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, 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
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, 1997, there were 45,000,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc. At that date there were 11,900,725
shares of Series F Voting Preferred Stock and 1,964,158 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
$282 million (based on a market price of $22.00 per share for Series
F and $10.375 per share for Series G.)
________________
Documents Incorporated by Reference: None
AMERICAN FINANCIAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 15
Other Companies 18
Investment Portfolio 18
Regulation 20
Item 2 - Properties 22
Item 3 - Legal Proceedings 22
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 24
Item 6 - Selected Financial Data 24
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8 - Financial Statements and Supplementary Data 34
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
Part III
Item 10 - Directors and Executive Officers of the Registrant 34
Item 11 - Executive Compensation 34
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 34
Item 13 - Certain Relationships and Related Transactions 34
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, 1996, American Financial Group, Inc. ("AFG") owned all
of the outstanding Common Stock of AFC (See "Mergers" below).
AFC is a holding company which, through its subsidiaries, is
engaged primarily in specialty and multi-line property and casualty
insurance businesses and in the sale of tax-deferred annuities.
AFC's property and casualty operations originated in 1872 and are
the seventeenth largest property and casualty group in the United
States based on 1995 statutory net premiums written of $3.1 billion.
Mergers/Capital Contribution
On April 3, 1995, AFC merged with a subsidiary of 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 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.
At the close of business on December 31, 1996, AFG contributed
to AFC 81% of the common stock of American Premier. Since AFC and
American Premier were under the common control of AFG, the
acquisition of American Premier has been recorded by AFC at AFG's
historical cost in a manner similar to a pooling of interests.
Accordingly, the historical consolidated financial statements of AFC
for periods subsequent to the April 1995 Mergers have been restated
to include the accounts of American Premier.
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,
1996 1995 1994 1993 1992
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 81% 81% 80% 80% 82%
American Financial Enterprises 83% 83% 83% 83% 83%
American Premier Underwriters 81% (a) 42% 41% 51%
Chiquita Brands International 43% 44% 46% 46% 46%
Citicasters (b) 38% 37% 20% 40%
General Cable - - (c) 45% 45%
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
(c) Sold in June 1994.
The following summarizes the more significant changes in
ownership percentages shown in the above table.
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. At the close
of business on December 31, 1996, AFG contributed to AFC 81% of the
common stock of 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 September 1996, the
investments in Citicasters were sold to an unaffiliated company.
General Cable In 1994, AFC sold its investment in General Cable
to an unaffiliated company.
Property and Casualty Insurance Operations
AFC manages and operates its property and casualty business in
three major business segments: Nonstandard Automobile Insurance,
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. AFC's property and casualty insurance
operations employ approximately 7,800 persons.
Unless indicated otherwise, the financial information presented
for the property and casualty insurance operations is presented
based on generally accepted accounting principles ("GAAP") and
includes the insurance operations of AFC and American Premier for
all periods.
2
The following table shows the size (in millions), segment and
A.M. Best rating of AFC's major property and casualty insurance
subsidiaries.
1996 Net Written Premiums
Commercial NSA A.M. Best
and Personal Specialty Group Rating
Great American $660 $636 $ - A
Republic Indemnity - 222 - A
Mid-Continent - 90 - A
American Empire Surplus Lines - 28 - A+
Atlanta Casualty - - 391 A
Windsor - - 323 A
Infinity - - 232 A
Leader National - - 63 A-
Transport - - 106 A
Other - 17 20
$660 $993 $1,135
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 losses, loss adjustment expenses ("LAE"),
underwriting expenses and policyholder dividends 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 101.2% for the period 1992 to
1996, as compared to 108.8% for the property and casualty industry
over the same period (Source: "Best's Review - Property/Casualty" -
January 1997 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 1996, net written premiums were nearly $2.8 billion compared
to $3.1 billion in 1995. The decrease reflects the effect of
significant rate increases initiated by the nonstandard auto group,
the continuing competitive pricing environment in the California
workers' compensation market as well as the casualty markets,
withdrawal from an unprofitable pool at the end of 1995 and reduced
writings of homeowners' insurance in certain states.
3
The following table shows (in millions) certain information of
AFC's property and casualty insurance operations. While financial
data is reported on a statutory basis for insurance regulatory
purposes, it is reported in accordance with 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; recording bonds and
redeemable preferred stocks primarily at amortized cost; 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.
1996 1995 1994
Statutory Basis
Premiums Earned $2,821 $3,006 $2,915
Admitted Assets 6,603 6,753 6,398
Unearned Premiums 1,104 1,160 1,093
Loss and LAE Reserves 3,397 3,394 3,275
Capital and Surplus 1,659 1,595 1,586
GAAP Basis
Premiums Earned $2,845 $3,031 $2,945
Total Assets 8,623 9,002 8,617
Unearned Premiums 1,248 1,294 1,213
Loss and LAE Reserves 4,124 4,097 4,021
Shareholder's Equity 2,695 2,893 2,615
The following table shows the performance of AFC's property and
casualty insurance operations in various categories (dollars in
millions):
1996 1995 1994
Net written premiums $2,788 $3,092 $3,124
Net earned premiums $2,845 $3,031 $2,945
Loss and LAE 2,132 2,265 2,077
Underwriting expenses 780 792 770
Policyholder dividends 14 8 84
Underwriting profit (loss) ($ 81) ($ 34) $ 14
GAAP ratios:
Loss and LAE ratio 75.0% 74.8% 70.5%
Underwriting expense ratio 27.4 26.1 26.1
Policyholder dividend ratio .5 .3 2.8
Combined ratio (a) 102.9% 101.2% 99.4%
Statutory ratios:
Loss and LAE ratio 74.8% 74.8% 71.0%
Underwriting expense ratio 27.2 25.9 26.3
Policyholder dividend ratio .4 1.7 3.6
Combined ratio (a) 102.4% 102.4% 100.9%
Industry statutory combined ratio (b) 107.0% 106.5% 108.5%
(a) The 1996 combined ratios include an increase of 2.8 percentage
points attributable to the strengthening of insurance reserves
relating to asbestos and other environmental matters ("A&E").
(b) Ratios are derived from "Best's Review - Property/Casualty"
(January 1997 Edition).
4
Nonstandard Automobile Insurance
General. The Nonstandard Automobile Insurance segment ("NSA Group")
underwrites private passenger automobile liability and physical damage
insurance policies for "nonstandard" risks. Nonstandard insureds are
those individuals who are unable to obtain insurance through standard
market carriers due to factors such as age, record of prior accidents,
driving violations, particular occupation or type of vehicle. Premium
rates for nonstandard risks are generally higher than for standard risks.
Total private passenger automobile insurance premiums written by insurance
carriers in the United States in 1996 have been estimated by A.M. Best
to be approximately $110 billion. Because it can be viewed as a residual
market, the size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when standard
coverage becomes more restrictive. When this occurs, the criteria which
differentiate standard from nonstandard insurance risks change. The size
of the voluntary nonstandard market is also affected by rate levels adopted
by state administered involuntary plans. According to A.M. Best, the
voluntary nonstandard market has accounted for about 15% of total private
passenger automobile insurance premiums written in recent years.
The NSA Group's implementation of significant rate increases during the
last couple years and competitive pressures in the nonstandard automobile
insurance industry served to curtail the trend of annual premium growth
it had experienced previously. These rate increases contributed to an
improvement, however, in underwriting profitability for 1996.
The NSA Group writes business in 42 states and holds licenses to
write policies in 48 states and the District of Columbia. The U.S.
geographic distribution of the NSA Group's statutory direct written
premiums in 1996 compared to 1992, was as follows:
1996 1992 1996 1992
Florida 12.1% 20.1% Mississippi 3.2% 3.3%
Pennsylvania 10.1 * Oklahoma 3.1 2.9
Texas 9.4 2.2 Missouri 3.0 2.2
Georgia 8.9 13.7 New York 3.0 *
California 8.0 8.4 Arizona 2.5 5.9
Connecticut 5.8 3.5 Washington 2.4 *
Indiana 3.3 3.6 Alabama 2.1 4.2
Tennessee 3.2 4.7 Other 19.9 25.3
100.0% 100.0%
_____________
* less than 2%
In addition, the NSA Group writes approximately 4% of its net
premiums annually in the United Kingdom.
Management believes that the NSA Group's underwriting success 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 rating evaluations of individual risks, providing
management greater flexibility in the ongoing assessment of the
business. In addition, the NSA Group has implemented cost control
measures both in the underwriting and claims handling areas.
5
The following table shows the performance of AFC's NSA Group
insurance operations in various categories (dollars in millions):
1996 1995 1994
Net written premiums $1,135 $1,277 $1,186
Net earned premiums $1,183 $1,246 $1,097
Loss and LAE 904 1,036 833
Underwriting expenses 278 273 265
Underwriting profit (loss) $ 1 ($ 63) ($ 1)
GAAP ratios:
Loss and LAE ratio 76.4% 83.2% 75.9%
Underwriting expense ratio 23.5 22.0 24.1
Combined ratio 99.9% 105.2% 100.0%
Statutory ratios:
Loss and LAE ratio 75.8% 83.1% 76.0%
Underwriting expense ratio 22.5 21.6 23.9
Combined ratio 98.3% 104.7% 99.9%
Industry statutory combined ratio (a) 101.0% 101.3% 101.3%
(a) Represents the private passenger automobile industry statutory
combined ratio derived from "Best's Review - Property/Casualty"
(January 1997 Edition). Although AFC believes that there is no
reliable regularly published combined ratio data for the
nonstandard automobile insurance industry, AFC believes that
such a combined ratio would be lower than the private passenger
automobile industry average shown above.
Marketing. Each of the principal units in the NSA Group is
responsible for its own marketing, sales, underwriting and claims
processing. Sales efforts are directed primarily toward independent
agents. These units each write policies through several thousand
independent agents.
The NSA Group had approximately 900,000 policies in force at
December 31, 1996, just under 90% of which had policy limits of
$50,000 or less per occurrence. Most NSA Group policies are written
for policy periods of six months or less, with some as short as one
month.
Competition. A large number of national, regional and local
insurers write nonstandard private passenger automobile insurance
coverage. Insurers in this market generally compete on the basis of
price (including differentiation on liability limits, variety of
coverages offered and deductibles), geographic availability and ease
of enrollment and, to a lesser extent, reputation for claims
handling, financial stability and customer service. NSA Group
management believes that sophisticated data analysis for refinement
of risk profiles has helped the NSA Group to compete successfully.
The NSA Group attempts to provide selected pricing for a wider
spectrum of risks and with a greater variety of payment options,
deductibles and limits of liability than are offered by many of its
competitors.
6
Specialty Lines
General. The Specialty Lines segment emphasizes the writing of
specialized insurance coverage where AFC personnel are experts in
particular lines of business or customer groups. Examples include
California 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
prescribed benefits payable to employees (principally in California)
who are injured on the job. The executive and professional
liability divisions market liability coverage for corporate
directors and officers and attorneys. Ocean and inland marine
businesses provide coverage primarily for 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 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. AFC continually evaluates expansion in existing
markets and opportunities in new specialty markets.
The U.S. geographic distribution of the Specialty Lines statutory
direct written premiums in 1996 compared to 1992, was as follows:
1996 1992 1996 1992
California 30.4% 47.4% Florida 3.5% *
Texas 7.3 2.7 New Jersey 2.8 2.6%
New York 5.2 5.7 Ohio 2.1 2.1
Massachusetts 5.1 2.8 Pennsylvania 2.0 2.1
Illinois 4.0 3.4 Other 33.9 25.3
Oklahoma 3.7 5.9 100.0% 100.0%
_____________
* less than 2%
The following table sets forth a distribution of statutory net
written premiums for AFC's Specialty Lines by NAIC annual statement
line for 1996 compared to 1992:
1996 1992
Workers' compensation 26.0% 47.2%
Other liability 23.4 15.7
Commercial multi-peril 10.1 3.1
Inland marine 9.2 5.8
Auto liability 8.3 8.7
Allied lines 5.7 4.2
Ocean marine 4.6 4.6
Surety 3.8 3.0
Auto physical damage 2.5 2.2
Other 6.4 5.5
100.0% 100.0%
7
The following table shows the performance of AFC's Specialty
Lines insurance operations in various categories (dollars in
millions):
1996 1995 1994
Net written premiums $993 $1,097 $1,250
Net earned premiums $976 $1,085 $1,185
Loss and LAE 527 730 785
Underwriting expenses 295 302 291
Policyholder dividends - (3) 76
Underwriting profit $154 $ 56 $ 33
GAAP ratios:
Loss and LAE ratio 53.9% 67.2% 66.2%
Underwriting expense ratio 30.2 27.9 24.6
Policyholder dividend ratio - (.3) 6.4
Combined ratio (a) 84.1% 94.8% 97.2%
Statutory ratios:
Loss and LAE ratio 54.1% 67.5% 66.7%
Underwriting expense ratio 30.3 28.1 25.2
Policyholder dividend ratio .5 4.2 8.5
Combined ratio (a) 84.9% 99.8% 100.4%
Industry statutory combined ratio (b) 111.0% 109.9% 107.9%
(a) The 1996 combined ratios reflect a reduction of 4.1 percentage
points attributable to a reallocation of loss reserves in
connection with the strengthening of A&E reserves.
(b) Represents the commercial industry statutory combined ratio
derived from "Best's Review - Property/Casualty" (January 1997
Edition).
Marketing. The Specialty Lines operations direct their sales
efforts primarily toward independent property and casualty insurance
agents and brokers. These businesses write insurance through
several thousand agents and brokers and have nearly 275,000 policies
in force.
Competition. These businesses compete with other insurers as
well as the California State Fund in the California workers'
compensation insurance market. 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 AFC's specialty lines compete
successfully.
8
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.
AFC'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, 1996, there were more than 850
insureds in 20 states with such programs producing approximately $67
million in annual net written premiums.
Commercial business is written in 26 states where management
believes adequate rates can be obtained and where assigned risk
costs are not excessive. AFC's approach focuses on specific
customer groups, such as fine restaurants, light manufacturers,
hotels/motels, workers' compensation safety groups 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 business consists primarily of standard private
passenger automobile and homeowners' insurance and is currently
being marketed in 25 states. AFC's approach is to develop tailored
rates for its personal automobile customers based on a variety of
factors, including the driving record of the insureds. The approach
to homeowners business is to limit exposure in locations which are
likely to be unprofitable and those which have significant
catastrophic potential (such as windstorms, earthquakes and
hurricanes).
The U.S. geographic distribution of the Commercial and Personal Lines
statutory direct written premiums in 1996 compared to 1992, was as follows:
1996 1992 1996 1992
Connecticut 13.6% 12.1% Ohio 3.6% 4.5%
New York 12.0 8.1 Florida 2.9 3.9
New Jersey 11.5 7.4 Massachusetts 2.8 *
North Carolina 11.0 10.3 Illinois 2.2 2.9
Pennsylvania 7.0 4.5 California * 7.1
Texas 3.9 2.7 Oregon * 2.5
Michigan 3.8 2.9 Washington * 2.4
Maryland 3.7 3.5 Other 22.0 25.2
100.0% 100.0%
_____________
* less than 2%
The following table sets forth a distribution of statutory net
written premiums for AFC's Commercial and Personal Lines by NAIC
annual statement line for 1996 compared to 1992:
1996 1992
Auto liability 26.5% 28.2%
Workers' compensation 21.1 12.7
Commercial multi-peril 17.2 20.8
Auto physical damage 12.9 13.4
Homeowners 9.9 11.0
Other liability 7.6 8.9
Other 4.8 5.0
100.0% 100.0%
9
The following table shows the performance of AFC's Commercial and
Personal Lines insurance operations in various categories (dollars
in millions):
1996 1995 1994
Net written premiums $ 660 $ 717 $ 683
Net earned premiums $ 685 $ 698 $ 656
Loss and LAE 538 468 430
Underwriting expenses 206 214 211
Policyholder dividends 14 11 8
Underwriting profit (loss) ($ 73) $ 5 $ 7
GAAP ratios:
Loss and LAE ratio 78.5% 66.9% 65.5%
Underwriting expense ratio 30.0 30.6 32.2
Policyholder dividend ratio 2.1 1.6 1.2
Combined ratio (a) 110.6% 99.1% 98.9%
Statutory ratios:
Loss and LAE ratio 78.8% 67.2% 67.0%
Underwriting expense ratio 30.4 29.9 32.4
Policyholder dividend ratio 1.0 .6 1.0
Combined ratio (a) 110.2% 97.7% 100.4%
Industry statutory combined ratio (b) 107.0% 106.5% 108.5%
(a) The 1996 combined ratios include 3.9 percentage points (GAAP) and
3.8 percentage points (statutory) due to losses from Hurricane Fran.
(b) Ratios are derived from "Best's Review - Property/Casualty"
(January 1997 Edition).
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 5,000
agents and have approximately 425,000 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,
AFC 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. AFC is subject to credit
risk with respect to its reinsurers, as the ceding of risk to
reinsurers does not relieve AFC of its liability to its insureds.
10
Reinsurance is provided on one of two bases, facultative or
treaty. 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 meeting prescribed criteria to
be automatically ceded and assumed according to contract provisions.
In order to limit the maximum loss arising out of any one
occurrence, AFC's insurance companies reinsure a portion of their
exposure under treaty and facultative reinsurance programs. The
following table presents (by type of coverage) the amount of each
loss above the specified retention maximum generally covered by
treaty reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
California Workers' Compensation $ 1.5 $148.5
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(b)
Property - Catastrophe 20.0 130.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) Beginning in 1997, AFC will cede 80% of its homeowners insurance
coverage through a reinsurance agreement.
AFC purchases facultative reinsurance providing coverage on a
risk by risk basis, both pro rata and excess of loss, depending on
the risk and available reinsurance markets. Due in part to the
limited exposure on individual policies, the NSA Group is not
materially involved in reinsuring risks with third party insurance
companies.
Included in the balance sheet caption "recoverables from
reinsurers and prepaid reinsurance premiums" were $79 million on
paid losses and LAE and $720 million on unpaid losses and LAE at
December 31, 1996. 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, 1996, AFC's insurance
subsidiaries had allowances of approximately $79 million for
doubtful collection of reinsurance recoverables. AFC regularly
monitors the financial strength of its reinsurers. This process
periodically results in the transfer of risks to more financially
secure reinsurers. AFC's major reinsurers include American Re-
Insurance Company, Employers Reinsurance Corporation, NAC
Reinsurance Corporation, Mitsui Marine and Fire Insurance Company
and General Reinsurance Corporation.
Premiums written for reinsurance ceded and assumed are presented
in the following table (in millions):
1996 1995 1994
Reinsurance ceded $518 $482 $422
Reinsurance assumed - including
involuntary pools and associations 58 98 119
11
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of AFC's insurance subsidiaries.
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 AFC's results at the amounts reported
by those entities.
Unless otherwise indicated, the following discussion of insurance
reserves includes the reserves of American Premier's subsidiaries
for only those periods following the Mergers. See Note P to the
Financial Statements for an analysis of changes in AFC's estimated
liability for losses and LAE, net of reinsurance (and grossed up),
over the past three years on a GAAP basis.
The following table presents the development of AFC's liability
for losses and LAE, net of reinsurance, on a GAAP basis for the last
ten years, excluding reserves of American Premier subsidiaries prior
to the Mergers. 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, 1996. 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.
1986 1987 1988 1989 1990
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $1,843 $2,024 $2,209 $2,246 $2,137
As re-estimated at
December 31, 1996 2,459 2,423 2,472 2,462 2,280
Liability re-estimated (*):
One year later 102.7% 102.5% 99.8% 100.4% 98.6%
Two years later 107.3% 103.6% 100.0% 99.3% 97.7%
Three years later 109.7% 103.1% 99.7% 98.4% 97.4%
Four years later 110.8% 102.5% 98.7% 98.2% 99.2%
Five years later 111.8% 102.6% 99.1% 101.1% 98.4%
Six years later 112.7% 103.5% 103.0% 101.1% 106.7%
Seven years later 115.3% 109.4% 103.0% 109.6%
Eight years later 122.1% 109.8% 111.9%
Nine years later 122.5% 119.7%
Ten years later 133.4%
Cumulative deficiency
(redundancy) 33.4% 19.7% 11.9% 9.6% 6.7%
Cumulative paid as of:
One year later 33.0% 29.2% 29.4% 32.3% 26.1%
Two years later 52.5% 49.0% 48.6% 48.2% 43.2%
Three years later 67.7% 63.5% 59.8% 59.2% 55.3%
Four years later 79.3% 72.2% 67.9% 67.6% 64.8%
Five years later 86.4% 78.5% 74.0% 74.3% 70.4%
Six years later 91.9% 83.6% 79.5% 78.1% 74.9%
Seven years later 96.1% 87.7% 82.4% 81.7%
Eight years later 100.0% 90.3% 85.7%
Nine years later 102.7% 93.3%
Ten years later 105.7%
1991 1992 1993 1994 1995 1996
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,129 $2,123 $2,113 $2,187 $3,393 $3,404
As re-estimated at
December 31, 1996 2,199 2,134 2,058 2,170 3,345 N/A
Liability re-estimated (*):
One year later 99.3% 100.0% 98.1% 95.1% 98.6%
Two years later 98.8% 98.2% 92.7% 99.2%
Three years later 98.0% 93.5% 97.4%
Four years later 95.8% 100.5%
Five years later 103.3%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency
(redundancy) 3.3% .5% (2.6%) (.8%) (1.4%) N/A
Cumulative paid as of:
One year later 26.4% 26.7% 25.2% 26.5% 33.0%
Two years later 43.0% 43.7% 40.1% 42.4%
Three years later 55.4% 53.6% 50.8%
Four years later 62.6% 61.0%
Five years later 68.1%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
(*) Reflects significant A&E charges and reallocations in 1994 and
1996 for prior years losses.
12
The following table presents certain data from the table above,
adjusted to include reserves of American Premier's subsidiaries for
periods prior to the Mergers.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $1,843 $2,024 $2,209 $2,616 $2,739 $2,793 $2,886 $3,029 $3,267 $3,393 $3,404
As re-estimated at
December 31, 1996 2,459 2,423 2,472 2,776 2,818 2,801 2,779 2,835 3,146 3, 345 N/A
Cumulative deficiency
(redundancy) 33.4% 19.7% 11.9% 6.1% 2.9% .3% (3.7%) (6.4%) (3.7%) (1.4%) N/A
These tables do 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 the latest year, but incurred before the earliest year,
would be included in the re-estimated liability and cumulative
deficiency (redundancy) percentage for each of the years shown.
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 tables 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.
The adverse litigious climate was 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. Under comparative
negligence rules, a plaintiff's negligence is no longer a bar to
recovery. Instead, 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. Recent years have seen a moderation of
inflation and the enactment of legislation intended to limit the
patterns of the previous years.
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, 1996, are as follows (in
millions):
Liability reported on a SAP basis $3,397
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (23)
Reserves of foreign operations 31
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables 720
Liability reported on a GAAP basis $4,124
13
Asbestos and Environmental Reserves ("A&E"). The insurance
industry typically includes only claims relating to polluted waste
sites and asbestos in defining environmental exposures. AFC 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.
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, AFC 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 that quarter, AFC allocated a
specific portion of its IBNR reserves to A&E claims.
In the third quarter of 1996, AFC strengthened its A&E reserves
based upon revised industry standards for reserving such claims.
AFC recorded a non-cash, pretax charge of $80 million and
reallocated $40 million in reserves from its Specialty Operations.
Based on known facts, current law, and current industry practices,
management believes that its reserves for such claims are
appropriate.
The following table (in millions) is a progression of reserves
for A&E exposures for which AFC has been held liable under general
liability policies written years ago where environmental coverage
was not intended and, in many cases, was specifically excluded.
1996 1995(*) 1994(*)
Reserves at beginning of year $225.7 $224.9 $143.5
Incurred losses and LAE 149.0 35.2 113.6
Paid losses and LAE (31.3) (34.4) (32.2)
Reserves at end of year, net of
reinsurance recoverable 343.4 225.7 224.9
Reinsurance recoverable 162.7 164.2 162.0
Gross reserves at end of year $506.1 $389.9 $386.9
(*) Amounts have been increased by $6.1 million in 1995 and
$5.1 million in 1994 to reflect certain items previously
classified as non-A&E.
Since the mid-1980's, AFC 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 $180 million of premiums has been written and
reserves for unpaid losses and LAE aggregated $41 million at
December 31, 1996 (not included in the above table).
14
Annuity and Life Operations
General. AFC's annuity operations are conducted through
American Annuity Group ("AAG"), a holding company whose primary
subsidiary is Great American Life Insurance Company ("GALIC") which
it acquired from GAI on December 31, 1992. GALIC sells (i) flexible
premium and single premium annuities in the qualified (not-for-
profit) market and (ii) single premium annuities in the non-
qualified market. AAG and its subsidiaries employ approximately
1,000 persons.
The following table (in millions) presents financial information
concerning GALIC.
1996 1995 1994
Statutory Basis
Total Assets $5,752 $5,414 $5,057
Insurance Reserves:
Annuities $5,298 $4,974 $4,655
Life 22 22 21
Accident and Health - - 1
$5,320 $4,996 $4,677
Capital and Surplus $ 285 $ 273 $ 256
Asset Valuation Reserve (a) 91 90 80
Interest Maintenance Reserve (a) 25 32 28
Annuity Receipts:
Flexible Premium:
First Year $ 35 $ 42 $ 39
Renewal 182 196 208
217 238 247
Single Premium 319 219 196
Total Annuity Receipts $ 536 $ 457 $ 443
GAAP Basis
Total Assets $5,934 $5,608 $5,044
Annuity Benefits Accumulated 5,205 4,917 4,596
Stockholder's Equity 658 623 449
(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.
GALIC's principal products are Flexible Premium Deferred
Annuities ("FPDAs") and Single Premium Deferred Annuities ("SPDAs").
FPDAs are characterized by premium payments that are flexible in
both amount and timing as determined by the policyholder. SPDAs are
issued in exchange for a one-time lump-sum premium payment.
Annuity contracts are generally classified as either fixed rate
or variable. With a fixed rate annuity, the interest crediting rate
is initially set by the issuer and thereafter may be changed from
time to time by the issuer based on market conditions, subject to
any guaranteed minimum interest crediting rates in the policy. With
a variable annuity, the value of the policy is tied to an underlying
securities portfolio or underlying mutual funds. The majority of
annuities issued by GALIC have been fixed rate annuities.
15
In the third quarter of 1996, GALIC began marketing a new type of
annuity that offers the traditional features of a fixed annuity
(guaranteed minimum annual interest rate on a portion of the premium
received and a guaranteed minimum surrender value) with the
opportunity to participate, in part, in increases in the S&P 500
Index over a selected term (generally a minimum of six years).
A GALIC subsidiary began marketing variable annuities in the
fourth quarter of 1995. With a variable annuity, the earnings
credited to the policy vary 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.
At December 31, 1996, substantially all of GALIC's annuity
policyholder benefit reserves consisted of fixed rate annuities
which offered a minimum interest rate guarantee of 3% or 4%. The
majority of GALIC's fixed rate annuity policies permit GALIC to
change the crediting rate at any time (subject to the minimum
guaranteed interest rate). In determining the frequency and extent
of changes in the crediting rate, GALIC takes into account the
economic environment and the relative competitive position of its
products.
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 designs its products with certain surrender
charges and front-end fees to discourage policyholders from
surrendering or withdrawing funds during the first five to ten years
after issuance of a policy. Partly due to these features, GALIC's
annuity surrenders have averaged approximately 7% of statutory
reserves over the past five years.
Marketing. GALIC markets its FPDAs principally to employees of
educational institutions in the kindergarten through high school
segment. In 1996, written premiums from this market segment
represented the majority of GALIC's total tax-qualified premiums.
GALIC distributes its annuity products through over 75 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.
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 1996
compared to 1992.
1996 1992 1996 1992
California 29.8% 20.2% North Carolina 3.0% 3.2%
Washington 7.0 * Minnesota 2.8 *
Texas 6.6 2.8 Connecticut 2.7 6.3
Florida 5.1 10.2 Indiana 2.3 *
Massachusetts 4.8 8.1 Arizona 2.1 *
Ohio 4.8 5.1 Illinois * 3.8
Michigan 3.5 9.9 Rhode Island * 2.6
Iowa 3.4 * New Hampshire * 2.3
New Jersey 3.1 6.2 Other 19.0 19.3
100.0% 100.0%
_____________
* less than 2%
16
Sales of annuities are affected by many factors, including:
(i) competitive annuity products and rates; (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) other alternative
investments; and (viii) general economic conditions. At December
31, 1996, GALIC had approximately 250,000 annuity policies in force,
nearly all of which were individual contracts.
American Memorial Life Insurance. Acquired in November 1995,
American Memorial (formerly Prairie States Life Insurance Company)
offers a variety of life insurance and annuity products to finance
pre-arranged funerals. American Memorial markets its products
through funeral home operators in addition to a captive general
agency force. At year-end 1996, American Memorial had relationships
with approximately 2,200 funeral homes nationwide. In 1996,
American Memorial collected $97 million in life and annuity
premiums. At December 31, 1996, American Memorial had total
statutory assets of approximately $412 million, reserves for future
policy benefits of approximately $371 million, and capital and
surplus of approximately $27 million.
Loyal American Life Insurance. Acquired in November 1995, Loyal
offers a variety of supplemental life and 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 1996, Loyal collected $41 million in
life and accident and health premiums. At December 31, 1996, Loyal
had total statutory assets of approximately $255 million, reserves
for future policy benefits of approximately $202 million, and
capital and surplus of approximately $37 million.
Independent Ratings. AAG's principal insurance subsidiaries are
currently rated by A.M. Best and Duff & Phelps as follows:
A.M. Best Duff & Phelps
GALIC A (Excellent) AA- (Very high claims paying ability)
American Memorial B+ (Very Good) AA- (Very high claims paying ability)
Loyal A- (Excellent) AA- (Very high claims paying ability)
AAG believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often
use a company's rating as an initial screening device in considering
annuity products. AAG also believes that the majority of purchasers
of tax-deferred annuities would not be willing to purchase annuities
from an issuer that had a rating below certain levels. In addition,
some school districts, hospitals and banks do not allow insurers
with a rating below certain levels to sell annuity products through
their institutions.
AAG believes that a rating in the "A" category by at least one
rating agency is necessary for GALIC to successfully market tax-
deferred annuities to public education employees and other not-for-
profit groups.
American Memorial and Loyal compete in markets other than the
sale of tax-deferred annuities. While ratings are an important
competitive factor in their markets, AAG believes that American
Memorial and Loyal can successfully compete in these markets with
their respective ratings.
Although management of AAG believes that its insurance companies'
ratings are very stable, those companies' operations could be
materially adversely affected by a downgrade in ratings.
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.
17
More than 150 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. 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.
Other Companies
AFEI is a holding company with assets consisting primarily of
investments in the common stock of AFG and AAG.
Millennium Dynamics, Inc. ("MDI") was formed in 1995 by Great
American to market software tools developed internally to solve
the inability of certain of its information systems to properly
interpret dates for the year 2000 and beyond. MDI licenses its
Vantage YR2000 conversion toolset through its own sales force in
the U.S. and through independent software distributors around the
world. MDI also offers project management and contract
programming services to its customers.
Through subsidiaries, AFC is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and
tennis facility) 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 March 1996, American Premier sold its interest in an
independent pipeline common carrier of refined petroleum products
for approximately $60 million in cash, net of transaction costs.
Investment Portfolio
General. A breakdown of AFC's December 31, 1996, investment
portfolio by business segment follows (excluding investment in
equity securities of investee corporations) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and short-term investments $ 190 $ 84 $131 $ 405 $ 405
Bonds and redeemable preferred
stocks 4,165 5,689 132 9,986 10,023
Other stocks, options and
warrants 196 51 81 328 328
Loans receivable 122 436 10 568 568(a)
Real estate and other investments 140 40 25 205 205(a)
$4,813 $6,300 $379 $11,492 $11,529
<FN>
(a) Carrying value used since market values are not readily available.
</FN>
18
The following tables present the percentage distribution and yields of
AFC's investment portfolio (excluding investment in equity securities of
investee corporations) as reflected in its financial statements.
1996 1995 1994 1993 1992
Cash and Short-term Investments 3.5% 4.0% 2.2% 2.3% 9.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 4.1 3.7 4.0 2.8 5.7
State and Municipal 1.0 .7 .8 .8 .6
Public Utilities 8.2 9.8 9.1 9.3 8.5
Mortgage-Backed Securities 22.3 20.9 21.8 24.7 22.9
Corporate and Other 49.5 47.2 48.6 42.0 33.9
Redeemable Preferred Stocks 0.5 1.0 1.4 1.3 .8
85.6 83.3 85.7 80.9 72.4
Net Unrealized Gains (Losses) on Bonds
and Redeemable Preferred Stocks held
Available for Sale 1.1 2.7 (1.0) 1.8 .8
86.7 86.0 84.7 82.7 73.2
Other Stocks, Options and Warrants 2.9 2.3 2.7 4.6 2.6
Loans Receivable 4.9 5.7 8.4 8.5 12.9
Real Estate and Other Investments 2.0 2.0 2.0 1.9 2.0
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.9% 7.9% 8.1% 8.0% 8.8%
Including realized gains and losses 7.7% 8.8% 8.1% 8.7% 9.8%
Yield on Stocks:
Excluding realized gains and losses 5.8% 3.9% 5.1% 4.4% 6.4%
Including realized gains and losses 15.1% 8.4% 35.4% 16.9% 15.5%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.9% 8.1% 7.9% 8.7%
Including realized gains and losses 7.8% 8.8% 8.8% 9.0% 10.0%
<FN>
(*)Excludes "Real Estate and Other Investments".
</FN>
Fixed Maturity Investments. Unlike many insurance groups which
have portfolios that are invested heavily in tax-exempt bonds, AFC's
bond portfolio is invested primarily in taxable bonds. The NAIC
assigns quality ratings which range from Class 1 (highest quality)
to Class 6 (lowest quality). The following table shows AFC's bonds
and redeemable preferred stocks, by NAIC designation (and comparable
Standard & Poor's Corporation rating) as of December 31, 1996
(dollars in millions):
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $6,844.1 $ 6,944.8 69%
2 BBB 2,380.2 2,423.9 24
Total investment grade 9,224.3 9,368.7 93
3 BB 341.7 344.9 4
4 B 280.6 296.7 3
5 CCC, CC, C 7.1 9.9 *
6 D - 2.5 *
Total non-investment grade 629.4 654.0 7
Total $9,853.7 $10,022.7 100%
_______________
(*) Less than 1%
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
and defaults by major issuers of securities.
19
AFC's primary investment objective for bonds and redeemable
preferred stocks is to earn interest and dividend income rather than
to realize capital gains. AFC invests in bonds and 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.
Chiquita At December 31, 1996, AFC owned 24 million shares of
Chiquita common stock representing 43% of its outstanding shares.
The carrying value and market value of AFC's investment in Chiquita
were approximately $200 million and $306 million, respectively, at
December 31, 1996. 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 other tropical fruit and fresh produce; fruit and vegetable
juices and beverages; processed fruits and vegetables; salads; and
edible oil-based consumer products.
Citicasters In September 1996, AFC sold its investment in
Citicasters to Jacor Communications for approximately $220 million
in cash plus warrants to purchase Jacor common stock. Citicasters
owned radio and television stations in major markets throughout
the country.
General Cable In 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.
Regulation
AFC's insurance company subsidiaries are subject to regulation
in the jurisdictions where they do business. In general, the
insurance laws of the various states establish regulatory agencies
with broad administrative powers governing, among other things,
premium rates, solvency standards, licensing of insurers, agents
and brokers, trade practices, forms of policies, maintenance of
specified reserves and capital for the protection of
policyholders, deposits of securities for the benefit of
policyholders, investment activities and relationships between
insurance subsidiaries and their parents and affiliates. Material
transactions between insurance subsidiaries and their parents and
affiliates generally must be disclosed and prior approval of the
applicable insurance regulatory authorities generally is required
for any such transaction which may be deemed to be material or
extraordinary. In addition, while differing from state to state,
these regulations typically restrict the maximum amount of
dividends that may be paid by an insurer to its shareholders in
any twelve-month period without advance regulatory approval. Such
limitations are generally based on net earnings or statutory
surplus. Under applicable restrictions, the maximum amount of
dividends available to AFC in 1997 from its insurance subsidiaries
without seeking regulatory clearance is approximately
$253 million.
Changes in state insurance laws and regulations have the
potential to materially affect the revenues and expenses of the
insurance operations. The Company is unable to predict whether or
when laws or regulations may be adopted or enacted in such states or
what the impact of such developments would be on the future
operations and revenues of its insurance businesses in such states.
Prior to 1995, minimum premium rates for California workers'
compensation insurance were determined by the California
Commissioner based in part upon recommendations of the Workers'
Compensation Insurance Rating Bureau of
20
California. In July 1993, California enacted legislation (the
"Reform Legislation") effecting an immediate overall 7% reduction in
workers' compensation insurance premium rates and replaced the
workers' compensation insurance minimum
rate law, effective January 1, 1995, with a procedure permitting
insurers to use any rate within 30 days after its filing with the
California Commissioner unless the rate is disapproved by the
California Commissioner. Between December 1, 1993 and January 1,
1995, when the "open rating" policy went into effect, the California
Commissioner ordered additional rate decreases totaling more than
25%.
Most states have created insurance guarantee associations to
provide for the payment of claims of insurance companies that become
insolvent. Annual assessments for AFC's insurance companies have
not been material. In addition, many states have created "assigned
risk" plans or similar arrangements to provide state mandated
minimum levels of automobile liability coverage to drivers whose
driving records or other relevant characteristics make it difficult
for them to obtain insurance otherwise. Automobile insurers in
those states are required to provide such coverage to a
proportionate number of those drivers applying as assigned risks.
Premium rates for assigned risk business are established by the
regulators of the particular state plan and are frequently
inadequate in relation to the risks insured, resulting in
underwriting losses. Assigned risks accounted for approximately one-
half of one percent of AFC's net written premiums in 1996.
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 31, 1996, the District of Columbia and 48 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. At December 31, 1996, the
capital ratios of all AFC insurance companies substantially
exceeded the risk-based capital requirements.
In September 1996, the NAIC adopted a model investment law. The
law will not be a requirement of the NAIC accreditation standards.
However, each state may adopt all, any part, or none of the model
investment law to regulate the investment policies of their
insurance companies. At this time, it is not possible to determine
the impact, if any, this will have on AFC's insurance subsidiaries.
21
ITEM 2
Properties
Subsidiaries of AFC own several buildings in downtown
Cincinnati. AFC and its affiliates occupy about three-fifths of
the aggregate 600,000 square feet of commercial and office space.
AFC'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 70% of the 126,000 square feet and lease the
remaining space to unaffiliated tenants.
ITEM 3
Legal Proceedings
AFC and its subsidiaries are involved in various litigation, most of which
arose in the ordinary course of business. Following American Eagle Group,
Inc.'s March 22, 1997, announcement of a $39.9 million loss for its 1996
fourth quarter (which included significant reserve additions) and termination
of negotiations toward a previously announced joint insurance underwriting
arrangement, AFC decided to writedown its $35 million investment in American
Eagle convertible preferred stock, effective December 31, 1996. AFC continues
to evaluate alternatives with respect to its American Eagle investment. Except
for the following, management believes that none of the litigation meets the
threshold for disclosure under this Item.
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 13, 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.
In January 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 in February 1996. In May 1996, the U.S. Supreme Court
declined to hear American Premier's petition with respect to the
bankruptcy bar issue, thereby permitting USX's lawsuits to
proceed. American Premier and its outside counsel believe that
American Premier has substantial defenses to these lawsuits,
besides the bankruptcy bar issue, and should not suffer a material
loss as a result of this litigation.
22
American Premier is a party or named as a potentially
responsible party in a number of proceedings and claims by
regulatory agencies and private parties under various
environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"),
seeking to impose responsibility on American Premier for hazardous
waste remediation costs at certain railroad sites formerly owned
by PCTC and at certain other sites where hazardous waste allegedly
generated by PCTC's railroad operations is present. It is
difficult to estimate American Premier's liability for
remediation costs at these sites for a number of reasons,
including the number and financial resources of other potentially
responsible parties involved at a given site, the varying
availability of evidence by which to allocate responsibility among
such parties, the wide range of costs for possible remediation
alternatives, changing technology and the period of time over which
these matters develop. Nevertheless, American Premier believes that
its previously established loss accruals for potential pre-reorganization
environmental liabilities at such sites are adequate to cover the probable
amount of such liabilities, based on American Premier's estimates
of remediation costs and related expenses at such sites and its
estimates of the portions of such costs that will be borne by
other parties. Such estimates are based on information currently
available to American Premier and are subject to future change as
additional information becomes available. American Premier
intends to seek reimbursement from certain insurers for portions
of whatever remediation costs it incurs.
In terms of potential liability to American Premier, the
company believes that the most significant such site is the
railyard at Paoli, Pennsylvania ("Paoli Yard") which PCTC
transferred to Consolidated Rail Corporation ("Conrail") in 1976.
A Record of Decision issued by the U.S. Environmental Protection
Agency in 1992 presented a final selected remedial action for
clean-up of polychlorinated biphenyls ("PCB's") at Paoli Yard
having an estimated cost of approximately $28 million. American
Premier has accrued its portion of such estimated clean-up costs
in its financial statements (in addition to other expenses) but
has not accrued the entire amount because it believes it is
probable that other parties, including Conrail, will be
responsible for substantial percentages of the clean-up costs by
virtue of their operation of electrified railroad cars at Paoli
Yard that discharged PCB's at higher levels than discharged by
cars operated by PCTC.
In management's opinion, the outcome of the foregoing
environmental claims and contingencies will not, individually or
in the aggregate, have a material adverse effect on the financial
condition of American Premier. In making this assessment,
management has taken into account previously established loss
accruals in its financial statements and probable recoveries from
third parties.
23
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
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).
1996 1995 1994 1993 1992
Earnings Statement Data:
Total Revenues $ 4,114 $ 3,628 $ 2,104 $ 2,721 $ 3,929
Earnings (Loss) From
Continuing Operations
Before Income Taxes 338 252 44 262 (145)
Earnings (Loss) From:
Continuing Operations 248 195 19 225 (162)
Extraordinary Items (26) 2 (17) (5) -
Cumulative Effect of
Accounting Change - - - - 85
Net Earnings (Loss) 222 197 2 220 (77)
Ratio of Earnings to
Fixed Charges (a) 4.99 3.10 1.69 2.62 2.15
Ratio of Earnings to
Fixed Charges and
Preferred Dividends (a) 3.96 2.60 1.40 2.26 1.94
Balance Sheet Data:
Total Assets $14,999 $14,851 $10,593 $10,077 $12,389
Long-term Debt:
Parent Company 173 311 490 572 557
American Premier (parent only) 167 337 - - 650
Great American Holding Corp. - - 359 199 299
Other Subsidiaries 178 234 258 283 503
Minority Interest 307 327 106 109 813
Capital Subject to
Mandatory Redemption - - 3 49 28
Other Capital 1,277 1,248 396 537 280
<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) the 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 and
distribution requirements of subsidiaries and a portion of
rental expense deemed to be representative of the interest
factor.
</FN>
24
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-noncurrent format.
Consequently, certain traditional ratios and financial analysis
tests are not meaningful.
As discussed in Note A to the financial statements, at the
close of business on December 31, 1996, AFG contributed to AFC
81% of the common stock of American Premier. Since AFC and
American Premier are under the common control of AFG, the
acquisition of American Premier has been recorded by AFC at
AFG's historical cost in a manner similar to a pooling of
interests. Accordingly, the historical consolidated financial
statements of AFC for periods subsequent to the April 3, 1995
Mergers have been restated to include the accounts of American
Premier.
LIQUIDITY AND CAPITAL RESOURCES
Ratios From the date of the Mergers to the end of 1996,
approximately $1.1 billion of AFC and American Premier debt was
retired or replaced with lower cost debt, resulting in a net
reduction of aggregate debt by approximately 75%. Consequently,
AFC's debt to total capital ratio at the parent holding company
level improved from approximately 60% at the date of the Mergers
to just over 20% at December 31, 1996. These debt reductions
and replacements will also reduce AFC's interest expense by over
$100 million annually.
AFC's ratio of earnings to fixed charges, excluding and
including preferred dividends, on a total enterprise basis for
the three years ended December 31, 1996, are shown below.
1996 1995 1994
Earnings to fixed charges 4.99 3.10 1.69
Earnings to fixed charges plus preferred
dividends 3.96 2.60 1.40
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, 1996, the capital ratios of
all AFC insurance companies substantially exceeded the RBC
requirements.
25
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.
Prior to the Mergers, American Premier had substantial cash
and short-term investments at the parent company level.
Subsequent to the Mergers, AFC and two of its subsidiaries entered
into separate credit agreements with American Premier. Funds
borrowed from American Premier under these agreements were used
for debt retirements, capital contributions to subsidiaries, and
other corporate purposes. In December 1996, American Premier paid
a dividend to AFG in the form of a $675 million note receivable
from AFC under the credit agreement plus $18.7 million of related
accrued interest. AFG then contributed $450 million of the note
(without accrued interest) to the capital of AFC. At December 31,
1996, the remaining $225 million is included in payable to AFG on
AFC's balance sheet.
Subsequent to the Mergers, American Premier entered into a
credit agreement with AFG under which American Premier and AFG
will make loans of up to $200 million available to each other.
Principal amounts payable to AFG under the credit agreement
totaled $175.5 million and $84.0 million at December 31, 1996 and
1995, respectively.
In September and October of 1996, three nationally recognized
rating agencies issued or upgraded ratings on AFC, American
Premier and AAG public debentures. All of the AFC debentures and
the AAG senior debentures are now rated investment grade; the APU
and AAG subordinated debentures are rated investment grade by two
of the agencies. Generally, the upgrades reflect the expectation
that consolidated debt to total capital will remain conservative
and that coverage ratios will benefit from higher subsidiary
earnings and a lower level of fixed charges at AFG's subsidiaries.
Bank credit lines at several subsidiary holding companies
provide ample liquidity and 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, a maximum of
$510 million is available under these bank facilities, $45 million
of which was borrowed at December 31, 1996.
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, AFC believes it may be prudent and
advisable to borrow up to $200 million of bank debt in the normal
course in order to retire public or privately held fixed rate
obligations over the next year or two.
26
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: 1996 1995 1994
Operations:
Dividends from subsidiaries $105.3 $165.3 $ 17.3
Dividends from AFG 8.7 4.3 -
Tax allocation payments from subsidiaries 102.5 73.9 65.9
Interest and dividends from others 1.4 2.8 4.4
Federal income tax refunds 0.1 9.5 0.3
From operations 218.0 255.8 87.9
Other transactions:
Net advances from affiliates 45.7 162.0 135.8
Sales of assets to non-affiliates 59.3 3.1 15.0
Sales of assets to affiliates 1.7 43.7 -
Sales of affiliates 44.0 - 6.0
Issuance of Preferred Stock 16.8 - -
Exercise of stock options - 8.7 -
Additional borrowings 0.1 98.8 0.7
Other 13.9 8.6 10.7
Total cash provided 399.5 580.7 256.1
Cash utilized for:
Operations:
Interest payments 22.7 47.9 61.8
Dividend payments 24.9 25.4 29.5
Federal income tax payments 31.0 23.0 28.6
BVIP payments - 48.9 0.7
Other holding company costs 30.4 29.3 35.3
For operations 109.0 174.5 155.9
Other transactions:
Purchases of affiliates and other investments 33.6 149.4 -
Principal payments on debt 177.9 252.9 89.9
Repurchases of Preferred Stock 36.9 2.9 6.7
Other 0.7 0.8 1.4
Total cash utilized 358.1 580.5 253.9
Net increase in cash and short-term investments 41.4 0.2 2.2
Cash and short-term investments at beginning
of period 5.1 4.9 2.7
Cash and short-term investments at end
of period $ 46.5 $ 5.1 $ 4.9
Payments of dividends by AFC's insurance subsidiaries 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) to AFC in 1997 from its insurance
subsidiaries is approximately $253 million.
For statutory accounting purposes, equity securities are
generally carried at market value. At December 31, 1996, AFC's
insurance subsidiaries owned publicly traded equity securities
with a market value of $1.3 billion, including equity securities
of AFC affiliates (including subsidiaries) of $1.0 billion.
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.
27
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. Beginning with the 1997 federal tax
return, American Premier and its 80%-owned U.S. subsidiaries
will join AFC's consolidated return.
Uncertainties Two lawsuits were filed in 1994 against American
Premier by USX Corporation ("USX") and a former USX subsidiary.
The lawsuits seek contribution from American Premier for all or
a portion of a $600 million final antitrust judgment entered
against a USX subsidiary in 1994. The lawsuits argue that USX's
liability for that judgment is attributable to the alleged
activities of American Premier's predecessor in an unlawful
antitrust conspiracy among certain railroad companies. American
Premier and its outside counsel believe that American Premier
has substantial defenses and should not suffer a material loss
as a result of this litigation.
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, 1996, Great American had recorded $343 million (net
of reinsurance recoverables of $163 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.
AFC's subsidiaries are parties in a number of proceedings
relating to former operations. See Note N to the financial
statements.
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 70% of AFC's consolidated assets are
invested in marketable securities. A diverse portfolio of bonds
and redeemable preferred stocks accounts for 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, 1996, the average life of AFC's bonds and
redeemable preferred stocks was just over 6 years.
Approximately 93% 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, 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.
28
Investments in mortgage-backed securities ("MBSs")
represented approximately one-fourth of AFC's bonds and
redeemable preferred stocks at December 31, 1996. 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 have been sheltered from income taxes through 1996,
non-taxable municipal bonds represent only a small portion
(approximately 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 investees,
during the past five years have been: 1996 - $166 million;
1995 -$84 million; 1994 - $50 million; 1993 - $165 million and
1992 - $104 million. At December 31, 1996, the net unrealized
gain on AFC's bonds and redeemable preferred stocks was
$169 million; the net unrealized gain on equity securities was
$185 million.
29
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1996
General As previously noted, financial statements for periods
subsequent to April 1995 have been restated to include the
accounts of American Premier. AFC had accounted for American
Premier as an investee from the second quarter of 1993 through
the first quarter of 1995. As a result of these changes,
current year income statement components are not comparable to
prior years.
Pretax earnings before extraordinary items were $338 million
in 1996, $252 million in 1995 and $44 million in 1994.
Results for 1996 include $203 million in pretax gains
primarily on the sales of Citicasters and Buckeye Management
Company, reduced by a charge of $80 million resulting from a
decision to strengthen insurance reserves relating to asbestos
and other environmental matters ("A&E").
In addition to the earnings contribution resulting from the
Mergers, results for 1995 include $84 million in pretax gains
on the sale of securities.
Results for 1994 include AFC's share ($28 million) of American
Premier's loss on the sale of General Cable securities, Great
American'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.
Property and Casualty Insurance - Underwriting AFC manages and
operates its property and casualty business as three major
sectors. The nonstandard automobile insurance companies (the "NSA
Group") insure risks not typically accepted for standard
automobile coverage because of the applicant's driving record,
type of vehicle, age or other criteria. The specialty lines are a
diversified group of over twenty-five business lines that offer a
wide variety of specialty insurance products. Some of the more
significant areas are California workers' compensation, executive
liability, inland and ocean marine, U.S.-based operations of
Japanese companies, agricultural-related coverages, excess and
surplus lines and fidelity and surety bonds. The 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.
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting losses, loss
adjustment expenses, underwriting expenses and policyholder
dividends 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.
30
While AFC desires and seeks to earn an underwriting profit on
all of its business, it is not always possible to do so. As a
result, AFC attempts to expand in the most profitable areas and
control growth or even reduce its involvement in the least
profitable ones.
Comparisons made in the following discussion of AFC's insurance
operations include American Premier's insurance operations even
though they were not consolidated in the financial statements
prior to the Mergers.
Net written premiums and combined ratios for AFC's property and
casualty insurance subsidiaries were as follows (dollars in
millions):
1996 1995 1994
Net Written Premiums (GAAP)
NSA Group $1,135 $1,277 $1,186
Specialty Operations 993 1,097 1,250
Commercial and Personal Operations 660 717 683
Other Lines - 1 5
$2,788 $3,092 $3,124
Combined Ratios (GAAP)
NSA Group 99.9% 105.2% 100.0%
Specialty Operations 84.1 94.8 97.2
Commercial and Personal Operations 110.6 99.1 98.9
Aggregate (including A&E and other lines) 102.9 101.2 99.4
Operating results for 1996 were adversely impacted by two
unusual items: (i) higher than normal catastrophe losses including
approximately $30 million in losses due to Hurricane Fran and (ii)
the strengthening of A&E reserves (exposures for which AFC may be
liable under general liability policies written years ago). AFC
increased A&E reserves of its discontinued insurance lines by $120
million by recording a third quarter, non-cash pretax charge of
$80 million and reallocating $40 million in reserves from its
Specialty Operations. A&E reserves at December 31, 1996, were
approximately $343 million, an amount equal to approximately 10.5
times the preceding three years' average claim payments.
In 1996, underwriting results of AFC's insurance operations
significantly outperformed the industry average for the eleventh
consecutive year. AFC's insurance operations have been able to
exceed the industry's results by focusing on highly specialized
niche products, supplemented by commercial lines coverages and
personal automobile products.
NSA Group The NSA Group has implemented premium rate increases
in various states over the last three years. The higher rate
levels along with competitive pressures in the nonstandard
automobile insurance industry resulted in an 11% decline in net
written premiums in 1996 and adversely impacted premium growth
during 1995. These rate increases contributed to an improvement,
however, in the combined ratio for 1996. The increase in the
combined ratio for 1995 was due primarily to inadequate rate
levels in certain markets and weather-related losses (principally
from hailstorms in Texas) which more than offset a reduction in
underwriting expenses due largely to cost control measures.
Specialty Operations Net written premiums for the specialty
operations declined 9% and 12% during 1996 and 1995, respectively,
due primarily to a decrease in the California workers' compensation
business in both years and withdrawal from an unprofitable pool at
the end of 1995, partially offset by increases in other specialty
niche lines. The decline in California workers' compensation
premiums reflects (i) extremely competitive pricing in the
marketplace as a result of the repeal of the California workers'
compensation minimum rate law effective January 1, 1995 and (ii) the
impact of mandatory premium rate reductions which took effect a year
earlier.
31
Excluding the impact of the decreases in the California
workers' compensation business and the withdrawal from the
voluntary pool, specialty net written premiums increased
$16 million (2%) in 1996. The increase is due in part to
increases in specialized coverages for fidelity and surety bonds,
executive liability, animal mortality and collateral protection
exposures.
The improvement in the combined ratio of the Specialty Lines
for 1996 includes 4.1 percentage points attributable to a
reallocation of loss reserves in connection with the strengthening
of A&E reserves. Further improvement is attributable to (i)
improved results in certain niche businesses, (ii) reductions in
loss, loss adjustment expense and policyholder dividend reserves
prompted by the fundamental changes in the California workers'
compensation market and actuarial evaluations, and (iii) losses in
1995 from participation in the voluntary pool.
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 AFC withdrew.
Commercial and Personal Operations Net written premiums for
the commercial and personal operations decreased 8% in 1996. The
decrease is due primarily to significant reductions in homeowners
coverages in certain states as well as competitive pricing
conditions in the commercial casualty market, partially offset by
increases in writings of workers' compensation coverages. The
profitability of the commercial and personal operations declined
in 1996 due primarily to deterioration in personal lines
operations as well as weather-related losses, including losses
from Hurricane Fran.
Net written premiums 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. These profitable results were offset by unfavorable results
in the personal lines operations from weather-related losses,
start-up costs related to a direct-to-consumer operation and
deteriorating automobile loss experience.
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested
assets.
1996 compared to 1995 Investment income increased $96 million
(13%) from 1995; adjusting for the effects of the Mergers
retroactively to January 1, 1995, investment income increased
$55 million (7%) from 1995 due primarily to an increase in the
average amount of investments held.
1995 compared to 1994 AFC's investment income increased $50
million (9%) from 1994 due to an increase in the average amount of
investments held. For the period following the Mergers,
investment income includes $117 million attributable to American
Premier.
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.
1996 compared to 1995 AFC's equity in net earnings of investee
corporations decreased $32 million compared to 1995. Chiquita
reported a decrease in operating income in 1996 of $92 million.
Chiquita recorded writedowns and costs of $70 million resulting
from (i) industry-wide flooding in Costa Rica, Guatemala and
Honduras, (ii) certain strategic undertakings designed to achieve
further long-term reductions in the delivered product cost of
Chiquita bananas and (iii) certain claims relating to prior
European Union quota restructuring actions. Aside from the
effects described above, operating income from remaining core
operations improved in 1996 primarily as a result of lower
delivered product cost for bananas. This improvement in core
operating results substantially offset the elimination of earnings
from Chiquita's Costa Rican edible oils operations which were sold
in December 1995.
32
1995 compared to 1994 AFC's equity in net earnings of investee
corporations increased $32 million in 1995. Chiquita reported a
$105 million improvement in operating income primarily due to net
gains from the sale of non-core assets, higher banana prices
outside the European Union, the
favorable effect of foreign exchange rates on European sales, and
earnings improvements from other food products.
Gains on Sales of Investees The gains on sales of investees in
1996 represent pretax gains, before $6.5 million of minority
interest, on the sale of Citicasters common stock. The gains on
sales of investees in 1994 represent pretax gains on the sale of
General Cable common stock.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries
in 1996 include a pretax gain of $33.9 million on the sale of
Buckeye and the settlement of litigation related to a subsidiary
sold in 1993.
Annuity Benefits For GAAP financial reporting purposes, annuity
receipts are 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.
Annuity receipts totaled approximately $570 million in 1996,
$460 million in 1995 and $440 million in 1994. Annuity receipts
have increased over the last few years due to sales of newly
introduced single premium products and, in 1995, the development
of new distribution channels.
Annuity benefits increased $17 million (7%) in 1996 and
$13 million (5%) in 1995 primarily due 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.
1996 compared to 1995 Interest expense for 1996 was
$86.1 million and interest expense for 1995, adjusted to reflect
the effect of the Mergers retroactively to January 1, 1995, was
$116.3 million. The $30 million (26%) decrease reflects
significant debt retirements during both 1995 and 1996.
1995 compared to 1994 Excluding $29 million attributable to
American Premier, interest expense decreased by $22 million (19%)
due primarily to repayments of borrowings by AFC and certain
subsidiaries and the AFC debt exchange in 1994.
Other Operating and General Expenses Operating and general
expenses included the following (in millions):
1996 1995 1994
Minority interest $56 $28 $ 9
Allowance for bad debts - - 18
Charge for California insurance
reform measure - - 19
Income Taxes See Note L to the Financial Statements for an
analysis of items affecting AFC's effective tax rate.
33
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1996 and 1995 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statement of Changes in Capital Accounts:
Years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note O
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 auditors of American Premier Underwriters,
Inc. The report is incorporated herein by reference.
PART III
The information required by the following Items will be provided
within 120 days after the end of Registrant's fiscal year.
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
34
REPORT 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,
1996 and 1995, 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, 1996. 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.
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, 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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 25, 1997
F-1
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
December 31,
1996 1995
Assets
Cash and short-term investments $ 404,831 $ 448,201
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,528,100 and $3,729,300) 3,491,126 3,588,943
Available for sale - at market
(amortized cost - $6,362,597 and $5,648,060) 6,494,597 5,949,260
Other stocks - principally at market
(cost - $142,364 and $136,944) 327,664 252,244
Investment in investee corporations 199,651 306,545
Loans receivable 568,055 630,084
Real estate and other investments 205,021 216,460
Total investments 11,286,114 10,943,536
Recoverables from reinsurers and prepaid
reinsurance premiums 942,450 923,080
Agents' balances and premiums receivable 609,403 703,274
Deferred acquisition costs 452,041 419,919
Other receivables 272,766 269,600
Deferred tax asset 137,284 200,434
Assets held in separate accounts 247,579 238,524
Prepaid expenses, deferred charges and other assets 368,114 390,750
Cost in excess of net assets acquired 278,581 314,136
$14,999,163 $14,851,454
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 4,123,701 $ 4,096,703
Unearned premiums 1,247,806 1,294,054
Annuity benefits accumulated 5,365,612 5,051,959
Life, accident and health reserves 575,380 538,274
Payable to American Financial Group, Inc. 422,015 85,056
Other long-term debt:
Direct obligations of AFC Parent Company 172,809 311,202
Obligations of AFC subsidiaries:
American Premier Underwriters (parent only) 166,695 337,334
American Annuity Group 114,900 167,734
Other subsidiaries 63,515 65,793
Liabilities related to separate accounts 247,579 238,524
Accounts payable, accrued expenses and other
liabilities 915,398 1,089,741
Total liabilities 13,415,410 13,276,374
Minority interest 306,858 326,979
Shareholders' Equity:
Preferred Stock (liquidation value
- $258,638 and $278,719) 162,760 168,484
Common Stock without par value 9,625 9,625
Capital Surplus 919,746 464,366
Retained earnings 1,364 365,126
Net unrealized gain on marketable securities,
net of deferred income taxes 183,400 240,500
Total shareholders' equity 1,276,895 1,248,101
$14,999,163 $14,851,454
See notes to consolidated financial statements.
F-2
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Year ended December 31,
1996 1995 1994
Income:
Property and casualty insurance premiums $2,844,512 $2,648,703 $1,378,628
Life, accident and health premiums 103,552 15,691 2,231
Investment income 845,330 749,510 582,931
Realized gains (losses) on sales of
securities (3,470) 84,028 48,342
Equity in net earnings (losses) of
investee corporations (16,955) 15,237 (16,573)
Gains on sales of investee corporations 169,138 335 1,694
Gains on sales of subsidiaries 36,837 - -
Other income 134,904 114,602 107,051
4,113,848 3,628,106 2,104,304
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,131,421 1,977,395 986,996
Commissions and other underwriting
expenses 793,800 707,340 428,590
Annuity benefits 271,821 254,650 241,811
Life, accident and health benefits 92,315 13,202 1,524
Interest charges on borrowed money 86,148 122,568 115,162
Book Value Incentive Plan - - 34,740
Other operating and general expenses 400,361 301,053 251,913
3,775,866 3,376,208 2,060,736
Earnings before income taxes and
extraordinary items 337,982 251,898 43,568
Provision for income taxes 89,658 56,447 24,650
Earnings before extraordinary items 248,324 195,451 18,918
Extraordinary items - gain (loss) on
prepayment of debt (26,328) 1,832 (16,818)
Net Earnings $ 221,996 $ 197,283 $ 2,100
See notes to consolidated financial statements.
F-3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS
(In Thousands)
Capital Other Net
Subject to Preferred Common Capital Retained Unrealized
Redemption Stock Stock Surplus Earnings Gain
Balance at December 31, 1993 $49,232 $168,588 $ 904 $ - $210,846 $156,900
Net earnings - - - - 2,100 -
Change in unrealized - - - - - (153,400)
Dividends on:
Preferred Stock - - - - (25,728) -
Common Stock - - - - (3,794) -
Purchases and redemptions (6,625) (104) - - (56) -
Decrease in capital subject to
put option (7,225) - - - 7,225 -
Transfer from capital subject
to put option (32,502) - - - 32,502 -
Balance at December 31, 1994 2,880 168,484 904 - 223,095 3,500
Adjustment for pooling of
interests at April 3, 1995 - - - 454,969 - 2,400
Net earnings - - - - 197,283 -
Change in unrealized - - - - - 234,600
Exercise of stock options - - 8,721 - - -
Dividends on:
Preferred Stock - - - - (25,397) -
Common Stock - - - - (29,855) -
Purchases and redemptions (2,880) - - - - -
Capital contribution from parent - - - 9,333 - -
Change in foreign currency translation - - - 64 - -
Balance at December 31, 1995 - 168,484 9,625 464,366 365,126 240,500
Net earnings - - - - 221,996 -
Change in unrealized - - - - - (57,100)
Dividends on:
Preferred Stock - - - - (24,898) -
Common Stock - - - - (560,860) -
Purchases and redemptions - (22,524) - (14,388) - -
Sale of preferred shares to
employee benefit plan - 16,800 - - - -
Capital contribution from parent - - - 468,666 - -
Change in foreign currency translation - - - 1,102 - -
Balance at December 31, 1996 $ - $162,760 $9,625 $919,746 $ 1,364 $183,400
See notes to consolidated financial statements.
F-4
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Year ended December 31,
Operating Activities: 1996 1995 1994
Net earnings $ 221,996 $ 197,283 $ 2,100
Adjustments:
Extraordinary items 26,328 (1,832) 16,818
Depreciation and amortization 79,425 47,760 30,729
Annuity benefits 271,821 254,650 241,811
Equity in net (earnings) losses of
investee corporations 16,955 (15,237) 16,573
Changes in reserves on assets 5,656 2,302 17,094
Realized gains on investing activities (198,676) (84,995) (59,609)
Decrease (increase) in reinsurance and
other receivables 95,553 25,781 (223,113)
Decrease (increase) in other assets 23,665 (10,955) (96,596)
Increase in insurance claims and reserves 9,171 137,180 345,542
Increase (decrease) in other liabilities (211,697) (255,404) 67,799
Increase in minority interest 53,894 18,989 6,773
Dividends from investees 4,799 9,568 21,567
Other, net (3,989) (1,233) (1,488)
394,901 323,857 386,000
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,128,015) (2,378,427) (1,726,318)
Equity securities (10,528) (1,034) (7,315)
Investees and subsidiaries - (68,591) (29,306)
Real estate, property and equipment (38,035) (42,579) (27,185)
Maturities and redemptions of fixed maturity
investments 615,849 308,526 420,945
Sales of:
Fixed maturity investments 881,114 2,310,837 694,947
Equity securities 53,195 17,379 127,181
Investees and subsidiaries 284,277 - 27,621
Real estate, property and equipment 7,981 27,759 6,151
Cash and short-term investments of acquired
(former) subsidiary (4,589) 392,100 -
Decrease (increase) in other investments 594 (7,326) (5,571)
(338,157) 558,644 (518,850)
Financing Activities:
Annuity receipts 573,741 457,525 442,703
Annuity payments (517,881) (412,854) (321,038)
Additional long-term borrowings 288,775 337,076 244,311
Reductions of long-term debt (582,288) (1,061,187) (193,481)
Borrowings from AFG 152,471 102,202 -
Payments to AFG (61,000) (18,174) -
Issuance of preferred stock 16,800 - -
Repurchases of preferred stock (36,912) (2,880) (6,738)
Exercise of stock options - 8,721 -
Issuance of trust originated preferred
securities 72,412 - -
Capital contribution 18,666 9,333 -
Cash dividends paid (24,898) (25,397) (29,522)
(100,114) (605,635) 136,235
Net Increase (Decrease) in Cash and Short-term
Investments (43,370) 276,866 3,385
Cash and short-term investments at beginning
of period 448,201 171,335 167,950
Cash and short-term investments at end of
period $ 404,831 $ 448,201 $ 171,335
See notes to consolidated financial statements.
F-5
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________
INDEX TO NOTES
A. Mergers I. Other Long-Term Debt
B. Accounting Policies J. Preferred Stock
C. Acquisitions and Sales of Subsidiaries K. Common Stock
and Investees L. Income Taxes
D. Segments of Operations M. Extraordinary Items
E. Investments N. Commitments and Contingencies
F. Investment in Investee Corporations O. Quarterly Operating Results
G. Cost in Excess of Net Assets Acquired P. Insurance
H. Payable to American Financial Group, Inc. Q. Additional Information
_______________________________________________________________________
A. Mergers On April 3, 1995, American Financial Corporation
("AFC") merged with a newly formed 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 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.
At the close of business on December 31, 1996, AFG
contributed to AFC 81% of the common stock of American
Premier. Since AFC and American Premier are under the common
control of AFG, the acquisition of American Premier has been
recorded by AFC at AFG's historical cost in a manner similar
to a pooling of interests. Accordingly, the historical
consolidated financial statements of AFC for periods
subsequent to the April 3, 1995 Mergers have been restated to
include the accounts of American Premier. The following
table (in millions) reconciles revenue and net earnings
previously reported by AFC and American Premier to those
reported in AFC's Statement of Earnings.
Nine Months Ended Year Ended
September 30, 1996 December 31,
(Unaudited) 1995
Revenues as previously reported:
AFC $2,096 $2,384
American Premier 1,236 1,736
3,332 4,120
Eliminations(*) (106) (492)
Restated revenues $3,226 $3,628
Net earnings as previously reported:
AFC $ 142 $ 138
American Premier 122 62
264 200
Eliminations(*) (33) (3)
Restated net earnings $ 231 $ 197
(*) Represents adjustments to (i) eliminate intercompany
transactions between AFC and American Premier, (ii)
eliminate American Premier's first quarter 1995 results
prior to the Mergers and (iii) reflect American Premier's
results on AFG's basis.
F-6
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of AFC and its subsidiaries. Mergers and
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 with g
enerally 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.
AFC's ownership of subsidiaries and significant affiliates
with publicly traded shares at December 31, was as follows:
1996 1995 1994
American Annuity Group, Inc. ("AAG") 81% 81% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. 81% (a) 42%
Chiquita Brands International, Inc. 43% 44% 46%
Citicasters Inc. (b) 38% 37%
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
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.
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.
F-7
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investment in Investee Corporations 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 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.
F-8
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Annuity Benefits Accumulated Annuity receipts and benefit
payments are 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 yield
(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
primarily 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; if
depositors elect to purchase an annuity from AAG, funds are
transferred to AAG.
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
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. 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.
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which
the related premium is earned. Changes in estimates are
included in income in the period determined. Policyholder
dividends do not become legal liabilities unless and until
declared by the boards of directors of the insurance
companies.
Income Taxes AFC and American Premier have each filed
consolidated federal income tax returns which include all
80%-owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. Because voting rights
aggregating 21% were extended to holders of AFC Series F and G
Preferred Stock in connection with the Mergers, AFC filed a
separate consolidated return for 1995 and will again for 1996.
At the close of business on December 31, 1996, AFG contributed
81% of the common stock of American Premier to AFC.
Accordingly, AFC and American Premier will file a consolidated
return for 1997.
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.
F-9
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Benefit Plans AFC provides retirement benefits, to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans. Contributions to
benefit plans are charged against earnings in the year for
which they are declared. Both AFC and American Premier had
Employee Stock Ownership Retirement Plans ("ESORP") which were
noncontributory, qualified plans invested in securities of AFG
and affiliates for the benefit of their employees. In 1997,
these ESORP plans were combined into a new plan.
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
1995 to holders of the units, were accrued at December 31,
1994.
Minority Interest For balance sheet purposes, minority
interest represents (i) the interests of noncontrolling
shareholders in AFC subsidiaries including $75 million of
trust originated preferred securities ("TOPrS") issued by a
trust subsidiary of AAG and (ii) AFC's direct ownership
interest in American Premier. For income statement purposes,
minority interest expense (included in "other operating and
general expenses") represents those shareholders' interest in
the earnings of AFC subsidiaries as well as accrued
distributions on the TOPrS.
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.
Fair Value of Financial Instruments Methods and assumptions
used in estimating fair values are described in Note Q 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.
F-10
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. Acquisitions and Sales of Subsidiaries and Investees
Citicasters In September 1996, AFC sold its investment in
Citicasters to Jacor Communications for approximately
$220 million in cash plus warrants to purchase Jacor common
stock. AFC realized a pretax gain of approximately
$169 million, before minority interest of $6.5 million, on
the sale. In 1994, AFEI purchased approximately 10% of
Citicasters common stock from an unaffiliated company for
$23.9 million in cash.
Buckeye In March 1996, American Premier sold Buckeye
Management Company to Buckeye's management (including an AFG
director who resigned in March 1996) and employees for $60
million in cash, net of transaction costs. AFC recognized a
$33.9 million pretax gain on the sale.
General Cable In 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).
D. Segments of Operations AFC operates its property and
casualty insurance business in three major segments:
nonstandard automobile, specialty lines, and commercial and
personal lines. AFC's annuity and life business primarily
sells tax-deferred annuities to employees of primary and
secondary educational institutions and hospitals. These
insurance businesses operate throughout the United States.
In addition, AFC has owned significant portions of the voting
equity securities of certain companies (investee corporations
- see Note F).
F-11
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
1996 1995 1994
Assets
Property and casualty insurance (a) $ 7,116,088 $ 7,443,115 $ 4,576,591
Annuities and life 7,009,127 6,600,377 5,078,928
Other 674,297 501,417 104,495
14,799,512 14,544,909 9,760,014
Investment in investee corporations 199,651 306,545 832,637
$14,999,163 $14,851,454 $10,592,651
Revenues (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 1,183,098 $ 954,210 $ 24,974
Specialty lines 976,150 995,528 698,365
Commercial and personal lines 684,776 697,512 648,222
Other lines 488 1,453 7,067
2,844,512 2,648,703 1,378,628
Investment and other income 500,897 465,998 314,731
3,345,409 3,114,701 1,693,359
Annuities and life (c) 585,079 444,082 379,534
Other 200,315 54,086 47,984
4,130,803 3,612,869 2,120,877
Equity in net earnings (losses)
of investee corporations (16,955) 15,237 (16,573)
$ 4,113,848 $ 3,628,106 $ 2,104,304
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Nonstandard automobile $ 1,015 ($ 60,316) ($ 3,080)
Specialty lines 154,329 50,690 (12,598)
Commercial and personal lines (72,513) 5,315 7,087
Other lines (d) (163,540) (31,721) (24,914)
(80,709) (36,032) (33,505)
Investment and other income 359,002 357,617 199,292
278,293 321,585 165,787
Annuities and life 77,119 79,579 58,748
Other (e) (475) (164,503) (164,394)
354,937 236,661 60,141
Equity in net earnings (losses) of
investee corporations (16,955) 15,237 (16,573)
$ 337,982 $ 251,898 $ 43,568
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other income
earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and
other environmental matters ("A&E").
(e) Includes holding company expenses.
F-12
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investments Bonds, redeemable preferred stocks and other stocks
at December 31, consisted of the following (in millions):
1996
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 80.0 79.9 1.1 (1.2)
Foreign government 8.5 9.0 .5 -
Public utilities 501.4 501.4 6.4 (6.4)
Mortgage-backed securities 935.9 949.0 18.8 (5.7)
All other corporate 1,965.3 1,988.8 34.8 (11.3)
Redeemable preferred stocks - - - -
$3,491.1 $3,528.1 $61.6 ($24.6)
Other stocks
1996
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 472.2 $ 475.7 $ 7.3 ($ 3.8)
States, municipalities and
political subdivisions 39.6 39.7 .5 (.4)
Foreign government 94.5 94.3 .8 (1.0)
Public utilities 443.8 453.6 13.1 (3.3)
Mortgage-backed securities 1,626.3 1,637.9 28.1 (16.5)
All other corporate 3,624.4 3,733.0 122.2 (13.6)
Redeemable preferred stocks 61.8 60.4 1.5 (2.9)
$6,362.6 $6,494.6 $173.5 ($41.5)
Other stocks $ 142.4 $ 327.7 $191.6 ($ 6.3)
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 55.0 56.6 1.7 (.1)
Foreign government 13.1 12.8 1.0 (1.3)
Public utilities 528.8 545.3 17.7 (1.2)
Mortgage-backed securities 945.7 980.3 35.3 (.7)
All other corporate 2,042.1 2,129.8 87.8 (.1)
Redeemable preferred stocks 4.2 4.5 .3 -
$3,588.9 $3,729.3 $143.8 ($ 3.4)
Other stocks
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 $ 413.9 $ 431.3 $ 17.5 ($ .1)
States, municipalities and
political subdivisions 20.6 20.3 .3 (.6)
Foreign government 87.5 89.9 2.4 -
Public utilities 561.3 591.0 32.3 (2.6)
Mortgage-backed securities 1,373.2 1,407.8 40.7 (6.1)
All other corporate 3,087.1 3,304.3 219.8 (2.6)
Redeemable preferred stocks 104.5 104.7 1.9 (1.7)
$5,648.1 $5,949.3 $314.9 ($13.7)
Other stocks $ 136.9 $ 252.2 $115.9 ($ .6)
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1996. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 7.5 years at December 31, 1996.
Held to Available
Maturity Maturity for Sale
One year or less 6% 2%
After one year through five years 27 17
After five years through ten years 36 41
After ten years 4 15
73 75
Mortgage-backed securities 27 25
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.
F-13
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
1996
Realized ($ 16,545) $13,075 $ 8,199 $ 4,729
Change in Unrealized (272,583) 70,000 70,904 (131,679)
1995
Realized 77,963 6,065 (13,915) 70,113
Change in Unrealized 810,690 43,700 (288,001) 566,389
1994
Realized (1,107) 49,449 30 48,372
Change in Unrealized (673,001) (60,500) 256,725 (476,776)
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
1996
Held to Maturity $ 202.2 $331.0 $ 9.3 $ 2.4 ($ 1.2)
Available for Sale 1,925.8 284.8 871.8 29.6 (47.3)
Total $2,128.0 $615.8 $ 881.1 $32.0 ($48.5)
1995
Held to Maturity $ 774.8 $175.2 $ 12.9 $ 1.9 ($ 2.3)
Available for Sale 1,603.6 133.3 2,297.9 88.0 (9.6)
Total $2,378.4 $308.5 $2,310.8 $89.9 ($11.9)
1994
Held to Maturity $1,090.0 $216.0 $ 8.0 $ 3.3 ($ 2.5)
Available for Sale 636.3 204.9 686.9 9.4 (11.3)
Total $1,726.3 $420.9 $ 694.9 $12.7 ($13.8)
Securities classified as "held to maturity" having an amortized cost of
$9.5 million, $14.7 million and $8.7 million were sold for a loss of
$159,000, $1.8 million and $712,000 in 1996, 1995 and 1994,
respectively, due to significant deterioration in the issuers'
creditworthiness.
F-14
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investee Corporations The companies in the
following table are subject to the rules and regulations of the
SEC. The market value of the investments was approximately
$306 million and $509 million at December 31, 1996 and 1995,
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)
12/31/96 12/31/95 1996 1995 1994
Chiquita (a) $199,651 (43%) $232,466 (44%) ($18,415) $ 3,628 ($26,670)
Citicasters (b) - 74,079 (38%) 1,460 4,702 8,950
American Premier(c) - - - 6,907 1,147
$199,651 $306,545 ($16,955) $15,237 ($16,573)
<FN>
(a) Equity in net earnings (losses) excludes AFC's share of
extraordinary losses.
(b) Sold in September 1996.
(c) Accounted for as an 81% subsidiary beginning on April 3, 1995.
</FN>
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed
food products. Citicasters owned and operated radio and
television stations in major markets throughout the country.
Summarized financial information for Chiquita at December 31, is
shown below (in millions). See "Investee Corporations" in
Management's Discussion and Analysis.
Chiquita Brands International, Inc.
1996 1995 1994
Current Assets $ 844 $ 877
Non-current Assets 1,623 1,747
Current Liabilities 464 510
Non-current Liabilities 1,279 1,442
Shareholders' Equity 724 672
Net Sales of Continuing Operations $2,435 $2,566 $2,506
Operating Income 84 176 71
Income (Loss) from Continuing Operations (28) 28 (84)
Discontinued Operations - (11) 35
Extraordinary Loss from Debt Refinancings (23) (8) (23)
Net Income (Loss) (51) 9 (72)
G. Cost in Excess of Net Assets Acquired At December 31, 1996 and
1995, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately
$121 million and $110 million, respectively. Amortization
expense was $10.8 million in 1996, $9.2 million in 1995 and
$6.1 million in 1994.
H. Payable to American Financial Group, Inc. Following the
Mergers, American Premier agreed to lend up to $675 million to
AFC under a line of credit. Borrowings under the credit line
bear interest at 11-5/8%. On December 27, 1996, American
Premier paid a dividend to AFG which consisted of the
$675 million note receivable plus accrued interest.
Subsequently, AFG contributed $450 million of the note to AFC.
At December 31, 1996, AFC had outstanding borrowings under the
note of $225.0 million, plus accrued interest of $19.1 million.
F-15
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Also subsequent to the Mergers, American Premier entered into
a credit agreement with AFG under which American Premier and
AFG may make loans of up to $200 million available to each
other. The balance outstanding under the credit line bears
interest at a variable rate of one percent over LIBOR and is
payable on December 31, 2010. At December 31, 1996, American
Premier had outstanding borrowings under the credit agreement
of $175.5 million, plus accrued interest of $2.5 million.
I. Other Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1996 1995
American Financial Corporation (Parent Company):
9-3/4% Debentures due April 2004, less discount of
$1,146 and $1,249(imputed rate - 9.8%) $164,368 $302,510
Other 8,441 8,692
$172,809 $311,202
American Premier Underwriters, Inc. (Parent Company):
9-3/4% Subordinated Notes due August 1999,
including premium of $1,912 and $4,403
(imputed rate - 8.8%) $ 93,604 $161,531
10-5/8% Subordinated Notes due April 2000,
including premium of $2,629 and $7,210
(imputed rate - 8.8%) 54,595 120,222
10-7/8% Subordinated Notes due May 2011,
including premium of $1,642 and $5,082
(imputed rate - 9.6%) 18,496 55,581
$166,695 $337,334
American Annuity Group, Inc.:
Notes payable to banks due September 1999 $ 44,700 $ 20,500
9-1/2% Senior Notes due August 2001 40,845 41,490
11-1/8% Senior Subordinated Notes due February 2003 24,080 101,443
Other 5,275 4,301
$114,900 $167,734
Other Subsidiaries:
Notes payable secured by real estate $ 52,543 $ 53,066
Other 10,972 12,727
$ 63,515 $ 65,793
F-16
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1996, sinking fund and other scheduled
principal payments on debt for the subsequent five years were
as follows (in thousands):
American
Parent Premier Other
Company (Parent) Subsidiaries Total
1997 $5,616 $ - $ 2,533 $ 8,149
1998 - - 2,846 2,846
1999 - 91,692 47,137 138,829
2000 - 51,966 8,735 60,701
2001 - - 42,304 42,304
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.
Great American Holding Company ("GAHC"), a wholly-owned
subsidiary of AFC, and Pennsylvania Company ("Pennco"), a
wholly-owned subsidiary of American Premier have revolving
loan agreements with groups of banks under which they can
borrow up to $300 million and $75 million, respectively.
Borrowings bear interest at floating rates based on prime or
LIBOR and are collateralized by certain stock of operating
subsidiaries. Each facility is guaranteed by the respective
immediate parent company. At December 31, 1996 and 1995,
there were no outstanding borrowings under either of these
credit lines.
AAG and AFEI have revolving credit agreements with banks
under which they can borrow up to $115 million and $20
million, respectively. Borrowings bear interest at floating
rates based on prime or LIBOR and are collateralized. At
December 31, 1996 and 1995, there were no outstanding
borrowings under the AFEI credit line.
During 1995, AFC redeemed $279 million of its various
debentures, repaid $187 million of GAHC's bank debt, and
redeemed $200 million of GAHC's Notes using funds borrowed
under the AFG line of credit. Also during 1995, AFC sold an
aggregate of $100 million of its 9-3/4% debentures due 2004
for cash. During 1996, AFC repurchased $138.2 million of its
9-3/4% debentures for $147.9 million in cash.
As the result of the Mergers and a subsequent ratings
downgrade, holders of American Premier's Notes had the right
to "put" their Notes to American Premier at face amount.
Approximately $44 million of the Notes were tendered under
the put right in 1995. In addition, American Premier
repurchased $136 million of the Notes during 1995 for
$142.7 million in cash.
In a December 1996 tender offer, American Premier retired
$95.3 million of its Notes for $105.6 million. In addition,
American Premier repurchased $64.8 million of its Notes for
$71.6 million in cash during 1996.
During 1995, AAG repurchased $4.9 million of its Notes for
$5.0 million in cash. During 1996, AAG repurchased
$78 million of its Notes for $84.2 million in cash.
Cash interest payments of $83 million, $137 million and
$115 million were made on long-term borrowings in 1996, 1995
and 1994, respectively.
F-17
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. 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, 13.9 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;
$20.00 liquidating value per share; annual dividends per
share $1.80; nonredeemable after 1996; 11,900,725 and
13,744,754 shares (stated value $145.4 million and
$167.9 million) outstanding at December 31, 1996 and 1995,
respectively.
Series G, $1 par value - authorized 2,000,000 shares;
annual dividends per share $1.05; redeemable at $10.50 per
share; 1,964,158 and 364,158 shares (stated value
$17.4 million and $600,000) outstanding at December 31,
1996 and 1995, respectively.
In December 1996, AFC redeemed 1.6 million shares of its
Series F Preferred Stock for $31.9 million and, in October,
AFC purchased 250,000 shares of Series F from AFC's ESORP for
$5.0 million. In December 1996, AFC issued 1.6 million
shares of its Series G Preferred Stock to AFC's ESORP for
$16.8 million.
During 1995 and 1994, AFC retired issues of its mandatorily
redeemable preferred stock for an aggregate of $2.9 million
and $6.6 million, respectively.
K. Common Stock At December 31, 1996, American Financial Group
owned all of the outstanding shares of AFC's Common Stock.
F-18
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. 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):
1996 1995 1994
Earnings before income taxes and
extraordinary items $337,982 $251,898 $ 43,568
Extraordinary items before income taxes (33,331) 1,551 (17,192)
Adjusted earnings before income taxes $304,651 $253,449 $ 26,376
Income taxes at statutory rate $106,628 $ 88,707 $ 9,232
Effect of:
Losses (utilized) not utilized (43,789) (40,292) 19,267
Dividends received deduction (7,450) (7,823) (8,528)
Minority interest 18,507 9,533 2,998
Amortization of intangibles 3,065 3,015 1,987
Tax exempt interest (597) (897) (689)
Foreign income taxes 3,474 359 6
State income taxes 4,140 81 149
Other (1,323) 3,483 (146)
Total provision 82,655 56,166 24,276
Amounts applicable to
extraordinary items 7,003 281 374
Provision for income taxes as shown
on the Statement of Earnings $ 89,658 $ 56,447 $ 24,650
Adjusted earnings before income taxes consisted of the following
(in thousands):
1996 1995 1994
Subject to tax in:
United States $318,919 $256,417 $ 28,422
Foreign jurisdictions (14,268) (2,968) (2,046)
$304,651 $253,449 $ 26,376
The total income tax provision consists of (in thousands):
1996 1995 1994
Current taxes:
Federal $ 22,450 $ 38,512 $ 21,028
Foreign (1,735) (1,213) -
State 6,369 124 226
Deferred taxes:
Federal 55,250 18,191 3,012
Foreign 321 552 10
$ 82,655 $ 56,166 $ 24,276
For income tax purposes, certain members of the AFC consolidated
tax group, including American Premier as of December 31, 1996,
had the following carryforwards available at December 31, 1996
(in millions):
Expiring Amount
{ 1997 - 2001 $ 20
Operating Loss { 2002 - 2006 126
{ 2007 - 2011 93
Capital Loss 1997 - 1999 195
Other - Tax Credits 23
F-19
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income tax assets and liabilities 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):
1996 1995
AFC AFC American
Tax Tax Premier
Group(*) Group Tax Group
Deferred tax assets:
Net operating loss carryforwards $ 83.7 $ 93.8 $166.5
Capital loss carryforwards 68.2 - 108.7
Insurance claims and reserves 289.8 195.9 102.9
Other, net 142.2 41.2 91.3
583.9 330.9 469.4
Valuation allowance for deferred
tax assets (131.9) (91.9) (214.0)
452.0 239.0 255.4
Deferred tax liabilities:
Deferred acquisition costs (124.9) (89.8) (31.2)
Investment securities (189.8) (210.8) (23.8)
(314.7) (300.6) (55.0)
Net deferred tax asset (liability) $137.3 ($ 61.6) $200.4
(*) Includes American Premier
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
$40.2 million, $14.8 million and $30.0 million for 1996, 1995
and 1994, respectively.
M. Extraordinary Items Extraordinary items represent AFC's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are
net of minority interest and income tax benefits (in
thousands):
1996 1995 1994
AFC (parent) ($ 9,672) ($1,713) ($ 6,454)
Subsidiaries:
APU (parent) (1,075) 7,102 -
AAG (7,159) (201) (1,328)
GAHC - (611) -
Other 57 - -
Investee:
Chiquita (8,479) (2,745) (9,036)
($26,328) $1,832 ($16,818)
F-20
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. Commitments and Contingencies Loss accruals have been recorded
for various environmental and occupational injury and disease
claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978. Any ultimate liability arising
therefrom in excess of previously established loss accruals
would normally be attributable to pre-reorganization events and
circumstances and accounted for as a reduction in capital
surplus. However, under purchase accounting in connection with
the Mergers, any such excess liability will be charged to
earnings in AFC's financial statements.
American Premier's liability for environmental claims
($50.1 million at December 31, 1996) consists of a number of
proceedings and claims seeking to impose responsibility for
hazardous waste remediation costs at certain railroad sites
formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad operation. It
is difficult to estimate remediation costs for a number of
reasons, including the number and financial resources of other
potentially responsible parties, the range of costs for
remediation alternatives, changing technology and the time
period over which these matters develop. American Premier's
liability is based on information currently available and is
subject to change as additional information becomes available.
American Premier's liability for occupational injury and disease
claims ($70.1 million at December 31, 1996, before anticipated
recovery of $54.1 million) includes pending and expected claims
by former employees of PCTC for injury or disease allegedly
caused by exposure to excessive noise, asbestos or other
substances in the railroad workplace. Recorded amounts are
based on the accumulation of estimates of reported and
unreported claims and related expenses and estimates of probable
recoveries from insurance carriers.
AFC has accrued approximately $41 million at December 31, 1996,
for environmental costs and certain other matters associated
with the sales of former operations.
In management's opinion, the outcome of the items discussed
under "Uncertainties" in Management's Discussion and Analysis of
this Form 10-K, and the above claims and contingencies will not,
individually or in the aggregate, have a material adverse effect
on AFC's financial condition or results of operations.
F-21
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. 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
investees' 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 investees in individual
quarters. The following are quarterly results of
consolidated operations for the two years ended December 31,
1996 (in millions).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1996
Revenues $1,030.2 $1,032.8 $1,163.5 $887.3 $4,113.8
Earnings (loss) before
extraordinary items 78.5 57.8 119.2 (7.2) 248.3
Extraordinary items (7.3) (9.3) (8.3) (1.4) (26.3)
Net earnings (loss) 71.2 48.5 110.9 (8.6) 222.0
1995
Revenues $553.6 $1,006.0 $1,001.8 $1,066.7 $3,628.1
Earnings before
extraordinary items 29.9 34.1 53.3 78.2 195.5
Extraordinary items - 1.3 2.1 (1.6) 1.8
Net earnings 29.9 35.4 55.4 76.6 197.3
In the third quarter of 1996, AFC increased A&E reserves by
recording a non-cash pretax charge of $80 million. Realized
gains (losses) on sales of securities amounted to (in
millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1996 $18.7 $2.7 $ 3.2 ($28.1) ($ 3.5)
1995 3.5 7.9 23.6 49.0 84.0
P. Insurance Securities owned by insurance subsidiaries having
a carrying value of approximately $1.5 billion at
December 31, 1996, were on deposit as required by regulatory
authorities.
GAI recorded a charge of $19 million (included in "Other
operating and general expenses") in 1994 in response to the
California court decision upholding an insurance reform
measure passed by California voters which led to rate
rollbacks for most lines of property and casualty insurance.
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.
F-22
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1996, has been
reduced by $64 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):
1996 1995 1994
Balance at beginning of period $3,393 $2,187 $2,113
Reserves of American Premier at date
of the Mergers - 1,090 -
Provision for losses and loss adjustment
expenses occurring in the current year 2,179 2,116 1,027
Net decrease in provision for claims
occurring in prior years (48) (139) (40)
2,131 1,977 987
Payments for losses and loss adjustment
expenses occurring during:
Current year (999) (987) (381)
Prior years (1,121) (874) (532)
(2,120) (1,861) (913)
Balance at end of period $3,404 $3,393 $2,187
Add back reinsurance recoverables 720 704 730
Unpaid losses and loss adjustment
expenses included in Balance Sheet,
gross of reinsurance $4,124 $4,097 $2,917
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by
AFC's insurance companies.
1996 1995 1994
Insurance group investment income:
Fixed maturities $817.8 $727.3 $560.6
Equity securities 8.2 5.3 8.3
Other 13.5 7.9 6.7
839.5 740.5 575.6
Insurance group investment expenses (*) (38.5) (33.8) (32.0)
$801.0 $706.7 $543.6
(*) Included primarily in "Other operating and general
expenses" in the Statement of Earnings.
F-23
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
1996 1995 1994 1996 1995
Property and casualty companies $276 $200 $63 $1,659 $1,595
Life insurance companies 67 76 54 287 273
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 premiums in
connection with reinsurance ceded, (ii) amounts included in
income for reinsurance assumed and (iii) reinsurance
recoveries deducted from losses and loss adjustment expenses.
1996 1995 1994
Reinsurance ceded to:
Non-affiliates $518 $476 $402
Affiliates - 33 161
Reinsurance assumed - including
involuntary pools and associations 58 93 83
Reinsurance recoveries 306 304 429
Q. Additional Information Total rental expense for various
leases of office space, data processing equipment and
railroad rolling stock was $34 million, $35 million and
$22 million for 1996, 1995 and 1994, respectively. Sublease
rental income related to these leases totaled
$6.1 million in 1996, $6.2 million in 1995 and $6.4 million
in 1994.
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, 1996, were as follows:
1997 - $39 million, 1998 - $32 million, 1999 - $24 million,
2000 - $15 million, 2001 - $11 million and $18 million
thereafter. At December 31, 1996, minimum sublease rentals
to be received through the expiration of the leases aggregated
$21 million.
Other operating and general expenses included charges for
possible losses on agents' balances, reinsurance recoverables
and other receivables in the following amounts: 1996 - $0,
1995 - $0 and 1994 - $18 million. The aggregate allowance
for such losses amounted to approximately $140 million and
$144 million at December 31, 1996 and 1995, respectively.
F-24
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $ 9,986 $10,023 $9,538 $9,679
Other stocks 328 328 252 252
Investment in investee
corporations 200 306 307 509
Liabilities:
Annuity benefits
accumulated $ 5,366 $ 5,180 $5,052 $4,887
Long-term debt:
Parent company 173 188 311 325
APU (parent company) 167 174 337 344
Other subsidiaries 178 183 234 243
TOPrS 75 77 - -
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, 1996, AFC and its subsidiaries had
commitments to fund credit facilities and contribute limited
partnership capital totaling $16 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. Under
applicable restrictions the maximum amount of dividends
available to AFC in 1997 from its insurance subsidiaries
without seeking regulatory clearance is approximately
$253 million. Total "restrictions" on intercompany transfers
from AFC's subsidiaries cannot be quantified due to the
discretionary nature of the restrictions.
Benefit Plans AFC expensed ESORP contributions of
$15.4 million in 1996, $14.5 million in 1995 and $6.2 million
in 1994.
Transactions With Affiliates In 1995, a subsidiary of AFC
sold a house to its Chairman for its appraised value of $1.8
million.
F-25
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 O
to the Consolidated Financial Statements.
B. Schedules filed herewith for 1996, 1995 and 1994:
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 Report Item Reported
January 14, 1997 Capital contributions from AFG -
American Premier common shares and
$450 million Note.
March 17, 1997 Pro forma financial information
relating to American Premier
acquisition.
S-1
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
_________________________________________________________________
Condensed Balance Sheet
December 31,
Assets: 1996 1995
Cash and short-term investments $ 46,493 $ 5,098
Investment in securities 100,871 417
Receivables from affiliates 606,416 679,659
Investment in subsidiaries 1,494,447 2,043,487
Investment in investees 22,647 59,538
Other assets 7,807 13,622
$2,278,681 $2,801,821
Liabilities and Capital:
Accounts payable, accrued expenses and other
liabilities $ 37,156 $ 60,892
Payable to affiliates 791,821 1,181,626
Long-term debt 172,809 311,202
Other capital 1,276,895 1,248,101
$2,278,681 $2,801,821
Condensed Statement of Earnings
Year ended December 31,
Income: 1996 1995 1994
Dividends from:
Subsidiaries $861,178 $195,578 $ 25,571
Investees 177 1,012 3,514
861,355 196,590 29,085
Equity in undistributed earnings
of subsidiaries and investees (472,440) 154,346 113,631
Realized gains (losses) on sales of:
Securities 963 2,389 7,477
Investees 33,950 (5,034) (5,555)
Investment and other income 46,980 35,226 26,546
470,808 383,517 171,184
Costs and Expenses:
Interest charges on intercompany borrowings 81,623 4,198 3,494
Interest charges on other borrowings 21,796 86,655 56,945
Book Value Incentive Plan - - 44,166
Other operating and general expenses 29,407 40,766 23,011
132,826 131,619 127,616
Earnings before income taxes and
extraordinary items 337,982 251,898 43,568
Provision for income taxes 89,658 56,447 24,650
Earnings before extraordinary items 248,324 195,451 18,918
Extraordinary items - gain (loss) on
prepayment of debt (26,328) 1,832 (16,818)
Net Earnings $221,996 $197,283 $ 2,100
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
1996 1995 1994
Operating Activities:
Net earnings $221,996 $197,283 $ 2,100
Adjustments:
Extraordinary items 26,328 (1,832) 16,818
Equity in earnings of subsidiaries (289,709) (235,448) (88,060)
Equity in net (earnings) losses of investee
corporations 379 (4,254) (2,872)
Depreciation and amortization 505 492 612
Realized losses (gains) on sales of
subsidiaries and investments (34,913) 2,797 (1,929)
Change in receivables from and payables
to affiliates (10,497) (103,634) (17,573)
Increase (decrease) in payables 12,790 (50,718) 37,051
Dividends from subsidiaries and investees 105,485 166,337 20,504
Other 7,522 38,421 (2,194)
39,886 9,444 (35,543)
Investing Activities:
Purchases of subsidiaries and other
investments (43,491) (154,404) -
Sales of subsidiaries and other investments 104,967 46,831 20,975
Other, net 265 (73) (788)
61,741 (107,646) 20,187
Financing Activities:
Additional long-term borrowings 75 98,828 732
Reductions of long-term debt (177,899) (252,880) (89,901)
Borrowings from affiliates 407,500 785,876 186,000
Repayments of borrowings from affiliates (263,564) (523,197) (43,000)
Issuance of Preferred Stock 16,800 - -
Repurchases of Preferred Stock (36,912) (2,880) (6,738)
Exercise of stock options - 8,721 -
Capital contributions from parent 18,666 9,333 -
Cash dividends paid (24,898) (25,397) (29,522)
(60,232) 98,404 17,571
Net Increase in Cash and Short-term Investments 41,395 202 2,215
Cash and short-term investments at beginning
of period 5,098 4,896 2,681
Cash and short-term investments at end
of period $ 46,493 $ 5,098 $ 4,896
S-3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1996
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
(a)
DEFERRED RESERVES FOR (b)
AFFILIATION POLICY UNPAID CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1996 (d) $257 $4,124 $64 $1,248 $2,845
1995 (d) $270 $4,097 $67 $1,294 $2,649
1994 $1,379
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
CLAIMS AND CLAIM AMORTIZATION PAID
ADJUSTMENT EXPENSES OF DEFERRED CLAIMS
NET INCURRED RELATED TO POLICY AND CLAIM
INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
INCOME YEARS YEARS COSTS EXPENSES WRITTEN
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1996 (d) $335 $2,179 ($ 48) $628 $2,120 $2,788
1995 (d) $303 $2,116 ($139) $577 $1,861 $2,688
1994 $177 $1,027 ($ 40) $329 $ 913 $1,481
(a) Grossed up for reinsurance recoverables of $720 and $704 at
December 31, 1996 and 1995, respectively.
(b) Discounted at rates ranging from 4% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $153 and $143 at
December 31, 1996 and 1995, respectively.
(d) Includes American Premier's Insurance Group after April 1, 1995.
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 26, 1997 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 26, 1997
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director (*) March 26, 1997
Theodore H. Emmerich
s/JAMES E. EVANS Director March 26, 1997
James E. Evans
s/S. CRAIG LINDNER Director March 26, 1997
S. Craig Lindner
s/WILLIAM R. MARTIN Director (*) March 26, 1997
William R. Martin
s/FRED J. RUNK Vice President and March 26, 1997
Fred J. Runk Treasurer (principal
financial and accounting
officer)
(*) Member of the Audit Committee
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) 1996 Bonus Plan. ____
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 Consent of independent auditors. ____
27 Financial data schedule. (**)
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the Securities
and Exchange Commission.
E-1