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
June 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 August 1, 1996, there were 53,000,000 shares of the Registrant's
Common Stock outstanding, all of which were owned by American
Financial Group, Inc.
Page 1 of 17
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 30, December 31,
1996 1995
Assets
Cash and short-term investments $ 153,647 $ 331,825
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,281,000 and $3,386,000) 3,289,337 3,257,204
Available for sale - at market
(amortized cost - $4,543,465
and $4,211,883) 4,540,065 4,412,483
Other stocks - principally at market
(cost - $133,958 and $133,665) 261,258 248,665
Investment in investees 849,845 833,886
Loans receivable 595,928 591,105
Real estate and other investments 199,003 198,120
Total investments 9,735,436 9,541,463
Recoverables from reinsurers and prepaid
reinsurance premiums 1,087,018 984,500
Agents' balances and premiums receivable 398,665 376,330
Deferred acquisition costs 352,077 330,353
Other receivables 228,147 202,099
Assets held in separate accounts 241,867 238,524
Prepaid expenses, deferred charges and
other assets 186,838 224,858
Cost in excess of net assets acquired 177,740 183,639
$12,561,435 $12,413,591
<PAGE>
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 3,064,155 $ 2,965,700
Unearned premiums 942,729 920,641
Annuity benefits accumulated 5,208,348 5,051,959
Life, accident and health reserves 556,301 538,274
Payable to American Premier Underwriters 735,736 639,455
Other long-term debt:
Direct obligations of AFC Parent Company 175,324 311,202
Obligations of AFC subsidiaries:
American Annuity Group 170,397 167,734
Other subsidiaries 55,644 56,705
Liabilities related to separate accounts 241,867 238,524
Accounts payable, accrued expenses and
other liabilities 630,881 675,052
Minority interest 133,577 148,338
Total liabilities 11,914,959 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 387,767 335,798
Net unrealized gain on marketable
securities, net of deferred
income taxes 80,600 186,100
Total shareholders' equity 646,476 700,007
$12,561,435 $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 Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance premiums $392,697 $376,158 $ 766,312 $ 725,291
Life, accident and health premiums 31,261 456 55,514 1,195
Investment income 175,304 159,954 341,986 312,288
Realized gains on sales of securities 1,570 956 14,239 4,432
Equity in net earnings of investees 23,101 19,675 41,763 42,576
Other income 37,027 24,636 63,109 49,660
660,960 581,835 1,282,923 1,135,442
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 279,963 269,651 527,075 513,294
Commissions and other underwriting
expenses 126,269 124,884 247,456 244,495
Annuity benefits 68,790 64,259 136,805 128,521
Life, accident and health benefits 26,877 665 48,470 1,080
Interest charges on borrowed money 35,126 36,980 70,247 66,109
Other operating and general expenses 76,118 58,496 147,943 115,941
613,143 554,935 1,177,996 1,069,440
Earnings before income taxes and
extraordinary items 47,817 26,900 104,927 66,002
Provision for income taxes 12,589 9,637 23,648 18,874
Earnings before extraordinary items 35,228 17,263 81,279 47,128
Extraordinary items - loss on prepayment
of debt (10,373) (3,048) (16,749) (3,048)
Net Earnings $ 24,855 $ 14,215 $ 64,530 $ 44,080
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended
June 30,
1996 1995
Operating Activities:
Net earnings $ 64,530 $ 44,080
Adjustments:
Extraordinary items 16,749 3,048
Depreciation and amortization 25,963 15,028
Annuity benefits 136,805 128,521
Equity in net earnings of investees (41,763) (42,576)
Changes in reserves on assets 7,662 (670)
Realized gains on investing activities (13,903) (3,906)
Increase in reinsurance and other receivables (153,936) (37,864)
Decrease (increase) in other assets 8,561 (56,811)
Increase in insurance claims and reserves 138,570 138,825
Decrease in other liabilities (37,318) (77,379)
Increase in minority interest 7,811 5,947
Dividends from investees 11,409 11,469
Other, net 2,081 (4,570)
173,221 123,142
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (965,304) (758,905)
Equity securities (13,844) (298)
Investees and subsidiaries (2,236) (13,327)
Real estate, property and equipment (12,942) (18,206)
Maturities and redemptions of fixed maturity
investments 255,260 114,737
Sales of:
Fixed maturity investments 355,832 232,710
Equity securities 25,919 11,064
Investee and subsidiaries - 43,697
Real estate, property and equipment 1,679 3,166
Increase in other investments (6,014) (5,541)
(361,650) (390,903)
<PAGE>
Financing Activities:
Annuity receipts 280,579 245,111
Annuity payments (241,706) (214,603)
Additional long-term borrowings 145,561 80,590
Reductions of long-term debt (248,658) (392,549)
Borrowings from American Premier 198,600 549,000
Repayments of borrowings from American Premier (111,564) (36,000)
Repurchases of preferred stock - (147)
Exercise of stock options - 8,721
Cash dividends paid (12,561) (12,699)
10,251 227,424
Net Decrease in Cash and Short-term Investments (178,178) (40,337)
Cash and short-term investments at beginning
of period 331,825 171,335
Cash and short-term investments at end of period $153,647 $130,998
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:
June 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. 38% 38% 37%
(a) Exchanged for shares of AFG in April 1995.
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.
5
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Only in certain limited circumstances, such as significant issuer credit
deterioration or if required by insurance or other regulators, may
a company change its intent to hold a certain security to maturity
without calling into question its intent to hold other debt
securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized
over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are
stated primarily at the aggregate unpaid balance.
Investment in 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.
<PAGE>
Insurance As discussed under "Reinsurance" below, unpaid losses
and loss adjustment expenses and unearned premiums have not been
reduced for reinsurance recoverable.
Reinsurance In the normal course of business, AFC's insurance
subsidiaries cede reinsurance to other companies to diversify risk
and limit maximum loss arising from large claims. To the extent
that any reinsuring companies are unable to meet obligations under
the agreements covering reinsurance ceded, AFC's insurance
subsidiaries would remain liable. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsurance policies. AFC's
insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate
for losses incurred but not reported, and (b) amounts paid to
reinsurers applicable to the unexpired terms of policies in force.
AFC's insurance subsidiaries also assume reinsurance from other
companies. Income on reinsurance assumed is recognized based on
reports received from ceding reinsurers.
Deferred Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses)
related to the production of new businesses are deferred ("DPAC").
For the property and casualty companies, the deferral of
acquisition costs is limited based upon their recoverability
without any consideration for anticipated investment income. DPAC
is charged against income ratably over the terms of the related
policies. For the annuity companies, DPAC is amortized, with
interest, in relation to the present value of expected gross
profits on the policies.
6
<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) esti-mates
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.
<PAGE>
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 app
licable to the unexpired terms of policies in force. On
reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from policyholders.
For interest-sensitive life and universal life products, premiums
are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against
the policyholder account for mortality coverage and contract
expenses.
Income Taxes AFC files consolidated federal income tax returns
which include all 80%-owned U.S. subsidiaries, except for certain
life insurance subsidiaries. Deferred income taxes are calculated
using the liability method. Under this method, deferred income
tax assets and liabilities are determined based on differences
between financial reporting and tax bases and are measured using
enacted tax rates. Deferred tax assets are recognized if it is
more likely than not that a benefit will be realized.
7
<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, to
qualified employees of participating companies. 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.
Six months ended June 30,
Revenues 1996 1995
Property and casualty insurance:
Premiums earned:
Specialty lines $ 407,811 $ 377,530
Commercial and personal lines 358,076 346,943
Other lines 425 818
766,312 725,291
Investment and other income 152,719 148,231
919,031 873,522
Annuities and life (*) 290,339 198,736
Other 31,790 20,608
1,241,160 1,092,866
Equity in net earnings of investees 41,763 42,576
$1,282,923 $1,135,442
(*) Represents primarily investment income.
8
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investees The companies named in the following table
are subject to the rules and regulations of the SEC. Market value
of the investments was approximately $1.1 billion and $1.0 billion
at June 30, 1996 and December 31, 1995, respectively. AFC's
investment (and common stock ownership percentage) in these
investees was as follows (dollars in thousands):
June 30, 1996 December 31, 1995
American Financial Group $566,127 (23%) $568,781 (24%)
Chiquita 208,180 (37%) 191,026 (38%)
Citicasters 75,538 (38%) 74,079 (38%)
$849,845 $833,886
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 February 1996, Citicasters and Jacor Communications, Inc.
entered into a merger agreement under which AFC and its
subsidiaries would receive approximately $220 million in cash plus
warrants to buy approximately 1.5 million shares of Jacor common
stock at $28 per share. AFC expects to realize a pretax gain of
approximately $160 million on the sale which is expected to close
in the third quarter. Consummation of the transaction is subject
to regulatory approvals, and certain adjustments to the price will
be made if the transaction closes after September 30, 1996.
<PAGE>
Summarized financial information for AFC's investees follows (in
millions):
Six months Three months
ended ended
American Financial Group June 30, 1996 June 30, 1995
Revenues $2,064 $1,007
Earnings before Extraordinary Items 140 33
Extraordinary Items (18) 1
Net Earnings 122 34
Six months ended June 30,
Chiquita 1996 1995
Net Sales $1,339 $1,402
Operating Income 133 146
Income from Continuing Operations 67 66
Discontinued Operations - 6
Extraordinary Item (5) (5)
Net Income 62 67
Six months ended June 30,
Citicasters 1996 1995
Net Revenues $71 $66
Operating Income 17 16
Net Earnings 5 7
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Payable to American Premier Underwriters At June 30, 1996, AFC
(parent) had borrowed $675 million under its credit agreement with
American Premier. Accrued interest of $19.5 million at that date
was paid in July 1996.
Also included in the payable to American Premier at June 30, 1996,
is an aggregate of $41.3 million representing borrowings of two AFC
subsidiaries under credit facilities with American Premier.
F. Other Long-Term Debt During the first six months of 1996, AFC
(parent) repurchased $135.5 million of its debentures for
$145.0 million. AAG repurchased $60.1 million of its Notes for
$65.0 million.
At June 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 $ - $ 9,627 $ 9,627
1997 5,439 1,750 7,189
1998 - 1,944 1,944
1999 - 75,235 75,235
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.
<PAGE>
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. At
June 30, 1996, the outstanding shares of voting preferred stock
consisted of the following:
Series F, $1 par value - authorized 15,000,000
shares; annual dividends per share $1.80; 10% may be
retired at AFC's option at $20 per share in 1996;
13,744,754 shares (stated value - $167.9 million)
outstanding at June 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 -
$600,000) outstanding at June 30, 1996 and December 31,
1995.
H. Common Stock At June 30, 1996, AFG owned all 53.0 million
outstanding shares of AFC's Common Stock.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Extraordinary Items Extraordinary items represent AFC's loss and
its proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
Six months ended
June 30,
1996 1995
AFC (parent) ($ 9,499) ($1,713)
AAG (5,605) 30
Other subsidiary 110 -
Chiquita (investee) (1,755) (1,365)
($16,749) ($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 $128,541 $836,763 $965,304
Maturities and redemptions 101,968 153,292 255,260
Sales - 355,832 355,832
1995
Purchases $327,946 $430,959 $758,905
Maturities and redemptions 68,814 45,923 114,737
Sales 9,040 223,670 232,710
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.
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 .21 at June 30, 1996
compared to .31 at December 31, 1995. Including the notes payable to
American Premier, the ratio changes to .57 at both June 30, 1996 and
December 31, 1995. AFC's ratio of earnings to fixed charges on a total
enterprise basis was 1.91 for the first six months of 1996 compared to
2.23 for the entire year of 1995; ratios of earnings to fixed charges
and preferred dividends were 1.63 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 May 1996, Standard and Poor's ("S&P") raised its debt ratings on
AFC's 9-3/4% Debentures and AAG's senior debt to an investment grade
rating of "BBB-". In addition, S&P raised its debt ratings on AAG's
subordinated debt to "BB+". S&P stated that the upgrade reflects the
sizable reduction in consolidated debt since April 1995 and the
continued financial strength of AFC's property and casualty and annuity
insurance operations.
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, $82 million of which was borrowed at June 30,
1996.
In the past, funds have been borrowed under certain of these bank
facilities and used for working capital, capital infusions into
subsidiaries, and to retire other issues of short-term or high-rate
debt. Also, AFC believes it may be prudent and advisable to carry
borrowings of up to $200 million of bank debt in the normal course in
order to retire public or privately held fixed rate debt over the next
year or two.
<PAGE>
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 June 30, 1996, AFC had borrowed $675 million under the
agreement which it used for debt retirements, capital contributions
to subsidiaries and other corporate purposes.
In addition, two AFC subsidiaries have separate 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 June 30, 1996, approximately
$40 million was borrowed under these lines.
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments Approximately 94% 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 June 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 June 30, 1996 were
$48 million, an increase of $21 million over the comparable 1995
period. This increase in earnings is attributable primarily to (i)
improvements in the property and casualty insurance operations, (ii)
the growth in invested assets and (iii) increases in investee earnings.
Pretax earnings were $105 million in the first six months of 1996, an
increase of $39 million over the comparable 1995 period. A $24 million
improvement in the property and casualty insurance results and
increases in investment income and realized gains on sales of
securities were partially offset by increases in other operating and
general expenses, benefits to annuity policyholders and interest on
borrowed money.
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):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Written Premiums (GAAP)
Specialty Operations $243.9 $202.8 $426.5 $401.7
Commercial and Personal Operations 162.9 182.8 328.2 338.7
Other lines .2 .1 .3 .7
$407.0 $385.7 $755.0 $741.1
Combined Ratios (GAAP)
Specialty Operations 100.6% 102.4% 95.7% 102.1%
Commercial and Personal Operations 104.7 102.1 104.2 100.9
Aggregate 103.4 105.2 100.9 104.5
</TABLE>
Specialty Operations Net written premiums for the specialty
operations increased 20% and 6% during the second quarter and first six
months of 1996 from the comparable 1995 periods. Excluding the impact
of withdrawal from an unprofitable voluntary pool, the increase is 27%
for the quarter and 17% for the first six 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 first six
months of 1996 is due primarily to larger losses in 1995 from (i)
participation in the voluntary pool and (ii) prior accident year
development on coverages of U.S. based operations of Japanese
companies.
Commercial and Personal Operations The 3% decrease in net written
premiums for the six months of 1996 is due primarily to significant
decreases in personal lines business partially offset by increases in
workers' compensation business. The 11% decrease in net written
premiums for the second 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 are due to less
favorable loss experience in commercial lines as well as weather-
related losses.
<PAGE>
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 second quarter and $29.7 million (10%) in the first six months of
1996 compared to 1995 due to AAG's acquisition of Laurentian and an
increase in the average amount of investments held.
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.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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.
Annuity Benefits Annuity benefits expense increased 6% in the first
six 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
$1.9 million (5%) in the second quarter of 1996 compared to the same
period in 1995 due primarily to retirements of debt. In the first six
months of 1996, interest on borrowed money increased $4.1 million (6%)
compared to 1995 reflecting borrowings from American Premier.
Other Operating and General Expenses Operating and general expenses
for the second quarter and first six months of 1996 include
$9.8 million and $17.3 million, respectively, attributable to the
operations of Laurentian. Also included in the first six months of
1996 and 1995 are charges of $8.2 million and $6.4 million,
respectively, for minority interest.
15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 4
Submission of Matters to a Vote of Security Holders
AFC's Annual Meeting of Shareholders was held on June 4, 1996; there
were two matters voted upon: (Item 1) establish the number of
directors at eight, and (Item 2) election of eight directors.
The votes cast for, against, withheld and the number of abstentions
as to each matter voted on at the 1996 Annual Meeting is set forth
below. All 53,000,000 common shares owned by AFG were voted in favor
of both items.
Name For Against Withheld Abstain
Item 1 65,247,183 35,549 N/A 47,032
Item 2
Theodore H. Emmerich 65,253,049 N/A 76,715 N/A
James E. Evans 65,250,689 N/A 79,075 N/A
Thomas M. Hunt 65,248,657 N/A 81,107 N/A
Carl H. Lindner 65,252,649 N/A 77,115 N/A
Carl H. Lindner III 65,251,631 N/A 78,133 N/A
Keith E. Lindner 65,251,294 N/A 78,470 N/A
S. Craig Lindner 65,251,697 N/A 78,067 N/A
William R. Martin 65,251,003 N/A 78,761 N/A
N/A - Not Applicable
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
August 13, 1996 BY: FRED J. RUNK
Fred J. Runk
Senior Vice President and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
American Financial Corporation 10-Q for the six months ended June 30,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 153,647
<SECURITIES> 8,940,505<F1>
<RECEIVABLES> 398,665
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,561,435
<CURRENT-LIABILITIES> 0
<BONDS> 401,365
0
168,484
<COMMON> 9,625
<OTHER-SE> 468,367
<TOTAL-LIABILITY-AND-EQUITY> 12,561,435
<SALES> 0
<TOTAL-REVENUES> 1,282,923
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 147,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,247
<INCOME-PRETAX> 104,927
<INCOME-TAX> 23,648
<INCOME-CONTINUING> 81,279
<DISCONTINUED> 0
<EXTRAORDINARY> (16,749)
<CHANGES> 0
<NET-INCOME> 64,530
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $850 million.
<F2>Not applicable since all common shares are owned by American Financial
Group.
</FN>
</TABLE>
