- -------------------------------------------------------------------------------
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, 2001 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
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, 2001, there were 67,840,464 shares of the Registrant's Common
Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 19
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AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
2001 2000
----------- -----------
Assets:
Cash and short-term investments $ 210,948 $ 438,670
Investments:
Fixed maturities - at market
(amortized cost - $10,355,240 and $10,148,348) 10,526,540 10,164,648
Other stocks - at market
(cost - $175,708 and $174,959) 308,208 385,359
Investment in investee corporations 23,996 23,996
Policy loans 212,005 213,469
Real estate and other investments 253,229 273,994
----------- -----------
Total investments 11,323,978 11,061,466
Recoverables from reinsurers and prepaid
reinsurance premiums 1,940,462 1,845,171
Agents' balances and premiums receivable 706,746 700,215
Deferred acquisition costs 782,939 763,097
Other receivables 253,649 240,731
Variable annuity assets (separate accounts) 472,902 533,655
Prepaid expenses, deferred charges and other assets 489,969 513,616
Cost in excess of net assets acquired 324,603 318,920
----------- -----------
$16,506,196 $16,415,541
=========== ===========
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,504,618 $ 4,515,561
Unearned premiums 1,482,400 1,414,492
Annuity benefits accumulated 5,549,650 5,543,683
Life, accident and health reserves 598,133 599,360
Long-term debt:
Holding companies 566,977 584,869
Subsidiaries 192,492 195,087
Variable annuity liabilities (separate accounts) 472,902 533,655
Accounts payable, accrued expenses and other
liabilities 1,030,935 972,271
----------- -----------
Total liabilities 14,398,107 14,358,978
Minority interest 518,784 508,033
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 67,834,556 and 67,410,091 shares outstanding 67,835 67,410
Capital surplus 905,840 898,066
Retained earnings 438,730 442,454
Unrealized gain on marketable securities, net 176,900 140,600
----------- -----------
Total shareholders' equity 1,589,305 1,548,530
----------- -----------
$16,506,196 $16,415,541
=========== ===========
2
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
March 31,
-----------------------
2001 2000
---- ----
Income:
Property and casualty insurance premiums $644,723 $572,137
Life, accident and health premiums 69,158 49,919
Investment income 208,552 208,890
Realized losses on sales of:
Securities (6,881) (1,433)
Subsidiaries (1,586) -
Other income 58,284 54,632
-------- --------
972,250 884,145
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 496,216 417,651
Commissions and other underwriting expenses 184,974 178,432
Annuity benefits 69,264 66,161
Life, accident and health benefits 54,083 36,724
Interest charges on borrowed money 16,800 16,026
Other operating and general expenses 110,065 98,544
-------- --------
931,402 813,538
-------- --------
Operating earnings before income taxes 40,848 70,607
Provision for income taxes 14,432 23,161
-------- --------
Net operating earnings 26,416 47,446
Minority interest expense, net of tax (9,952) (9,896)
Equity in net earnings (losses) of investees,
net of tax (3,334) 7,175
-------- --------
Net Earnings $ 13,130 $ 44,725
======== ========
Earnings per Common Share:
Basic $.19 $.76
==== ====
Diluted $.19 $.76
==== ====
Average number of Common Shares:
Basic 67,510 58,466
Diluted 67,933 58,545
Cash dividends per Common Share $.25 $.25
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Common Stock Unrealized
Common and Capital Retained Gain (Loss)
Shares Surplus Earnings on Securities Total
---------- ------------ -------- ------------- ----------
Balance at January 1, 2001 67,410,091 $965,476 $442,454 $140,600 $1,548,530
Net earnings - - 13,130 - 13,130
Change in unrealized - - - 36,300 36,300
----------
Comprehensive income 49,430
Dividends on Common Stock - - (16,854) - (16,854)
Shares issued:
Exercise of stock options 22,842 491 - - 491
Employee stock purchase plan 15,022 385 - - 385
Retirement plan contributions 385,277 9,149 - - 9,149
Directors fees paid in stock 996 24 - - 24
Tax effect of intercompany dividends - (1,600) - - (1,600)
Other 328 (250) - - (250)
---------- -------- -------- -------- ----------
Balance at March 31, 2001 67,834,556 $973,675 $438,730 $176,900 $1,589,305
========== ======== ======== ======== ==========
Balance at January 1, 2000 58,419,952 $800,640 $557,538 ($18,200) $1,339,978
Net earnings - - 44,725 - 44,725
Change in unrealized - - - (23,000) (23,000)
----------
Comprehensive income 21,725
Dividends on Common Stock - - (14,607) - (14,607)
Shares issued:
Employee stock purchase plan 22,945 527 - - 527
Retirement plan contributions 99,716 2,119 - - 2,119
Directors fees paid in stock 930 24 - - 24
Tax effect of intercompany dividends - (1,600) - - (1,600)
Repurchase of trust preferred securities - - 156 - 156
Other - 91 - - 91
---------- -------- -------- ------- ----------
Balance at March 31, 2000 58,543,543 $801,801 $587,812 ($41,200) $1,348,413
========== ======== ======== ======= ==========
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
-----------------------
2001 2000
---- ----
Operating Activities:
Net earnings $ 13,130 $ 44,725
Adjustments:
Equity in net (earnings) losses of investees 3,334 (7,175)
Depreciation and amortization 36,574 30,580
Annuity benefits 69,264 66,161
Changes in reserves on assets 4,637 1,088
Realized gains on investing activities (6,840) (7,611)
Deferred annuity and life policy acquisition costs (35,551) (33,668)
Decrease in reinsurance and other receivables 797 124,728
Decrease (increase) in other assets (19,934) 13,844
Increase (decrease) in insurance claims and reserves 74,616 (50,957)
Increase in other liabilities 35,660 4,542
Increase (decrease) in minority interest 4,260 (1,515)
Other, net 3,491 (1,215)
-------- --------
183,438 183,527
-------- --------
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (544,186) (601,115)
Equity securities (2,571) (14,786)
Real estate, property and equipment (13,278) (18,935)
Maturities and redemptions of fixed maturity
investments 131,547 154,704
Sales of:
Fixed maturity investments 194,182 227,797
Equity securities 4,679 19,265
Subsidiaries 22,000 -
Real estate, property and equipment 24,562 1,504
Cash and short-term investments of former
subsidiaries (132,858) -
Decrease (increase) in other investments (673) 5,486
-------- --------
(316,596) (226,080)
-------- --------
Financing Activities:
Fixed annuity receipts 126,223 126,416
Annuity surrenders, benefits and withdrawals (186,921) (192,820)
Net transfers from (to) variable annuity assets 2,929 (21,453)
Additional long-term borrowings 26,842 44,091
Reductions of long-term debt (47,601) (610)
Issuances of Common Stock 818 448
Repurchases of trust preferred securities - (2,313)
Cash dividends paid (16,854) (14,607)
-------- --------
(94,564) (60,848)
-------- --------
Net Decrease in Cash and Short-term Investments (227,722) (103,401)
Cash and short-term investments at beginning
of period 438,670 390,630
-------- --------
Cash and short-term investments at end of period $210,948 $287,229
======== ========
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for American Financial Group, Inc. ("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.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in circumstances
could cause actual results to differ materially from those estimates.
INVESTMENTS All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses reported
as a separate component of shareholders' equity. Short-term investments
are carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. 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.
INVESTMENT IN INVESTEE CORPORATIONS Investments in securities of 20%- to
50%-owned companies are generally carried at cost, adjusted for AFG's
proportionate share of their undistributed earnings or losses.
Due to Chiquita's announced intention to pursue a plan to restructure its
public debt, AFG wrote down its investment in Chiquita common stock to
market value at December 31, 2000, and may suspend accounting for Chiquita
under the equity method pending resolution of the current uncertainty.
COST IN EXCESS OF NET ASSETS ACQUIRED The excess of cost of subsidiaries
and investees over AFG's equity in the underlying net assets ("goodwill")
is being amortized over periods of 20 to 40 years. In February 2001, the
Financial Accounting Standards Board issued a proposal to eliminate the
amortization of goodwill and require that goodwill be tested for
impairment.
INSURANCE As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable. To the extent that unrealized gains (losses) from
securities classified as "available for sale" would result in adjustments
to deferred acquisition costs and policyholder liabilities had those gains
(losses) actually been realized, such balance sheet amounts are adjusted,
net of deferred taxes.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 reinsured
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 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, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against
income ratably over the terms of the related policies. DPAC related to
annuities and universal life insurance products is amortized, with
interest, in relation to the present value of expected gross profits on
the policies. DPAC related to traditional life and health insurance is
amortized over the expected premium paying period of the related policies,
in proportion to the ratio of annual premium revenues to total anticipated
premium revenues.
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.
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 life, accident and health policies are computed
using the net level premium method. Computations are based on anticipated
investment yield, mortality, morbidity and surrenders and include
provisions for unfavorable deviations. Reserves established for accident
and health claims are modified as necessary to reflect actual experience
and developing trends.
VARIABLE ANNUITY ASSETS AND LIABILITIES Separate accounts related to
variable annuities represent deposits invested in underlying investment
funds on which Great American Financial Resources, Inc. ("GAFRI"), an
83%-owned subsidiary, earns a fee. The investment funds are selected and
may be changed only by the policyholder.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
MINORITY INTEREST For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries,
including American Financial Corporation ("AFC") preferred stock and
preferred securities issued by trust subsidiaries of AFG. For income
statement purposes, minority interest expense represents those
shareholders' interest in the earnings of AFG subsidiaries as well as AFC
preferred dividends and accrued distributions on the trust preferred
securities.
INCOME TAXES AFC files 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 Preferred
Stock hold in excess of 20% of AFC's voting rights, AFG (parent) and its
direct subsidiary, AFC Holding Company ("AFC Holding" or "AFCH"), own less
than 80% of AFC, and therefore, file separate returns.
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.
STOCK-BASED COMPENSATION As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," AFG accounts for stock options and other stock-based
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees."
BENEFIT PLANS AFG provides retirement benefits to qualified employees of
participating companies through contributory and noncontributory defined
contribution plans contained in AFG's Retirement and Savings Plan. Under
the retirement portion of the plan, company contributions are invested
primarily in securities of AFG and affiliates. Under the savings portion
of the plan, AFG matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in the year
for which they are declared.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 earn
such benefits.
DERIVATIVES Effective October 1, 2000, AFG implemented SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
(including derivative instruments that are embedded in other contracts)
and for hedging activities. Prior year financial statements were not
restated. SFAS No. 133 generally requires that derivatives (both assets
and liabilities) be recognized in the balance sheet at fair value with
changes in fair value included in current earnings.
Derivatives included in AFG's Balance Sheet consist primarily of
investments in common stock warrants (included in other stocks), the
equity-based component of certain annuity products (included in annuity
benefits accumulated) and call options (included in other investments)
used to mitigate the risk embedded in the equity-indexed annuity products.
EARNINGS PER SHARE Basic earnings per share is calculated using the
weighted average number of shares of common stock outstanding during the
period. The calculation of diluted earnings per share includes 423,000
shares in 2001 and 79,000 shares in 2000 representing the dilutive effect
of common stock options.
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.
B. SALE OF SUBSIDIARIES
JAPANESE DIVISION In December 2000, AFG agreed to sell its Japanese
property and casualty division to Mitsui Marine & Fire Insurance Company
of America for approximately $22 million in cash and recorded a $10.7
million pretax loss on the sale. Upon completion of the sale in March
2001, AFG realized an additional pretax loss of $1.6 million and deferred
a gain of approximately $21 million on ceded insurance which is being
recognized over the estimated settlement period (weighted average of 4
years) of the ceded claims. At the same time, a reinsurance agreement
under which Great American Insurance ceded a portion of its pool of
insurance to Mitsui was terminated. The Japanese division generated net
written premiums of approximately $60 million per year to Great American
while Great American ceded approximately $45 million per year to Mitsui.
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. SEGMENTS OF OPERATIONS AFG's property and casualty group is engaged
primarily in private passenger automobile and specialty insurance
businesses. The Personal group writes nonstandard and preferred/standard
private passenger auto and other personal insurance coverage. The
Specialty group includes a highly diversified group of specialty business
units. Some of the more significant areas are inland and ocean marine,
California workers' compensation, agricultural-related coverages,
executive and professional liability, fidelity and surety bonds,
collateral protection, and umbrella and excess coverages. AFG's annuity
and life business markets primarily retirement products as well as life
and supplemental health insurance. In addition, AFG owns a significant
portion of the voting equity securities of Chiquita Brands International,
Inc. (an investee corporation - see Note D).
The following table (in thousands) shows AFG's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
Three months ended
March 31,
----------------------
2001 2000
---- ----
Revenues (a)
Property and casualty insurance:
Premiums earned:
Personal $327,632 $297,313
Specialty 316,307 274,823
Other lines - primarily discontinued 784 1
-------- --------
644,723 572,137
Investment and other income 107,335 121,167
-------- --------
752,058 693,304
Annuities and life (b) 217,030 187,337
Other 3,162 3,504
-------- --------
$972,250 $884,145
======== ========
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($ 27,782) ($10,933)
Specialty (2,230) (10,498)
Other lines - primarily discontinued (6,455) (2,515)
-------- --------
(36,467) (23,946)
Investment and other income 75,202 84,525
-------- --------
38,735 60,579
Annuities and life 30,123 27,514
Other (c) (28,010) (17,486)
-------- --------
$ 40,848 $ 70,607
======== ========
(a) Revenues include sales of products and services as well as other
income earned by the respective segments.
(b) Represents primarily investment income.
(c) Includes holding company expenses.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. INVESTEE CORPORATIONS Investment in investee corporations reflects AFG's
ownership of 24 million shares (33%) of Chiquita common stock. The market
value of this investment was $31 million and $24 million at March 31, 2001
and December 31, 2000, respectively. Chiquita is a leading international
marketer, producer and distributor of quality fresh fruits and vegetables
and processed foods. Summarized financial information for Chiquita follows
(in millions):
Three months ended March 31,
2001 2000
---- ----
Net Sales $577 $658
Operating Income 38 68
Net Income 4 35
Net Income Attributed to Common Shares 0.4 31
In January 2001, Chiquita announced a restructuring initiative that
included discontinuing all interest and principal payments on its public
debt. If successful, the restructuring would result in the conversion of a
significant portion of Chiquita's $862 million in public debt into common
equity. Although the intended restructuring would not impact Chiquita's
day-to-day operations, it would adversely affect the holders of its stock,
including AFG.
START-UP MANUFACTURING BUSINESSES Since 1998, AFG subsidiaries have made
loans to two start-up manufacturing businesses which were previously owned
by unrelated third-parties. During 2000, the former owners chose to
forfeit their equity interests to AFG rather than invest additional
capital. In the fourth quarter of 2000, AFG sold the equity interests to a
group of employees for nominal cash consideration plus warrants to
repurchase a significant ownership interest. Due to the absence of
significant financial investment by the buyers relative to the amount of
debt owed to AFG subsidiaries, the sale was not recognized as a
divestiture for accounting purposes. Assets of the businesses transferred
(approximately $55 million at March 31, 2001 and December 31, 2000) are
included in other assets; liabilities of the businesses transferred
(approximately $7 million at March 31, 2001 and December 31, 2000, after
elimination of loans from AFG subsidiaries) are included in other
liabilities. AFG's equity in the losses of these two companies during the
first quarter of 2001 of $3.3 million is included in investee losses in
the statement of earnings.
E. LONG-TERM DEBT The carrying value of long-term debt consisted of the
following (in thousands):
March 31, December 31,
2001 2000
-------- -----------
Holding Companies:
AFG 7-1/8% Senior Debentures due April 2009 $300,976 $300,931
AFG 7-1/8% Senior Debentures due December 2007 79,600 79,600
AFC notes payable under bank line 160,000 178,000
APU 10-7/8% Subordinated Notes due May 2011 11,597 11,611
Other 14,804 14,727
-------- --------
$566,977 $584,869
======== ========
Subsidiaries:
GAFRI 6-7/8% Senior Notes due June 2008 $100,000 $100,000
GAFRI notes payable under bank line 53,100 48,500
Notes payable secured by real estate 24,396 31,201
Other 14,996 15,386
-------- --------
$192,492 $195,087
======== ========
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At March 31, 2001, sinking fund and other scheduled principal payments on
debt for the balance of 2001 and the subsequent five years were as follows
(in millions):
Holding
Companies Subsidiaries Total
--------- ------------ ------
2001 $ 1.4 $ 1.0 $ 2.4
2002 170.4 1.5 171.9
2003 - 1.5 1.5
2004 - 61.5 61.5
2005 - 10.0 10.0
2006 - .7 .7
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 previously purchased are applied to the
earliest scheduled retirements.
AFC and GAFRI each have an unsecured credit agreement with a group of
banks under which they can borrow up to $300 million and $155 million,
respectively. Borrowings bear interest at floating rates based on prime or
Eurodollar rates. Loans mature in December 2002 under the AFC credit
agreement and in December 2004 under the GAFRI credit agreement.
F. MINORITY INTEREST Minority interest in AFG's balance sheet is comprised
of the following (in thousands):
March 31, December 31,
2001 2000
-------- -----------
Interest of noncontrolling shareholders
in subsidiaries' common stock $129,967 $119,216
Preferred securities issued by
subsidiary trusts 316,663 316,663
AFC preferred stock 72,154 72,154
-------- --------
$518,784 $508,033
======== ========
PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFG and GAFRI have
issued preferred securities and, in turn, purchased a like amount of
subordinated debt which provides interest and principal payments to fund
the respective trusts' obligations. The preferred securities must be
redeemed upon maturity or redemption of the subordinated debt. AFG and
GAFRI effectively provide unconditional guarantees of their respective
trusts' obligations.
The preferred securities consisted of the following (in thousands):
Date of March 31, December 31, Optional
Issuance Issue (Maturity Date) 2001 2000 Redemption Dates
------------- ------------------------ -------- ----------- ----------------------
October 1996 AFCH 9-1/8% TOPrS (2026) $98,750 $98,750 On or after 10/22/2001
November 1996 GAFRI 9-1/4% TOPrS (2026) 72,913 72,913 On or after 11/7/2001
March 1997 GAFRI 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007
May 1997 GAFRI 7-1/4% ROPES (2041) 75,000 75,000 After 9/28/2001
AFC PREFERRED STOCK AFC's Preferred Stock is voting, cumulative, and
consists of the following:
SERIES J, no par value; $25.00 liquidating value per share; annual
dividends per share $2.00; redeemable at AFC's option at $25.75 per
share beginning December 2005 declining to $25.00 at December 2007
and thereafter; 2,886,161 shares (stated value $72.2 million)
outstanding at March 31, 2001 and December 31, 2000.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
Three months ended
March 31,
--------------------
2001 2000
---- ----
Interest of noncontrolling shareholders
in earnings of subsidiaries $4,131 $3,971
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities, net of tax 4,378 4,482
AFC preferred stock 1,443 1,443
------ ------
$9,952 $9,896
====== ======
G. SHAREHOLDERS' EQUITY At March 31, 2001, there were 67,834,556 shares of
AFG Common Stock outstanding, including 1,363,192 shares held by American
Premier for possible distribution to certain creditors and other claimants
upon proper claim presentation and settlement pursuant to the 1978 plan of
reorganization of American Premier's predecessor, The Penn Central
Corporation. Shares being held for distribution are not eligible to vote
but otherwise are accounted for as issued and outstanding. 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 March 31, 2001, there were 6.8 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date, AFG
had options for 6.3 million shares outstanding. Options generally become
exercisable at the rate of 20% per year commencing one year after grant;
those granted to non-employee directors of AFG are fully exercisable upon
grant. All options expire ten years after the date of grant.
The change in unrealized gain (loss) on marketable securities for the
three months ended March 31 included the following (in millions):
Minority
Pretax Taxes Interest Net
------ ----- -------- -----
2001
----------------------------------------
Unrealized holding gains on securities
arising during the period $59.0 ($20.6) ($6.4) $32.0
Reclassification adjustment for
realized losses included in net income 6.9 (2.4) (.2) 4.3
----- ----- ---- -----
Change in unrealized gain on
marketable securities, net $65.9 ($23.0) ($6.6) $36.3
===== ===== ==== =====
2000
----------------------------------------
Unrealized holding losses on securities
arising during the period ($40.3) $14.5 $2.2 ($23.6)
Reclassification adjustment for
realized losses included in net income 1.4 (.5) (.3) .6
----- ----- ---- -----
Change in unrealized gain (loss) on
marketable securities, net ($38.9) $14.0 $1.9 ($23.0)
===== ===== ==== =====
H. COMMITMENTS AND CONTINGENCIES There have been no significant changes to
the matters discussed and referred to in Note L "Commitments and
Contingencies" of AFG's Annual Report on Form 10-K for 2000.
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
------------------------------------------------
GENERAL
AFG and its subsidiaries, AFC Holding, AFC and American Premier, are
organized as holding companies with almost all of their operations being
conducted by subsidiaries. These parent corporations, however, have
continuing cash needs for administrative expenses, the payment of
principal and interest on borrowings, shareholder dividends, 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, AFG does not prepare its
consolidated financial statements using a current-noncurrent format.
Consequently, certain traditional ratios and financial analysis tests are
not meaningful.
IT INITIATIVE In 1999, AFG initiated an enterprise-wide study of its
information technology ("IT") resources, needs and opportunities. The
initiative entails extensive effort and costs. While the costs precede the
expected savings, management believes the benefits in efficiencies and
effectiveness will exceed the costs incurred, all of which have been and
will be funded through available working capital.
FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. Some of the
forward-looking statements can be identified by the use of forward-looking
words such as "believes", "expects", "may", "will", "should", "seeks",
"intends", "plans", "estimates", "anticipates" or the negative version of
those words or other comparable terminology. Actual results could differ
materially from those contained in or implied by such forward-looking
statements for a variety of factors including:
o changes in economic conditions, including interest rates, performance
of securities markets, and the availability of capital;
o regulatory actions;
o changes in legal environment;
o tax law changes;
o levels of catastrophes and other major losses;
o adequacy of loss reserves;
o availability of reinsurance; and
o competitive pressures, including the ability to obtain rate
increases.
Forward-looking statements speak only as of the date made. AFG undertakes
no obligations to update any forward-looking statements to reflect events
or circumstances arising after the date on which they are made.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFG's debt to total capital ratio (at the parent holding company
level) was approximately 24% at March 31, 2001 and 25% at December 31,
2000. AFG's ratio of earnings to fixed charges (on a total enterprise
basis) was 2.06 for the first three months of 2001 and 1.63 for the entire
year of 2000.
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
SOURCES OF FUNDS Management believes the parent holding companies have
sufficient resources to meet their liquidity requirements, primarily
through funds generated by their subsidiaries' operations. If funds
provided by subsidiaries through dividends and tax payments are
insufficient to meet fixed charges in any period, the holding companies
would be required to generate cash through borrowings, sales of securities
or other assets, or similar transactions.
AFC has a revolving credit agreement with several banks under which it can
borrow up to $300 million. This credit line provides ample liquidity and
can be used to obtain funds for operating subsidiaries or, if necessary,
for the parent companies. There was $160 million borrowed under the line
at March 31, 2001 and $212 million at May 1, 2001.
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies during certain
periods in the past. However, the reliance on such dividend payments has
been lessened in recent years by the combination of (i) reductions in the
amounts and cost of debt at the holding companies from historical levels
(and the related decrease in ongoing cash needs for interest and principal
payments), (ii) AFG's ability to obtain financing in capital markets, as
well as (iii) the sales of certain noncore investments.
INVESTMENTS Approximately 92% of the fixed maturities held by AFG were
rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at March 31, 2001. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated and noninvestment grade. Management believes that the high quality
investment portfolio should generate a stable and predictable investment
return.
AFG'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 operating earnings for the first quarter of 2001 were $40.8
million compared to $11.2 million for the fourth quarter of 2000 and $70.6
million for the first quarter of 2000. Pretax operating earnings improved
compared to the fourth quarter of 2000 due primarily to decreased realized
losses and improved underwriting results. The decrease in pretax operating
earnings compared to the first quarter of 2000 reflects a decline in the
Personal group's underwriting results and increased realized losses.
Many investors and analysts focus on "core earnings" of companies, setting
aside certain items included in net earnings. Such "core earnings" for
AFG, consisting of net earnings adjusted to exclude (i) realized gains
(losses), (ii) equity in investee earnings (losses) and (iii) a fourth
quarter 2000 accounting change were $21.8 million ($.32 per share,
diluted) in the first quarter of 2001 compared to $14.3 million ($.24 per
share) in the fourth quarter of 2000 and $38.3 million ($.65 per share) in
the first quarter of 2000.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and casualty
group consists of two major business groups: Personal and Specialty.
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
The Personal group sells nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risk not typically accepted for
standard automobile coverage because of the applicant's driving record,
type of vehicle, age or other criteria.
The Specialty group includes a highly diversified group of business lines.
Some of the more significant areas are inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, fidelity and surety bonds, collateral protection,
and umbrella and excess coverages.
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.
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various specialty
businesses listed above), management believes that it is prudent and
appropriate to use conservative assumptions until such time as the data,
experience and projections have more credibility, as evidenced by data
volume, consistency and maturity of the data. While this practice
mitigates the risk of adverse development on this business, it does not
eliminate it.
Net written premiums and combined ratios for AFG's property and casualty
insurance subsidiaries were as follows (dollars in millions):
Three months ended
March 31,
--------------------
2001 2000
---- ----
Net Written Premiums (GAAP)
Personal $370.5 $349.8
Specialty 356.6(a) 297.7
Other lines - -
------ ------
$727.1 $647.5
====== ======
Combined Ratios (GAAP)(b)
----------------------
Personal 108.5% 103.7%
Specialty 100.6 103.8
Aggregate (including discontinued lines) 105.6 104.2
(a) Before a reduction of $29.7 million for unearned premium
transfer related to the sale of the Japanese division.
(b) Combined ratios for the fourth quarter of 2000 were: Personal
- 111.0%, Specialty - 104.3%, Aggregate - 106.1%. Combined
ratios for the entire year of 2000 were: Personal - 108.6%,
Specialty - 107.9%, Aggregate - 108.0%.
PERSONAL The Personal group's increase in net written premiums reflects
the impact of significant rate increases implemented primarily in the
second half of 2000, partially offset by lower business volume. The
combined ratio improved compared to the 2000 fourth quarter due primarily
to the impact of these rate
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
increases. The increase in the combined ratio compared to the first
quarter of 2000 reflects the impact of inadequate rates on policies
written during the first part of 2000. To further improve underwriting
results, AFG implemented rate increases averaging 5% in the first quarter
of 2001 and expects rate increases to be in excess of 10% by the end of
2001.
SPECIALTY The Specialty group's increase in net written premiums reflects
the impact of rate increases implemented in 2000 and 2001 and the
realization of growth opportunities in certain commercial markets. In its
California workers' compensation business, AFG implemented rate increases
averaging 40% on renewals in the first quarter 2001 and expects rate
increases of at least 30% on renewals in this business during the second
quarter. Rate increases implemented in the other specialty operations
averaged 17% for the first quarter of 2001. The improvement in the
combined ratio compared to both the fourth and first quarters of 2000
reflects the impact of these rate increases. Excluding the California
workers' compensation business, the Specialty group's combined ratio for
the first quarter of 2001 was 98.0%.
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS The increase in life,
accident and health premiums and benefits is due primarily to increased
sales of supplemental health insurance products.
REAL ESTATE OPERATIONS AFG's subsidiaries are engaged in a variety of real
estate operations including hotels, apartments, office buildings and
recreational facilities; they also own several parcels of land. Revenues
and expenses of these operations, including gains and losses on disposal,
are included in AFG's statement of earnings as shown below (in millions).
Three months ended
March 31,
------------------
2001 2000
---- ----
Other income $32.0 $17.9
Other operating and general expenses 15.0 14.3
Interest charges on borrowed money .7 .7
Minority interest expense, net 1.9 .2
Other income includes net pretax gains on the sale of real estate assets
of $15.3 million in the first quarter of 2001 and $2.1 million in the
first quarter of 2000.
OTHER INCOME Other income increased $3.7 million (7%) in the first quarter
of 2001 compared to 2000 due primarily to increased income from the sale
of real estate which exceeded income from the sale of operating assets and
lease residuals in the first quarter of 2000.
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.
Under Statement of Financial Accounting Standards ("SFAS") No. 133, which
was adopted as of October 1, 2000, warrants to purchase common stock of
publicly traded companies are generally considered derivatives and marked
to market through current earnings as realized gains and losses. Realized
losses on sales of securities includes $.8 million in losses recognized
during the first quarter of 2001 to adjust the carrying value of AFG's
investment in warrants to market value at March 31, 2001.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
LOSS ON SALE OF SUBSIDIARIES In 2001, AFG recognized a $1.6 million pretax
loss representing an adjustment to the fourth quarter 2000 loss recorded
on the sale of its Japanese division.
ANNUITY BENEFITS Annuity benefits reflect amounts accrued on annuity
policyholders' funds accumulated. The majority of GAFRI's fixed rate
annuity products permit GAFRI to change the crediting rate at any time
(subject to minimum interest rate guarantees of 3% or 4% per annum). As a
result, management has been able to react to changes in market interest
rates and maintain a desired interest rate spread.
GAFRI's equity-indexed fixed annuities provide policyholders with a
crediting rate tied, in part, to the performance of an existing stock
market index. GAFRI attempts to mitigate the risk in the equity-based
component of these products through the purchase of call options on the
appropriate index. GAFRI's strategy is designed so that an increase in the
liabilities due to an increase in the market index will be substantially
offset by unrealized gains on the call options. Under SFAS No. 133, both
the equity-based component of the annuities and the related call options
are considered derivatives and marked to market through current earnings
as annuity benefits. Adjusting these derivatives to market value had
virtually no net effect on annuity benefits during the first quarter of
2001.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
increased $11.5 million (12%) in the first quarter of 2001 compared to the
first quarter of 2000 due primarily to increased expenses associated with
the IT initiative and slightly higher holding company expenses.
INVESTEE CORPORATIONS For 2001, equity in earnings (losses) of investee
corporations represents losses of two start-up manufacturing businesses.
Equity in net earnings (losses) of investees in 2000 represents AFG's
proportionate share of Chiquita's earnings. Chiquita reported net income
of $.01 per share for the first quarter of 2001 and $.46 per share for the
first quarter of 2000.
-----------------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
------------------------------------------------------
As of March 31, 2001, there were no material changes to the information
provided in AFG's Form 10-K for 2000 under the caption "Exposure to Market
Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: none
(b) Reports on Form 8-K: none
-----------------------------------------------------
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.
May 11, 2001 BY: Fred J. Runk
-----------------------------------
Fred J. Runk
Senior Vice President and Treasurer
19