-----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, VJrxJgfGcK8tugun73TTm4jWnd5eFpbYGbG5DLOEUA3guVd1jlha2q0t9ygSlHDC 4/QkKPKTNzzAJk0n6PuHwg== 0000005016-96-000026.txt : 19961118 0000005016-96-000026.hdr.sgml : 19961118 ACCESSION NUMBER: 0000005016-96-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD 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: 96663435 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, 1996 No. 1-7361 AMERICAN FINANCIAL CORPORATION Incorporated under IRS Employer I.D. the Laws of Ohio No. 31-0624874 One East Fourth Street, Cincinnati, Ohio 45202 (513) 579-2121 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, 1996, 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 17 AMERICAN FINANCIAL CORPORATION 10-Q PART I FINANCIAL INFORMATION AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands) September 30, December 31, 1996 1995 Assets Cash and short-term investments $ 297,818 $ 331,825 Investments: Bonds and redeemable preferred stocks: Held to maturity - at amortized cost (market - $3,258,200 and $3,386,000) 3,256,622 3,257,204 Available for sale - at market (amortized cost - $4,773,787 and $4,211,883) 4,799,687 4,412,483 Other stocks - principally at market (cost - $151,390 and $133,665) 308,590 248,665 Investment in investees 772,032 833,886 Loans receivable 577,765 591,105 Real estate and other investments 197,641 198,120 Total investments 9,912,337 9,541,463 Recoverables from reinsurers and prepaid reinsurance premiums 966,760 984,500 Agents' balances and premiums receivable 369,422 376,330 Deferred acquisition costs 364,472 330,353 Other receivables 196,376 202,099 Assets held in separate accounts 243,339 238,524 Prepaid expenses, deferred charges and other assets 206,998 224,858 Cost in excess of net assets acquired 176,377 183,639 $12,733,899 $12,413,591 Liabilities and Shareholders' Equity Unpaid losses and loss adjustment expenses $ 3,139,783 $ 2,965,700 Unearned premiums 894,207 920,641 Annuity benefits accumulated 5,279,208 5,051,959 Life, accident and health reserves 561,150 538,274 Payable to American Premier Underwriters 725,411 639,455 Other long-term debt: Direct obligations of AFC Parent Company 173,566 311,202 Obligations of AFC subsidiaries: American Annuity Group 159,456 167,734 Other subsidiaries 55,411 56,705 Liabilities related to separate accounts 243,339 238,524 Accounts payable, accrued expenses and other liabilities 597,361 675,052 Minority interest 147,423 148,338 Total liabilities 11,976,315 11,713,584 Shareholders' Equity: Preferred Stock (liquidation value - $278,719) 168,484 168,484 Common Stock without par value 9,625 9,625 Retained earnings 464,875 335,798 Net unrealized gain on marketable securities, net of deferred income taxes 114,600 186,100 Total shareholders' equity 757,584 700,007 $12,733,899 $12,413,591 2 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (In Thousands)
Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 Income: Property and casualty insurance premiums $398,093 $381,850 $1,164,405 $1,107,141 Life, accident and health premiums 24,809 403 80,323 1,598 Investment income 175,424 160,034 517,410 472,322 Realized gains on sales of securities 2,547 17,787 16,786 22,219 Equity in net earnings of investees 8,929 1,422 50,692 43,998 Gains (losses) on sales of investee corporations 169,376 95 169,376 (347) Other income 33,702 27,067 96,811 77,169 812,880 588,658 2,095,803 1,724,100 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 394,854 262,256 921,929 775,550 Commissions and other underwriting expenses 117,593 114,590 365,049 359,085 Annuity benefits 69,514 65,631 206,319 194,152 Life, accident and health benefits 21,742 230 70,212 1,310 Interest charges on borrowed money 32,190 36,928 102,437 103,037 Other operating and general expenses 80,221 60,978 228,164 176,919 716,114 540,613 1,894,110 1,610,053 Earnings before income taxes and extraordinary items 96,766 48,045 201,693 114,047 Provision for income taxes 11,710 12,275 35,358 31,149 Earnings before extraordinary items 85,056 35,770 166,335 82,898 Extraordinary items - loss on prepayment of debt (7,756) - (24,505) (3,048) Net Earnings $ 77,300 $ 35,770 $ 141,830 $ 79,850
3 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) Nine months ended September 30, 1996 1995 Operating Activities: Net earnings $ 141,830 $ 79,850 Adjustments: Extraordinary items 24,505 3,048 Depreciation and amortization 38,815 23,362 Annuity benefits 206,319 194,152 Equity in net earnings of investees (50,692) (43,998) Changes in reserves on assets 7,714 2,932 Realized gains on investing activities (186,768) (22,921) Decrease (increase) in reinsurance and other receivables 45,728 (41,283) Increase in other assets (30,686) (80,826) Increase in insurance claims and reserves 170,525 116,692 Decrease in other liabilities (69,396) (18,625) Increase in minority interest 18,685 16,961 Dividends from investees 17,114 17,124 Other, net 236 (4,765) 333,929 241,703 Investing Activities: Purchases of and additional investments in: Fixed maturity investments (1,315,341) (1,352,959) Equity securities (9,117) (3,749) Investees and subsidiaries (2,236) (13,327) Real estate, property and equipment (19,854) (23,600) Maturities and redemptions of fixed maturity investments 369,880 193,451 Sales of: Fixed maturity investments 422,011 672,221 Equity securities 31,666 15,258 Investee and subsidiaries 221,792 43,697 Real estate, property and equipment 4,068 5,040 Increase in other investments (8,741) (11,030) (305,872) (474,998) Financing Activities: Annuity receipts 410,203 338,353 Annuity payments (372,005) (302,486) Additional long-term borrowings 204,275 145,128 Reductions of long-term debt (369,220) (494,753) Borrowings from American Premier 238,600 639,000 Repayments of borrowings from American Premier (161,164) (80,000) Repurchases of preferred stock - (147) Exercise of stock options - 8,721 Cash dividends paid (12,753) (12,890) (62,064) 240,926 Net Increase (Decrease) in Cash and Short-term Investments (34,007) 7,631 Cash and short-term investments at beginning of period 331,825 171,335 Cash and short-term investments at end of period $ 297,818 $ 178,966 4 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Mergers On April 3, 1995, American Financial Corporation ("AFC") merged with a subsidiary of American Financial Group, Inc. ("AFG"), a new company formed to own 100% of the common stock of both AFC and American Premier Underwriters, Inc. ("American Premier"). In the transaction, Carl H. Lindner and members of his family, who owned 100% of the Common Stock of AFC, exchanged their AFC Common Stock for approximately 55% of AFG voting common stock. Former shareholders of American Premier, including AFC and its subsidiaries, received shares of AFG stock on a one-for-one basis. AFC continues to be a separate SEC reporting company with publicly traded debentures and preferred stock. Holders of AFC Series F and G Preferred Stock were granted voting rights equal to approximately 21% of the total voting power of AFC shareholders immediately prior to the Mergers. B. Accounting Policies Basis of Presentation The accompanying consolidated financial statements for 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. 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. AFC's ownership of subsidiaries and significant affiliates with publicly traded shares was as follows: September 30, December 31, 1996 1995 1994 American Annuity Group, Inc. ("AAG") 81% 80% 80% American Financial Enterprises, Inc. ("AFEI") 83% 83% 83% American Financial Group, Inc. 23% 24% - American Premier Underwriters, Inc. (a) (a) 42% Chiquita Brands International, Inc. 37% 38% 46% Citicasters Inc. (b) 38% 37% (a) Exchanged for shares of AFG in April 1995. (b) Sold in September 1996. Investments Debt securities are classified as "held to maturity" and reported at amortized cost if AFC has the positive intent and ability to hold them to maturity. Debt and equity securities are classified as "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity if the securities are not classified as held to maturity or bought and held principally for selling in the near term. Only in 5 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 Investees 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 businesses 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. 6 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 generally 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 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; depositors can elect to purchase an annuity from AAG with funds in their account. 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. Income Taxes AFC files consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries, except for certain life insurance 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. 7 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Benefit Plans AFC provides retirement benefits through contributory and noncontributory defined contribution plans. Contributions to benefit plans are charged against earnings in the year for which they are declared. AFC's Employee Stock Ownership Retirement Plan ("ESORP") is a noncontributory, qualified plan which invests in securities of AFG and affiliates for the benefit of their 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. 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. Segments of Operations AFC operates its property and casualty insurance business in two major segments: specialty lines and commercial and personal lines. AFC's annuity business sells tax- deferred annuities principally to employees of primary and secondary educational institutions and hospitals. These insurance businesses operate throughout the United States. AFC also owns significant portions of the voting equity securities of certain companies (investee corporations - see Note D). The following table (in thousands) shows AFC's revenues by significant business segment. Intersegment transactions are not significant. Nine months ended September 30, Revenues 1996 1995 Property and casualty insurance: Premiums earned: Specialty lines $ 644,835 $ 585,019 Commercial and personal lines 519,112 520,984 Other lines 458 1,138 1,164,405 1,107,141 Investment and other income 305,683 231,272 1,470,088 1,338,413 Annuities and life (*) 437,763 310,128 Other 137,260 31,561 2,045,111 1,680,102 Equity in net earnings of investees 50,692 43,998 $2,095,803 $1,724,100 (*) Represents primarily investment income. 8 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED D. Investment in Investees The companies in the following table are subject to the rules and regulations of the SEC. The market value of the investments was approximately $842 million and $1.0 billion at September 30, 1996 and December 31, 1995, respectively. AFC's investment (and common stock ownership percentage) in these investees was as follows (dollars in thousands): September 30, 1996 December 31, 1995 American Financial Group $574,262 (23%) $568,781 (24%) Chiquita 197,770 (37%) 191,026 (38%) Citicasters (*) 74,079 (38%) $772,032 $833,886 (*) Sold in September 1996. 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, producer and distributor of bananas and other quality fresh and processed food products. Citicasters owns and operates radio and television stations in major markets throughout the country. In September 1996, AFC sold its investment in Citicasters to Jacor Communications for approximately $220 million in cash plus warrants to purchase Jacor common stock. AFC realized a pretax gain of approximately $169 million, before minority interest of $6.5 million, on the sale. Summarized financial information for AFC's investees follows (in millions): Nine months Six months ended ended American Financial Group September 30, 1996 September 30, 1995 Revenues $3,227 $2,009 Earnings before Extraordinary Items 261 84 Extraordinary Items - Gain (Loss) on Debt Prepayments (26) 3 Net Earnings 235 87 Nine months ended September 30, Chiquita 1996 1995 Net Sales $1,880 $1,971 Operating Income 149 172 Income from Continuing Operations 60 57 Discontinued Operations - 4 Extraordinary Item - Loss on Debt Prepayments (23) (5) Net Income 37 56 9 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED E. Payable to American Premier Underwriters At September 30, 1996, AFC (parent) had borrowed $675 million under its revolving credit agreement with American Premier. Accrued interest of $19.8 million at that date was paid in October 1996. Included in the payable to American Premier at September 30, 1996, is an aggregate of $30.6 million representing borrowings of an AFC subsidiary under a revolving credit facility with American Premier. F. Other Long-Term Debt During the first nine months of 1996, AFC (parent) repurchased $137.4 million of its debentures for $147.0 million. AAG repurchased $78.0 million of its Notes for $84.2 million. At September 30, 1996, sinking fund and other scheduled principal payments on debt for the balance of 1996 and the subsequent five years were as follows (in thousands): Parent Company Other Total 1996 $ - $ 309 $ 309 1997 5,604 16,250 21,854 1998 - 1,944 1,944 1999 - 76,736 76,736 2000 - 7,163 7,163 2001 - 42,321 42,321 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. Preferred Stock Under provisions of both the Nonvoting (21.1 million shares authorized) 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. Outstanding shares of AFC voting preferred stock consisted of the following (see Note L - "Subsequent Events"): Series F, $1 par value - authorized 15,000,000 shares; annual dividends per share $1.80; nonredeemable after 1996; 13,744,754 shares (stated value - $167.9 million) outstanding at September 30, 1996 and December 31, 1995. Series G, $1 par value - authorized 2,000,000 shares; annual dividends per share $1.05; may be retired at AFC's option at $10.50 per share; 364,158 shares (stated value - $600,000) outstanding at September 30, 1996 and December 31, 1995. H. Common Stock Since the Mergers, AFG has owned all outstanding shares of AFC's Common Stock. 10 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED I. Extraordinary Items Extraordinary items represent AFC's loss and its proportionate share of gains and losses related to debt retirements by the following companies. Amounts shown are net of minority interest and income tax benefits (in thousands): Nine months ended September 30, 1996 1995 AFC (parent) ($ 9,605) ($1,713) AAG (7,159) 30 Other subsidiary 57 - Chiquita (investee) (7,798) (1,365) ($24,505) ($3,048) J. 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 1996 Maturity For Sale Total Purchases $156,834 $1,158,507 $1,315,341 Maturities and redemptions 173,562 196,318 369,880 Sales 9,310 412,701 422,011 1995 Purchases $424,915 $928,044 $1,352,959 Maturities and redemptions 118,469 74,982 193,451 Sales 9,040 663,181 672,221 Securities classified as "held to maturity" having an amortized cost of $9.5 million and $9.0 million were sold in 1996 and 1995, respectively, due to significant deterioration in the issuers' creditworthiness. K. 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. L. Subsequent Events In October 1996, AFC announced it will redeem 1.6 million shares of its Series F preferred stock at $20 per share in December 1996. In November 1996, an AAG trust subsidiary issued $75 million of 9-1/4% Trust Originated Preferred Securities for cash. 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 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. LIQUIDITY AND CAPITAL RESOURCES Ratios AFC's ratio of debt to total capital at the holding company level (excluding amounts due to affiliates) was .19 at September 30, 1996 compared to .31 at December 31, 1995. Including the notes payable to American Premier, the ratio changes to .54 at September 30, 1996 compared to .57 at December 31, 1995. AFC's ratio of earnings to fixed charges on a total enterprise basis was 2.58 for the first nine months of 1996 compared to 2.23 for the entire year of 1995; ratios of earnings to fixed charges and preferred dividends were 2.19 and 1.90 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, AFC would be required to generate cash through borrowings, sales of securities or other assets, or similar transactions. In recent months, three nationally recognized rating agencies issued or upgraded their ratings on AFC and AAG senior public debentures, all of which are now rated investment grade. AAG's subordinated debentures are rated investment grade by two of the agencies. Generally, the upgrades reflect the expectation that AFC's consolidated debt to total capital will remain conservative and that coverage ratios will benefit from higher subsidiary earnings and a lower level of fixed charges. Bank credit lines at several subsidiary holding companies provide ample liquidity which 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 $415 million is available under these bank facilities, $89 million of which was borrowed at September 30, 1996. In the past, funds have been borrowed under certain of these bank facilities and used for working capital, capital infusions into subsidiaries, and to retire other issues of short-term or high-rate debt. Also, AFC believes it may be prudent and advisable to carry borrowings of up to $200 million of bank debt in the normal course in order to retire public or privately held fixed rate debt over the next year or two. 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. At September 30, 1996, AFC had borrowed $675 million under the agreement which it used for debt retirements, capital contributions to subsidiaries and other corporate purposes. 12 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued In addition, two AFC subsidiaries have separate revolving credit agreements with American Premier allowing for maximum aggregate borrowings of $170 million. Borrowings under these credit lines bear interest at rates approximating prime or LIBOR. At September 30, 1996, approximately $30 million was borrowed under these lines. 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 September 30, 1996. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high quality investment portfolio should generate a stable and predictable investment return. AFC's equity securities 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. RESULTS OF OPERATIONS General Pretax earnings for the three months ended September 30, 1996 were $97 million, an increase of $49 million over the comparable 1995 period. Pretax earnings for the 1996 quarter include (i) a $169 million gain on the sale of AFC's investment in Citicasters, (ii) a charge of $87 million resulting from a decision to strengthen insurance reserves relating to asbestos and other environmental matters ("A&E") and (iii) losses of approximately $30 million related to damage from Hurricane Fran. Pretax earnings were $202 million in the first nine months of 1996, an increase of $88 million over the comparable 1995 period. The gain on the sale of Citicasters and an increase in investment income were partially offset by the charge for A&E reserves and losses from Hurricane Fran. Property and Casualty Insurance Great American (GAI and its property and casualty insurance subsidiaries) manages and operates its property and casualty business as two major sectors. The specialty lines is a diversified group that offers a wide variety of specialty insurance products. Some of the more significant lines are executive liability, inland and ocean marine, U.S.-based operations of Japanese companies, agricultural-related coverages, excess and surplus lines, nonstandard auto 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 the 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 Great American's property and casualty insurance subsidiaries were as follows (dollars in millions): Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 Net Written Premiums (GAAP) Specialty Operations $245.1 $228.6 $ 671.6 $ 630.3 Commercial and Personal Operations 160.7 186.8 488.9 525.5 Other lines - .1 .3 .8 $405.8 $415.5 $1,160.8 $1,156.6 Combined Ratios (GAAP) Specialty Operations 75.7% 96.6% 88.4% 100.2% Commercial and Personal Operations 126.7 99.6 111.2 100.5 Aggregate (including A&E and other lines) 128.7 98.8 110.5 102.4 Operating results for the third quarter and first nine months of 1996 were adversely impacted by two unusual items: (i) approximately $30 million in losses due to Hurricane Fran and (ii) the strengthening of A&E reserves (exposures for which AFC has been held liable under general liability policies written years ago). AFC increased A&E reserves of its discontinued insurances lines by $120 million by recording a third quarter, non-cash, pretax charge of $87 million and reallocating $33 million in reserves from its Specialty Operations. A&E reserves at September 30, 1996 were approximately $340 million, an amount expected to be approximately 11 times the preceding three years' average claim payments. Specialty Operations Net written premiums for the specialty operations increased 7% during the third quarter and first nine months of 1996 from the comparable 1995 periods. Excluding the impact of withdrawal from an unprofitable voluntary pool, the increase is 13% for the quarter and 15% for the first nine months. The increases are due in part to increases in specialized coverages for U.S.-based operations of Japanese companies, agricultural-related businesses, nonstandard automobile, animal mortality and collateral protection exposures. The improvement in the combined ratio for the third quarter and first nine months of 1996 is due primarily to (i) improved results in certain niche businesses, (ii) the reallocation of $33 million in reserves to A&E reserves (a combined ratio impact of 13.9 points and 5.1 points for the third quarter and first nine months of 1996), and (iii) losses in 1995 from participation in the voluntary pool. Commercial and Personal Operations The 7% decrease in net written premiums for the nine months of 1996 is due primarily to significant decreases in personal lines business. The 14% decrease in net written premiums for the third quarter is due to price competition in the commercial casualty lines and reduced writings of homeowners' insurance in certain states. Increases in the combined ratio reflect the impact of losses due to Hurricane Fran as well as other weather-related losses. Life, Accident and Health Premiums and Benefits The increase in life, accident and health premiums and benefits reflects AAG's acquisition of Laurentian Capital Corporation in November 1995. Investment Income Investment income increased $15.4 million (10%) in the third quarter and $45.1 million (10%) in the first nine months of 1996 compared to 1995 due to AAG's acquisition of Laurentian and an increase in the average amount of investments held. 14 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 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 investees (companies in which AFC owns a significant portion of the voting stock) represents AFC's proportionate share of the investees' earnings and losses. Gains (Losses) on Sales of Investee Corporations The gain on sale of investee for the third quarter and first nine months of 1996 represents a pretax gain, before minority interest, on the sale of Citicasters common stock. Annuity Benefits Annuity benefits expense increased 6% in the first nine months of 1996 due primarily 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. Interest on Borrowed Money Interest on borrowed money decreased $4.7 million (13%) in the third quarter compared to 1995 due primarily to retirements of debt. Other Operating and General Expenses Operating and general expenses for the third quarter and first nine months of 1996 include $8.9 million and $26.2 million, respectively, attributable to the operations of Laurentian. Also included in the first nine months of 1996 and 1995 are charges of $19.3 million and $10.8 million, respectively, for minority interest. 15 AMERICAN FINANCIAL CORPORATION 10-Q PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibit: Number Description 27 Financial Data Schedule - Included in Report filed electronically with the Securities and Exchange Commission. (b) Report on Form 8-K: None 16 AMERICAN FINANCIAL CORPORATION 10-Q PART II OTHER INFORMATION - CONTINUED 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 11, 1996 BY: FRED J. RUNK Fred J. Runk Senior Vice President and Treasurer 17 EX-27 2
5 This schedule contains summary financial information extracted from American Financial Corporation 10-Q for the nine months ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1996 $297,818 9,136,931 369,422 0 0 0 0 0 12,733,899 0 388,433 0 168,484 9,625 579,475 12,733,899 0 2,095,803 0 0 228,164 0 102,437 201,693 35,358 166,335 0 (24,505) 0 $141,830 0 0 Includes an investment in investees of $772 million. Not applicable since all common shares are owned by American Financial Group.
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