SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 1997 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90
days. Yes X No ___
As of May 1, 1997, there were 45,000,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc.
Page 1 of 16
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
1997 1996
Assets
Cash and short-term investments $ 404,801 $ 404,831
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,412,300 and $3,528,100) 3,439,287 3,491,126
Available for sale - at market
(amortized cost - $6,681,142 and $6,362,597) 6,674,942 6,494,597
Other stocks - principally at market
(cost - $144,270 and $142,364) 340,670 327,664
Investment in investee corporation 213,234 199,651
Loans receivable 540,087 568,055
Real estate and other investments 207,335 205,021
Total investments 11,415,555 11,286,114
Recoverables from reinsurers and prepaid
reinsurance premiums 932,704 942,450
Agents' balances and premiums receivable 638,718 609,403
Deferred acquisition costs 468,143 452,041
Other receivables 256,228 272,766
Deferred tax asset 154,429 137,284
Assets held in separate accounts 253,544 247,579
Prepaid expenses, deferred charges and other assets 373,953 368,114
Cost in excess of net assets acquired 274,971 278,581
$15,173,046 $14,999,163
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,028,032 $ 4,123,701
Unearned premiums 1,311,851 1,247,806
Annuity benefits accumulated 5,423,164 5,365,612
Life, accident and health reserves 581,431 575,380
Payable to American Financial Group, Inc. 452,401 422,015
Other long-term debt:
Holding Companies 338,214 339,504
Subsidiaries 184,848 178,415
Liabilities related to separate accounts 253,544 247,579
Accounts payable, accrued expenses and other
liabilities 946,038 915,398
Total liabilities 13,519,523 13,415,410
Minority interest 378,151 306,858
Shareholders' Equity:
Preferred Stock (liquidation value $258,638) 162,760 162,760
Common Stock without par value 9,625 9,625
Capital Surplus 923,519 919,746
Retained earnings 62,268 1,364
Net unrealized gain on marketable securities,
net of deferred income taxes 117,200 183,400
Total shareholders' equity 1,275,372 1,276,895
$15,173,046 $14,999,163
2
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended
March 31,
1997 1996
Income:
Property and casualty insurance premiums $663,762 $ 713,389
Life, accident and health premiums 25,365 24,253
Investment income 212,752 202,460
Realized gains on sales of securities 1,813 18,718
Equity in net earnings of investee corporations 14,780 8,522
Gains on sales of subsidiaries 731 33,891
Other income 26,424 28,931
945,627 1,030,164
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 469,324 509,157
Commissions and other underwriting expenses 184,301 200,679
Annuity benefits 68,830 68,015
Life, accident and health benefits 24,163 21,593
Interest charges on borrowed money 23,611 24,262
Other operating and general expenses 77,187 86,995
847,416 910,701
Earnings before income taxes and extraordinary items 98,211 119,463
Provision for income taxes 36,221 40,951
Earnings before extraordinary items 61,990 78,512
Extraordinary items - loss on prepayment of debt (55) (7,277)
Net Earnings $ 61,935 $ 71,235
3
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
1997 1996
Operating Activities:
Net earnings $ 61,935 $ 71,235
Adjustments:
Extraordinary items 55 7,277
Depreciation and amortization 17,979 15,414
Annuity benefits 68,830 68,015
Equity in net earnings of investee corporations (14,780) (8,522)
Changes in reserves on assets 418 3,752
Realized gains on investing activities (2,544) (51,582)
Decrease (increase) in reinsurance and
other receivables (24,175) 15,500
Increase in other assets (49,036) (50,392)
Decrease in insurance claims and reserves (25,573) (82,242)
Increase (decrease) in other liabilities (26,180) 32,431
Increase in minority interest 6,293 6,788
Dividends from investees 1,200 1,200
Other, net (830) (2,622)
13,592 26,252
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (616,655) (726,148)
Equity securities (9,408) (8,573)
Real estate, property and equipment (8,762) (7,898)
Maturities and redemptions of fixed maturity
investments 155,184 167,358
Sales of:
Fixed maturity investments 332,008 242,365
Equity securities 7,943 20,845
Investees and subsidiaries 2,500 59,585
Real estate, property and equipment 396 1,206
Cash and short-term investments of former
subsidiaries (70) (4,589)
Increase in other investments (1,119) (390)
(137,983) (256,239)
Financing Activities:
Annuity receipts 133,402 137,241
Annuity payments (134,699) (113,852)
Additional long-term borrowings 7,053 111,200
Reductions of long-term debt (1,718) (197,918)
Borrowings from AFG 42,000 103,800
Payments to AFG - (15,000)
Capital contribution 4,667 4,667
Issuance of trust preferred securities 74,687 -
Cash dividends paid (1,031) (191)
124,361 29,947
Net Decrease in Cash and Short-term Investments (30) (200,040)
Cash and short-term investments at beginning
of period 404,831 448,201
Cassh and short-term investments at end of period $404,801 $248,161
4
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Financial Corporation ("AFC") and
subsidiaries are unaudited; however, management believes that
all adjustments (consisting only of normal recurring accruals
unless otherwise disclosed herein) necessary for fair
presentation have been made. The results of operations for
interim periods are not necessarily indicative of results to be
expected for the year. The financial statements have been
prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary
to be in conformity with generally accepted accounting
principles.
Certain reclassifications have been made to prior years to
conform to the current year's presentation. All significant
intercompany balances and transactions have been eliminated.
The results of operations of companies since their formation or
acquisition are included in the consolidated financial
statements.
The preparation of the financial statements requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Changes in circumstances could cause actual results to differ
materially from those estimates.
At the close of business on December 31, 1996, American
Financial Group ("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 April 3, 1995 (date of common control) have been
restated to include the accounts of American Premier.
AFC's ownership of subsidiaries and significant affiliates with
publicly traded common shares was as follows:
March 31, December 31,
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. 81% 81% -
Chiquita Brands International, Inc. 43% 43% 44%
Citicasters Inc. (a) (a) 38%
(a) 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.
5
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 Corporation 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
6
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. These liabilities are subject
to the impact of changes in claim amounts and frequency and
other factors. In spite of the variability inherent in such
estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are adequate. Changes in
estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the
period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to
other income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional ordinary life, accident and
health policies are computed using a net level premium method.
Computations are based on anticipated investment yields,
mortality, morbidity and surrenders and include provisions for
unfavorable deviations. Reserves are modified as necessary to
reflect actual experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
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 holders of AFC
Series F and G Preferred Stock hold 21% of AFC's voting rights,
the companies file separate consolidated returns. 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 single consolidated return for 1997.
7
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities
are determined based on differences between financial reporting
and tax bases and are measured using enacted tax rates.
Deferred tax assets are recognized if it is more likely than not
that a benefit will be realized.
Benefit Plans AFC provides retirement benefits 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"). In 1997, these
ESORP plans were combined into a new plan. Like the ESORP plan,
the new plan is a noncontributory, qualified plan invested in
securities of AFG and affiliates for the benefit of employees.
AFC and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFC also provides
postemployment benefits to former or inactive employees
(primarily those on disability) who were not deemed retired
under other company plans. The projected future cost of
providing these benefits is expensed over the period the
employees qualify for such benefits.
Minority Interest For balance sheet purposes, minority interest
represents (i) the interests of noncontrolling shareholders in
AFC subsidiaries including $150 million of preferred securities
issued by trust subsidiaries of AAG and (ii) AFG'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 trust preferred securities.
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.
8
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. 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. In addition, AFC has owned
significant portions of the voting equity securities of certain
companies (investee corporations - see Note C). The following
table (in thousands) shows AFC's revenues by significant
business segment.
Three months ended March 31,
Revenues 1997 1996
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $288,659 $ 304,392
Specialty lines 232,590 229,292
Commercial and personal lines 142,485 179,547
Other lines 28 158
663,762 713,389
Investment and other income 110,150 121,364
773,912 834,753
Annuities and life (*) 148,706 139,414
Other 8,229 47,475
930,847 1,021,642
Equity in net earnings of investee
corporations 14,780 8,522
$945,627 $1,030,164
(*) Represents primarily investment income.
C. Investment in Investee Corporation AFC owned 24 million shares
(43%) of Chiquita common stock at March 31, 1997 and December
31, 1996. The market value of AFC's investment in Chiquita was
$372 million and $306 million at March 31, 1997 and December
31, 1996, respectively. Chiquita is a leading international
marketer, producer and distributor of bananas and other quality
fresh and processed food products.
Summarized financial information for Chiquita follows (in
millions):
Three months ended March 31,
1997 1996
Net Sales $631 $625
Operating Income 71 58
Net Income 43 24
D. Payable to American Financial Group, Inc. At March 31, 1997,
AFC had outstanding borrowings under a note with AFG (bearing
interest at 11-5/8%) of $225 million, plus accrued interest of
$6.4 million. American Premier has a credit agreement with AFG
under which American Premier and AFG may make loans of up to
$250 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
March 31, 1997, American Premier had outstanding borrowings
under the credit agreement of $217.5 million, plus accrued
interest of $3.5 million.
9
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Other Long-Term Debt The carrying value of other long-term
debt consisted of the following (in thousands):
March 31, December 31,
1997 1996
Holding Companies:
9-3/4% AFC Debentures due April 2004 $163,968 $164,368
9-3/4% APU Subordinated Notes due August 1999 93,101 93,604
10-5/8% APU Subordinated Notes due April 2000 54,193 54,595
10-7/8% APU Subordinated Notes due May 2011 18,381 18,496
Other 8,571 8,441
$338,214 $339,504
Subsidiaries:
AAG notes payable to banks due September 1999 $ 51,700 $ 44,700
9-1/2% AAG Senior Notes due August 2001 40,845 40,845
11-1/8% AAG Senior Subordinated Notes
due February 2003 24,080 24,080
Other 68,223 68,790
$184,848 $178,415
At March 31, 1997, sinking fund and other scheduled principal
payments on debt for the balance of 1997 and the subsequent
five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1997 $ 5,735 $ 1,933 $ 7,668
1998 - 2,846 2,846
1999 91,361 54,137 145,498
2000 51,744 8,752 60,496
2001 - 42,304 42,304
2002 - 1,411 1,411
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.
F. Preferred Stock Under provisions of both the Nonvoting
(21.1 million shares authorized) 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 (see Note K - "Subsequent
Event"):
Series F, $1 par value; $20.00 liquidating value per share;
annual dividends per share $1.80; nonredeemable; 11,900,725
shares (stated value $145.4 million) outstanding at
March 31, 1997 and December 31, 1996.
Series G, $1 par value; annual dividends per share $1.05;
redeemable at $10.50 per share; 1,964,158 shares (stated
value $17.4 million) outstanding at March 31, 1997 and
December 31, 1996.
G. Common Stock At March 31, 1997, American Financial Group owned all
of the outstanding shares of AFC's Common Stock.
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses related to debt retirements by the
following companies. Amounts shown are net of minority interest
and income tax benefits (in thousands):
Three months ended
March 31,
1997 1996
AFC (parent) ($17) ($4,198)
APU (parent) (38) (901)
AAG - (2,178)
($55) ($7,277)
I. Cash Flows - Fixed Maturity Investments "Investing activities"
related to fixed maturity investments in AFC's Statement of Cash Flows
consisted of the following (in thousands):
Held to Available
1997 Maturity For Sale Total
Purchases $ 987 $615,668 $616,655
Maturities and redemptions 81,185 73,999 155,184
Sales - 332,008 332,008
1996
Purchases $86,697 $639,451 $726,148
Maturities and redemptions 72,669 94,689 167,358
Sales - 242,365 242,365
J. Commitments and Contingencies There have been no significant
changes to the matters discussed and referred to in Note N
"Commitments and Contingencies" in AFC's Annual Report on Form
10-K for 1996.
K. Subsequent Event In April 1997, AFG announced two transactions
intended to reduce its corporate expenses and simplify the
public company structure of certain subsidiaries.
AFG has proposed a merger transaction in which AFC's Series F
and Series G preferred stock would be retired for $21.50 and
$10.50 per share in cash, respectively. Under the proposal,
holders of Series F and G preferred stock will have as an option
the right to receive shares of a new issue of AFC preferred
stock. The new preferred will be redeemable at AFC's option
after the eighth anniversary of its issuance, have a liquidation
value of $21.50 per share and an annual dividend of $1.8275 per
share, paid semi-annually.
AFG has also proposed that AFEI engage in a merger transaction
whereby all publicly held shares of AFEI would be exchanged, at
the option of AFEI shareholders, for shares of AFG common stock
on a one-for-one basis, or $37.00 per share in cash. There are
approximately 2.3 million shares of AFEI common stock
outstanding which are not beneficially owned by AFG.
The transactions would be subject to the negotiation of final
documentation, the approval of the Board of Directors of each of
AFG, AFC, and AFEI, and the receipt of all required shareholder,
stock exchange listing and regulatory approvals.
11
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC is organized as a holding company with almost all of its
operations being conducted by subsidiaries and affiliates. The
parent corporation, however, has continuing cash needs for
administrative expenses, the payment of principal and interest on
borrowings, dividends on AFC Preferred Stock, and taxes.
Therefore, certain analyses are best done on a parent only basis
while others are best done on a total enterprise basis. In
addition, since most of its businesses are financial in nature, AFC
does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional
ratios and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's debt to total capital ratio at the parent holding
company level was just over 20% at March 31, 1997 and December 31,
1996. AFC's ratio of earnings to fixed charges on a total
enterprise basis was 4.27 for the first three months of 1997
compared to 4.99 for the entire year of 1996; ratios of earnings to
fixed charges and preferred dividends were 3.21 and 3.96 for the
same periods.
Sources of Funds Management believes AFC has sufficient
resources to meet its liquidity requirements through operations in
the short-term and long-term future. If funds generated from
operations, including dividends from subsidiaries, are insufficient
to meet fixed charges in any period, these companies would be
required to generate cash through borrowings, sales of securities
or other assets, or similar transactions.
In December 1996, American Premier paid a dividend to AFG in the
form of a $675 million note receivable from AFC 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
March 31, 1997, the remaining $225 million is included in payable
to AFG on AFC's balance sheet.
American Premier has a credit agreement with AFG under which
American Premier and AFG will make loans of up to $250 million
available to each other. Principal amounts payable to AFG under
the credit agreement totaled $217.5 million and $175.5 million at
March 31, 1997 and December 31, 1996, respectively.
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,
$52 million of which was borrowed at March 31, 1997.
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.
The cash to be utilized if the proposed transactions discussed in
Note K are completed is expected to come from internally generated
funds and existing credit lines.
12
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies in the
past. However, the reliance on such dividend payments has been
lessened by the combination of (i) strong capital at AFC's
insurance subsidiaries (and the related decreased likelihood of a
need for investment in those companies), (ii) the reductions of
debt at the holding companies (and the related decrease in ongoing
cash needs for interest and principal payments), (iii) AFC's
ability to obtain financing in capital markets, as well as (iv) the
sales of non-insurance investments.
Investments 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
March 31, 1997. Investment grade securities generally bear lower
yields and lower degrees of risk than those that are unrated and
non-investment grade. Management believes that the high quality
investment portfolio should generate a stable and predictable
investment return.
AFC's equity securities are concentrated in a relatively limited
number of major positions. This approach allows management to more
closely monitor the companies and the industries in which they
operate.
RESULTS OF OPERATIONS
General Pretax earnings before extraordinary items were
$98.2 million for the first quarter of 1997 and $119.5 million for
the first quarter of 1996. While results included (i) an increase
of $6.6 million in underwriting profit in the property and casualty
operations, (ii) an increase of $10.3 million in investment income
primarily in the annuity, life and health operations and (iii) an
increase of $6.3 million in investee earnings, these improvements
were more than offset by reductions of $50.1 million in realized
gains.
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, aviation coverages and fidelity and surety bonds.
The commercial and personal lines provide coverages in commercial
multi-peril, workers' compensation, umbrella and commercial
automobile, standard private passenger automobile and homeowners
insurance.
Underwriting profitability is measured by the combined ratio which
is a sum of the ratios of underwriting 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.
13
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Net written premiums and combined ratios for AFC's property and
casualty insurance subsidiaries were as follows (dollars in
millions):
Three months ended
March 31,
1997 1996
Net Written Premiums (GAAP)
NSA Group $329.7 $295.5
Specialty Operations 264.4 217.7
Commercial and Personal Operations 94.8 165.3
Other Lines - .1
$688.9 $678.6
Combined Ratios (GAAP)
NSA Group 97.1% 101.9%
Specialty Operations 92.7 90.0
Commercial and Personal Operations 102.9 103.7
Aggregate (including other lines) 98.5 99.6
NSA Group For the first three months of 1997, net written
premiums of the NSA Group increased 12% from the comparable 1996
period due primarily to volume increases in California resulting
from enactment of legislation which requires drivers to provide
proof of insurance in order to obtain a valid permit. The
improvement in the combined ratio reflects rate increases in
various states over the last couple of years.
Specialty Operations Net written premiums for the specialty
operations increased 21% during the first three months of 1997 from
the comparable 1996 period due to the impact of $30 million of
premiums assumed on general aviation policies under a reinsurance
agreement with American Eagle Insurance Company and the return of
premiums related to the withdrawal from a voluntary pool in 1996.
The combined ratio for the first three months of 1997 increased
from the comparable 1996 period due in part to a reduction in
underwriting profit in the California workers' compensation
business. Underwriting results for the 1996 first quarter included
reserve reductions prompted by fundamental changes in the
California workers' compensation market and actuarial evaluations.
Excluding the effects of such reserve reductions, first quarter
1997 underwriting results improved moderately as compared to 1996.
Commercial and Personal Operations The 43% decrease in net
written premiums for the commercial and personal operations from
the comparable 1996 period was due primarily to a reinsurance
agreement, effective January 1, 1997, under which 80% of all AFG's
homeowners' business will be reinsured, and reduced writings of
personal automobile coverages in certain states. Excluding the
impact of the reinsurance agreement, premiums decreased 13%.
Investment Income Investment income increased $10.3 million (5%)
for the first quarter of 1997 compared to 1996 due primarily to an
increase in the average amount of investments held.
Realized Gains Realized capital gains have been an important part
of the return on investments in marketable securities. Individual
securities are sold creating gains and losses as market
opportunities exist.
Investee Corporations Equity in net earnings of investee
corporations in 1997 represents AFC's proportionate share of
Chiquita's earnings. Chiquita reported first quarter net income of
$43.3 million for 1997 and $24.2 million for 1996. Chiquita's
results for 1996 include $12 million of charges for damages
resulting
14
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
from industry-wide flooding in Costa Rica. Included in earnings
from investees in 1996 were losses of $330,000 attributable to
AFC's investment in Citicasters which was sold in September 1996.
Gains on Sales of Subsidiaries Gains on sales of subsidiaries
represent pretax gains on the sales of a travel agency in 1997 and
Buckeye Management Company in 1996.
Annuity Benefits Annuity benefits expense increased slightly in
the first three months of 1997 due to an increase in average 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.
Other Operating and General Expenses Included in other operating
and general expenses are charges for minority interest of
$9.5 million for the first quarter of 1997 compared to $11.4
million for the same period in 1996.
____________________________________________________________
15
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Reports on Form 8-K: None
____________________________________________________________
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, American Financial Corporation has duly caused this Report to
be signed on its behalf by the undersigned duly authorized.
American Financial Corporation
May 12, 1997 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
16