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, 1997 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, 1997, 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 18
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
September 30, December 31,
1997 1996
Assets
Cash and short-term investments $ 352,261 $ 404,831
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,318,500 and $3,528,100) 3,250,282 3,491,126
Available for sale - at market
(amortized cost - $7,051,321 and
$6,362,597) 7,307,421 6,494,597
Other stocks - principally at market
(cost - $110,812 and $142,364) 401,112 327,664
Investment in investee corporations 219,044 199,651
Loans receivable 541,694 568,055
Real estate and other investments 213,769 205,021
Total investments 11,933,322 11,286,114
Recoverables from reinsurers and prepaid
reinsurance premiums 1,001,615 942,450
Agents' balances and premiums receivable 709,882 609,403
Deferred acquisition costs 481,859 452,041
Other receivables 259,976 272,766
Deferred tax asset 12,384 137,284
Assets held in separate accounts 280,461 247,579
Prepaid expenses, deferred charges
and other assets 368,488 368,114
Cost in excess of net assets acquired 269,850 278,581
$15,670,098 $14,999,163
<PAGE>
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,199,056 $ 4,123,701
Unearned premiums 1,336,031 1,247,806
Annuity benefits accumulated 5,505,794 5,365,612
Life, accident and health reserves 600,105 575,380
Payable to American Financial Group, Inc. 334,388 422,015
Other long-term debt:
Holding companies 243,719 339,504
Subsidiaries 147,134 178,415
Liabilities related to separate accounts 280,461 247,579
Accounts payable, accrued expenses and other
liabilities 973,563 915,398
Total liabilities 13,620,251 13,415,410
Minority interest 494,744 306,858
Shareholders' Equity:
Preferred Stock (liquidation value $258,638) 162,760 162,760
Common Stock without par value (45,000,000
shares outstanding) 9,625 9,625
Capital surplus 931,892 919,746
Retained earnings 139,226 1,364
Net unrealized gain on marketable securities,
net of deferred income taxes 311,600 183,400
Total shareholders' equity 1,555,103 1,276,895
$15,670,098 $14,999,163
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 739,858 $ 718,826 $2,102,001 $2,162,634
Life, accident and health premiums 32,149 24,809 84,845 80,323
Investment income 218,626 212,571 645,961 627,128
Realized gains on sales of securities 29,682 3,161 35,693 24,604
Equity in net earnings (losses) of
investee corporations (13,914) (3,361) 18,094 22,505
Gain on sale of investee corporation - 169,376 - 169,376
Gains on sales of subsidiaries - - 731 36,837
Other income 28,335 38,072 80,582 103,007
1,034,736 1,163,454 2,967,907 3,226,414
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 545,915 616,294 1,510,426 1,655,634
Commissions and other underwriting
expenses 208,975 187,486 586,580 596,505
Annuity benefits 72,868 69,514 212,305 206,319
Life, accident and health benefits 28,250 21,742 78,238 70,212
Interest charges on borrowed money 21,167 20,180 67,293 68,528
Minority interest expense 10,530 18,670 30,887 39,348
Other operating and general expenses 89,775 81,587 233,214 240,628
977,480 1,015,473 2,718,943 2,877,174
Earnings before income taxes and
extraordinary items 57,256 147,981 248,964 349,240
Provision for income taxes 22,339 28,799 91,343 92,967
Earnings before extraordinary items 34,917 119,182 157,621 256,273
Extraordinary items - loss on prepayment
of debt (6,908) (8,286) (6,986) (25,644)
Net Earnings $ 28,009 $ 110,896 $ 150,635 $ 230,629
</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,
1997 1996
Operating Activities:
Net earnings $ 150,635 $ 230,629
Adjustments:
Extraordinary items 6,986 25,644
Depreciation and amortization 51,173 50,724
Annuity benefits 212,144 206,319
Equity in net earnings of investee corporations (18,094) (22,505)
Changes in reserves on assets (102) 11,866
Realized gains on investing activities (36,102) (230,142)
Increase (decrease) in reinsurance and other
receivables (216,226) 48,171
Decrease in other assets 66,962 29,799
Increase in insurance claims and reserves 188,305 62,453
Decrease in other liabilities (104,382) (133,124)
Increase in minority interest 24,944 34,857
Dividends from investees 3,600 3,600
Other, net (19,044) (7,169)
310,799 311,122
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,816,550) (1,522,126)
Equity securities (22,783) (9,270)
Investees and subsidiaries (4,900) -
Real estate, property and equipment (35,396) (25,629)
Maturities and redemptions of fixed maturity
investments 535,178 444,986
Sales of:
Fixed maturity investments 935,942 587,677
Equity securities 85,677 32,687
Investees and subsidiaries 2,500 286,648
Real estate, property and equipment 2,792 7,438
Cash and short-term investments of former
subsidiaries (70) (4,589)
Increase in other investments (4,448) (9,183)
(322,058) (211,361)
<PAGE>
Financing Activities:
Annuity receipts 369,731 410,203
Annuity payments (439,818) (372,005)
Additional long-term borrowings 63,090 278,275
Reductions of long-term debt (110,494) (515,253)
Borrowings from AFG 44,100 106,972
Payments to AFG (118,500) (55,000)
Capital contribution 14,000 14,000
Issuances of trust preferred securities 149,353 -
Cash dividends paid (12,773) (12,753)
(41,311) (145,561)
Net Decrease in Cash and Short-term Investments (52,570) (45,800)
Cash and short-term investments at beginning
of period 404,831 448,201
Cash and short-term investments at end of period $ 352,261 $ 402,401
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Financial Corporation ("AFC") and
subsidiaries are unaudited; however, management believes that
all adjustments (consisting only of normal recurring accruals
unless otherwise disclosed herein) necessary for fair
presentation have been made. The results of operations for
interim periods are not necessarily indicative of results to be
expected for the year. The financial statements have been
prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary
to be in conformity with generally accepted accounting
principles.
Certain reclassifications have been made to prior years to
conform to the current year's presentation. All significant
intercompany balances and transactions have been eliminated.
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.
At the close of business on December 31, 1996, American
Financial Group ("AFG") contributed to AFC 81% of the common
stock of American Premier. Since AFC and American Premier are
under the common control of AFG, the acquisition of American
Premier has been recorded by AFC at AFG's historical cost in a
manner similar to a pooling of interests. Accordingly, the
historical consolidated financial statements of AFC for periods
subsequent to April 3, 1995 (date of common control) have been
restated to include the accounts of American Premier.
AFC's ownership of subsidiaries and significant affiliates with
publicly traded common shares was as follows:
September 30, December 31,
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") 81% 83% 83%
Chiquita Brands International, Inc. 40% 43% 44%
Citicasters Inc. (a) (a) 38%
(a) Sold in September 1996.
<PAGE>
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 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.
5
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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.
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 business 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.
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
6
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. These liabilities are subject
to the impact of changes in claim amounts and frequency and
other factors. In spite of the variability inherent in such
estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are adequate. Changes in
estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the
period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to
other income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional 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
primarily 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; if
depositors elect to purchase an annuity from AAG, funds are
transferred to AAG.
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>
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period
in which the related premium is earned. Changes in estimates
are included in income in the period determined. Policyholder
dividends do not become legal liabilities unless and until
declared by the boards of directors of the insurance companies.
Income Taxes AFC and American Premier have each filed
consolidated federal income tax returns which include all 80%-
owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. At the close of business
on December 31, 1996, AFG contributed 81% of the common stock of
American Premier to AFC. Accordingly, AFC and American Premier
will file a single consolidated return for 1997. Because
holders of AFC Preferred Stock hold in excess of 20% of AFC's
voting rights, AFG (parent) owns less than 80% of AFC, and
therefore, will file a separate return.
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities
are determined based on differences between financial reporting
and tax bases and are measured using enacted tax rates.
Deferred tax assets are recognized if it is more likely than not
that a benefit will be realized.
Benefit Plans AFC provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans. Contributions to
benefit plans are charged against earnings in the year for which
they are declared. Both AFC and American Premier had
contributory employee savings plans and noncontributory Employee
Stock Ownership Retirement Plans ("ESORP"). Under one of the
savings plans, American Premier matched a specific portion of
employee contributions. Under the ESORP plans, contributions
were invested in securities of AFG and affiliates for the
benefit of their employees. In 1997, these ESORP plans were
combined into a new plan.
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.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFC
subsidiaries including preferred securities issued by trust
subsidiaries of AAG and AFG's direct ownership interest in
American Premier. For income statement purposes, minority
interest expense represents those shareholders' interest in the
earnings of AFC subsidiaries as well as accrued distributions on
the trust preferred securities.
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.
8
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. Segments of Operations AFC operates its property and casualty
insurance business in three major segments: nonstandard
automobile, specialty lines, and commercial and personal lines.
AFC's annuity and life business primarily sells tax-deferred
annuities to employees of primary and secondary educational
institutions and hospitals. In addition, AFC has owned
significant portions of the voting equity securities of certain
companies (investee corporations - see Note C). The following
table (in thousands) shows AFC's revenues by significant
business segment.
Nine months ended September 30,
Revenues 1997 1996
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 898,390 $ 900,989
Specialty lines 778,447 742,075
Commercial and personal lines 425,140 519,112
Other lines 24 458
2,102,001 2,162,634
Investment and other income 340,608 423,294
2,442,609 2,585,928
Annuities and life (*) 466,046 437,763
Other 41,158 180,218
2,949,813 3,203,909
Equity in net earnings of investee
corporations 18,094 22,505
$2,967,907 $3,226,414
(*) Represents primarily investment income.
C. Investment in Investee Corporations Investment in investee
corporations reflects primarily AFC's 40% ownership (24 million
shares; carrying value of $214.1 million at September 30, 1997)
of Chiquita common stock. The market value of AFC's investment
in Chiquita was $387 million and $306 million at
September 30, 1997 and December 31, 1996, respectively.
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed
food products.
Summarized financial information for Chiquita follows (in
millions):
Nine months ended September 30,
1997 1996
Net Sales $1,834 $1,880
Operating Income 134 149
Income before Extraordinary Item 56 60
Extraordinary Loss from Debt Refinancings - (23)
Net Income 56 37
<PAGE>
In September 1997, 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.
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Payable to American Financial Group, Inc. At September 30,
1997, AFC had outstanding borrowings under a note with AFG
(bearing interest at 11-5/8%) of $213 million, plus accrued
interest of $6.2 million. American Premier has a credit
agreement with AFG under which American Premier and AFG may
make loans of up to $250 million available to each other. The
balance outstanding under the credit line bears interest at a
variable rate of one percent over LIBOR and is payable on
December 31, 2010. At September 30, 1997, American Premier had
outstanding borrowings under the credit agreement of
$113.1 million, plus accrued interest of $2.0 million.
E. Other Long-Term Debt The carrying value of other long-term
debt consisted of the following (in thousands):
September 30, December 31,
1997 1996
Holding Companies:
9-3/4% AFC Debentures due April 2004 $ 80,446 $164,368
9-3/4% APU Subordinated Notes due August 1999 92,299 93,604
10-5/8% APU Subordinated Notes due April 2000 44,676 54,595
10-7/8% APU Subordinated Notes due May 2011 18,158 18,496
Other 8,140 8,441
$243,719 $339,504
Subsidiaries:
AAG notes payable under bank lines due
September 1998 and 1999 $ 56,000 $ 44,700
9-1/2% AAG Senior Notes due August 2001 - 40,845
11-1/8% AAG Senior Subordinated Notes
due February 2003 24,080 24,080
Notes payable secured by real estate 52,120 52,543
Other 14,934 16,247
$147,134 $178,415
In a September 1997 tender offer, AFC retired $82.8 million of
its 9-3/4% Debentures for $90.6 million in cash. In addition,
during the first nine months of 1997, American Premier
repurchased $10.1 million of its Notes for $11.1 million in
cash and AAG redeemed all of its outstanding 9-1/2% Senior
Notes for $42.5 million in cash.
<PAGE>
At September 30, 1997, sinking fund and other scheduled
principal payments on debt for the balance of 1997 and the
subsequent five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1997 $ 5,282 $ 670 $ 5,952
1998 - 18,841 18,841
1999 90,903 42,433 133,336
2000 42,967 8,746 51,713
2001 - 1,453 1,453
2002 - 1,458 1,458
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures
previously purchased are applied to the earliest scheduled
retirements.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Minority Interest Included in minority interest are the
preferred securities issued by trust subsidiaries of AAG.
In November 1996, a wholly-owned subsidiary trust of AAG issued
three million units of 9-1/4% trust originated preferred
securities ("TOPrS") for $75 million in cash. The Trust then
purchased $75 million of newly issued AAG 9-1/4% Subordinated
Debentures due 2026, which, along with related interest and
principal payments received, are the only assets of the Trust.
The TOPrS are mandatorily redeemable upon maturity or
redemption of the Subordinated Debentures. The Subordinated
Debentures are redeemable by AAG on or after November 7, 2001.
AAG effectively provides an unconditional guarantee of the
Trust's obligations under the TOPrS.
Through private transactions completed in March and May 1997,
wholly-owned subsidiary trusts of AAG issued $75 million of 8-
7/8% preferred securities and $75 million of 7-1/4% Remarketed
Par Securities ("ROPES"), respectively, and used the proceeds
to purchase the related debentures of their parent due in 2027
and 2041.
G. Preferred Stock Under provisions of both the Nonvoting
(21.1 million shares authorized) and Voting (17.0 million
shares authorized, 13.9 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. The outstanding shares of preferred
stock consisted of the following (see Note L - "Subsequent
Event"):
Series F, $1 par value; $20.00 liquidating value per share;
annual dividends per share $1.80; nonredeemable; 11,900,725
shares (stated value $145.4 million) outstanding at
September 30, 1997 and December 31, 1996.
Series G, $1 par value; annual dividends per share $1.05;
redeemable at $10.50 per share; 1,964,158 shares (stated
value $17.4 million) outstanding at September 30, 1997 and
December 31, 1996.
<PAGE>
H. Common Stock At September 30, 1997, American Financial Group
owned all of the outstanding shares of AFC's Common Stock.
I. Extraordinary Items Extraordinary items represent AFC's
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,
1997 1996
AFC (parent) ($5,357) ($ 9,605)
Subsidiaries:
APU (parent) (379) (458)
AAG (1,250) (7,159)
Other - 57
Investee:
Chiquita - (8,479)
($6,986) ($25,644)
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
1997 Maturity For Sale Total
Purchases $ 3,759 $1,812,791 $1,816,550
Maturities and redemptions 268,432 266,746 535,178
Sales - 935,942 935,942
1996
Purchases $175,629 $1,346,497 $1,522,126
Maturities and redemptions 220,417 224,569 444,986
Sales 9,310 578,367 587,677
Securities classified as "held to maturity" having an amortized
cost of $9.5 million were sold in 1996 due to significant
deterioration in the issuers' creditworthiness.
K. Commitments and Contingencies There have been no significant
changes to the matters discussed and referred to in Note N
"Commitments and Contingencies" in AFC's Annual Report on Form
10-K for 1996.
L. Subsequent Events
Sale of Millennium Dynamics On October 22, 1997, AFG announced
that it has agreed to sell the assets of its software solutions
and consulting services subsidiary, Millennium Dynamics, Inc.,
to a subsidiary of Peritus Software Services, Inc. AFC is to
receive $30 million in cash and 2,175,000 shares of Peritus
common stock on the sale which is expected to close in the
fourth quarter of 1997. AFG estimates that its basis in the
subsidiary plus fees and expenses related to the sale will be
approximately $15 million to $20 million.
Merger Transactions Involving AFC and AFEI In July 1997, AFG
announced that it has entered into agreements with AFC and AFEI
to reduce its corporate expenses and improve its corporate
capital structure.
<PAGE>
AFG has proposed a merger transaction, as amended in October 1997,
whereby holders of AFC's Series F Preferred would receive
consideration of the greater of $23.75 per share or a fixed spread
price which will be measured at the time of closing. Also, accrued
dividends on Series F Preferred Stock will be paid from November 1,
1997 to the closing date. Holders of AFC's Series G Preferred would
receive consideration of $10.50 per share plus accrued dividends.
Consideration would be payable, at the holder's election, in shares
of a new issue of AFC Preferred Stock, in cash, or a combination of
the two. It is a condition to the merger that there be
approximately $70.4 million in liquidation value of a new Preferred
Stock issued, representing at least 20% of AFC's total voting power.
The new preferred would be redeemable at AFC's option after the
eighth anniversary of its issuance, have a liquidation value of
$25.00 per share and pay an 8% dividend of $2.00 per share per year
on a semi-annual basis.
AFG has also proposed that AFEI engage in a merger transaction
whereby all publicly held shares of AFEI would be exchanged, at
the option of AFEI shareholders, for shares of AFG common stock
on a one-for-one basis, or $37.00 per share in cash. There are
approximately 2.7 million shares of AFEI common stock
outstanding (including yet-unexercised stock options) which are
not beneficially owned by AFG.
These transactions are subject to the receipt of all required
shareholder, stock exchange listing and regulatory approvals.
Shareholder meetings for the companies involved in these
transactions are scheduled for December 2, 1997.
12
<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 cash needs for
administrative expenses, the payment of principal and interest on
borrowings, dividends on AFC Preferred Stock, and taxes.
Therefore, certain analyses are best done on a parent only basis
while others are best done on a total enterprise basis. In
addition, since most of its businesses are financial in nature, AFC
does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional
ratios and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's debt to total capital ratio at the parent holding
company level was approximately 14% at September 30, 1997 and 20%
at December 31, 1996. AFC's ratio of earnings to fixed charges on
a total enterprise basis was 3.85 for the first nine months of 1997
compared to 4.99 for the entire year of 1996; ratios of earnings to
fixed charges and preferred dividends were 2.90 and 3.96 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, these companies would be
required to generate cash through borrowings, sales of securities
or other assets, or similar transactions.
In December 1996, American Premier paid a dividend to AFG in the
form of a $675 million note receivable from AFC plus $18.7 million
of related accrued interest. AFG then contributed $450 million of
the note (without accrued interest) to the capital of AFC. At
September 30, 1997, $213 million is outstanding under the note and
included in payable to AFG on AFC's balance sheet.
American Premier has a credit agreement with AFG under which
American Premier and AFG will make loans of up to $250 million
available to each other. Principal amounts payable to AFG under
the credit agreement totaled $113.1 million and $175.5 million at
September 30, 1997 and December 31, 1996, respectively.
<PAGE>
Bank credit lines at several subsidiary holding companies provide
ample liquidity and 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 $510 million is available under these bank facilities,
$56 million of which was borrowed at September 30, 1997.
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 borrow
up to $200 million of bank debt in the normal course in order to
retire public or privately held fixed rate obligations over the
next year or two.
The cash to be utilized for the proposed merger transactions
involving AFC and AFEI is expected to come from internally
generated funds and existing credit lines (see Note L).
13
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies in the
past. However, the reliance on such dividend payments has been
lessened by the combination of (i) strong capital at AFC's
insurance subsidiaries (and the related decreased likelihood of a
need for investment in those companies), (ii) the reductions of
debt at the holding companies (and the related decrease in ongoing
cash needs for interest and principal payments), (iii) AFC's
ability to obtain financing in capital markets, as well as (iv) the
sales of non-insurance investments.
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, 1997. 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 the companies and the industries in which they
operate.
RESULTS OF OPERATIONS
General Pretax earnings before extraordinary items for the three
months ended September 30, 1997 were $57.3 million compared to
$148 million for the third quarter of 1996. Results for 1996
include (i) $166 million in pretax gains (net of minority interest)
primarily on the sale of Citicasters, (ii) a charge of $80 million
resulting from an increase in insurance reserves relating to
asbestos and other environmental matters ("A&E") and (iii) losses
of about $30 million form Hurricane Fran. Excluding realized gains
and the unusual 1996 items, pretax earnings before extraordinary
items were approximately $30 million and $90 million for the third
quarter of 1997 and 1996, respectively. This decrease is
attributable to a deterioration in underwriting profit in the
property and casualty operations due primarily to increasing claims
severity in the California workers' compensation business, several
unusually large commercial lines casualty losses, increased
investee losses, and a nonrecurring charge associated with an
arbitration settlement.
Pretax earnings before extraordinary items were $249 million for
the first nine months of 1997 compared to $349.2 million for the
first nine months of 1996. Excluding realized gains (net of
minority interest), the A&E charge and the effect of Hurricane
Fran, pretax earnings before extraordinary items were approximately
$215 million and $240 million for the first nine months of 1997 and
1996, respectively. This decrease was due primarily to third
quarter results which more than offset improved earnings in the
first six months of 1997.
<PAGE>
Property and Casualty Insurance - Underwriting AFC manages and
operates its property and casualty business as three major sectors.
The nonstandard automobile insurance companies (the "NSA Group")
insure risks not typically accepted for standard automobile
coverage because of the applicant's driving record, type of
vehicle, age or other criteria. The specialty lines are a
diversified group of over twenty-five business lines that offer a
wide variety of specialty insurance products. Some of the more
significant areas are California workers'compensation, executive
liability, inland and ocean marine, U.S.-based operations of Japanese
companies, agricultural-related coverages, excess and surplus lines,
aviation 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.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Underwriting profitability is measured by the combined ratio which
is a sum of the ratios of underwriting losses, loss adjustment
expenses, underwriting expenses and policyholder dividends to
premiums. When the combined ratio is under 100%, underwriting
results are generally considered profitable; when the ratio is over
100%, underwriting results are generally considered unprofitable.
The combined ratio does not reflect investment income, other income
or federal income taxes.
For certain lines of business and products where the credibility of
the range of loss projections is less certain (primarily the
various specialty lines listed above), management believes that it
is prudent and appropriate to use conservative assumptions until
such time as the data, experience and projections have more
credibility, as evidenced by data volume, consistency and maturity
of the data. While this practice mitigates the risk of adverse
development on this business, it does not eliminate it.
Net written premiums and combined ratios for AFC's property and
casualty insurance subsidiaries were as follows (dollars in
millions):
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
Net Written Premiums (GAAP)
NSA Group $299.1 $277.2 $ 957.0 $ 868.8
Specialty Operations 304.8 270.5 826.8 755.6
Commercial and Personal
Operations 136.4 160.7 367.0 488.9
Other Lines - - - .3
$740.3 $708.4 $2,150.8 $2,113.6
Combined Ratios (GAAP)
NSA Group 97.3% 98.2% 97.2% 100.3%
Specialty Operations 101.5 69.2 94.5 85.0
Commercial and Personal
Operations 111.7 126.7 105.8 111.2
Aggregate (including A&E
and other lines) 102.0 111.8 99.8 104.2
<PAGE>
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)
increases in A&E reserves (exposures for which AFC has been held
liable under general liability policies written years ago). A
standard insurance measure used in analyzing the adequacy of A&E
reserves is the "survival ratio" (reserves divided by three-year
average annual paid losses). Due in part to the greater
uncertainties inherent in estimating A&E claims, management
evaluates its survival ratio in relation to those published for
the industry. Based primarily on industry survival ratios published
in mid-1996, AFC increased A&E reserves of its discontinued insurance
lines by $120 million by recording a third quarter, non-cash, pretax
charge of $80 million and reallocating $40 million, or approximately
2%, of reserves from its Specialty Operations. Reserves for unpaid
losses and loss adjustment expenses of the Specialty Lines were
approximately $2.1 billion at September 30, 1997 and December 31, 1996.
A&E reserves at September 30, 1997, were approximately $348 million,
an amount equal to approximately 10 times the preceding three years'
average claim payments.
15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
NSA Group Net written premiums for the NSA Group increased 8%
during the third quarter and 10% during the first nine months of
1997 from the comparable 1996 periods due primarily to volume
increases in California resulting from enactment of legislation
which requires drivers to provide proof of insurance in order to
obtain a valid permit. The improvement in the combined ratio
reflects rate increases in various states over the last couple of
years.
Specialty Operations Net written premiums for the specialty
operations increased 13% during the third quarter and 9% during the
first nine months of 1997 from the comparable 1996 periods due
primarily to premiums recorded by a newly acquired aviation
division and the return of premiums related to the withdrawal from
a voluntary pool in 1996. Underwriting results for the third
quarter and first nine months of 1997 declined due primarily to (i)
the reallocation of $40 million in reserves to A&E reserves (a
combined ratio impact of 15.0 points and 5.4 points for the third
quarter and first nine months of 1996, respectively), (ii) 1996
reductions in reserves for business written primarily prior to 1995
in response to fundamental changes in the California workers'
compensation market and actuarial evaluations, and (iii) increased
losses during the third quarter of 1997 relating to deteriorating
underwriting margins in California workers' compensation business
written in 1996 and 1997.
Commercial and Personal Operations Net written premiums for the
commercial and personal operations decreased 15% during the third
quarter and 25% during the first nine months of 1997 from the
comparable 1996 periods due primarily to a reinsurance agreement,
effective January 1, 1997, under which 80% of all AFG's homeowners'
business will be reinsured, and reduced writings of personal
automobile coverages in certain states. Excluding the impact of
the reinsurance agreement, premiums decreased 6% and 9%,
respectively. Underwriting results for 1997 were impacted by
several current year commercial casualty losses as well as adverse
development in certain prior year claims. Underwriting results for
1996 included losses attributable to Hurricane Fran and other
weather-related losses.
Investment Income Investment income increased approximately 3% in
the third quarter and the first nine months of 1997 compared to
1996 due primarily to 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.
<PAGE>
Investee Corporations Equity in net earnings of investee
corporations in 1997 represents AFC's proportionate share of
Chiquita's earnings. Chiquita reported net earnings (losses)
before extraordinary item for the third quarter and first nine
months of 1997 of ($28 million) and $56.4 million, respectively,
and ($7.6 million) and $59.7 million for the comparable 1996
periods. Chiquita's results for 1997 have been adversely affected
by (i) a stronger dollar, mitigated in part by the company's foreign
currency hedging program and (ii) increased banana production costs
arising from weather-related effects on current productivity. Chiquita's
results for 1996 include first quarter writedowns and costs of
$12 million resulting from flood damage in Costa Rica. Included in
earnings from investees in 1996 were earnings of $1.5 million
attributable to AFC's investment in Citicasters which was sold in
September 1996.
Gain on Sale of Investee Corporation The gain on sale of investee
corporation for the third quarter and first nine months of 1996
represent pretax gains, before minority interest, on the sale of
Citicasters common stock.
16
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Gains on Sales of Subsidiaries The gain on sale of subsidiaries in
1997 represents a pretax gain on the sale of a travel agency. The
gains on sales of subsidiaries in 1996 include a pretax gain of
$33.9 million on the sale of Buckeye Management Company and the
settlement of litigation related to a subsidiary sold in 1993.
Other Income Other income decreased $9.7 million (26%) during the
third quarter and $22.4 million (22%) during the first nine months
of 1997 due primarily to the sale of a subsidiary in the first
quarter of 1997.
Annuity Benefits Annuity benefits reflect interest credited to
annuity policyholders' funds accumulated. The majority of AAG's
fixed rate annuity products permit AAG to change the crediting rate
at any time (subject to minimum interest rate guarantees of 3% or
4% per annum). As a result, management has been able to react to
changes in market interest rates and maintain a desired interest
rate spread without a substantial effect on persistency. Annuity
benefits increased 5% in the third quarter and 3% in the first nine
months of 1997 due primarily to an increase in average annuity
benefits accumulated.
Minority Interest Expense Minority interest expense decreased
$8.1 million (44%) during the third quarter and $8.5 million (22%)
during the first nine months of 1997 due primarily to lower earnings
reported by American Premier in 1997 and the absence of the $6.5 million
in minority interest recorded from the sale of Citicasters common
stock in the third quarter of 1996. These items were partially offset
by increases in the charge for distribution requirements on trust
preferred securities.
Other Operating and General Expenses Other operating and general
expenses increased $8.2 million (10%) during the third quarter of 1997
compared to 1996. Decreases in other operating and general expenses
resulting from the sale of a subsidiary in 1997 were more than offset by
additional expenses recorded including a nonrecurring charge of
$5.5 million relating to an arbitration settlement and a $4 million
charge related to the estimated costs of relocating operations of a
subsidiary to Cincinnati. Other operating and general expenses
decreased $7.4 million (3%) during the first nine months of 1997.
New Accounting Standards to be Implemented During 1997, the
Financial Accounting Standards Board issued the following Statement
of Financial Accounting Standards ("SFAS"); the implementation of
these standards will not have a significant effect on AFC's
financial position or results of operations.
SFAS # Subject of Standard Period to be Implemented
129 Capital Structure 4th quarter of 1997
130 Comprehensive Income 1st quarter of 1998
131 Segment Information 4th quarter of 1998
__________________________________________________________
17
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Reports on Form 8-K:
Date of Report Item Reported
July 14, 1997 Proposal to pay cash or issue new Preferred Stock
in exchange for Series F and G Preferred Stock.
____________________________________________________________
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 13, 1997 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
18
<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, 1997 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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 352,261
<SECURITIES> 11,177,859<F1>
<RECEIVABLES> 709,882
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,670,098
<CURRENT-LIABILITIES> 0
<BONDS> 390,853
0
162,760
<COMMON> 9,625
<OTHER-SE> 1,382,718
<TOTAL-LIABILITY-AND-EQUITY> 15,670,098
<SALES> 0
<TOTAL-REVENUES> 2,967,907
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 233,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,293
<INCOME-PRETAX> 248,964
<INCOME-TAX> 91,343
<INCOME-CONTINUING> 157,621
<DISCONTINUED> 0
<EXTRAORDINARY> (6,986)
<CHANGES> 0
<NET-INCOME> 150,635
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $219 million.
<F2>Not applicable since all common shares are owned by American Financial
Group.
</FN>
</TABLE>
