-----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, JgqP9lPp0PZ3JSQCB+AHW6cJIbfsUqvHYcuMWD1y/SeSen6sh1zRWsQDMY7syk8T 8BLx0dMWJJYtDt3FClTA9Q== 0000005016-00-000016.txt : 20000515 0000005016-00-000016.hdr.sgml : 20000515 ACCESSION NUMBER: 0000005016-00-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: SEC FILE NUMBER: 001-07361 FILM NUMBER: 630199 BUSINESS ADDRESS: STREET 1: ONE E 4TH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5135792121 10-Q 1 AFC MARCH 31, 2000 FORM 10-Q 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, 2000 No. 1-7361 AMERICAN FINANCIAL CORPORATION Incorporated under IRS Employer I.D. the Laws of Ohio No. 31-0624874 One East Fourth Street, Cincinnati, Ohio 45202 (513) 579-2121 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 1, 2000, there were 10,593,000 shares of the Registrant's Common Stock outstanding, all of which were owned by American Financial Group, Inc. Page 1 of 18 AMERICAN FINANCIAL CORPORATION 10-Q PART I FINANCIAL INFORMATION AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars In Thousands)
March 31, December 31, 2000 1999 ----------- ----------- Assets: Cash and short-term investments $ 285,379 $ 389,018 Investments: Fixed maturities - at market (amortized cost - $10,306,884 and $10,101,005) 10,039,884 9,862,205 Other stocks - at market (cost - $233,168 and $229,201) 399,568 409,701 Investment in investee corporation 171,019 159,984 Policy loans 215,247 217,171 Real estate and other investments 270,315 265,288 ----------- ----------- Total investments 11,096,033 10,914,349 Recoverables from reinsurers and prepaid reinsurance premiums 1,898,066 2,105,818 Agents' balances and premiums receivable 708,443 656,924 Deferred acquisition costs 705,695 660,672 Other receivables 255,593 222,438 Variable annuity assets (separate accounts) 466,359 354,371 Prepaid expenses, deferred charges and other assets 376,291 384,567 Cost in excess of net assets acquired 332,239 335,652 ----------- ----------- $16,124,098 $16,023,809 =========== =========== Liabilities and Capital: Unpaid losses and loss adjustment expenses $ 4,656,193 $ 4,795,449 Unearned premiums 1,410,459 1,325,766 Annuity benefits accumulated 5,494,318 5,519,528 Life, accident and health reserves 525,750 520,644 Payable to American Financial Group, Inc. 356,809 370,965 Long-term debt: Holding companies 155,009 112,557 Subsidiaries 240,850 239,733 Variable annuity liabilities (separate accounts) 466,359 354,371 Accounts payable, accrued expenses and other liabilities 979,261 970,495 ----------- ----------- Total liabilities 14,285,008 14,209,508 Minority interest 486,119 490,194 Shareholders' Equity: Preferred Stock (liquidation value $72,154) 72,154 72,154 Common Stock, no par value - 20,000,000 shares authorized - 10,593,000 shares outstanding 9,625 9,625 Capital surplus 963,896 960,782 Retained earnings 344,596 296,246 Unrealized loss on marketable securities, net (37,300) (14,700) ----------- ----------- Total shareholders' equity 1,352,971 1,324,107 ----------- ----------- $16,124,098 $16,023,809 =========== ===========
2 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (In Thousands)
Three months ended March 31, --------------------- 2000 1999 ---- ---- Income: Property and casualty insurance premiums $572,137 $537,466 Life, accident and health premiums 49,919 25,588 Investment income 209,605 205,460 Realized gains (losses) on sales of securities (1,433) 4,449 Other income 50,307 27,805 -------- -------- 880,535 800,768 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 417,651 365,829 Commissions and other underwriting expenses 178,432 168,221 Annuity benefits 66,161 64,941 Life, accident and health benefits 36,724 18,879 Interest charges on borrowed money 15,554 16,847 Other operating and general expenses 92,376 76,227 -------- -------- 806,898 710,944 -------- -------- Operating earnings before income taxes 73,637 89,824 Provision for income taxes 24,255 30,214 -------- -------- Net operating earnings 49,382 59,610 Minority interest expense, net of tax (8,207) (11,962) Equity in net earnings of investee, net of tax 7,175 10,606 -------- -------- Earnings before accounting change 48,350 58,254 Cumulative effect of accounting change - (3,854) -------- -------- Net Earnings $ 48,350 $ 54,400 ======== ========
3 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in Thousands)
Common Stock Unrealized Preferred and Capital Retained Gain (Loss) Stock Surplus Earnings on Securities Total ---------- ------------ -------- ------------- ---------- Balance at January 1, 2000 $72,154 $970,407 $296,246 ($14,700) $1,324,107 Net earnings - - 48,350 - 48,350 Change in unrealized - - - (22,600) (22,600) ---------- Comprehensive income (loss) 25,750 Capital contribution from parent - 3,067 - - 3,067 Other - 47 - - 47 ------- -------- -------- ------- ---------- Balance at March 31, 2000 $72,154 $973,521 $344,596 ($37,300) $1,352,971 ======= ======== ======== ======= ========== Balance at January 1, 1999 72,154 $952,984 $157,218 $348,300 $1,530,656 Net earnings - - 54,400 - 54,400 Change in unrealized - - - (71,400) (71,400) ---------- Comprehensive income (loss) (17,000) Capital contribution from parent - 3,067 - - 3,067 Other - 1,716 - - 1,716 ------- -------- -------- -------- ---------- Balance at March 31, 1999 $72,154 $957,767 $211,618 $276,900 $1,518,439 ======= ======== ======== ======== ==========
4 AMERICAN FINANCIAL CORPORATION 10-Q AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
Three months ended March 31, --------------------- 2000 1999 ---- ---- Operating Activities: Net earnings $ 48,350 $ 54,400 Adjustments: Cumulative effect of accounting change - 3,854 Equity in net earnings of investee (7,175) (10,606) Depreciation and amortization 30,498 21,947 Annuity benefits 66,161 64,941 Realized gains on investing activities (7,611) (7,247) Deferred annuity and life policy acquisition costs (33,668) (28,236) Decrease in reinsurance and other receivables 124,640 61,589 Decrease (increase) in other assets 13,710 (10,838) Decrease in insurance claims and reserves (50,957) (15,614) Increase in other liabilities 2,454 20,224 Increase (decrease) in minority interest (285) 4,634 Dividends from investee - 1,200 Other, net (2,393) (1,111) -------- -------- 183,724 159,137 -------- -------- Investing Activities: Purchases of and additional investments in: Fixed maturity investments (601,115) (535,513) Equity securities (14,786) (19,183) Subsidiaries - (26,636) Real estate, property and equipment (18,935) (18,541) Maturities and redemptions of fixed maturity investments 154,704 340,961 Sales of: Fixed maturity investments 227,797 180,604 Equity securities 19,265 15,763 Real estate, property and equipment 1,504 2,990 Cash and short-term investments of acquired subsidiaries, net - 11,740 Decrease in other investments 5,486 21,563 -------- -------- (226,080) (26,252) -------- -------- Financing Activities: Fixed annuity receipts 126,416 107,487 Annuity surrenders, benefits and withdrawals (192,820) (189,980) Net transfers from fixed to variable annuity assets (21,453) (3,063) Additional long-term borrowings 44,091 69,150 Reductions of long-term debt (610) (549) Borrowings from AFG - 3,000 Repayments of borrowings from AFG (20,313) (64,800) Capital contribution 4,667 4,667 Repurchases of trust preferred securities (1,261) (5,509) -------- -------- (61,283) (79,597) -------- -------- Net Increase (Decrease) in Cash and Short-term Investments (103,639) 53,288 Cash and short-term investments at beginning of period 389,018 289,944 -------- -------- Cash and short-term investments at end of period $285,379 $343,232 ======== ========
5 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements for American Financial Corporation ("AFC") and subsidiaries are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary to be in conformity with generally accepted accounting principles. Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. 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 CORPORATION Investments in securities of 20%- to 50%-owned companies are generally carried at cost, adjusted for AFC's proportionate share of their undistributed earnings or losses. 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 periods of 20 to 40 years. 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. 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 reinsured policies. AFC's insurance subsidiaries report as 6 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. AFC's insurance subsidiaries also assume reinsurance from other companies. Income on reinsurance assumed is recognized based on reports received from ceding reinsurers. DEFERRED ACQUISITION COSTS Policy acquisition costs (principally commissions, premium taxes and other underwriting expenses) related to the production of new business are deferred ("DPAC"). For the property and casualty companies, 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. For the annuity companies, DPAC is amortized, with interest, in relation to the present value of expected gross profits on the policies. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon (a) the accumulation of case estimates for losses reported prior to the close of the accounting period on the direct business written; (b) estimates received from ceding reinsurers and insurance pools and associations; (c) estimates of unreported losses based on past 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 American Annuity Group, Inc. ("AAG") earns a fee. The investment funds are selected and may be changed only by the policyholder. 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. 7 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 (i) the interests of noncontrolling shareholders in AFC subsidiaries, including preferred securities issued by trust subsidiaries of AAG, and (ii) the American Financial Group, Inc. ("AFG") direct ownership interest in American Premier Underwriters, Inc. ("American Premier" or "APU") and American Financial Enterprises, Inc. For income statement purposes, minority interest expense represents those shareholders' interest in the earnings of AFC subsidiaries as well as 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. Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a benefit will be realized. BENEFIT PLANS AFC provides retirement benefits to qualified employees of participating companies through contributory and noncontributory defined contribution plans contained in AFC's Retirement and Savings Plan. Under the retirement portion of the plan, company contributions are invested primarily in securities of AFC and affiliates. Under the savings portion of the plan, AFC matches a specific portion of employee contributions. Contributions to benefit plans are charged against earnings in the year for which they are declared. 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 earn such benefits. START-UP COSTS Prior to 1999, AAG, an 83%-owned subsidiary, deferred certain costs associated with introducing new products and distribution channels and amortized them on a straight-line basis over 5 years. In 1999, AAG implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires that (i) costs of start-up activities be expensed as incurred and (ii) unamortized balances of previously deferred costs be expensed and reported as the cumulative effect of a change in accounting principle. Accordingly, AFC expensed previously capitalized start-up costs of $3.8 million (net of minority interest and taxes) or $.06 per diluted share, effective January 1, 1999. 8 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DERIVATIVES The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," during the second quarter of 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments that are embedded in other contracts, and for hedging activities and must be implemented no later than January 1, 2001. SFAS No. 133 requires the recognition of all derivatives (both assets and liabilities) in the balance sheet at fair value. Changes in fair value of derivative instruments are included in current income or as a component of comprehensive income (outside current income) depending on the type of derivative. Implementation of SFAS No. 133 is not expected to have a material effect on AFC's financial position or results of operations. 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. ACQUISITIONS AND SALES OF SUBSIDIARIES WORLDWIDE INSURANCE COMPANY In April 1999, AFC acquired Worldwide Insurance Company for $157 million in cash. Worldwide is a provider of direct response private passenger automobile insurance. UNITED TEACHER ASSOCIATES In October 1999, AAG acquired United Teacher Associates Insurance Company of Austin, Texas ("UTA") for $81 million in cash, pending post-closing adjustments under which AAG may receive as much as several million dollars. UTA provides supplemental health products and retirement annuities, and purchases blocks of insurance policies from other insurers. GREAT AMERICAN LIFE INSURANCE COMPANY OF NEW YORK AND CONSOLIDATED FINANCIAL In February 1999, AAG acquired Great American Life Insurance Company of New York, formerly Old Republic Life Insurance Company of New York, for $27 million in cash. In July 1999, AAG acquired Consolidated Financial Corporation, an insurance agency, for $21 million in cash. COMMERCIAL LINES DIVISION In connection with the 1998 sale of its Commercial lines division to Ohio Casualty Corporation, AFC deferred a gain of $103 million related to the insurance business ceded which is being recognized over the estimated remaining settlement period (weighted average of 4.25 years) of the claims ceded. AFC may receive up to an additional $40 million in mid-2000 based upon the retention and growth through May 31, 2000 of the insurance businesses sold. 9 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED C. SEGMENTS OF OPERATIONS AFC'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, U.S.-based operations of Japanese companies, fidelity and surety bonds, collateral protection, and umbrella and excess coverages. AFC's annuity and life business markets primarily retirement products as well as life and supplemental health insurance. In addition, AFC 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 AFC's revenues and operating profit (loss) by significant business segment. Operating profit (loss) represents total revenues less operating expenses.
Three months ended March 31, ----------------------- 2000 1999 ---- ---- Revenues (a) Property and casualty insurance: Premiums earned: Personal $297,313 $285,817 Specialty 274,823 250,588 Other lines - primarily discontinued 1 1,061 -------- -------- 572,137 537,466 Investment and other income 121,167 102,268 -------- -------- 693,304 639,734 Annuities and life (b) 181,488 154,016 Other 5,743 7,018 -------- -------- $880,535 $800,768 ======== ======== Operating Profit (Loss) Property and casualty insurance: Underwriting: Personal ($10,933) $ 4,480 Specialty (10,498) 349 Other lines - primarily discontinued (2,515) (1,413) -------- -------- (23,946) 3,416 Investment and other income 89,365 68,689 -------- -------- 65,419 72,105 Annuities and life 27,988 35,409 Other (c) (19,770) (17,690) -------- -------- $ 73,637 $ 89,824 ======== ========
(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 CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED D. INVESTMENT IN INVESTEE CORPORATION Investment in investee corporation reflects AFC's ownership of 24 million shares (36%) of Chiquita common stock. The market value of this investment was $114 million at March 31, 2000 and December 31, 1999. 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, ---------------------------- 2000 1999 ---- ---- Net Sales $658 $693 Operating Income 68 77 Net Income 35 49 E. PAYABLE TO AMERICAN FINANCIAL GROUP AFC has a reciprocal Master Credit Agreement with various AFG holding companies under which these companies make funds available to each other for general corporate purposes. F. LONG-TERM DEBT The carrying value of long-term debt consisted of the following (in thousands):
March 31, December 31, 2000 1999 -------- ----------- Holding Companies: AFC notes payable under bank line $110,000 $ 68,000 APU 10-5/8% Subordinated Notes due April 2000 23,684 23,786 APU 10-7/8% Subordinated Notes due May 2011 11,648 11,661 Other 9,677 9,110 -------- -------- $155,009 $112,557 ======== ======== Subsidiaries: AAG 6-7/8% Senior Notes due June 2008 $100,000 $100,000 AAG notes payable under bank line 97,000 97,000 Notes payable secured by real estate 31,582 31,704 Other 12,268 11,029 -------- -------- $240,850 $239,733 ======== ========
At March 31, 2000, sinking fund and other scheduled principal payments on debt for the balance of 2000 and the subsequent five years were as follows (in millions): Holding Companies Subsidiaries Total --------- ------------ -------- 2000 $ 23.7 $ 2.8 $ 26.5 2001 - 1.4 1.4 2002 116.7 38.3 155.0 2003 - 61.3 61.3 2004 - 14.2 14.2 2005 - 9.6 9.6 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 AAG each have an unsecured credit agreement with a group of banks under which they can borrow up to $300 million and $200 million, respectively. Borrowings bear interest at floating rates based on prime or Eurodollar rates. Loans mature December 2002 under the AFC credit agreement and from 2000 to 2003 under the AAG credit agreement. 11 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED G. MINORITY INTEREST Minority interest in AFC's balance sheet is comprised of the following (in thousands): March 31, December 31, 2000 1999 -------- ----------- Interest of AFG (parent) and noncontrolling shareholders in subsidiaries' common stock $268,009 $270,594 Preferred securities issued by subsidiary trusts 218,110 219,600 -------- -------- $486,119 $490,194 ======== ======== TRUST ISSUED PREFERRED SECURITIES Wholly-owned subsidiary trusts of AAG have issued $225 million of preferred securities and, in turn, purchased a like amount of AAG 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. AAG effectively provides unconditional guarantees of its trusts' obligations. The preferred securities consisted of the following (in thousands):
Date of March 31, December 31, Optional Issuance Issue (Maturity Date) 2000 1999 Redemption Dates ------------- ------------------------ -------- ----------- ---------------------- November 1996 AAG 9-1/4% TOPrS (2026) $73,110 $74,600 On or after 11/7/2001 March 1997 AAG 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007 May 1997 AAG 7-1/4% ROPES (2041) 75,000 75,000 Prior to 9/28/2000 and after 9/28/2001
In the first quarter of 2000, AAG repurchased $1.5 million of its trust preferred securities for $1.3 million in cash. MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in thousands): Three months ended March 31, ------------------- 2000 1999 ---- ---- Interest of AFG (parent) and noncontrolling shareholders in earnings of subsidiaries $5,192 $ 8,886 Accrued distributions by subsidiaries on trust issued preferred securities, net of tax 3,015 3,076 ------ ------- $8,207 $11,962 ====== ======= 12 AMERICAN FINANCIAL CORPORATION 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED H. SHAREHOLDERS' EQUITY At March 31, 2000 and December 31, 1999, AFG beneficially owned all of the outstanding shares of AFC's Common Stock. PREFERRED STOCK Under provisions of both the Nonvoting (4.0 million shares authorized) and Voting (4.0 million shares authorized) Cumulative Preferred Stock, the Board of Directors may divide the authorized stock into series and set specific terms and conditions of each series. At March 31, 2000 and December 31, 1999, the outstanding voting shares of AFC's Preferred Stock consisted 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 $72.2 million). UNREALIZED LOSS ON MARKETABLE SECURITIES The change in unrealized gain (loss) on marketable securities for the three months ended March 31 included the following (in millions):
Minority Pretax Taxes Interest Net ------ ----- -------- ------ 2000 ---------------------------------------- Unrealized holding gains (losses) on securities arising during the period ($ 40.3) $14.5 $2.4 ($23.4) Reclassification adjustment for realized losses included in net income 1.4 (.5) (.1) .8 ------ ----- ---- ----- Change in unrealized gain (loss) on marketable securities, net ($ 38.9) $14.0 $2.3 ($22.6) ====== ===== ==== ===== 1999 ---------------------------------------- Unrealized holding gains (losses) on securities arising during the period ($120.5) $41.4 $ 9.8 ($69.3) Reclassification adjustment for realized gains included in net income (4.4) 1.6 .7 (2.1) ------ ----- ----- ----- Change in unrealized gain (loss) on marketable securities, net ($124.9) $43.0 $10.5 ($71.4) ====== ===== ===== =====
I. COMMITMENTS AND CONTINGENCIES There have been no significant changes to the matters discussed and referred to in Note L "Commitments and Contingencies" of AFC's Annual Report on Form 10-K for 1999. 13 AMERICAN FINANCIAL CORPORATION 10-Q ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL 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, AFC 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 the third quarter of 1999, AFC initiated an enterprise-wide study of its information technology ("IT") resources, needs and opportunities. AFC expects that the initiative will entail extensive effort and costs and may lead to substantial changes in the area, which should result in significant cost savings, efficiencies and effectiveness in the future. While the costs (most of which will be expensed) will precede any savings to be realized, management expects benefits to greatly exceed the costs incurred, all of which will be funded through available working capital. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 encourages corporations to provide investors with information about the company's anticipated performance and provides protection from liability if future results are not the same as management's expectations. This document contains certain forward- looking statements that are based on assumptions which management believes are reasonable, but by their nature, inherently uncertain. Future results could differ materially from those projected. Factors that could cause such differences include, but are not limited to: changes in economic conditions especially with regard to availability of and returns on capital, regulatory actions, changes in legal environment, levels of catastrophe and other major losses, availability of reinsurance, and competitive pressures. AFC undertakes no obligation to update any forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES RATIOS AFC's debt to total capital ratio at the parent holding company level (excluding amounts due AFG) was approximately 10% at March 31, 2000 and 8% at December 31, 1999. Including amounts due AFG, the ratio was 27% at March 31, 2000 and December 31, 1999. AFC's ratio of earnings to fixed charges, excluding and including preferred dividends, (on a total enterprise basis) was 3.95 and 3.61 for the first three months of 2000 and 4.01 and 3.67 for the entire year of 1999. SOURCES OF FUNDS Management believes the parent holding companies have sufficient resources to meet their liquidity requirements through operations. If funds generated from operations, including dividends and tax payments from subsidiaries, are insufficient to meet fixed charges in any period, these companies would be required to generate cash through borrowings, sales of securities or other assets, or similar transactions. 14 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 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. At March 31, 2000, there was $110 million borrowed under the line. In April 1999, AFC used funds borrowed under its credit agreement with AFG to retire outstanding holding company public debt and borrowings under its credit line. 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) AFC's ability to obtain financing in capital markets, as well as (iii) the sales of certain noncore investments. INVESTMENTS Approximately 90% of the fixed maturities held by AFC were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies at March 31, 2000. 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. AFC's equity securities are concentrated in a relatively limited number of major positions. This approach allows management to more closely monitor the companies and the industries in which they operate. RESULTS OF OPERATIONS GENERAL Pretax operating earnings for the first quarter of 2000 were $73.6 million compared to $89.8 million for the first quarter of 1999. A decline in property and casualty underwriting results and the absence of realized gains were partially offset by increased investment income and other income, including sales of certain assets. PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFC's property and casualty group consists of two major business groups: Personal and Specialty. 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, U.S.-based operations of Japanese companies, fidelity and surety bonds, collateral protection, and umbrella and excess coverages. 15 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 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 AFC's property and casualty insurance subsidiaries were as follows (dollars in millions): Three months ended March 31, ------------------- 2000 1999 ---- ---- Net Written Premiums (GAAP) --------------------------- Personal $349.8 $276.5 Specialty 297.7 248.1 Other lines - .2 ------ ------ $647.5 $524.8 ====== ====== Combined Ratios (GAAP)(*) ---------------------- Personal 103.7% 98.5% Specialty 103.8 99.8 Aggregate (including discontinued lines) 104.2 99.4 (*) Combined ratios for the entire year of 1999 were: Personal - 100.7%, Specialty - 102.7% and aggregate - 102.0%. PERSONAL The Personal group's 26% increase in net written premiums reflects $27.5 million in premiums generated by Worldwide (AFC's direct marketing channel acquired in April 1999) and expanded writings in certain private passenger automobile markets. The combined ratio for 2000 increased due to (i) losses from severe storms in certain southern and western states, (ii) the impact of a very competitive pricing environment on policies written during 1999 and (iii) increased underwriting expenses associated with the expansion of the direct and Internet marketing initiatives. SPECIALTY The Specialty group's 20% increase in net written premiums reflects the effect of (i) the January 2000 commutation of reinsurance agreements relating to the California workers' compensation business which were in effect throughout 1999, (ii) rate increases in certain casualty markets (particularly California workers' compensation) and (iii) the realization of growth opportunities in certain commercial markets. The combined ratio for 2000 reflects the effect of a highly competitive pricing environment on policies written in 1999. LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS The increase in life, accident and health premiums and benefits is due primarily to the acquisition of UTA in October 1999. 16 AMERICAN FINANCIAL CORPORATION 10-Q Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued INVESTMENT INCOME Investment income increased $4.1 million (2%) in the first three months of 2000 compared to 1999 due primarily to higher average investments held. OTHER INCOME Other income increased $22.5 million (81%) in the first three months of 2000 compared to 1999 due primarily to increased fee income generated by certain insurance operations and income from the sale of operating assets and lease residuals. 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. ANNUITY BENEFITS Annuity benefits reflect amounts accrued on annuity policyholders' funds accumulated. The majority of AAG's fixed rate annuity products permit AAG 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. INTEREST ON BORROWED MONEY Interest expense decreased $1.3 million (8%) in the first quarter of 2000 compared to 1999 due to lower average indebtedness. OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses increased $16.1 million (21%) in the first three months of 2000 compared to 1999 due primarily to the inclusion of the operations of UTA following its acquisition in late 1999 and increased expenses from certain start-up insurance operations. INVESTEE CORPORATION Equity in net earnings of investee represents AFC's proportionate share of Chiquita's earnings. Chiquita reported net income for the first three months of 2000 and 1999 of $35 million and $49 million, respectively. CUMULATIVE EFFECT OF ACCOUNTING CHANGE In the first quarter of 1999, AAG implemented Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires that costs of start-up activities be expensed as incurred and that unamortized balances of previously deferred costs be expensed and reported as the cumulative effect of a change in accounting principle. Accordingly, AFC expensed previously capitalized start-up costs of $3.8 million (net of minority interest and taxes) in the first quarter of 1999. ---------------------------------------- Item 3 Quantitative and Qualitative Disclosure of Market Risk ------------------------------------------------------ As of March 31, 2000, there were no material changes to the information provided in AFC's Form 10-K for 1999 under the caption "Exposure to Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations. 17 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibit 27.1 - Financial Data Schedule as of March 31, 2000. For submission in electronic filing only. (b) Reports on Form 8-K: none ---------------------------------------- Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, American Financial Corporation has duly caused this Report to be signed on its behalf by the undersigned duly authorized. American Financial Corporation May 12, 2000 BY: Fred J. Runk ----------------------------------- Fred J. Runk Senior Vice President and Treasurer 18 EX-27 2 FINANCIAL DATA SCHEDULE - MARCH 31, 2000
5 This schedule contains summary financial information extracted from the American Financial Corporation Form 10-Q for the three months ended March 31, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-2000 MAR-31-2000 $285,379 10,610,471 708,443 0 0 0 0 0 16,124,098 0 395,859 0 72,154 9,625 1,271,192 16,124,098 0 880,535 0 0 92,376 0 15,554 73,637 24,255 48,350 0 0 0 $48,350 0 0 Includes an investment in investee corporation of $171 million. Not applicable since all common shares are owned by American Financial Group, Inc.
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