SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 1995 No. 1-11453
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1422526
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 1, 1995, there were 55,493,140 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 21
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
September 30, December 31,
1995 1994
Assets
Cash and short-term investments $ 260,366 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $6,166,200 and $4,336,700) 5,998,337 4,629,633
Available for sale - at market
(amortized cost - $2,975,125
and $1,938,853) 3,082,025 1,862,653
Other stocks - principally at market
(cost - $136,139 and $137,106) 228,839 208,706
Investment in investee corporations 328,152 832,637
Loans receivable 697,281 641,964
Real estate and other investments 214,499 154,262
10,549,133 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 821,685 902,063
Agents' balances and premiums receivable 764,288 363,156
Deferred policy acquisition costs 347,563 231,343
Other receivables 276,209 197,119
Deferred tax asset 246,215 -
Prepaid expenses, deferred charges
and other assets 371,344 179,314
Cost in excess of net assets acquired 305,827 175,866
$13,942,630 $10,550,051
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - continued
(Dollars In Thousands)
September 30, December 31,
1995 1994
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,075,500 $ 2,916,985
Unearned premiums 1,312,868 824,691
Annuity policyholders' funds accumulated 4,857,576 4,618,108
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation
(parent only) 375,252 490,065
American Premier Underwriters
(parent only) 381,271 -
Great American Holding Corporation 149,389 359,185
American Annuity Group, Inc. 149,725 183,242
Other subsidiaries 84,320 74,255
Accounts payable, accrued expenses and other
liabilities 1,151,210 579,151
Minority interest 305,026 105,506
12,842,137 10,151,188
AFC Mandatory Redeemable Preferred Stock (at
redemption value) - 2,880
Other AFC Preferred Stock (redemption
value - $278,719) - 168,484
AFC Common Stock without par value - 904
Common Stock, $1 par value
- 200,000,000 shares authorized
- 55,290,534 shares outstanding 55,291 -
Capital surplus 611,312 -
Retained earnings 312,590 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 121,300 3,500
$13,942,630 $10,550,051
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
Income:
Property and casualty insurance
premiums $ 753,910 $ 361,728 $1,856,701 $1,013,591
Investment income 198,177 149,449 552,340 434,133
Realized gains on sales
of securities 23,646 19,961 34,978 43,104
Equity in net earnings (losses)
of investee corporations (4,452) (21,066) 33,548 (8,844)
Other income 31,187 27,408 84,023 87,147
1,002,468 537,480 2,561,590 1,569,131
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 565,626 253,201 1,387,620 710,578
Commissions and other underwriting
expenses 196,002 108,815 519,997 322,204
Benefits to annuity policyholders 65,631 61,277 194,152 180,701
Interest charges on borrowed money 30,635 28,285 95,473 87,141
Other operating and general expenses 75,973 70,465 210,695 186,031
933,867 522,043 2,407,937 1,486,655
Earnings before income taxes and
extraordinary items 68,601 15,437 153,653 82,476
Provision for income taxes 17,641 7,991 39,860 25,078
Earnings before extraordinary items 50,960 7,446 113,793 57,398
Extraordinary items, net of income
taxes 2,025 (501) 2,557 (16,938)
Net Earnings $ 52,985 $ 6,945 $ 116,350 $ 40,460
Preferred dividend requirement of
predecessor company - 6,407 6,349 19,320
Net earnings available to Common Shares $ 52,985 $ 538 $ 110,001 $ 21,140
Earnings per Common Share:
Before extraordinary items $ .95 $ .04 $ 2.39 $ 1.35
Extraordinary items .04 (.02) .06 (.60)
Net earnings $ .99 $ .02 $ 2.45 $ .75
Average number of Common Shares 53,423 28,324 44,912 28,324
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended
September 30,
1995 1994
Operating Activities:
Net earnings $ 116,350 $ 40,460
Adjustments:
Extraordinary (gains) losses from retirement
of debt (2,557) 16,938
Depreciation and amortization 30,009 16,178
Benefits to annuity policyholders 194,152 180,701
Equity in net (earnings) losses of investee
corporations (33,548) 8,844
Changes in reserves on assets 2,932 7,482
Realized gains on investing activities (35,728) (52,471)
Increase in reinsurance and other
receivables (38,717) (252,345)
Increase in other assets (65,850) (62,368)
Increase in insurance claims and reserves 159,269 300,359
Increase (decrease) in other liabilities (71,801) 55,943
Increase in minority interest 8,428 5,456
Dividends from investees 8,115 15,753
Other, net (14,104) (1,956)
256,950 278,974
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,630,954) (1,296,238)
Equity securities (4,902) (2,574)
Investees and subsidiaries (13,355) (23,852)
Real estate, property and equipment (30,216) (18,988)
Maturities and redemptions of fixed maturity
investments 248,001 310,472
Sales of:
Fixed maturity investments 1,267,275 543,939
Equity securities 17,418 111,522
Investees and subsidiaries - 27,621
Real estate, property and equipment 6,120 2,619
Cash and short-term investments of acquired
subsidiary 392,100 -
Decrease (increase) in other investments (11,421) 11,441
Other - (12,536)
240,066 (346,574)
Financing Activities:
Annuity receipts 338,353 313,077
Annuity benefits and withdrawals (302,486) (244,175)
Additional long-term borrowings 145,128 198,271
Reductions of long-term debt (639,415) (173,354)
Issuances of common stock 77,304 -
Repurchases of preferred stock (14) (4,466)
Cash dividends paid (26,855) (16,900)
(407,985) 72,453
Net Increase in Cash and Short-term Investments 89,031 4,853
Cash and short-term investments
at beginning of period 171,335 167,950
Cash and short-term investments
at end of period $ 260,366 $ 172,803
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Mergers American Premier Group, Inc. was formed in December 1994 for the
purpose of acquiring American Financial Corporation ("AFC") and American
Premier Underwriters, Inc. ("American Premier"). In mergers completed on
April 3, 1995, American Premier Group issued 71.4 million shares of its
Common Stock in exchange for all of the outstanding common stock of AFC
and American Premier. The 18.7 million shares held by AFC and its
subsidiaries are accounted for herein as retired. In June 1995, American
Premier Group, Inc. changed its name to American Financial Group, Inc.
("AFG"), to better reflect its core property and casualty insurance and
annuity businesses.
For financial reporting purposes, because the former shareholders of AFC
owned more than 50% of AFG following the mergers, the mergers were
accounted for as a reverse acquisition whereby AFC was deemed to have
acquired American Premier. Financial statements for periods prior to the
mergers are those of AFC. The operations of American Premier are included
in AFG's financial statements from the date of acquisition.
The valuation of American Premier's net assets was determined based on the
fair market value of the AFG shares issued to shareholders other than AFC
and was allocated to American Premier's assets and liabilities based on
their fair values at the date of acquisition. The following pro forma
data is presented as if the mergers occurred on January 1 of each year (in
millions, except per share data).
Nine months ended
September 30,
1995 1994
Revenues $2,981 $2,853
Earnings before
Extraordinary Items 139 41
Extraordinary Items 3 (17)
Net Earnings 142 24
Earnings per Share $ 2.68 $ 0.46
B. Accounting Policies
Basis of Presentation The accompanying consolidated financial statements for
AFG and subsidiaries are unaudited; however, management believes that all
adjustments (consisting only of normal recurring accruals unless otherwise
disclosed herein) necessary for fair presentation have been made. The
results of operations for interim periods are not necessarily indicative
of results to be expected for the year. The financial statements have
been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary to be in
conformity with generally accepted accounting principles ("GAAP").
Mergers and changes in ownership levels of subsidiaries and investees have
resulted in certain differences in the financial statements and have
affected comparability between years. Certain reclassifications have been
made to prior years to conform to the current year's presentation. All
significant intercompany balances and transactions have been eliminated.
All acquisitions have been treated as purchases. The results of
operations of companies since their formation or acquisition are included
in the consolidated financial statements.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG's ownership of subsidiaries and significant investees with publicly
traded common shares was as follows:
September 30, December 31,
1995 1994 1993
American Annuity Group, Inc. ("AAG") 81% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) 42% 41%
Chiquita Brands International, Inc. 45% 46% 46%
Citicasters Inc. 37% 37% 20%
General Cable Corporation - (b) 45%
(a) Became a 100%-owned subsidiary on April 3, 1995.
(b) Sold in June 1994.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AFG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as
(i) "trading" and reported at fair value with unrealized gains and losses
included in earnings if the securities are bought and held principally for
selling in the near term and (ii) as "available for sale" and reported at
fair value, with unrealized gains or losses reported as a separate
component of shareholders' equity if the debt or equity securities are not
classified as held to maturity or trading. Only in certain limited
circumstances, such as significant issuer credit deterioration or if
required by insurance or other regulators, may a company change its intent
to hold a certain security to maturity without calling into question its
intent to hold other debt securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized over
their expected average lives using the interest method. Gains or losses
on sales of securities are recognized at the time of disposition with the
amount of gain or loss determined on the specific identification basis.
When a decline in the value of a specific investment is considered to be
other than temporary, a provision for impairment is charged to earnings
and the carrying value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are stated
primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in securities of 20%- to
50%-owned companies are carried at cost, adjusted for AFG's proportionate
share of their undistributed earnings or losses. Investments in less than
20%-owned companies are accounted for by the equity method when, in the
opinion of management, AFG can exercise significant influence over
operating and financial policies of the investee.
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries and
investees (purchased subsequent to October 1970) over AFG's equity in the
underlying net assets ("goodwill") is being amortized over 40 years. The
excess of AFG's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative goodwill")
has been allocated to AFG's basis in these companies' fixed assets,
goodwill and other long-term assets and is amortized on a 10- to 40-year
basis.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Insurance As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
Reinsurance In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFG's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsurance
policies. AFG's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. AFG's insurance subsidiaries
also assume reinsurance from other companies. Income on reinsurance
assumed is recognized based on reports received from ceding reinsurers.
Deferred Policy Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related to the
production of new business are deferred. For the property and casualty
companies, the deferral of acquisition costs is limited based upon their
recoverability without any consideration for anticipated investment
income. Deferred policy acquisition costs ("DPAC") are charged against
income ratably over the term of the related policies. For the annuity
company, DPAC is amortized, with interest, in relation to the present
value of expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for
unpaid claims and for expenses of investigation and adjustment of unpaid
claims are based upon (a) the accumulation of case estimates for losses
reported prior to the close of the accounting period on the direct
business written; (b) estimates received from ceding reinsurers and
insurance pools and associations; (c) estimates of unreported losses based
on past experience and (d) estimates based on experience of expenses for
investigating and adjusting claims. These liabilities are subject to the
impact of changes in claim amounts and frequency and other factors. In
spite of the variability inherent in such estimates, management believes
that the liabilities for unpaid losses and loss adjustment expenses are
adequate. Changes in estimates of the liabilities for losses and loss
adjustment expenses are reflected in the Statement of Earnings in the
period in which determined.
Premium Recognition Premiums are earned over the terms of the policies on
a pro rata basis. Unearned premiums represent that portion of premiums
written which is applicable to the unexpired terms of policies in force.
On reinsurance assumed from other insurance companies or written through
various underwriting organizations, unearned premiums are based on reports
received from such companies and organizations.
Policyholder Dividends Dividends payable to policyholders are included in
"Accounts payable, accrued expenses and other liabilities" and represent
estimates of amounts payable on participating policies which share in
favorable underwriting results. The estimate is accrued during the period
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
in which the related premium is earned. Changes in estimates are included
in income in the period determined. Policyholder dividends do not become
legal liabilities unless and until declared by the boards of directors of
the insurance companies.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in "annuity
policyholders' funds accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to expense
and decreases for surrender charges are credited to other income.
Income Taxes AFG files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries. Because voting rights
aggregating 21% were extended to holders of AFC Series F and G Preferred
Stock in connection with the mergers, AFC will continue to file a separate
consolidated return. Deferred income taxes are calculated using the
liability method. Under this method, deferred income tax assets and
liabilities are determined based on differences between financial
reporting and tax bases and are measured using enacted tax rates.
Deferred tax assets are recognized if it is more likely than not that a
benefit will be realized.
Benefit Plans AFG provides retirement benefits to qualified employees of
participating companies. Contributions to benefit plans are charged
against earnings in the year for which they are declared.
AFC's Employee Stock Ownership Retirement Plan ("ESORP") is a
noncontributory, trusteed plan which invests in securities of AFC and
affiliates for the benefit of the employees of AFC and certain of its
subsidiaries. American Premier provides retirement benefits, primarily
through contributory and noncontributory defined contribution plans. In
addition, American Premier sponsors employee savings plans under which
American Premier matches a specified portion of contributions made by
eligible employees.
AFG and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. AFG also provides postemployment benefits
to former or inactive employees (primarily those on disability) who were
not deemed retired under other company plans. The projected future cost
of providing these benefits is expensed over the period the employees
qualify for such benefits.
In connection with the mergers, full vesting was granted to holders of
units under AFC's Book Value Incentive Plan and the plan was terminated.
Cash payments, which were made in April to holders of the units, were
accrued at December 31, 1994.
Debt Discount Debt discount and expenses are amortized over the lives of
respective borrowings, generally on the interest method.
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries and
includes AFC preferred stock for periods subsequent to the mergers. For
income statement purposes, minority interest (included in other expenses)
represents those shareholders' interest in the earnings of AFG
subsidiaries and includes AFC preferred dividends following the mergers.
Earnings Per Share Earnings per share are calculated on the basis of the
weighted average number of shares of common stock outstanding during the
period and the dilutive effect, if material, of assumed conversion of
common stock equivalents (stock options and Career Shares). The weighted
average number of shares used for periods prior to April 3, 1995, is based
upon the 28.3 million shares issued in exchange for AFC common shares in
the mergers discussed in Note A.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include obtaining resources from owners and providing them with a return
on their investments, borrowing money and repaying amounts borrowed.
Annuity receipts, benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating". Short-term
investments having original maturities of three months or less when
purchased are considered to be cash equivalents for purposes of the
financial statements.
C. Segments of Operations Through subsidiaries, AFG is engaged in several
financial businesses, including property and casualty insurance, annuities
and portfolio investing. AFG also owns significant portions of the voting
equity securities of certain companies (investee corporations - see
Note D). The following table (in thousands) shows AFG's revenues by
significant business segment. Intersegment transactions are not
significant.
Nine months ended September 30,
Revenues 1995 1994
Property and casualty insurance:
Underwriting $1,856,701 $1,013,591
Investment and other income 317,974 245,146
2,174,675 1,258,737
Annuities (*) 308,818 283,244
Other 44,549 35,994
2,528,042 1,577,975
Equity in net earnings (losses)
of investee corporations 33,548 (8,844)
$2,561,590 $1,569,131
(*) Represents primarily investment income and realized gains.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investee Corporations Investment in investee corporations represents AFG's
ownership of securities of certain companies. All of the companies named
in the following table are subject to the rules and regulations of the
SEC. Market value of the investments was approximately $580 million and
$890 million at September 30, 1995 and December 31, 1994, respectively.
AFG's investment (and common stock ownership percentage) in these
investees was as follows (dollars in thousands):
September 30, 1995 December 31, 1994
Chiquita $255,324 (45%) $237,015 (46%)
Citicasters 72,828 (37%) 69,695 (37%)
American Premier (*) 525,927 (42%)
$328,152 $832,637
(*) Became a 100%-owned subsidiary on April 3, 1995.
Chiquita is a leading international marketer, processor and producer of
quality food products. Citicasters owns and operates radio and
television stations in major markets throughout the country. Summarized
financial information for AFG's investees follows (in millions):
Nine months ended September 30,
Chiquita 1995 1994
Net Sales $3,065 $2,964
Operating Income 176 108
Income (Loss) before Extraordinary Item 61 (14)
Extraordinary Item (5) (23)
Net Income (Loss) 56 (37)
Chiquita's 1994 results included charges and losses aggregating
$57 million recorded in the third quarter resulting from the shutdown of
non-productive banana farms in Honduras and a scaling back of Japanese
operations. Amounts for 1994 were reclassified by Chiquita to reflect
the reconsolidation of its Meat Division.
Nine months ended September 30,
Citicasters 1995 1994
Net Revenues $100 $160
Operating Income 25 39
Net Earnings 10 48
In the third and fourth quarters of 1994, Citicasters sold four network-
affiliated television stations for $355 million in cash and a warrant to
purchase common stock of the purchaser. The proceeds were used to reduce
debt and repurchase shares of common stock. Included in Citicasters' net
earnings for the 1994 period is a net gain of $41.7 million from the sale
of three of these stations.
Three months ended Nine months ended
American Premier March 31, 1995 September 30, 1994
Revenues $433 $1,304
Income (Loss) from Continuing
Operations 16 (14)
Discontinued Operations - (1)
Net Earnings (Loss) 16 (15)
American Premier's results for the 1994 period included a $75.8 million
loss on the sale of securities of General Cable.
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Long-Term Debt In furtherance of the previously announced plan to use
American Premier cash following the mergers to retire debt, AFC (i)
repaid $187 million of borrowings under a subsidiary's bank credit
agreement in April 1995 and (ii) redeemed all $185 million of its 12% and
12-1/4% debentures in May 1995, using funds borrowed under a line of
credit with American Premier. Included in Extraordinary Items is a loss
of $1.7 million realized as a result of the repurchases.
In May 1995, rating agencies downgraded American Premier's subordinated
notes. As a result of the mergers and the subsequent ratings downgrade,
the holders of the notes had the right (which has since expired) to
require American Premier to purchase all or any portion of the notes on
August 10, 1995 at par plus accrued interest (the "Put Right"). The Put
Right was exercised for approximately $44 million of the notes. In
addition, during the second and third quarters of 1995, American Premier
repurchased $27 million of its 10-5/8% subordinated notes and
$69.3 million of its 10-7/8% subordinated notes for an average of
approximately 104% of principal amount. Included in Extraordinary Items
is a gain of $5.7 million as a result of these purchases. During the
fourth quarter (through November 10), American Premier repurchased an
additional $26 million principal amount of its 10-7/8% subordinated
notes.
In the second, third and fourth (through November 10) quarters of 1995,
respectively, AFC issued $50 million, $20 million and $30 million
principal amount of 9-3/4% debentures due April 20, 2004 in private
offerings.
In September 1995, Great American Holding Corporation ("GAHC"), a wholly-
owned subsidiary of AFC, retired all $50 million principal amount of its
floating rate notes at par and in October 1995, redeemed all $150 million
principal amount of its 11% notes at par. Funds for these repayments
were derived from (i) borrowings under GAHC's bank credit line, (ii)
AFC's issuance of 9-3/4% debentures and (iii) the sale of AFG Common
Stock to an employee stock ownership plan and to persons exercising AFG
employee stock options.
At September 30, 1995, sinking fund and other scheduled principal
payments on debt for the balance of 1995 and the subsequent five years,
adjusted to reflect the redemption of the GAHC 11% notes and borrowings
under GAHC's bank line, were as follows (in thousands):
American
Premier AFC Other
(Parent) (Parent) Subsidiaries Total
1995 $ - $ - $ 455 $ 455
1996 - - 2,582 2,582
1997 - 5,900 44,599 50,499
1998 - - 26,762 26,762
1999 159,990 93,895 26,349 280,234
2000 120,871 - 56,609 177,480
Debentures purchased in excess of scheduled payments may be applied to
satisfy any sinking fund requirement. The scheduled principal payments
shown above assume that debentures purchased are applied to the earliest
scheduled retirements.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Capital Stock In connection with the merger discussed in Note A, AFG issued
51.3 million shares (net of 18.7 million shares held by AFC and its
subsidiaries, which are shown herein as retired) of Common Stock on
April 3, 1995. In addition, approximately 1.4 million shares of AFG
Common Stock are held by American Premier for issuance to certain
creditors and other claimants pursuant to a plan of reorganization
relating to American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting Preferred Stock
and 12.5 million shares of Nonvoting Preferred Stock, each without par
value. At September 30, 1995, AFG had 212,698 shares of convertible
preferred stock outstanding with a stated value of $469,000 (included in
Capital Surplus, net of related notes receivable). There are 446,799
shares of AFG Common Stock reserved for issuance upon conversion of the
Preferred Stock.
At September 30, 1995, there were 6.1 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options and options for 2.6
million shares outstanding. Options granted to officers and key
employees become exercisable at the rate of 20% per year commencing one
year after grant; those granted to non-employee directors of AFG are
generally fully exercisable upon grant. All options expire ten years
after the date of grant.
A progression of AFG's Shareholders' Equity is as follows (dollars in
thousands):
Common Capital Retained
Shares Stock Surplus Earnings Unrealized
Balance at December 31, 1994 18,971,217 $ 904 $ - $223,095 $ 3,500
AFC preferred stock dividends - - - (191) -
Exercise of AFC stock options 762,500 8,721 - - -
Restatement of AFC equity in
terms of AFG Common Stock 8,590,159 18,699 (18,699) - -
Shares issued in merger to
holders of APU common stock 24,376,667 24,377 564,115 - -
Net earnings - - - 116,350 -
Change in unrealized - - - - 117,800
Common Stock dividends - - - (26,664) -
Shares issued:
Under employee stock
purchase plan 12,239 12 303 - -
Upon exercise of stock
options 855,941 856 17,407 - -
Employee gift shares 19,050 19 476 - -
Upon sale to AFC ESORP 1,703,000 1,703 48,301 - -
Shares repurchased (239) - (14) - -
Change in foreign currency
translation - - (577) - -
Balance at September 30, 1995 55,290,534 $55,291 $611,312 $312,590 $121,300
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Extraordinary Items Extraordinary items consisted of the following (in
thousands):
1995 1994
Gain (loss) on subsidiaries' prepayment of debt
(net of minority interest of ($5) and $216) $4,063 ($ 7,902)
Share of loss on investee's prepayment of debt
(net of minority interest of $24 and $139
and income tax benefit of $151 and $374) (1,506) (9,036)
$2,557 ($16,938)
H. Cash Flows - Fixed Maturity Investments "Investing activities" related to
fixed maturity investments in AFG's Statement of Cash Flows consisted
of the following (in thousands):
Held to Available
1995 Maturity For Sale Total
Purchases $548,670 $1,082,284 $1,630,954
Maturities and redemptions 153,990 94,011 248,001
Sales 9,040 1,258,235 1,267,275
1994
Purchases $897,460 $ 398,778 $1,296,238
Maturities and redemptions 142,561 167,911 310,472
Sales 7,781 536,158 543,939
Securities classified as "held to maturity" having an amortized cost of
$9.0 million and $8.5 million were sold in 1995 and 1994, respectively,
due primarily to deterioration in the issuers' creditworthiness.
I. Commitments and Contingencies Loss accruals have been recorded for
certain matters arising out of the railroad operations disposed of by
American Premier's predecessor, Penn Central Transportation Company,
prior to its bankruptcy reorganization in 1978. Accordingly, any
ultimate liability arising therefrom in excess of previously
established loss accruals would be attributable to pre-reorganization
events and circumstances and accounted for as a reduction in American
Premier's capital surplus. Under purchase accounting, however, any
such ultimate liability will be charged to earnings in AFG's financial
statements.
AFG's subsidiaries are parties in a number of proceedings involving
environmental claims. In management's opinion, the outcome of these
claims and contingencies will not, individually or in the aggregate,
have a material adverse effect on AFG's financial condition or results
of operations. In making this assessment, management has taken into
account previously established loss accruals in its financial
statements and probable recoveries from third parties.
J. Subsequent Event In November 1995, AFG announced plans to issue
four million shares of its Common Stock in a public offering. Proceeds
of the proposed offering are expected to be used to reduce certain
holding company indebtedness.
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
As discussed in Note A, financial statements for periods prior to the
April 3, 1995 mergers are those of AFC. Since many of its businesses
are financial in nature, AFG does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
AFG as well as its two subsidiaries, American Premier and AFC, are
organized as holding companies with almost all of their operations being
conducted by subsidiaries and investees of American Premier and AFC.
The parent corporations, however, have continuing expenditures for
administrative expenses and corporate services and, most importantly,
for the payment of principal and interest on borrowings and dividends to
shareholders.
Ratio of Earnings to Fixed Charges AFG's ratio of earnings to fixed charges
on a total enterprise basis was 2.53 for the first nine months of 1995
compared to 1.69 for the entire year of 1994. Assuming the mergers and
related transactions discussed in Note A occurred at the beginning of
each of these periods, these ratios would have been 3.04 and 2.50,
respectively.
Sources of Funds As a holding company, AFG relies on dividends and tax
payments from subsidiaries to meet cash requirements for corporate
expenses and dividends. Likewise, AFC and American Premier rely on such
payments from their subsidiaries to meet cash needs for corporate
expenses and, most importantly, to meet debt service requirements and to
pay dividends.
Prior to the merger, American Premier had substantial cash and short-
term investments at the parent company level. Subsequent to the merger,
AFC entered into a credit agreement with American Premier. At September
30, 1995, AFC had borrowed $559.6 million under this agreement which it
used for debt retirements, capital contributions to subsidiaries, and
other corporate purposes. In addition, AFG and American Premier entered
into a reciprocal credit agreement under which these companies will make
funds available to each other for general corporate purposes.
GAHC has a revolving credit agreement with several banks under which it
can borrow up to $300 million. The credit line converts to a four-year
term loan in December 1996 with scheduled principal payments to begin in
March 1997. Borrowings under the credit line are generally advanced to
AFC. At September 30, 1995, AFC had no outstanding borrowings under the
agreement; $160 million was outstanding at December 31, 1994. During
October 1995, $120 million was borrowed under the credit line;
$75 million of which is expected to be repaid in mid-November.
In September 1995, GAHC retired all $50 million principal amount of its
floating rate notes at par and in October 1995, redeemed all $150
million principal amount of its 11% notes at par. Funds for these
repayments were derived from (i) borrowings under GAHC's credit line in
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
October 1995, (ii) AFC's issuance of 9-3/4% debentures due April 20,
2004 in September and October 1995, and (iii) the sale of AFG Common
Stock to an employee stock ownership plan and to persons exercising AFG
employee stock options.
During the second and third quarters of 1995, American Premier
repurchased approximately $140 million principal amount of its
subordinated notes for $144 million, including $44 million which were
"put" to American Premier at par. During the fourth quarter (through
November 10), American Premier repurchased an additional $26 million
principal amount of its subordinated notes for $28 million.
Investments Significant portions of equity and, to a lesser extent, fixed
income investments are concentrated in a relatively limited number of
major positions. This approach allows management to more closely
monitor these companies and the industries in which they operate. Some
of the investments, because of their size, may not be as readily
marketable as the typical small investment position. Alternatively, a
large equity position may be attractive to persons seeking to control or
influence the policies of a company. While management believes this
investment philosophy will produce higher overall returns, such
concentrations subject the portfolio to greater risk in the event one of
the companies invested in becomes financially distressed.
Approximately 95% of the bonds and redeemable preferred stocks held by
AFG were rated "investment grade" (credit rating of AAA to BBB) by
nationally recognized rating agencies at September 30, 1995. Investment
grade securities generally bear lower yields and lower degrees of risk
than those that are unrated and non-investment grade.
RESULTS OF OPERATIONS
General The operations of American Premier are included in AFG's
financial statements from the date of acquisition. Accordingly, 1995
third quarter and nine-month operating results are not comparable to
prior periods. Results of interim periods are not necessarily
indicative of future results of operations.
Excluding net realized gains of $18.7 million and an extraordinary
credit of $2.0 million, earnings were $32.3 million, or $.60 per share
for the third quarter of 1995.
Property and Casualty Insurance Underwriting profitability is measured by the
combined ratio which is a sum of the ratios of underwriting expenses,
losses, and loss adjustment expenses to premiums. When the combined
ratio is under 100%, underwriting results are generally considered
profitable; when the ratio is over 100%, underwriting results are
generally considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
AFG manages and operates its property and casualty business as three major
sectors. The non-standard automobile insurance companies (the "NSA Group")
insure risks not typically accepted for standard automobile coverage
because of the applicant's driving record, type of vehicle, age or other
criteria. The specialty lines are a diversified group of over twenty-five
business lines that offer a wide variety of specialty insurance products.
Some of the more significant areas are California workers' compensation,
executive liability, inland and ocean marine, U.S.-based operations of
Japanese companies, agricultural-related coverages, excess and surplus
lines and fidelity and surety bonds. The commercial and personal lines
provide coverages in commercial multi-peril, workers' compensation,
umbrella and commercial automobile, standard private passenger automobile
and homeowners insurance.
Prior year comparisons are made in the following discussion of AFG's
insurance operations even though American Premier's insurance operations
were not consolidated in the financial statements prior to the mergers.
Results for AFG's property and casualty insurance subsidiaries are as
follows (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
Net Written Premiums
NSA Group $299.7 $294.5 $ 930.8 $ 858.9
Specialty Operations 294.5 349.7 861.2 967.5
Commercial/Personal
Operations 186.7 178.5 525.5 489.9
Other Lines .1 2.0 .8 5.6
Total $781.0 $824.7 $2,318.3 $2,321.9
Combined Ratios (GAAP)
NSA Group 107.0% 100.5% 105.2% 99.1%
Specialty Operations 94.0% 97.5% 97.0% 95.8%
Commercial/Personal
Operations 99.6% 88.3% 100.5% 99.3%
Total 100.8% 97.7% 102.2% 98.8%
NSA Group For the third quarter and first nine months of 1995, net
written premiums of the NSA Group grew 2% and 8%, respectively, over the
comparable 1994 periods due to increased penetration within the NSA Group's
existing markets, limited expansion into new states and an increase in
premium rates. The increase in the combined ratio for the first nine
months of 1995 compared with the comparable 1994 period was due primarily
to inadequate rate levels in certain markets and weather-related losses
principally from hailstorms in Texas. In addition, the 1995 third quarter
combined ratio includes 4.6 points for reserve strengthening related to
prior accident years. These factors were partially offset by a reduction
in the underwriting expense ratio due largely to cost control measures.
Premium rate increases were implemented in several states during 1994 and
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
the NSA Group has continued to increase rates in 1995. Rate increases
implemented and to be implemented in various states during 1995 will
average approximately 10% across the NSA Group's entire book of business.
The higher rate levels and competitive pressures in the non-standard
automobile insurance industry have impacted the premium growth rates during
1995.
Specialty Operations Net written premiums for the specialty operations
declined 11% during the first nine months of 1995 over the comparable 1994
period due to a decrease in the California workers' compensation writings,
partially offset by increases in other specialty niche lines. The third
quarter 1995 combined ratios include losses resulting from participation in
a voluntary pool, offset by a similar amount of favorable reserve
development in the specialty niche lines. AFG will significantly reduce
its participation in voluntary pools beginning in December 1995.
Commercial/Personal Operations Net written premiums for the
commercial/personal operations increased 7% for the first nine months of
1995 over the comparable 1994 period due principally to increased
commercial lines writings. The unusually low combined ratio for the third
quarter of 1994 was due primarily to favorable reserve development in 1994
relating to prior accident years.
Investment Income AFC's investment income increased $38 million (9%) from
1994 due to an increase in the average amount of investments held.
Investment income for the first nine months of 1995 includes $80 million
attributable to American Premier in the second and third quarters.
Investment income of American Premier's insurance operations rose $8.7
million (13%) in the second and third quarters due to increased average
investments but was offset by a $15.1 million decline (excluding
intercompany interest) in parent company investment income. The decline in
parent company investment income reflects the sale of investments used to
fund advances to AFC and to retire American Premier equity and debt
securities.
Realized Gains Realized capital gains have been an important part of the
return on investments in marketable securities. Individual securities are
sold creating gains and losses from time to time as investment strategies
change or as market opportunities appear to present optimal conditions.
Investee Corporations Equity in net earnings of investee corporations
(companies in which AFG owns a significant portion of the voting stock)
represents AFG's proportionate share of the investees' earnings and losses.
AFG's equity in net earnings (losses) of investee corporations in 1994 and
in the first quarter of 1995 includes AFC's share of American Premier's
earnings prior to the mergers. Results for the first nine months of 1994
include AFC's share ($28.4 million) of American Premier's loss on the sale
of securities of General Cable and its share ($26 million) of charges and
losses recorded by Chiquita pertaining to the shutdown of banana farms in
Honduras and a scaling back of operations in Japan.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased
approximately 7% over those of the comparable three and nine month periods
in 1994 due primarily to an increase in average annuity policyholder funds
accumulated. The rate at which interest is credited on annuity
policyholders' funds is subject to change based on management's judgment of
market conditions.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Interest on Borrowed Money Excluding $21.0 million attributable to American
Premier, interest expense decreased by $12.7 million (15%) for the nine
months ended September 30, 1995. The decrease is due primarily to the
repayments of borrowings by AFC and certain subsidiaries and the AFC debt
exchange in 1994.
Other Operating and General Expenses Included in operating and general expenses
in the first nine months of 1995 and 1994 are charges of $23.5 million and
$5.9 million, respectively, for minority interest. The 1995 expense
includes AFC's quarterly preferred dividend requirement of $6.4 million
beginning in April. Operating and general expenses in the first nine
months of 1994 also includes a charge of $26 million for Proposition 103,
an insurance reform measure passed by California voters, and a credit of
$9.1 million for an adjustment to the liability for units outstanding under
AFC's Book Value Incentive Plan.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
Reference is made to Item 3 - "Legal Proceedings" of the Annual Report
on Form 10-K for 1994 of AFG's wholly-owned subsidiary, American Premier
Underwriters, Inc (SEC File No. 1-1569), for a description of an action
filed against American Premier by USX Corporation ("USX") and one of its
former subsidiaries, Bessemer and Lake Erie Railroad Company ("B&LE").
In May 1994, lawsuits were filed against American Premier by USX and
B&LE seeking contribution by American Premier, as the successor to the
railroad business conducted by its predecessor Penn Central Transportation
Company ("PCTC") prior to 1976, for all or a portion of the approximately
$600 million that USX paid in satisfaction of a judgment against B&LE for
its participation in an unlawful antitrust conspiracy among certain
railroads commencing in the 1950's and continuing through the 1970's. The
lawsuits argue that USX's liability for that payment was attributable to
PCTC's alleged activities in furtherance of the conspiracy. On October 13,
1994, the U.S. District Court for the Eastern District of Pennsylvania
enjoined USX and B&LE from continuing their lawsuits against American
Premier, ruling that their claims are barred by the 1978 consummation order
issued by that Court in PCTC's bankruptcy reorganization proceedings. USX
and B&LE have appealed the District Court's ruling to the U.S. Court of
Appeals for the Third Circuit. Briefing of the appeal has been completed,
the case was orally argued on July 24, 1995 and the parties are awaiting
the Court of Appeal's decision. If the Court of Appeals were to reverse
the District Court and allow these lawsuits to proceed in spite of the
bankruptcy consummation order, management believes that the defenses
described in American Premier's prior filings should enable it to prevail
on the merits.
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Report on Form 8-K:
Date of Report Item Reported
August 29, 1995 Change in Registrant's Independent
Auditors
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Financial Group, Inc. has duly caused this Report to be signed on
its behalf by the undersigned duly authorized.
American Financial Group, Inc.
November 13, 1995 BY: FRED J. RUNK
Fred J. Runk
Senior Vice President and Treasurer
21