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, 1998 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, 1998, there were 10,593,000 shares of the
Registrant's Common Stock outstanding, all of which were owned
indirectly by American Financial Group, Inc.
Page 1 of 21
<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,
1998 1997
Assets:
Cash and short-term investments $ 405,831 $ 231,227
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,911,400 and $3,417,900) 2,764,137 3,326,996
Available for sale - at market
(amortized cost - $7,462,670 and $7,225,736) 7,897,070 7,532,836
Other stocks - principally at market
(cost - $196,868 and $153,322) 393,468 446,222
Investment in investee corporation 232,933 200,714
Policy loans 221,208 240,955
Real estate and other investments 268,657 280,235
Total investments 11,777,473 12,027,958
Recoverables from reinsurers and prepaid
reinsurance premiums 1,161,686 998,743
Agents' balances and premiums receivable 754,855 691,005
Deferred acquisition costs 500,052 521,898
Other receivables 262,182 261,454
Assets held in separate accounts 84,890 300,491
Prepaid expenses, deferred charges and other assets 359,600 405,798
Cost in excess of net assets acquired 283,422 299,408
$15,589,991 $15,737,982
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,528,175 $ 4,225,336
Unearned premiums 1,294,259 1,328,910
Annuity benefits accumulated 5,424,690 5,528,111
Life, accident and health reserves 339,558 709,899
Payable to American Financial Group, Inc. 292,000 352,766
Other long-term debt:
Holding companies 332,589 286,661
Subsidiaries 207,306 194,084
Liabilities related to separate accounts 84,890 300,491
Accounts payable, accrued expenses and other
liabilities 980,005 908,622
Total liabilities 13,483,472 13,834,880
Minority interest 527,801 509,619
Shareholders' Equity:
Preferred Stock
- $72,154 liquidation value 72,154 72,154
Common Stock, no par value
- 20,000,000 shares authorized
- 10,593,000 shares outstanding 9,625 9,625
Capital surplus 948,740 936,154
Retained earnings 194,699 34,350
Net unrealized gain on marketable securities,
net of deferred income taxes 353,500 341,200
Total shareholders' equity 1,578,718 1,393,483
$15,589,991 $15,737,982
2
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 696,537 $ 739,858 $2,080,003 $2,102,001
Life, accident and health premiums 50,434 32,149 145,710 84,845
Investment income 223,322 218,626 672,760 645,961
Equity in net earnings (loss) of
investee (5,518) (13,914) 26,396 18,094
Realized gains on sales of:
Securities 14,302 29,682 28,890 35,693
Investee and subsidiaries 11,090 - 20,510 731
Other investments - - 6,843 -
Other income 42,262 28,335 106,112 80,582
1,032,429 1,034,736 3,087,224 2,967,907
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 513,537 545,915 1,577,440 1,510,426
Commissions and other underwriting
expenses 201,777 208,975 586,409 586,580
Annuity benefits 64,514 72,868 204,735 212,305
Life, accident and health benefits 40,547 28,250 115,208 78,238
Interest charges on borrowed money 19,005 21,167 54,059 67,293
Minority interest expense 15,048 10,530 38,135 30,887
Other operating and general expenses 88,823 89,775 248,655 233,214
943,251 977,480 2,824,641 2,718,943
Earnings before income taxes and
extraordinary items 89,178 57,256 262,583 248,964
Provision for income taxes 31,185 22,339 98,594 91,343
Earnings before extraordinary items 57,993 34,917 163,989 157,621
Extraordinary items - loss on prepayment
of debt (33) (6,908) (754) (6,986)
Net Earnings $ 57,960 $ 28,009 $ 163,235 $ 150,635
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized
Preferred and Capital Retained Gain on Comprehensive
Stock Surplus Earnings Securities Income
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $72,154 $936,154 $ 34,350 $341,200
Net earnings - - 163,235 - $163,235
Dividends on Preferred Stock - - (2,886) - -
Capital contribution from parent - 12,530 - - -
Change in unrealized - - - 12,300 12,300
Other - 56 - - -
Balance at September 30, 1998 $72,154 $948,740 $194,699 $353,500 $175,535
Balance at January 1, 1997 $162,760 $929,371 $ 1,364 $183,400
Net earnings - - 150,635 - $150,635
Dividends on Preferred Stock - - (12,773) - -
Capital contribution from parent - 12,530 - - -
Change in unrealized - - - 128,200 128,200
Other - (384) - - -
Balance at September 30, 1997 $162,760 $941,517 $139,226 $311,600 $278,835
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended
September 30,
1998 1997
Operating Activities:
Net earnings $ 163,235 $ 150,635
Adjustments:
Extraordinary items 754 6,986
Depreciation and amortization 71,589 51,173
Annuity benefits 204,735 212,144
Equity in net earnings of investee (26,396) (18,094)
Changes in reserves on assets 761 (102)
Realized gains on investing activities (80,357) (36,102)
Increase in reinsurance and other receivables (229,730) (216,226)
Decrease (increase) in other assets (125,352) 66,962
Increase in insurance claims and reserves 293,264 188,305
Increase (decrease) in other liabilities 111,765 (104,382)
Increase in minority interest 14,743 24,944
Dividends from investee 3,600 3,600
Other, net (12,783) (19,044)
389,828 310,799
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,682,077) (1,816,550)
Equity securities (54,971) (22,783)
Subsidiaries (30,325) (4,900)
Real estate, property and equipment (49,425) (35,396)
Maturities and redemptions of fixed maturity
investments 1,017,004 535,178
Sales of:
Fixed maturity investments 544,722 935,942
Equity securities 19,119 85,677
Subsidiaries 164,589 2,500
Real estate, property and equipment 48,634 2,792
Cash and short-term investments of acquired
(former) subsidiaries (19,646) (70)
Increase in other investments (9,363) (4,448)
(51,739) (322,058)
<PAGE>
Financing Activities:
Fixed annuity receipts 358,659 369,731
Annuity surrenders, benefits and withdrawals (538,912) (439,818)
Additional long-term borrowings 217,537 63,090
Reductions of long-term debt (159,383) (110,494)
Borrowings from AFG - 44,100
Payments to AFG (52,500) (118,500)
Capital contribution 14,000 14,000
Issuances of trust preferred securities - 149,353
Cash dividends paid (2,886) (12,773)
(163,485) (41,311)
Net Increase (Decrease) in Cash and
Short-term Investments 174,604 (52,570)
Cash and short-term investments at beginning
of period 231,227 404,831
Cash and short-term investments at end of period $ 405,831 $ 352,261
5
<PAGE>
AMERICAN FINANCIAL CORPORATION, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Financial Corporation ("AFC") and
subsidiaries are unaudited; however, management believes that
all adjustments (consisting only of normal recurring accruals
unless otherwise disclosed herein) necessary for fair
presentation have been made. The results of operations for
interim periods are not necessarily indicative of results to be
expected for the year. The financial statements have been
prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes
necessary to be in conformity with generally accepted
accounting principles.
Certain reclassifications have been made to prior years to
conform to the current year's presentation. All significant
intercompany balances and transactions have been eliminated.
All acquisitions have been treated as purchases. The results
of operations of companies since their formation or acquisition
are included in the consolidated financial statements.
The preparation of the financial statements requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Changes in circumstances could cause actual results to differ
materially from those estimates.
AFC's Common Stock is owned by AFC Holding Company, a wholly-
owned subsidiary of American Financial Group, Inc. ("AFG").
AFC's ownership of subsidiaries and significant affiliates was
as follows:
September 30, December 31,
1998 1997 1996
American Annuity Group, Inc. ("AAG") 82% 81% 81%
American Financial Enterprises, Inc. ("AFEI")(*) 80% 80% 83%
American Premier Underwriters, Inc.(*) 81% 81% 81%
Chiquita Brands International, Inc. 37% 39% 43%
(*) AFG owned the remaining 20% of AFEI and 19% of American Premier at
September 30, 1998 and December 31, 1997.
<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.
Short-term investments are carried at cost; loans receivable
are carried primarily at the aggregate unpaid balance.
Premiums and discounts on mortgage-backed securities are
amortized over their expected average lives using the interest
method.
Gains or losses on sales of securities are recognized at the
time of disposition with the amount of gain or loss determined
on the specific identification basis. When a decline in the
value of a specific investment is considered to be other than
temporary, a provision for impairment is charged to earnings
and the carrying value of that investment is reduced.
6
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investment in Investee Corporation Investments in securities
of 20%- to 50%-owned companies are generally carried at cost,
adjusted for AFC's proportionate share of their undistributed
earnings or losses.
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFC's equity in the underlying
net assets ("goodwill") is being amortized over 40 years.
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 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.
<PAGE>
Unpaid Losses and Loss Adjustment Expenses The net
liabilities stated for unpaid claims and for expenses of
investigation and adjustment of unpaid claims are based upon
(a) the accumulation of case estimates for losses reported
prior to the close of the accounting period on the direct
business written; (b) estimates received from ceding reinsurers
and insurance pools and associations; (c) estimates of
unreported losses based on past experience; (d) estimates based
on experience of expenses for investigating and adjusting
claims and (e) the current state of the law and coverage
litigation. These liabilities are subject to the impact of
changes in claim amounts and frequency and other factors. In
spite of the variability inherent in such estimates, management
believes that the liabilities for unpaid losses and loss
adjustment expenses are adequate. Changes in estimates of the
liabilities for losses and loss adjustment expenses are
reflected in the Statement of Earnings in the period in which
determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged
to expense and decreases for surrender charges are credited to
other income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional life, accident and health
policies are computed using a net level premium method.
Computations are based on anticipated
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
investment yield, 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
Separate account assets and related liabilities represent
variable annuity deposits and, in 1997, include deposits
maintained by several banks under a previously offered tax-
deferred annuity program which was sold as part of the Funeral
Services division (see Note B).
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.
Policyholder Dividends Dividends payable to policyholders
are included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which
the related premium is earned. Changes in estimates are
included in income in the period determined. Policyholder
dividends do not become legal liabilities unless and until
declared by the boards of directors of the insurance companies.
Minority Interest For balance sheet purposes, minority
interest represents the interests of noncontrolling
shareholders in AFC subsidiaries, including preferred
securities issued by trust subsidiaries of AAG, and the AFG
direct ownership interest in American Premier Underwriters,
Inc. ("American Premier" or "APU") and AFEI. 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.
Issuances of Stock by Subsidiaries and Investees Changes in
AFC's equity in a subsidiary or an investee caused by issuances
of the subsidiary's or investee's stock are accounted for as
gains or losses where such issuance is not part of a broader
reorganization.
<PAGE>
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 filed a consolidated return for 1997.
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.
8
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Benefit Plans AFC provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans contained in AFC's
Retirement and Savings Plan. Under the retirement portion of
the plan, company contributions (approximately 6% of covered
compensation in 1997) are invested primarily in securities of
AFG and affiliates. Under the savings portion of the plan, AFC
matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in
the year for which they are declared.
AFC and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFC also provides
postemployment benefits to former or inactive employees
(primarily those on disability) who were not deemed retired
under other company plans. The projected future cost of
providing these benefits is expensed over the period the
employees earn such benefits.
Start-up Costs Certain costs associated with introducing new
products and distribution channels are deferred by AAG and are
amortized on a straight-line basis over 5 years. See
Management's Discussion and Analysis - "New Accounting
Standards to be Implemented."
Comprehensive Income Effective January 1, 1998, AFC
implemented Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No.
130 uses the term "comprehensive income" to describe the total
of net earnings plus other comprehensive income. For AFC,
other comprehensive income represents the change in net
unrealized gain on marketable securities net of deferred taxes
and a reclassification adjustment for gains and losses included
in net earnings. Implementation of this statement had no
impact on net earnings or shareholders' equity. Prior periods
have been restated to conform to the current presentation.
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.
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. Sale of Subsidiaries On September 30, 1998, AAG sold its
Funeral Services division for approximately $165 million in
cash. AFC realized a pretax gain of $21.6 million, before
$2.7 million of minority interest, on this sale.
In September 1998, AFC reached a definitive agreement to sell
the majority of its Commercial lines division to Ohio Casualty
Company for $300 million in cash plus warrants to purchase
3 million shares of Ohio Casualty common stock. The commercial
lines being sold generated net written premiums of
approximately $215 million and $235 million for the nine months
ended September 30, 1998 and 1997, respectively, and
$330 million for the year ended December 31, 1997. AFC expects
to record a pretax gain in excess of $140 million on this
transaction. Completion of the sale, which is expected to
occur in the fourth quarter of 1998, is subject to certain
conditions, including receipt of regulatory approval.
C. Segments of Operations Following the sale of its Commercial
lines division, AFC's property and casualty group will be
engaged primarily in private passenger automobile and specialty
insurance businesses. 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 corporation - see
Note D).
The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" which is required to be implemented by the end of
1998. The implementation of SFAS No. 131 will have no effect
on AFC's earnings or its financial position.
<PAGE>
The following table (in thousands) shows AFC's revenues by
significant business segment. The Personal group consists of
the nonstandard auto group along with the preferred/standard
private passenger auto and other personal insurance business,
formerly included in the Commercial and Personal lines. The
Specialty group now includes a highly diversified group of
specialty business units (formerly, Specialty lines) plus the
commercial business previously included in the Commercial and
Personal lines.
Nine months ended September 30,
1998 1997
Property and casualty insurance:
Premiums earned:
Personal $ 980,288 $1,017,976
Specialty 1,068,854 1,056,531
Other (a) 30,861 27,494
2,080,003 2,102,001
Investment and other income 376,684 340,608
2,456,687 2,442,609
Annuities and life (b) 584,834 466,046
Other 19,307 41,158
3,060,828 2,949,813
Equity in net earnings of investee 26,396 18,094
$3,087,224 $2,967,907
(a) Includes nonstandard auto group operations in the United Kingdom.
(b) Represents primarily investment income.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investee Corporation Investment in investee
corporation reflects AFC's ownership of 24 million shares of
Chiquita common stock. The market value of this investment was
$253 million and $391 million at September 30, 1998 and
December 31, 1997, 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,
1998 1997
Net Sales $2,095 $1,834
Operating Income 157 134
Net Income 83 56
In November 1998, Chiquita reported that it had incurred significant
damage to its operations in Honduras as a result of widespread
flooding caused by Hurricane Mitch. Chiquita estimated that its
asset write-offs and charges relating to Honduras for its fourth
quarter will be in the $50 million range.
E. Payable to American Financial Group In December 1997, AFC and
APU entered into a ten-year reciprocal Master Credit Agreement
with AFG and AFC's direct parent, AFC Holding Company, under
which funds are made available to each other at one percent
over LIBOR. At September 30, 1998 and December 31, 1997, AFC
and APU had outstanding net borrowings due AFG and AFC Holding
under the Master Credit Agreement of $292.0 million and
$352.8 million (including accrued interest payable),
respectively.
F. Other Long-Term Debt The carrying value of long-term debt
consisted of the following (in thousands):
September 30, December 31,
1998 1997
Holding Companies:
AFC notes payable to banks due December 2002 $ 95,000 $45,000
AFC 9-3/4% Debentures due April 2004 78,797 79,792
APU 9-3/4% Subordinated Notes due August 1999 89,738 92,127
APU 10-5/8% Subordinated Notes due April 2000 43,108 43,889
APU 10-7/8% Subordinated Notes due May 2011 17,544 17,586
Other 8,402 8,267
$332,589 $286,661
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $ -
AAG notes payable to banks due
in installments to December 2003 57,000 107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 37,744 49,525
Other 12,562 13,479
$207,306 $194,084
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At September 30, 1998, sinking fund and other scheduled
principal payments on debt for the balance of 1998 and the
subsequent five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1998 $ - $ 472 $ 472
1999 89,030 1,962 90,992
2000 42,042 8,666 50,708
2001 - 1,381 1,381
2002 100,502 1,266 101,768
2003 - 58,294 58,294
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.
In February 1998, AFC entered into a new unsecured credit
agreement with a group of banks under which AFC can borrow up
to $300 million through December 2002. Borrowings bear
interest at floating rates based on prime or Eurodollar rates.
In January 1998, AAG replaced its existing bank lines with a
new $200 million unsecured credit agreement. Loans under the
credit agreement mature from 2000 to 2003 and bear interest at
floating rates based on prime or Eurodollar rates. In February
1998, AAG borrowed $50 million under the line and retired its
11-1/8% Notes (including $24.3 million principal amount held by
AAG and its subsidiaries). In June 1998, AAG sold $100 million
principal amount of 6-7/8% Senior Notes due 2008 to the public
and used the net proceeds to reduce outstanding indebtedness
under the credit agreement.
G. Minority Interest Minority interest in AFC's balance sheet
is comprised of the following (in thousands):
September 30, December 31,
1998 1997
Interest of AFG (parent) and of
noncontrolling shareholders
in subsidiaries' common stock $302,801 $284,619
Preferred securities issued by
subsidiary trusts 225,000 225,000
$527,801 $509,619
<PAGE>
Trust Issued Preferred Securities Wholly-owned subsidiary
trusts of AAG have issued $225 million of preferred securities
and, in turn, purchased $225 million of newly authorized AAG
subordinated debt issues which provide interest and principal
payments to fund the respective trusts' obligations. The
preferred securities are mandatorily redeemable upon maturity
or redemption of the subordinated debt.
The preferred securities are summarized as follows:
Date of Optional
Issuance Issuance (Maturity Date) Amount Redemption Dates
November 1996 9-1/4% TOPrS (2026) $75,000,000 On or after 11/7/2001
March 1997 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000
and after 9/28/2001
AAG effectively provides unconditional guarantees of its trusts' obligations.
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
Nine months ended
September 30,
1998 1997
Interest of AFG (parent) and
noncontrolling shareholders in
earnings of subsidiaries $23,861 $20,417
Accrued distributions on trust issued
preferred securities 14,274 10,470
$38,135 $30,887
H. Preferred Stock Under provisions of both the Nonvoting
(4.0 million shares authorized) and Voting (4.0 million shares
authorized) Cumulative Preferred Stock, the Board of Directors
may divide the authorized stock into series and set specific
terms and conditions of each series. AFC's Preferred Stock
consisted of the following:
Series J, no par value; $25.00 liquidating value per share;
annual dividends per share $2.00; redeemable at $25.75 per
share beginning December 2005 declining to $25.00 at
December 2007; 2,886,161 shares (stated value $72.2 million)
outstanding at September 30, 1998 and December 31, 1997.
I. Unrealized Gain on Marketable Securities The change in net
unrealized gain on marketable securities for the nine months
ended September 30 included the following (in millions):
<TABLE>
<CAPTION>
Minority
Pretax Taxes Interest Net
<S> <C> <C> <C> <C>
1998
Unrealized holding gains (losses) on
securities arising during the period $67.2 ($22.0) ($8.1) $37.1
Less reclassification adjustment for
realized gains included in net income
and unrealized gains of subsidiaries sold (45.1) 15.8 4.5 (24.8)
Change in net unrealized gain on
marketable securities $22.1 ($ 6.2) ($3.6) $12.3
1997
Unrealized holding gains (losses) on
securities arising during the period $254.0 ($89.0) ($15.6) $149.4
Less reclassification adjustment for
realized gains included in net income (36.1) 12.6 2.3 (21.2)
Change in net unrealized gain on
marketable securities $217.9 ($76.4) ($13.3) $128.2
</TABLE>
<PAGE>
J. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses related to debt retirements by
the following companies. Amounts shown are net of minority
interest and income tax benefits (in thousands):
Nine months ended
September 30,
1998 1997
Holding Companies:
AFC (parent) ($ 51) ($5,357)
APU (parent) (54) (379)
Subsidiaries:
AAG (649) (1,250)
($ 754) ($6,986)
13
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. 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
Maturity For Sale Total
1998
Purchases 826 1,681,251 1,682,077
Maturities and redemptions 478,711 538,293 1,017,004
Sales 37,903(*) 506,819 544,722
1997
Purchases $ 3,759 $1,812,791 $1,816,550
Maturities and redemptions 268,432 266,746 535,178
Sales - 935,942 935,942
(*) Sold (at a gain of $.7 million) due to significant
deterioration in the issuers' creditworthiness.
L. Commitments and Contingencies Other than as disclosed in
"Legal Proceedings" in Part II of AFC's June 30, 1998 Form 10-
Q, there have been no significant changes to the matters
discussed and referred to in Note O "Commitments and
Contingencies" in AFC's Annual Report on Form 10-K for 1997.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC and American Premier are organized as holding companies with
almost all of their operations being conducted by subsidiaries.
These parent corporations, however, have continuing cash needs for
administrative expenses, the payment of principal and interest on
borrowings and shareholder dividends. 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.
Year 2000 Status AFC's Year 2000 Project is a corporate-wide
program designed to ensure that its computer systems will function
properly in the year 2000. The Project also encompasses
communicating with agents, vendors, financial institutions and
others with which the companies conduct business to determine their
Year 2000 readiness and resulting effects on AFC. AFC's Year 2000
Project is being coordinated by its Year 2000 Project Office which
monitors the work being performed by the various business units and
reports monthly to the Audit Committee of the Board of Directors
and more frequently to senior management.
To address the Year 2000 problem, AFC's operations have been
divided into separate systems groups. At September 30, 1998,
these groups were in the process of either (i) modifying their
software programs or (ii) replacing programs with new software
that is Year 2000 compliant. Nearly three-fourths of the groups
are "on target" to meet AFC's goal of having program
modifications and new software installations substantially
completed by the end of 1998, with testing continuing in and
through 1999. About one-fourth of the groups are being "closely
watched" because there is some risk that critical dates in the
project schedule may be missed with a potential for some
disruption of normal business operations. One group is
considered "critical" at this time since it has significantly
missed internal project deadlines. This project has recently been
reorganized and staffing levels have been increased. The project
is being closely monitored and will be reviewed to determine if it
can be upgraded to the "closely watched" category during the fourth
quarter of 1998.
<PAGE>
Contingency plans have been developed for certain systems deemed
most critical to operations. These plans provide a documented
order of actions necessary to keep the business functions operating
for these systems. Such plans typically include procedures and
workflow processes for developing contingent databases.
Contingency planning for other systems deemed critical to
operations and reasonably likely not to be modified on schedule
will begin in the fourth quarter of 1998 and be completed by mid-
1999.
Many of the systems being replaced were planned replacements which
were merely accelerated due to the Year 2000 problem. In addition,
a significant portion of AFC's Year 2000 Project is being completed
using internal staff. Therefore, cost estimates for the Year 2000
Project do not entirely represent incremental costs.
From inception in the early 1990s through September 30, 1998, AFC
has incurred approximately $32 million in Year 2000 costs,
including capitalized costs of $7 million for new systems. During
the first nine months of 1998, $17 million in Year 2000 costs have
been expensed. AFC estimates that it will incur an additional
$30 million of such costs in completing the Project.
15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Projected Year 2000 costs and completion dates are based on
management's best estimates. However, there can be no assurance
that these estimates will be achieved. Should software
modifications and new software installations not be completed on a
timely basis, the resulting disruptions could have a material
adverse affect on operations.
AFC's operations could also be affected by the inability of third
parties such as agents and vendors to become Year 2000 compliant.
In addition, AFC's property and casualty insurance subsidiaries are
reviewing the potential impact of the Year 2000 issue on insureds
as part of their underwriting process. They are also reviewing
policy forms, issuing clarifying endorsements where appropriate and
examining coverage issues for Year 2000 exposures. While it is
possible that Year 2000 claims may emerge in future periods, it is
not possible to estimate any such amounts.
A&E Reserves Under the agreement to sell a majority of its
Commercial lines division, AFC will retain liabilities for certain
asbestos and environmental exposures ("A&E") relating to claims
under policies written prior to the mid-1980's. AFC's insurance
subsidiaries are in the process of reviewing their A&E reserves and
expect this review to be completed before the end of this year.
While its A&E reserves at September 30, 1998, were about
$350 million, approximately 10 times the preceding three years'
average claim payments, AFC expects that the review could indicate
estimated ultimate aggregate losses as much as two-thirds greater
than that amount. Any additional A&E reserves estimated to be
required will be recorded as a special charge upon completion of
the review.
Forward-Looking Statements The Private Securities Litigation
Reform Act of 1995 encourages corporations to provide investors
with information about the company's anticipated performance and
provides protection from liability if future results are not the
same as management's expectations. This document contains certain
forward-looking statements that are based on assumptions which
management believes are reasonable, but by their nature, inherently
uncertain. Future results could differ materially from those
projected. Factors that could cause such differences include, but
are not limited to: changes in economic conditions, regulatory
actions, level of catastrophe losses, the Year 2000 issue and
competitive pressures. AFC undertakes no obligation to update any
forward-looking statements.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's debt to total capital ratio (at the parent holding
company level and excluding amounts due AFG) was approximately 17%
at September 30, 1998 and December 31, 1997. Including amounts due
AFG, the ratio was 28% at September 30, 1998 and 31% at
December 31, 1997.
AFC's ratio of earnings to fixed charges, excluding and including
preferred dividends, on a total enterprise basis are shown below.
Nine months Year Ended
Ended September 30, December 31,
1998 1997
Earnings to fixed charges 4.43 4.20
Earnings to fixed charges plus
preferred dividends 4.06 3.52
16
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Sources of Funds Management believes the parent holding companies
have sufficient resources to meet their liquidity requirements
through operations in the short-term and long-term future. If
funds generated from operations, including dividends and tax
payments from subsidiaries, are insufficient to meet fixed charges
in any period, these companies would be required to generate cash
through borrowings, sales of securities or other assets, or similar
transactions.
AFC participates in a reciprocal Master Credit Agreement among the
various AFG holding companies under which funds are made available
to each other for general corporate purposes. Amounts due AFG
under the Master Credit Agreement were $292 million at September 30,
1998 and $345 million at December 31, 1997.
A new five-year, $300 million bank credit line was established by
AFC in February 1998, replacing two subsidiary holding company
lines. The new credit line provides ample liquidity and can be
used to obtain funds for operating subsidiaries or, if necessary,
for the parent companies. At September 30, 1998, there was
$95 million borrowed under the credit line.
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 reduction of debt
at the holding companies from historical levels (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-core investments.
Investments Approximately 91% of fixed maturities held by AFC were
rated "investment grade" (credit rating of AAA to BBB) by
nationally recognized rating agencies at September 30, 1998.
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.
<PAGE>
RESULTS OF OPERATIONS
General Pretax earnings before extraordinary items for the three
months ended September 30, 1998 were $89.2 million compared to
$57.3 million for the third quarter of 1997. The earnings
improvement for the 1998 quarter reflects an increase in investment
income and income from the sale of lease residuals and real estate
properties, a decrease in investee losses and the absence of
certain costs and expenses included in the 1997 period.
Pretax earnings before extraordinary items for the nine months
ended September 30, 1998 were $262.6 million compared to $249.0
million for the first nine months of 1997. The earnings reflect
higher realized gains in addition to those items mentioned above
related to the third quarter, partially offset by a deterioration
in underwriting results in the property and casualty operations due
primarily to severe storms in the midwestern part of the country
during the 1998 second quarter and a continuation of the adverse
claims environment in the California workers' compensation
business.
17
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Property and Casualty Insurance - Underwriting Following the sale
of its Commercial lines division as described in Note B, which is
expected to be completed in the fourth quarter of 1998, AFC's
property and casualty group will be engaged primarily in private
passenger automobile and specialty insurance businesses.
Accordingly, AFC has realigned its property and casualty group into
two major business groups: Personal and Specialty.
The Personal group consists of the nonstandard auto group along
with the preferred/standard private passenger auto and other
personal insurance business, formerly included in the Commercial
and Personal lines. The nonstandard automobile insurance companies
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 group includes a highly diversified group of business
lines (formerly, Specialty lines) plus the commercial business
previously included in the Commercial and Personal lines. Some of
the more significant areas are executive liability, inland and
ocean marine, U.S.-based operations of Japanese companies,
agricultural-related coverages, California workers' compensation,
non-profit liability, general aviation coverages, fidelity and
surety bonds, and umbrella and excess coverages. Commercial lines
businesses to be sold include certain coverages in workers'
compensation, commercial multi-peril, umbrella, and commercial
automobile.
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.
<PAGE>
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,
1998 1997 1998 1997
Net Written Premiums (GAAP)
Personal $314.3 $329.0 $ 998.0 $1,030.6
Specialty 357.9 397.7 1,039.6 1,090.8
Other 2.1 13.6 17.7 29.4
$674.3 $740.3 $2,055.3 $2,150.8
Combined Ratios (GAAP)
Personal 97.3% 98.5% 96.9% 99.1%
Specialty 106.0 103.9 107.5 96.5
Aggregate (including other) 102.8 102.0 104.1 99.8
Personal The Personal group's net written premiums decreased 4%
in the third quarter and 3% in the first nine months of the year
compared to the same 1997 periods. The decline is due primarily to
stronger price competition in the personal automobile market.
18
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Specialty The Specialty group's net written premiums decreased
$39.8 million (10%) during the third quarter from the comparable
1997 period due primarily to the initial impact of a reinsurance
agreement whereby approximately 30% of AFC's California workers'
compensation premiums are being ceded. Also, the Specialty group's
writings continue to be affected by intense price competition in
the commercial casualty markets. Underwriting results for the third
quarter of 1998 continue to be affected by the adverse claims
environment in the California workers' compensation business and
weak results in the general aviation business.
Net written premiums for the first nine months of 1998 decreased
$51.2 million (5%) from 1997 due to the workers' compensation
reinsurance agreement mentioned above and a decline in commercial
multi-peril due to price competition. Underwriting results for the
first nine months of 1998 worsened from the comparable periods in
1997 due to (i) losses from the midwestern storms in the second
quarter of 1998, (ii) the continuation of the adverse claims
environment in the California workers' compensation business, (iii)
weak results in the general aviation business and (iv) unusually
good results in 1997 in certain other lines.
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects primarily
AAG's acquisition of GA Life Assurance Company in December 1997 and
increased sales of pre-need life insurance.
Investment Income Investment income increased $4.7 million (2%)
for the third quarter of 1998 and $26.8 million (4%) for the first
nine months of 1998 compared to 1997 due primarily to an increase
in the average amount of investments held partially offset by
decreasing market interest rates.
Investee Corporations Equity in net earnings of investee
corporations represents AFC's proportionate share of Chiquita's
earnings. Chiquita reported net income (losses) for the third
quarter and first nine months of 1998 of ($11 million) and
$83 million, respectively, compared to ($28 million) and
$56 million for the same periods in 1997.
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>
Gain on Sale of Investee and Subsidiaries
Investee Chiquita's public issuance of shares of its common
stock in the first and second quarters of 1998 resulted in pretax
gains to AFC of $7.7 million and $1.7 million in those periods.
Subsidiaries In the third quarter of 1998, AFC recorded a
pretax gain of $21.6 million on AAG's sale of its Funeral Services
Division and a charge of $10.5 million relating to operations
expected to be sold or otherwise disposed of.
Other Income Other income increased $13.9 million (49%) during the
third quarter and $25.5 million (32%) in the first nine months of
1998 due primarily to income from the sale of operating real estate
assets and lease residuals.
19
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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. While management believes the recent
interest rate environment has contributed to an increase in
annuitizations and surrenders, AAG's persistency rate remains over
87%. A continuation of the current interest rate environment could
adversely affect this rate.
Interest on Borrowed Money Interest expense decreased $2.2 million
(10%) during the third quarter and $13.2 million (20%) during the
first nine months of 1998. The decrease reflects a decrease in
average amounts borrowed and a decrease in average rates.
Minority Interest Expense Minority interest expense increased
$4.5 million (43%) during the third quarter and $7.2 million (23%)
during the first nine months of 1998. Dividends paid by
subsidiaries on their trust issued preferred securities have varied
as the securities were issued over the past few years.
New Accounting Standard to be Implemented Statement of Position 98-
5, "Reporting on the Costs of Start-Up Activities," was issued
during the second quarter of 1998. The SOP is effective for fiscal
years beginning after December 15, 1998, and requires that costs of
start-up activities be expensed as incurred. The SOP requires that
unamortized balances of previously deferred costs be expensed no
later than the first quarter of 1999 and reported as the cumulative
effect of a change in accounting principle. AAG had approximately
$8 million in capitalized start-up costs at September 30, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be implemented for fiscal years
beginning after June 15, 1999. Management does not anticipate that
implementation of the new statement will have a significant effect
on AFC's earnings or its financial position.
20
<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 as of September 30, 1998. For
submission in electronic filing only.
(b) Reports on Form 8-K:
Date of Report Item Reported
September 21, 1998 Agreement to sell Commercial Lines Division
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 12, 1998 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule conatins summary financial information extracted from
the American Financial Corporation 10-Q for the nine months ended
Sepbember 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $405,831
<SECURITIES> 11,287,608<F1>
<RECEIVABLES> 754,855
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,589,991
<CURRENT-LIABILITIES> 0
<BONDS> 539,895
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,569,093
<TOTAL-LIABILITY-AND-EQUITY> 15,589,991
<SALES> 0
<TOTAL-REVENUES> 3,087,224
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 248,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,059
<INCOME-PRETAX> 262,583
<INCOME-TAX> 98,594
<INCOME-CONTINUING> 163,989
<DISCONTINUED> 0
<EXTRAORDINARY> (754)
<CHANGES> 0
<NET-INCOME> $163,235
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Included an investment in investee of $233 million.
<F2>Not applicable since all common shares are owned
by American Financial Group, Inc.
</FN>
</TABLE>
