-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KqOn3Dk/g9bzz6Z176sAKr0uL1byDh8C37sZllVQZmCmVYYWQp7elCXNrKjx9bmz BKbxQMlDIE8jUjyY5VS+MQ== 0000005016-95-000054.txt : 19951119 0000005016-95-000054.hdr.sgml : 19951119 ACCESSION NUMBER: 0000005016-95-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: CSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN FINANCIAL CORP CENTRAL INDEX KEY: 0000005016 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310624874 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07361 FILM NUMBER: 95591410 BUSINESS ADDRESS: STREET 1: ONE E 4TH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5135792121 10-Q 1 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. 1-7361 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 November 1, 1995, there were 53,000,000 shares of the Registrant's Common Stock outstanding, all of which were owned by American Financial Group, Inc. Page 1 of 16 AMERICAN FINANCIAL CORPORATION 10-Q PART I FINANCIAL INFORMATION AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
September 30, December 31, 1995 1994 Assets Cash and short-term investments $ 178,966 $ 171,335 Investments: Bonds and redeemable preferred stocks: Held to maturity - at amortized cost (market - $5,054,700 and $4,336,700) 4,933,152 4,629,633 Available for sale - at market (amortized cost - $2,189,194 and $1,938,853) 2,265,494 1,862,653 Other stocks - principally at market (cost - $131,855 and $137,106) 223,555 208,706 Investment in affiliates 831,761 832,637 Loans receivable 650,405 641,964 Real estate and other investments 176,372 154,262 9,080,739 8,329,855 Recoverables from reinsurers and prepaid reinsurance premiums 886,448 902,063 Agents' balances and premiums receivable 409,931 363,156 Other receivables 208,643 197,119 Prepaid expenses, deferred charges and other assets 457,862 410,657 Cost in excess of net assets acquired 173,697 175,866 $11,396,286 $10,550,051 Liabilities and Capital Unpaid losses and loss adjustment expenses $ 2,948,330 $ 2,916,985 Unearned premiums 911,911 824,691 Annuity policyholders' funds accumulated 4,857,576 4,618,108 Long-term debt: Direct obligations of AFC Parent Company 375,252 490,065 Obligations of AFC subsidiaries: Great American Holding Corporation 149,389 359,185 American Annuity Group, Inc. 149,725 183,242 Other subsidiaries 75,050 74,255 Payable to American Premier Underwriters, Inc. 574,756 - Accounts payable, accrued expenses and other liabilities 646,858 579,151 Minority interest 135,495 105,506 10,824,342 10,151,188 Mandatory Redeemable Preferred Stock (at redemption value) 2,880 2,880 Other Preferred Stock (redemption value - $278,719) 168,484 168,484 Common Stock without par value 9,625 904 Retained earnings 290,055 223,095 Net unrealized gain on marketable securities, net of deferred income taxes 100,900 3,500 $11,396,286 $10,550,051
2 AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (In Thousands)
Three months ended Nine months ended September 30, September 30, 1995 1994 1995 1994 Income: Property and casualty insurance premiums $381,850 $361,728 $1,107,141 $1,013,591 Investment income 160,034 149,449 472,322 434,133 Realized gains on sales of securities 17,787 19,961 22,219 43,104 Equity in net earnings (losses) of affiliates 1,422 (21,066) 43,998 (8,844) Other income 27,335 27,408 77,110 87,147 588,428 537,480 1,722,790 1,569,131 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 262,256 253,201 775,550 710,578 Commissions and other underwriting expenses 114,590 108,815 359,085 322,204 Benefits to annuity policyholders 65,631 61,277 194,152 180,701 Interest charges on borrowed money 36,928 28,285 103,037 87,141 Other operating and general expenses 60,978 70,465 176,919 186,031 540,383 522,043 1,608,743 1,486,655 Earnings before income taxes and extraordinary items 48,045 15,437 114,047 82,476 Provision for income taxes 12,275 7,991 31,149 25,078 Earnings before extraordinary items 35,770 7,446 82,898 57,398 Extraordinary items, net of income taxes - (501) (3,048) (16,938) Net Earnings $ 35,770 $ 6,945 $ 79,850 $ 40,460
3 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
Nine months ended September 30, 1995 1994 Operating Activities: Net earnings $ 79,850 $ 40,460 Adjustments: Extraordinary losses from retirement of debt 3,048 16,938 Depreciation and amortization 23,362 16,178 Benefits to annuity policyholders 194,152 180,701 Equity in net (earnings) losses of affiliates (43,998) 8,844 Changes in reserves on assets 2,932 7,482 Realized gains on investing activities (22,921) (52,471) Increase in reinsurance and other receivables (41,283) (252,345) Increase in prepaid expenses, deferred charges and other assets (80,826) (62,368) Increase in insurance claims and reserves 116,692 300,359 Increase (decrease) in other liabilities (18,625) 55,943 Increase in minority interest 16,961 5,456 Dividends from affiliates 17,124 15,753 Other, net (4,765) (1,956) 241,703 278,974 Investing Activities: Purchases of and additional investments in: Fixed maturity investments (1,352,959) (1,296,238) Equity securities (3,749) (2,574) Affiliates and subsidiaries (13,327) (23,852) Real estate, property and equipment (23,600) (18,988) Maturities and redemptions of fixed maturity investments 193,451 310,472 Sales of: Fixed maturity investments 672,221 543,939 Equity securities 15,258 111,522 Affiliates and subsidiaries 43,697 27,621 Real estate, property and equipment 5,040 2,619 Decrease (increase) in other investments (11,030) 11,441 Other - (12,536) (474,998) (346,574) Financing Activities: Annuity receipts 338,353 313,077 Annuity surrenders, benefits and withdrawals (302,486) (244,175) Additional long-term borrowings 145,128 198,271 Reductions of long-term debt (494,753) (173,354) Borrowings from American Premier 639,000 - Repayments of borrowings from American Premier (80,000) - Repurchases of preferred stock (147) (4,466) Exercise of stock options 8,721 - Cash dividends paid (12,890) (16,900) 240,926 72,453 Net Increase in Cash and Short-term Investments 7,631 4,853 Cash and short-term investments at beginning of period 171,335 167,950 Cash and short-term investments at end of period $ 178,966 $ 172,803
4 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Merger On April 3, 1995, American Financial Corporation ("AFC") merged with a newly formed subsidiary of American Premier Group, Inc., another new company formed to own 100% of the common stock of both AFC and American Premier Underwriters, Inc. ("American Premier"). Subsequently, American Premier Group changed its name to American Financial Group, Inc. to reflect its core property and casualty insurance and annuity businesses. In the transaction, Carl H. Lindner and members of his family, who owned 100% of the Common Stock of AFC, exchanged their AFC Common Stock for approximately 55% of American Financial Group voting common stock. Former shareholders of American Premier, including AFC and its subsidiaries, received shares of American Financial Group stock on a one-for-one basis. No gain or loss was recorded on the exchange of shares. AFC will continue to be a separate SEC reporting company with publicly traded debentures and preferred stock. Holders of AFC Series F and G Preferred Stock were granted voting rights equal to approximately 21% of the total voting power of AFC shareholders immediately prior to the merger. B. Accounting Policies Basis of Presentation The accompanying consolidated financial statements for American Financial Corporation 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. AFC's ownership of subsidiaries and significant affiliates with publicly traded shares was as follows:
September 30, December 31, 1995 1994 1993 American Annuity Group, Inc. ("AAG") 80% 80% 80% American Financial Enterprises, Inc. ("AFEI") 83% 83% 83% American Financial Group, Inc. ("AFG") 25% - - American Premier Underwriters, Inc. (a) 42% 41% Chiquita Brands International, Inc. 39% 46% 46% Citicasters Inc. 37% 37% 20% General Cable Corporation - (b) 45% (a) Exchanged for shares of American Financial Group in April 1995. (b) Sold in June 1994.
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 (i) "trading" and 5 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 Affiliates 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 affiliate. Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries and affiliates (purchased subsequent to October 1970) 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 affiliates over its cost of acquiring these companies ("negative goodwill") has been 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. 6 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Deferred Policy Acquisition Costs Policy acquisition costs (principally commissions, premium taxes and other underwriting expenses) related to the production of new business are deferred and included in "Prepaid expenses, deferred charges and other assets". 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 terms 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) esti-mates 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. 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 AFC files consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries. Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a benefit will be realized. Benefit Plans 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. The ESORP covers all employees of participating companies who are qualified as to age and length of service. Contributions are discretionary by the directors of participating companies and are charged against earnings in the year for which they are declared. 7 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED AFC and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFC also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period the employees qualify for such benefits. In connection with the 1995 merger, 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 being amortized over the lives of respective borrowings, generally on the interest method. Statement of Cash Flows For cash flow purposes, "investing activities" are defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. "Financing activities" include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, benefits and withdrawals are also reflected as financing activities. All other activities are considered "operating". Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements. C. Sales of Affiliates In April 1995, AFC sold 3.2 million shares of Chiquita common stock to American Premier for $43.7 million, realizing a $442,000 loss on the sale. In June 1994, AFC sold its investment in General Cable common stock to an unaffiliated company for $27.6 million in cash. AFC realized a $1.7 million pretax gain on the sale (excluding its share of American Premier's loss on its sale of securities of General Cable). The loss on the sale of Chiquita and gain on the sale of General Cable are included in "Other income." D. Segments of Operations Through subsidiaries, AFC is engaged in several financial businesses, including property and casualty insurance, annuities and portfolio investing. AFC also owns significant portions of the voting equity securities of certain companies (affiliate corporations - see Note E). The following table (in thousands) shows AFC's revenues by significant business segment. Intersegment transactions are not significant.
Nine months ended September 30, 1995 1994 Revenues Property and casualty insurance: Underwriting $1,107,141 $1,013,591 Investment and other income 231,272 245,146 1,338,413 1,258,737 Annuities (*) 308,818 283,244 Other 31,561 35,994 1,678,792 1,577,975 Equity in net earnings (losses) of affiliates 43,998 (8,844) $1,722,790 $1,569,131 (*) Represents primarily investment income and realized gains.
8 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED E. Investment in Affiliates Investment in affiliates represents AFC'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 $1.1 billion and $890 million at September 30, 1995 and December 31, 1994, respectively. AFC's investment (and common stock ownership percentage) in these affiliates was as follows (dollars in thousands):
September 30, 1995 December 31, 1994 American Financial Group $548,169 (25%) $ - American Premier - 525,927 (42%) Chiquita 210,764 (39%) 237,015 (46%) Citicasters 72,828 (37%) 69,695 (37%) $831,761 $832,637
In addition to owning the common stock of AFC, American Financial Group owns all of the common stock of American Premier, a specialty property and casualty insurance company. Chiquita is a leading international marketer, processor and producer of quality food products. Citicasters owns and operates radio and television stations in major markets throughout the country. As discussed in Note A, AFC received shares of American Financial Group in exchange for its American Premier stock on a one-for-one basis in April 1995. Summarized financial information for AFC's affiliates follows (in millions):
Six months ended American Financial Group September 30, 1995 Revenues $2,009 Income before Extraordinary Item 84 Extraordinary Item 3 Net Earnings 87
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.
Nine months ended September 30, 1995 1994 Chiquita 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. 9 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nine months ended September 30, 1995 1994 Citicasters 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. F. Long-Term Debt Long-term debt of American Financial Corporation (Parent Company) consisted of the following (in thousands):
September 30, December 31, 1995 1994 9-3/4% Debentures due 2004 $272,685 $203,759 10% Debentures due 1999 (including Series A) 89,620 89,620 12% Debentures due 1999 (including Series A and B) - 120,463 12-1/4% Debentures due 2003 - 51,556 Other 12,947 24,667 $375,252 $490,065
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 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. The 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) borrowings under AFC's line of credit with American Premier. 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 lines, were as follows (in thousands):
Parent Other Company Subsidiaries Total 1995 $ - $ 278 $ 278 1996 - 1,831 1,831 1997 5,900 43,779 49,679 1998 - 25,868 25,868 1999 93,895 25,953 119,848 2000 - 55,074 55,074
10 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Debentures purchased in excess of scheduled payments may be applied to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures purchased are applied to the earliest scheduled retirements. G. Payable to American Premier Underwriters, Inc. In furtherance of the previously announced plan to use American Premier cash following the merger to retire debt, AFC (i) repaid $187 million of borrowings under its bank credit agreement in April 1995 and (ii) redeemed all of its outstanding 12% and 12-1/4% Debentures in May 1995, using funds borrowed under a new $675 million subordinated line of credit with American Premier. Borrowings under the credit line bear interest at 11-5/8% and convert to a four-year term loan in March 2005. At September 30, 1995, AFC had borrowed $559.6 million under the credit agreement. Accrued interest of $15.2 million at September 30, 1995, was paid in October 1995. H. Mandatory Redeemable Preferred Stock At September 30, 1995 and December 31, 1994, there were 274,242 shares of $10.50 par value Series E Preferred Stock outstanding. These shares are nonvoting, cumulative and are required to be retired, at par, in December 1995. I. Other Preferred Stock Under provisions of both the Nonvoting (21.1 million shares authorized, including the Mandatory Redeemable Preferred Stock) and Voting (17.0 million shares authorized, 14.1 million shares outstanding) Cumulative Preferred Stock, the Board of Directors may divide the authorized stock into series and set specific terms and conditions of each series. At September 30, 1995, the outstanding shares of other preferred stock consisted of the following:
September 30, December 31, 1995 1994 Series F - $20.00 liquidation value per share; annual dividends per share $1.80; 10% may be retired annually at AFC's option in 1995 and 1996. 13,744,754 13,744,754 Series G - $10.50 liquidation value per share; annual dividends per share $1.05; may be retired at AFC's option. 364,158 364,158
J. Common Stock In connection with the April 1995 merger discussed in Note A, AFC issued 762,500 common shares upon exercise of stock options and increased the number of authorized common shares to 53.5 million. At September 30, 1995, American Financial Group owned all 53.0 million outstanding shares of AFC's Common Stock. 11 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED K. Extraordinary Items Extraordinary items consisted of the following (in thousands):
1995 1994 Loss on AFC's prepayment of debt ($1,713) $ - Premium paid on AFC debentures retired in exchange offer - (6,454) Gain (loss) on subsidiary's prepayment of debt (net of minority interest of ($5) and $216) 30 (1,448) Share of loss on affiliate's prepayment of debt (net of minority interest of $24 and $139 and income tax benefit of $65 and $374) (1,365) (9,036) ($3,048) ($16,938)
L. 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 1995 Maturity For Sale Total Purchases $424,915 $928,044 $1,352,959 Maturities and redemptions 118,469 74,982 193,451 Sales 9,040 663,181 672,221 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. M. Pending Legal Proceedings Counsel has advised AFC that there is little likelihood of any substantial liability being incurred from any litigation pending against AFC and subsidiaries. 12 AMERICAN FINANCIAL CORPORATION 10-Q ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL AFC is organized as a holding company with almost all of its operations being conducted by subsidiaries and affiliates. The parent corporation, however, has continuing expenditures for administrative expenses and corporate services and, most importantly, for the payment of principal and interest on borrowings and dividends on AFC Preferred Stock. Therefore, certain analyses are best done on a parent only basis while others are best done on a total enterprise basis. In addition, since most of its businesses are financial in nature, AFC does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful. MERGER As discussed in Note A to the financial statements, on April 3, 1995, AFC merged with a newly formed subsidiary of American Financial Group, Inc., another new company formed to own both AFC and American Premier. LIQUIDITY AND CAPITAL RESOURCES Ratios The ratio of AFC's (parent only) long-term debt to equity (excluding Mandatory Redeemable Preferred Stock) was .66 at September 30, 1995, compared to 1.24 at December 31, 1994. AFC's ratio of earnings to fixed charges on a total enterprise basis was 1.90 for the first nine months of 1995 compared to 1.69 for the entire year of 1994; ratios of earnings to fixed charges and preferred dividends were 1.62 and 1.40 for the same periods. Sources of Funds In April 1995, AFC entered into a subordinated credit agreement with American Premier under which it can borrow up to $675 million. The credit line bears interest at 11-5/8% and converts to a four-year term loan in March 2005 with scheduled principal payments to begin in April 2005. During April and May 1995, AFC borrowed $549 million under the agreement using the proceeds for debt retirements, capital contributions to subsidiaries and other corporate purposes. At September 30, 1995, AFC had borrowed $559.6 million under the credit agreement. 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 made by GAHC and are generally advanced to AFC. The line is guaranteed by AFC and secured by 50% of the stock of Great American Insurance Company ("GAI"). AFC had no outstanding borrowings under the agreement at September 30, 1995, and $160 million outstanding at December 31, 1994. During October 1995, GAHC borrowed $120 million under the line; it is anticipated that $75 million of the borrowing will 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. The funds for these repayments were derived from (i) borrowings under GAHC's credit line in October 1995, (ii) AFC's issuance of 9-3/4% debentures in September and October 1995, and (iii) borrowings under AFC's line of credit with American Premier. 13 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 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 AFC 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 Pretax earnings for the three months ended September 30, 1995 were $48 million, an increase of $32.6 million over the comparable 1994 period. The increase is attributable to an $11 million increase in investment income, the absence of charges for AFC's share ($26 million) of certain nonrecurring losses recorded by an affiliate in 1994 and a 1994 charge of $26 million for Proposition 103, an insurance reform measure passed by California voters. Partially offsetting these items were a $9 million increase in interest on borrowed money, a $4 million increase in benefits to annuity policyholders and a $5 million credit in 1994 for AFC's Book Value Incentive Plan. Pretax earnings were $114 million in the first nine months of 1995, an increase of 38% over the $82.5 million in the comparable 1994 period. The $32 million increase is attributable to an increase of $38 million in investment income, the absence of charges for AFC's share ($54 million) of certain nonrecurring losses recorded by affiliates in 1994 and a 1994 charge of $26 million for Proposition 103. These items were partially offset by (i) an $8 million decrease in underwriting results of the property and casualty insurance segment, (ii) a $30 million decrease in realized gains from sales of securities, affiliates and other investments, (iii) an increase of $13 million in benefits to annuity policyholders, (iv) an increase of $16 million in interest on borrowed money and (v) a $9 million credit in 1994 for AFC's Book Value Incentive Plan. 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. The combined underwriting ratio (based on generally accepted accounting principles) of GAI and its property and casualty insurance subsidiaries was 98.8% and 102.4% for the third quarter and nine months of 1995; comparable ratios for the same periods of 1994 were 99.8% and 101.6%. The deterioration in the nine-month 14 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued underwriting results was due primarily to losses from hailstorms in Texas and Great American's participation in a voluntary pool. These losses were partially offset by favorable reserve development in Great American's niche products in the third quarter of 1995. Great American will significantly reduce its participation in voluntary pools beginning in December 1995. The 1994 ratio does not reflect Great American's third quarter charge for Proposition 103. Earned premiums increased $94 million (9%) and insurance expenses increased $102 million (10%) during the first nine months of 1995. The increase in premiums was due to an increase in sales of specialized niche products and workers' compensation insurance. Investment Income Investment income increased $10.6 million (7%) in the third quarter and $38 million (9%) in the nine months of 1995 compared to 1994 due to an increase in the average amount of investments held. Realized Gains Realized capital gains have been an important part of AFC's return on its 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. Affiliate Corporations Equity in net earnings of affiliate corporations (companies in which AFC owns a significant portion of the voting stock) represents AFC's proportionate share of the affiliates' earnings and losses. AFC's equity in net earnings (losses) of affiliate corporations in the first nine months of 1994 includes its share ($28 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 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. Interest on Borrowed Money Interest expense on borrowed money increased $8.6 million (31%) and $16 million (18%) from the third quarter and first nine months of 1994, respectively, due primarily to an increase in average borrowings. In the second quarter of 1995, AFC borrowed $549 million under its new credit agreement with American Premier using the proceeds to retire $372 million of debt and for other corporate purposes. Other Operating and General Expenses Included in other operating and general expenses in the first nine months of 1995 and 1994 are charges of $10.8 million and $5.9 million, respectively, for minority interest. Also included in other operating and general expenses are (i) a third quarter charge of $26 million in 1994 for Proposition 103 and (ii) a credit of $9.1 million in the first nine months of 1994 for an adjustment to the liability for units outstanding under AFC's Book Value Incentive Plan. 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) Report on Form 8-K: Date of Report Item Reported August 29, 1995 Change in Parent's Independent Auditors 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 November 13, 1995 BY: FRED J. RUNK Fred J. Runk Vice President and Treasurer 16 EX-27 2
5 This schedule contains summary financial information extracted from American Financial Corporation 10-Q for September 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1995 SEP-30-1995 178,966 8,253,962 409,931 0 0 0 0 0 11,396,286 0 749,416 9,625 2,880 168,484 390,955 11,396,286 0 1,722,790 0 0 176,919 0 103,037 114,047 31,149 82,898 0 (3,048) 0 79,850 0 0 Includes an investment in affiliates of $832 million. Not applicable since all common shares are owned by American Financial Group.
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