $833,886
In addition to owning the common stock of AFC, American Financial
Group owns all of the common stock of American Premier, a
specialty property and casualty insurance company. Chiquita is a
leading international marketer, producer and distributor of
bananas and other quality fresh and processed food products.
Citicasters owns and operates radio and television stations in
major markets throughout the country.
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 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 closes
after September 30, 1996.
Summarized financial information for AFC's investees follows (in
millions):
Three months ended
American Financial Group March 31, 1996
Revenues $1,031
Income before Extraordinary Item 81
Extraordinary Item (7)
Net Earnings 74
Three months ended March 31,
Chiquita 1996 1995
Net Sales $625 $674
Operating Income 58 76
Income from Continuing Operations 24 34
Discontinued Operations - 4
Net Income 24 38
Three months ended March 31,
Citicasters 1996 1995
Net Revenues $31 $29
Operating Income 4 5
Net Earnings (Loss) (1) 1
9
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Payable to American Premier Underwriters At March 31, 1996, AFC
(parent) had borrowed $675 million under its credit agreement with
American Premier. Accrued interest of $19.9 million at March 31,
1996, was paid in April 1996.
Also included in the payable to American Premier at March 31,
1996, is an aggregate of $107.7 million representing borrowings of
two AFC subsidiaries under credit facilities with American
Premier.
F. Other Long-Term Debt During the first quarter of 1996, AFC
(parent) repurchased $49.0 million of its debentures for
$53.2 million. AAG repurchased $22.1 million of its Notes for
$24.1 million. During the second quarter of 1996 (through May 13),
these companies repurchased an aggregate of $45.6 million of debt
for $48.9 million.
At March 31, 1996, sinking fund and other scheduled principal
payments on debt for the balance of 1996 and the subsequent five
years were as follows (in thousands):
Parent
Company Other Total
1996 $ - $ 1,035 $ 1,035
1997 5,431 1,740 7,171
1998 - 1,934 1,934
1999 - 41,725 41,725
2000 - 7,151 7,151
2001 - 42,934 42,934
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures purchased
are applied to the earliest scheduled retirements.
G. Preferred Stock Under provisions of both the Nonvoting
(21.1 million shares authorized) and Voting (17.0 million shares
authorized, 14.1 million shares outstanding) Cumulative Preferred
Stock, the Board of Directors may divide the authorized stock into
series and set specific terms and conditions of each series. At
March 31, 1996, the outstanding shares of voting 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 March 31, 1996 and December 31, 1995.
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 March 31, 1996
and December 31, 1995.
H. Common Stock At March 31, 1996, AFG owned all 53.0 million
outstanding shares of AFC's Common Stock.
I. 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 (in thousands):
AFC (parent) ($4,198)
AAG (2,178)
($6,376)
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Cash Flows - Fixed Maturity Investments "Investing activities"
related to fixed maturity investments in AFC's Statement of Cash
Flows consisted of the following (in thousands):
Held to Available
1996 Maturity For Sale Total
Purchases $64,896 $537,110 $602,006
Maturities and redemptions 50,200 84,722 134,922
Sales - 159,570 159,570
1995
Purchases $97,511 $157,352 $254,863
Maturities and redemptions 26,700 22,319 49,019
Sales - 54,732 54,732
K. 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.
11
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC is organized as a holding company with almost all of its
operations being conducted by subsidiaries and affiliates. The parent
corporation, however, has continuing expenditures for administrative
expenses and corporate services and, most importantly, for the payment
of principal and interest on borrowings and dividends on AFC Preferred
Stock. Therefore, certain analyses are best done on a parent only
basis while others are best done on a total enterprise basis. In
addition, since most of its businesses are financial in nature, AFC
does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional ratios
and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's ratio of debt to total capital at the holding company
level (excluding amounts due to affiliates) was .28 at March 31, 1996
compared to .31 at December 31, 1995. Including the notes payable to
American Premier, the ratio changes to .61 at March 31, 1996 compared
to .57 at December 31, 1995. AFC's ratio of earnings to fixed charges
on a total enterprise basis was 2.13 for the first three months of
1996 compared to 2.23 for the entire year of 1995; ratios of earnings
to fixed charges and preferred dividends were 1.82 and 1.90 for the
same periods.
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 March 31,
1996, 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. At March 31, 1996, AFC had borrowed $675 million under the
agreement which it used for debt retirements, capital contributions to
subsidiaries and other corporate purposes.
In addition, two AFC subsidiaries have separate credit agreements with
American Premier allowing for maximum aggregate borrowings of
$170 million. Borrowings under these credit lines bear interest at
rates approximating prime or LIBOR.
12
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments Approximately 95% of the bonds and redeemable preferred
stocks held by AFC were rated "investment grade" (credit rating of AAA
to BBB) by nationally recognized rating agencies at March 31, 1996.
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.
AFC's equity securities are concentrated in a relatively limited
number of major positions. This approach allows management to more
closely monitor these companies and the industries in which they
operate.
RESULTS OF OPERATIONS
General Pretax earnings for the three months ended March 31, 1996
were $57.1 million, an increase of $18.0 million over the comparable
1995 period. The increase is attributable primarily to improved
results from the property and casualty insurance segment.
Property and Casualty Insurance 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.
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.
Net written premiums and combined ratios for Great American's
property and casualty insurance subsidiaries were as follows (dollars
in millions):
Three months ended
March 31,
1996 1995
Net Written Premiums (GAAP)
Specialty Operations $182.6 $199.0
Commercial and Personal Operations 165.3 155.9
Other lines .1 .6
$348.0 $355.5
Combined Ratios (GAAP)
Specialty Operations 90.4% 101.9%
Commercial and Personal Operations 103.7 99.8
Aggregate 98.5% 103.6%
Specialty Operations Net written premiums for the specialty
operations decreased 8% during the first three months of 1996 from
the comparable 1995 period due primarily to the withdrawal from a
voluntary pool. The improvement in the combined ratio is due
primarily to large losses in 1995 from (i) participation in a
voluntary pool
13
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
in which AFC is no longer a member and (ii) prior accident year
development on coverages of U.S. based operations of Japanese
companies.
Commercial and Personal Operations The 6% increase in net written
premiums for the commercial and personal operations for the first
three months of 1996 over the comparable 1995 period was due
principally to commercial lines writings. The deterioration in the
combined ratio is due primarily to increased winter storm losses
partially offset by improved results in the commercial operations
workers' compensation line of business.
Life, Accident and Health Premiums and Benefits The increase in life,
accident and health premiums and benefits reflects AAG's acquisition
of Laurentian Capital Corporation in November 1995.
Investment Income Investment income increased $14.3 million (9%) from
1995 due to AAG's acquisition of Laurentian and an increase in the
average amount of investments held.
Realized Gains Realized capital gains have been an important part of
the return on investments in marketable securities. Individual
securities are sold creating gains and losses as market opportunities
exist.
Investee Corporations Equity in net earnings of investees (companies
in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the investees' earnings and
losses.
Annuity Benefits Annuity benefits increased approximately 6% over
those of the comparable three month period in 1995 due primarily to an
increase in average annuity benefits accumulated. The rate at which
interest is credited on annuity policyholders' funds is subject to
change based on management's judgment of market conditions.
Interest on Borrowed Money Interest expense on borrowed money
increased $6.0 million (21%) from 1995 due to borrowings from American
Premier, used primarily to retire other long-term debt.
Other Operating and General Expenses Included in other operating and
general expenses in the first three months of 1996 is approximately
$7.5 million attributable to Laurentian. Also included in the first
three months of 1996 and 1995 are charges of $4.0 million and
$3.4 million, respectively, for minority interest.
14
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
10(a) Credit Agreement dated April 3, 1995 between
American Financial Corporation (borrower) and
Pennsylvania Company (lender).
10(b) Reducing Revolving Credit Agreement dated March 29,
1996 between Great American Holding Corporation
(borrower) and Pennsylvania Company (lender).
27 Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange
Commission.
(b) Report on Form 8-K:
Date of Report Item Reported
February 14, 1996 Agreement to sell Citicasters Common Stock
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Financial Corporation has duly caused this Report to be
signed on its behalf by the undersigned duly authorized.
American Financial Corporation
May 14, 1996 BY: FRED J. RUNK
Fred J. Runk
Senior Vice President and Treasurer
15