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
<PAGE>
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
<PAGE>
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
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
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
</TABLE>
3
<PAGE>
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)
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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 -
$600,000) outstanding at September 30, 1996 and
December 31, 1995.
<PAGE>
H. Common Stock Since the Mergers, AFG has owned all outstanding
shares of AFC's Common Stock.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Extraordinary Items Extraordinary items represent AFC's loss and
its proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
Nine months ended
September 30,
1996 1995
AFC (parent) ($ 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
<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 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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> $297,818
<SECURITIES> 9,136,931<F1>
<RECEIVABLES> 369,422
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,733,899
<CURRENT-LIABILITIES> 0
<BONDS> 388,433
0
168,484
<COMMON> 9,625
<OTHER-SE> 579,475
<TOTAL-LIABILITY-AND-EQUITY> 12,733,899
<SALES> 0
<TOTAL-REVENUES> 2,095,803
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 228,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,437
<INCOME-PRETAX> 201,693
<INCOME-TAX> 35,358
<INCOME-CONTINUING> 166,335
<DISCONTINUED> 0
<EXTRAORDINARY> (24,505)
<CHANGES> 0
<NET-INCOME> $141,830
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $772 million.
<F2>Not applicable since all common shares are owned by American Financial
Group.
</FN>
</TABLE>
