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, 1994 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, 1994, there were 18,971,217 shares of the Registrant's Common
Stock outstanding, all of which were privately owned.
Page 1 of 16
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AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Assets
Cash and short-term investments $ 124,669 $ 167,950
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $4,087,500 and $3,959,400) 4,103,534 3,788,732
Available for sale - at market
(amortized cost - $2,034,552 and $2,216,328) 2,089,352 2,349,528
Other stocks - principally at market
(cost - $172,718 and $207,056) 265,418 339,156
Investment in investee corporations 902,093 899,800
Loans receivable 618,567 630,932
Real estate and other investments 152,065 139,319
8,131,029 8,147,467
Recoverables from reinsurers and prepaid
reinsurance premiums 791,647 756,060
Trade receivables 273,761 298,240
Other receivables 209,215 213,507
Prepaid expenses, deferred charges and other assets 367,503 320,299
Cost in excess of net assets acquired 176,318 173,965
$10,074,142 $10,077,488
Liabilities and Capital
Insurance claims and reserves $ 3,516,717 $ 3,422,657
Annuity policyholders' funds accumulated 4,315,628 4,256,674
Long-term debt:
Parent company 571,452 571,874
Subsidiaries 491,554 482,132
Accounts payable, accrued expenses and other
liabilities 537,957 648,462
Minority interest 118,456 109,219
9,551,764 9,491,018
Capital subject to mandatory redemption 41,383 49,232
Preferred Stock (redemption value - $278,889) 168,588 168,588
Common Stock without par value 904 904
Retained earnings 221,403 210,846
Net unrealized gain on marketable securities,
net of deferred income taxes 90,100 156,900
$10,074,142 $10,077,488
</TABLE>
2
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<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1994 1993
<S> <C> <C>
Income:
Property and casualty insurance premiums $313,049 $ 545,931
Investment income 141,070 175,128
Realized gains on sales of securities 14,956 17,386
Equity in net earnings of investee corporations 21,694 14,813
Gains on sales of investee corporations 11 51,934
Sales of other products and services - 152,100
Other income 32,867 67,449
523,647 1,024,741
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 231,017 389,642
Commissions and other underwriting expenses 104,166 152,658
Benefits to annuity policyholders 59,223 59,182
Interest on borrowed money 32,293 54,313
Cost of sales - 134,900
Other operating and general expenses 61,936 139,004
488,635 929,699
Earnings before income taxes and extraordinary items 35,012 95,042
Provision for income taxes 8,319 6,397
Earnings before extraordinary items 26,693 88,645
Extraordinary items - loss on prepayment of debt (15,693) -
Net Earnings $ 11,000 $ 88,645
</TABLE>
3
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<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1994 1993
<S> <C> <C>
Operating Activities:
Net earnings $ 11,000 $ 88,645
Adjustments:
Extraordinary losses from retirement of debt 15,693 -
Depreciation and amortization 2,315 15,307
Benefits to annuity policyholders 59,223 59,182
Equity in net earnings of investee corporations (21,694) (14,813)
Changes in reserves on assets 3,831 (1,451)
Realized gains on investing activities (21,551) (76,746)
Increase in reinsurance and other receivables (7,082) (45,747)
Increase in prepaid expenses, deferred charges
and other assets (47,628) (6,824)
Increase in insurance claims and reserves 94,060 74,357
Decrease in other liabilities (74,251) (59,529)
Increase in minority interest 8,585 26,146
Dividends from investees 5,250 6,200
Other, net (1,243) (18,450)
26,508 46,277
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (522,111) (1,150,784)
Equity securities (1,269) (5,633)
Investees and subsidiaries - (6,288)
Real estate, property and equipment (7,936) (26,951)
Maturities and redemptions of fixed maturity
investments 100,553 139,941
Sales of:
Fixed maturity investments 292,081 459,467
Equity securities 48,932 35,233
Real estate, property and equipment 491 58,718
Decrease in other investments 9,853 7,343
Other - (1,500)
(79,406) (490,454)
Financing Activities:
Annuity receipts 94,906 106,834
Annuity benefits and withdrawals (86,400) (71,009)
Additional long-term borrowings 18,077 172,249
Reductions of long-term debt (8,586) (149,563)
Repurchases of capital stock (4,294) (343)
Cash dividends paid (4,086) (191)
9,617 57,977
Net Decrease in Cash and Short-term Investments (43,281) (386,200)
Cash and short-term investments at beginning of period 167,950 837,429
Cash and short-term investments at end of period $124,669 $ 451,229
</TABLE>
4
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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, but 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.
Changes in ownership levels of subsidiaries and investees have resulted
in certain differences in the financial statements and have affected
comparability between years. 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 investees with publicly
traded shares was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993 1992
<S> <C> <C> <C>
American Annuity Group, Inc. ("AAG") 80% 80% 82%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. 40% 41%(a) 51%
(formerly The Penn Central Corporation)
Chiquita Brands International, Inc. 46% 46% 46%
General Cable Corporation 45% 45% 45%
Great American Communications Company ("GACC") 20% 20% 40%
Spelling Entertainment Group Inc. ("Spelling") - (b) 48%
(a) In anticipation of a reduction of AFC's ownership of American Premier below 50%,
AFC ceased accounting for it as a subsidiary and began accounting for it as an
investee in April 1993.
(b) Sold in March 1993.
</TABLE>
Investments AFC implemented Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," beginning December 31, 1993. This standard requires (i)
debt securities be classified as "held to maturity" and reported at
amortized cost if AFC has the positive intent and ability to hold them to
maturity, (ii) debt and equity securities be classified as "trading" and
reported at fair value, with unrealized gains and losses included in
earnings, if they are bought and held principally for selling in the near
term and (iii) debt and equity securities not classified as held to
maturity or trading be classified as "available for sale" and reported at
fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity. Only in certain limited
circumstances, such as significant issuer credit deterioration or if
required by insurance or other regulators, may a company change its
<PAGE>
intent to hold a certain security to maturity without calling into
question its intent to hold other debt securities to maturity in the
future.
5
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AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Premiums and discounts on collateralized mortgage obligations are
amortized over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific
investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of that
investment is reduced.
Investment in Investee Corporations Investments in securities of 20%-
to 50%-owned companies are 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.
Due to GACC's financial difficulties, AFC transferred all GACC
securities and loans to the investee account and reduced the carrying
value of that investment to estimated net realizable value ($35 million)
at the end of 1992. AFC resumed equity accounting for its investment in
GACC following GACC's reorganization at the end of 1993.
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees (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 investees 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 Claims and Reserves Insurance claims and reserves include
unpaid losses and loss adjustment expenses in addition to unearned
insurance premiums. As discussed under "Reinsurance" below, amounts
have not been reduced for reinsurance recoverable.
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 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.
Unearned insurance premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in force,
generally computed by the application of daily pro rata fractions. 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.
<PAGE>
6
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AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
term 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.
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 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 insurance
subsidiaries also assume reinsurance from other companies. Income on
reinsurance assumed is recognized based on reports received from ceding
reinsurers.
Annuity Policyholders' Funds Accumulated Annuity premium deposits 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.
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.
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.
7
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AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Under AFC's Book Value Incentive Plan, units may be granted at initial
values between 80% and 120% of "book value" to key employees. Units may
be exercised at any time, to the extent vested. Payments are made to
the holder 50% in cash and the remainder in installments over a ten-year
period with an assumed interest factor of 12% per annum. "Book value"
is determined in accordance with generally accepted accounting
principles except that all equity securities (including investees and
subsidiaries with publicly traded shares) are reflected at market value.
The value of the units is the excess of the current book value of a
share of AFC Common Stock, as defined, over the initial value of the
units at the date of grant. This value is being accrued over the
vesting period (five years).
AFC and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. The projected future cost of providing
these benefits is expensed over the period the employees qualify for
such benefits.
Effective January 1, 1994, AFC implemented SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which covers benefits provided
to former or inactive employees (primarily those on disability) who were
not deemed retired under other company plans. This standard requires
companies to accrue the projected future cost of providing
postemployment benefits instead of recognizing an expense for these
benefits when paid. The implementation of SFAS No. 112 did not have a
material effect on AFC's financial position or results of operations.
Debt Discount Debt discount and expenses are amortized over the lives
of respective borrowings, generally on the interest method. Unamortized
balances are charged off in the event of early retirement of the related
debt.
B. Sales of Investees In March 1993, AFC sold its common stock investment
in Spelling to Blockbuster Entertainment Corporation in exchange for
7.6 million shares of Blockbuster common stock and warrants to purchase
an additional two million Blockbuster shares at $25 per share. AFC
realized a $52 million pretax gain on the sale.
8
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<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. 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 (investee
corporations - see Note D). The following table (in thousands) shows
AFC's revenues by significant business segment. Intersegment
transactions are not significant.
<TABLE>
<CAPTION>
Three months ended March 31,
1994 1993
<S> <C> <C>
Revenues (a)
Property and casualty insurance:
Underwriting $313,049 $ 545,931
Investment and other income 83,258 140,116
396,307 686,047
Annuities (b) 92,465 101,522
Other 13,181 222,359
501,953 1,009,928
Equity in net earnings
of investee corporations 21,694 14,813
$523,647 $1,024,741
(a) See Note A for a discussion of certain sales of subsidiaries and
investees affecting the comparability of revenues in the table above.
(b) Represents primarily investment income.
</TABLE>
D. Investee Corporations Investment in investee corporations 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 $930 million and $940 million at March 31, 1994 and
December 31, 1993, respectively. AFC's investment (and common stock
ownership percentage) in these investees was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Investment (Ownership %)
March 31, December 31,
1994 1993
<S> <C> <C>
American Premier(*) $557,594 (40%) $559,116 (41%)
Chiquita 282,069 (46%) 277,854 (46%)
GACC 36,492 (20%) 36,892 (20%)
General Cable 25,938 (45%) 25,938 (45%)
$902,093 $899,800
(*) In March 1994, American Premier changed its name from The Penn Central
Corporation to reflect its identity as a property and casualty insurance
company.
</TABLE>
In May 1994, AFC agreed to sell its investment in General Cable common
stock to an unaffiliated company for $27.6 million in cash. The sale is
subject to certain conditions. Because AFC expects to recognize a small
gain on the sale of General Cable, it did not recognize its share of
<PAGE>
General Cable's first quarter loss of $1.6 million.
9
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AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information for AFC's major investees follows (in
millions):
<TABLE>
<CAPTION>
Three months ended March 31,
American Premier 1994 1993
<S> <C> <C>
Revenues $358 $370
Income (Loss) from Continuing Operations (56) 31
Discontinued Operations - 3
Net Income (Loss) (56) 34
</TABLE>
American Premier's 1994 revenues were reduced by a $75.8 million
provision for loss on notes receivable from General Cable which American
Premier has agreed to sell back to General Cable at a discount. This
amount was excluded in determining AFC's equity in American Premier's
earnings because (i) General Cable will record a corresponding gain when
the transaction is completed and (ii) AFC's proportionate ownership of
General Cable exceeds that of American Premier.
<TABLE>
<CAPTION>
Three months ended March 31,
Chiquita 1994 1993
<S> <C> <C>
Net Sales $669 $731
Operating Income 81 70
Income before Extraordinary Item 36 28
Extraordinary Item (23) -
Net Income 13 28
</TABLE>
E. Long-Term Debt Long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
American Financial Corporation
(Parent Company):
Non-subordinated $ 566,811 $ 564,075
Subordinated 4,641 7,799
571,452 571,874
Subsidiaries:
Non-subordinated 373,686 357,132
Senior Subordinated 117,868 125,000
491,554 482,132
$1,063,006 $1,054,006
</TABLE>
On April 15, 1994, AFC completed an offer to issue 9-3/4% Debentures due
April 20, 2004 in exchange for its publicly traded debentures. In the
exchange offer, AFC issued approximately $203.5 million ($195.3 million
as of March 31) of the 9-3/4% Debentures. A cash premium of
$6.2 million on debentures exchanged through March 31 is included in
Extraordinary Items in the Statement of Earnings. On April 11, AFC
redeemed at par all 13-1/2% Debentures not tendered in the exchange for
<PAGE>
approximately $63.3 million in cash.
10
<PAGE>
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At March 31, 1994, sinking fund and other scheduled principal payments
on debt for the balance of 1994 and the subsequent five years, adjusted
to reflect the results of the exchange offer through April 15 and the
redemption, were as follows (in thousands):
<TABLE>
<CAPTION>
Parent
Company Subsidiaries Total
<S> <C> <C> <C>
1994 $ 3,231 $ 2,490 $ 5,721
1995 261 63,444 63,705
1996 261 1,476 1,737
1997 5,456 28,884 34,340
1998 261 172,077 172,338
1999 225,927 13,920 239,847
</TABLE>
AFC may, at its option, apply debentures otherwise purchased in excess
of scheduled payments to satisfy any sinking fund requirement. The
scheduled principal payments shown above assume that debentures
purchased are applied to the earliest scheduled retirements.
F. Capital Subject to Mandatory Redemption Capital subject to mandatory
redemption includes AFC's Mandatory Redeemable Preferred Stock and
capital subject to a put option.
Mandatory Redeemable Preferred Stock The outstanding shares of
Mandatory Redeemable Preferred Stock are nonvoting, cumulative and
consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Series E - $10.50 par value per share; annual
dividends per share $1. 504,711 504,711
Series I - $28.00 liquidation value per share;
annual dividends per share $2.66. - 150,212
</TABLE>
In February 1994, AFC redeemed the outstanding shares of Series I
Preferred Stock. Approximately 45% of the Series E Preferred Stock is
scheduled to be retired in December 1994; the balance is to be retired
in December 1995.
Capital Subject to Put Option Under an agreement entered into in 1983,
certain members of the Lindner family (the "Group") who, in the
aggregate, owned 1,848,235 shares of AFC Common Stock, were granted
options to purchase an additional 1,225,000 shares. The options, which
expire two years after the death of Robert D. Lindner, are exercisable
at $6.65 per share plus $.40 per share per year from April 1983.
Holders have the right to "put" to AFC any shares of AFC Common Stock or
options at any time at a price equal to AFC's book value per share,
adjusted to reflect all equity securities (including investees and
subsidiaries with publicly traded shares) at market prices. The
purchase price is to be paid one-third in cash and the balance in a
<PAGE>
five-year installment note bearing interest at a rate equal to the five-
year U.S. Treasury note rate plus 3%. AFC has the right to "call" any
AFC shares owned by the Group after Robert D. Lindner's death at the
same price as described under the "put" (but not less than $6.65 per
share plus 10% compounded annually from April 1983). Further, AFC has a
right of first refusal on shares owned by members of the Group.
11
<PAGE>
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At March 31, 1994, the Group owned 1,533,767 shares of AFC Common Stock
and options to purchase an additional 762,500 shares. The aggregate
purchase price for all shares covered by the put is included in "capital
subject to mandatory redemption" and amounted to $36 million and
$40 million at March 31, 1994 and December 31, 1993, respectively.
Changes in the aggregate purchase price are charged or credited directly
to retained earnings without affecting earnings.
G. Other Preferred Stock Other Preferred Stock is nonvoting, cumulative
and consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Series F - $20.00 liquidation value per share;
annual dividends per share $1.80; 10% may
be retired annually at AFC's option between
1994 and 1996. 13,753,254 13,753,254
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
</TABLE>
H. Common Stock At March 31, 1994, Carl H. Lindner and certain members of
the Lindner family owned all of the outstanding Common Stock of AFC.
I. Extraordinary Items Extraordinary items consisted of the following (in
thousands):
<TABLE>
<S> <C>
Premium paid on AFC debentures exchanged $ 6,159
Loss on subsidiary's prepayment of debt
(net of minority interest of $74) 498
Share of loss on investee's prepayment of debt 9,036
$15,693
</TABLE>
J. Cash Flows - Fixed Maturity Investments "Investing activities" related
to fixed maturity investments in AFC's 1994 Statement of Cash Flows
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Held to Available
Maturity For Sale Total
<S> <C> <C> <C>
Purchases $373,379 $148,732 $522,111
Maturities and paydowns 51,480 49,073 100,553
Sales 7,781 284,300 292,081
</TABLE>
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. Proposed Sale of Personal Lines Business In February 1994, American
Premier announced that it was considering a proposal from AFC to
<PAGE>
purchase GAI's personal lines business for $380 million. These
operations had earned premiums of $342 million in 1993 and represented
approximately 25% of the premiums earned by all of GAI's insurance
operations. Completion of the transaction is subject to certain
conditions, including approval by a special committee of American
Premier's board, receipt of a fairness opinion from an independent
investment banking firm and regulatory approvals.
12
<PAGE>
<PAGE>
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 investees. 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 redemptions of 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
many 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 The ratio of AFC's (parent only) long-term debt to equity
(excluding Capital Subject to Mandatory Redemption) was 1.19 at March 31,
1994, compared to 1.06 at December 31, 1993. Adding AFC's Capital Subject
to Mandatory Redemption to its debt changes these ratios to 1.27 and 1.16;
whereas, adding it to equity changes the ratios to 1.09 and .98 at those
same dates. AFC's ratio of earnings to fixed charges on a total enterprise
basis was 1.43 for the first three months of 1994 compared to 2.62 for the
entire year of 1993; ratios of earnings to fixed charges and preferred
dividends were 1.20 and 2.26 for the same periods.
Sources of Funds A wholly-owned subsidiary, Great American Holding
Corporation ("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 advanced to AFC. The line is guaranteed by AFC and secured by 50% of
the stock of Great American Insurance Company ("GAI"). GAHC had no
outstanding borrowings under the agreement at March 31, 1994 and
December 31, 1993 and $85 million outstanding at April 30, 1994.
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) at March 31,
1994. Investment grade securities generally bear lower yields and lower
degrees of risk than those that are unrated and non-investment grade.
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AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
The cost basis of investments other than investees was determined after
deducting cumulative provisions for impairment aggregating $50 million at
March 31, 1994 and $47 million at December 31, 1993.
RESULTS OF OPERATIONS
General Due to a decrease in ownership percentage, AFC ceased accounting
for American Premier as a subsidiary and began accounting for it as an
investee on April 1, 1993. As a result, current year income statement
components are not comparable to prior years and are not necessarily
indicative of future years.
Pretax earnings in the first quarter of 1994 were $60 million less than in
1993's quarter, primarily due to a $52 million pretax gain on the sale of
an investee in 1993.
Property and Casualty Insurance Underwriting profitability is measured by
the combined ratio which is a sum of the ratio of underwriting expenses to
premiums written and the ratio of losses and loss adjustment expenses to
premiums earned. 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 (statutory basis, after policyholders'
dividends) of GAI and its property and casualty insurance subsidiaries was
106.7% for the first three months of 1994 compared to 103.5% for the same
period in 1993 and 103.9% for the entire year of 1993. While the combined
ratio includes about 5 or 6 points for winter storms in the first quarter
of each year, the California earthquake in January added about 3 points to
the 1994 ratio.
Property and casualty insurance premiums were $233 million less than in the
first three months of 1993, reflecting the deconsolidation of American
Premier beginning in the second quarter of 1993. Insurance premiums for
the remainder of AFC's insurance group increased $21 million (7%) and
losses and loss adjustment expenses increased $29 million (14%). The
increase in premiums was due to an increase in sales of specialized niche
products and a decrease in the percentage of business ceded to reinsurers.
Investment Income Investment income decreased $34 million (19%) from 1993
as the deconsolidation of American Premier in April 1993 more than offset
the effects of an increase in the remaining 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.
Investee Corporations Equity in net earnings of investee corporations
(companies in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the investees' earnings and losses.
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AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Gains on Sales of Investee Corporations The gain on sale of investee in
1993 represents a pretax gain on the sale of Spelling Entertainment Group
common stock.
Sales of Other Products and Services Sales of other products and services
in the first three months of 1993 represent American Premier's revenues
from systems and software engineering services and the manufacture and
supply of industrial products and services.
Benefits to Annuity Policyholders Benefits to annuity policyholders were
about the same for the first quarters of 1994 and 1993. An increase in
average annuity policyholders' funds accumulated was offset by a decrease
in overall interest rates credited to policyholders' funds. The average
crediting rate on funds held has decreased from 6.2% at December 31, 1992
to 5.3% at December 31, 1993 and March 31, 1994. 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 was $22 million less
than the first three months of 1993 due primarily to the deconsolidation of
American Premier and, to a lesser extent, repayments of borrowings in 1993.
Other Operating and General Expenses Included in operating and general
expenses in the first three months of 1994 and 1993 are charges of
$2.1 million and $19.0 million, respectively, for minority interest. Also
included is a charge of $8.0 million in 1993 for the estimated costs of
moving AAG's annuity operations from Los Angeles to Cincinnati.
Income Taxes The 1993 provision for income tax includes a $15 million
first quarter benefit due to American Premier's revision of estimated
future taxable income likely to be generated during the company's tax loss
carryforward period.
New Accounting Standards Effective January 1, 1994, AFC implemented SFAS
112, "Employers' Accounting for Postemployment Benefits"; the
implementation of this standard did not have a material adverse effect on
AFC.
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AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Items required in Part II of this form have been omitted since they are
either inapplicable or not required.
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 13, 1994 BY:/s/ FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
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