SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 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 August 1, 1998, there were 10,593,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc.
Page 1 of 20
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
June 30, December 31,
1998 1997
Assets:
Cash and short-term investments $ 274,984 $ 231,227
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $2,910,700 and $3,202,300) 2,822,029 3,120,106
Available for sale - at market
(amortized cost - $7,819,968
and $7,225,736) 8,149,168 7,532,836
Other stocks - principally at market
(cost - $182,109 and $153,322) 437,309 446,222
Investment in investee corporation 239,649 200,714
Loans receivable 408,647 512,608
Real estate and other investments 218,891 215,472
Total investments 12,275,693 12,027,958
Recoverables from reinsurers and prepaid
reinsurance premiums 1,076,346 998,743
Agents' balances and premiums receivable 729,577 691,005
Deferred acquisition costs 558,029 521,898
Other receivables 267,160 261,454
Deferred tax asset 4,299 41,413
Assets held in separate accounts 343,590 300,491
Prepaid expenses, deferred charges and
other assets 336,470 364,385
Cost in excess of net assets acquired 298,327 299,408
$16,164,475 $15,737,982
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,368,302 $ 4,225,336
Unearned premiums 1,323,952 1,328,910
Annuity benefits accumulated 5,589,107 5,528,111
Life, accident and health reserves 752,671 709,899
Payable to American Financial Group, Inc. 321,913 352,766
Other long-term debt:
Holding companies 335,877 286,661
Subsidiaries 213,980 194,084
Liabilities related to separate accounts 343,590 300,491
Accounts payable, accrued expenses and other
liabilities 900,614 908,622
Total liabilities 14,150,006 13,834,880
Minority interest 520,523 509,619
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 944,728 936,154
Retained earnings 136,739 34,350
Net unrealized gain on marketable
securities, net of deferred income
taxes 330,700 341,200
Total shareholders' equity 1,493,946 1,393,483
$16,164,475 $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 Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 707,294 $ 698,381 $1,383,466 $1,362,143
Life, accident and health premiums 48,460 27,331 95,276 52,696
Investment income 229,207 214,583 449,438 427,335
Equity in net earnings of investee 17,996 17,228 31,914 32,008
Realized gains on sales of:
Securities 7,142 4,198 14,588 6,011
Investee and subsidiary 1,716 - 9,420 731
Other investments - - 6,843 -
Other income 26,317 25,823 63,850 52,247
1,038,132 987,544 2,054,795 1,933,171
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 564,078 495,187 1,063,903 964,511
Commissions and other underwriting
expenses 191,027 193,304 384,632 377,605
Annuity benefits 69,111 70,607 140,221 139,437
Life, accident and health benefits 36,555 25,825 74,661 49,988
Interest charges on borrowed money 18,023 22,515 35,054 46,126
Minority interest expense 10,946 4,274 23,087 13,727
Other operating and general expenses 83,133 82,335 159,832 150,069
972,873 894,047 1,881,390 1,741,463
Earnings before income taxes and
extraordinary items 65,259 93,497 173,405 191,708
Provision for income taxes 25,673 32,783 67,409 69,004
Earnings before extraordinary items 39,586 60,714 105,996 122,704
Extraordinary items - loss on prepayment
of debt (36) (23) (721) (78)
Net Earnings $ 39,550 $ 60,691 $ 105,275 $ 122,626
</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> <C>
Balance at January 1, 1998 $72,154 $945,779 $ 34,350 $341,200
Net earnings - - 105,275 - $105,275
Dividends on Preferred Stock - - (2,886) - -
Capital contribution from parent - 8,354 - - -
Change in unrealized - - - (10,500) (10,500)
Other - 220 - - -
Balance at June 30, 1998 $72,154 $954,353 $136,739 $330,700 $94,775
Balance at January 1, 1997 $162,760 $929,371 $ 1,364 $183,400
Net earnings - - 122,626 - $122,626
Dividends on Preferred Stock - - (11,742) - -
Capital contribution from parent - 8,353 - - -
Change in unrealized - - - 49,300 49,300
Other - (160) - - -
Balance at June 30, 1997 $162,760 $937,564 $112,248 $232,700 $171,926
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended
June 30,
1998 1997
Operating Activities:
Net earnings $ 105,275 $ 122,626
Adjustments:
Extraordinary items 721 78
Depreciation and amortization 51,233 36,057
Annuity benefits 140,221 139,437
Equity in net earnings of investee (31,914) (32,008)
Changes in reserves on assets 1,083 506
Realized gains on investing activities (44,411) (6,742)
Increase in reinsurance and other
receivables (121,030) (77,692)
Increase in other assets (43,744) (18,136)
Increase in insurance claims
and reserves 167,165 65,484
Increase (decrease) in other liabilities 33,618 (122,376)
Increase in minority interest 11,462 15,761
Dividends from investee 2,400 2,400
Other, net (11,790) (3,889)
260,289 121,506
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,243,852) (1,205,788)
Equity securities (33,137) (16,555)
Subsidiaries (30,325) (4,900)
Real estate, property and equipment (34,932) (22,872)
Maturities and redemptions of fixed maturity
investments 772,496 360,774
Sales of:
Fixed maturity investments 358,597 698,990
Equity securities 12,194 9,552
Subsidiary - 2,500
Real estate, property and equipment 30,989 1,914
Cash and short-term investments of acquired
(former) subsidiaries 20,841 (70)
Increase (decrease) in other investments (4,843) (2,233)
(151,972) (178,688)
<PAGE>
Financing Activities:
Fixed annuity receipts 238,198 259,708
Annuity surrenders, benefits and withdrawals (354,790) (288,531)
Additional long-term borrowings 202,248 7,053
Reductions of long-term debt (134,164) (54,820)
Borrowings from AFG - 44,100
Payments to AFG (22,500) (101,500)
Capital contribution 9,334 9,333
Issuances of trust preferred securities - 149,353
Cash dividends paid (2,886) (11,742)
(64,560) 12,954
Net Increase (Decrease) in Cash and Short-term
Investments 43,757 (44,228)
Cash and short-term investments at beginning
of period 231,227 404,831
Cash and short-term investments at end of period $ 274,984 $ 360,603
5
<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. 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:
June 30, December 31,
1998 1997 1996
American Annuity Corporation ("AAG") 81% 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
June 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.
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.
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.
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.
<PAGE>
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 yield, mortality,
morbidity and surrenders and include provisions for unfavorable
deviations. Reserves are modified as necessary to reflect actual
experience and developing trends.
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent deposits
maintained by several banks under a previously offered tax-deferred
annuity program and, to a lesser extent, variable annuity deposits.
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.
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 will file 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 Costs associated with introducing new products and
distribution channels are deferred by AAG until normal operations
are reached. These deferred costs 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. 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 corporation - see Note C).
The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is scheduled to become effective during the
fourth quarter of 1998. The implementation of SFAS No. 131 is not
expected to have a material effect on the segments currently
disclosed by AFC.
The following table (in thousands) shows AFC's revenues by
significant business segment.
Six months ended June 30,
1998 1997
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 580,565 $ 574,604
Specialty lines 517,875 482,711
Commercial and personal lines 263,332 286,647
Other lines (a) 21,694 18,181
1,383,466 1,362,143
Investment and other income 253,556 216,274
1,637,022 1,578,417
Annuities and life (b) 373,992 302,426
Other 11,867 20,320
2,022,881 1,901,163
Equity in net earnings of investee 31,914 32,008
$2,054,795 $1,933,171
(a) NSA operations in the United Kingdom have been reclassified to
other lines.
(b) Represents primarily investment income.
C. 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
$337 million and $391 million at June 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.
<PAGE>
Summarized financial information for Chiquita follows (in
millions):
Six months ended June 30,
1998 1997
Net Sales $1,461 $1,278
Operating Income 144 139
Net Income 94 84
D. 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
June 30, 1998 and December 31, 1997, AFC and APU had outstanding
net borrowings due AFG and AFC Holding under the Master Credit
Agreement of $321.9 million and $352.8 million (including accrued
interest payable), respectively.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Other Long-Term Debt The carrying value of long-term debt
consisted of the following (in thousands):
June 30,December 31,
1998 1997
Holding Companies:
AFC notes payable to banks due December 2002 $ 97,000 $ 45,000
AFC 9-3/4% Debentures due April 2004 79,049 79,792
APU 9-3/4% Subordinated Notes due August 1999 90,733 92,127
APU 10-5/8% Subordinated Notes due April 2000 43,299 43,889
APU 10-7/8% Subordinated Notes due May 2011 17,558 17,586
Other 8,238 8,267
$335,877 $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 44,114 49,525
Other 12,866 13,479
$213,980 $194,084
At June 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 $ - $ 967 $ 967
1999 89,853 2,039 91,892
2000 42,042 8,751 50,793
2001 - 1,473 1,473
2002 102,349 1,364 103,713
2003 - 58,402 58,402
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.
<PAGE>
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.
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Minority Interest Minority interest in AFC's balance sheet is
comprised of the following (in thousands):
June 30, December 31,
1998 1997
Interest of AFG (parent) and of
noncontrolling shareholders
in subsidiaries' common stock $295,523 $284,619
Preferred securities issued by
subsidiary trusts 225,000 225,000
$520,523 $509,619
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 Issue (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.
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
Six months ended
June 30,
1998 1997
Interest of AFG (parent) and
noncontrolling shareholders in
earnings of subsidiaries $13,571 $ 7,744
Accrued distributions on trust issued
preferred securities 9,516 5,983
$23,087 $13,727
G. 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:
<PAGE>
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 $72.2 million)
outstanding at June 30, 1998 and December 31, 1997.
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Unrealized Gain on Marketable Securities The change in net
unrealized gain on marketable securities for the six months ended
June 30 included the following (in millions):
<TABLE>
<CAPTION>
Minority
Pretax Taxes Interest Net
<S> <C> <C> <C> <C>
1998
Unrealized holding gains (losses) on
securities arising during the period ($ 6.8) $ 2.5 ($ .2) ($ 4.5)
Less reclassification adjustment for
realized gains included in net income ( 10.1) 3.5 .6 (6.0)
Change in net unrealized gain on
marketable securities ($ 16.9) $ 6.0 $ .4 ($10.5)
1997
Unrealized holding gains (losses) on
securities arising during the period $ 87.2 ($30.6) ($4.1) $52.5
Less reclassification adjustment for
realized gains included in net income (5.4) 1.9 .3 (3.2)
Change in net unrealized gain on
marketable securities $ 81.8 ($28.7) ($3.8) $49.3
</TABLE>
I. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses related to debt retirements by the
following companies. Amounts shown are net of minority interest
and income tax benefits (in thousands):
Six months ended
June 30,
1998 1997
Holding Companies:
AFC (parent) ($ 35) ($36)
APU (parent) (37) (42)
Subsidiaries:
AAG (649) -
($721) ($78)
<PAGE>
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
Maturity For Sale Total
1998
Purchases $ 826 $1,243,026 $1,243,852
Maturities and redemptions 374,625 397,871 772,496
Sales 31,940(*) 326,657 358,597
1997
Purchases $ 1,675 $1,204,113 $1,205,788
Maturities and redemptions 197,546 163,228 360,774
Sales - 698,990 698,990
(*) Sold (at a gain of $.2 million) due to significant deterioration
in the issuers' creditworthiness.
13
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. Commitments and Contingencies Other than as described in "Legal
Proceedings" in Part II of this report, 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.
L. Subsequent Event In July 1998, AAG reached a definitive agreement
to sell its funeral services division for $164 million in cash. At
June 30, 1998, the carrying value of the funeral services division
was approximately $125 million. 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.
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.
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, and competitive pressures.
AFC undertakes no obligation to update any forward-looking
statements.
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 18%
at June 30, 1998 and 17% at December 31, 1997. Including amounts
due AFG, the ratio was 31% at June 30, 1998 and December 31, 1997.
AFC's ratio of earnings to fixed charges, excluding and including
preferred dividends, on a total enterprise basis are shown below.
Six months Year Ended
Ended June 30, December 31,
1998 1997
Earnings to fixed charges 4.13 4.20
Earnings to fixed charges plus
preferred dividends 3.77 3.52
<PAGE>
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 $322 million at June 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 June 30, 1998, there was $97 million
borrowed under the credit line.
15
<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-core investments.
Investments Approximately 91% of the bonds and redeemable
preferred stocks held by AFC were rated "investment grade" (credit
rating of AAA to BBB) by nationally recognized rating agencies at
June 30, 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.
RESULTS OF OPERATIONS
General Pretax earnings before extraordinary items for the three
months and six months ended June 30, 1998 were $65.3 million and
$173.4 million, respectively, compared to $93.5 million and
$191.7 million in the comparable 1997 periods. The decrease
reflects 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. These items were partially offset
by growth in investment income, higher realized gains on sales of
certain investments and income from the sale of real estate
properties (primarily in the first quarter).
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
<PAGE>
Japanese companies, agricultural-related coverages, non-profit
liability, general aviation coverages, fidelity and surety bonds,
and umbrella and excess coverages. The commercial and personal
lines provide coverages in workers' compensation, commercial multi-
peril, umbrella, commercial automobile, standard private passenger
automobile and homeowners insurance.
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.
16
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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 Six months ended
June 30, June 30,
1998 1997 1998 1997
Net Written Premiums (GAAP)
NSA Group $284.3 $320.9 $ 606.7 $ 642.1
Specialty Operations 272.6 257.6 519.5 522.0
Commercial and Personal Operations 121.3 135.8 239.2 230.6
Other lines (*) 7.9 7.3 15.6 15.8
$686.1 $721.6 $1,381.0 $1,410.5
Combined Ratios (GAAP)
NSA Group 97.0% 96.9% 96.4% 96.8%
Specialty Operations 110.0 88.0 105.9 90.3
Commercial and Personal Operations 116.7 102.7 110.4 102.9
Aggregate (including other lines) 106.8 98.6 104.7 98.5
(*) NSA operations in the United Kingdom have been reclassified to
other lines.
NSA Group The NSA Group's net written premiums decreased 11% in
the second quarter and 5.5% in the first six months of the year
compared to the same 1997 periods. The decline is due primarily to
stronger price competition in the industry. Underwriting results
for the second quarter and the first six months of the year were
comparable to the previous periods.
Specialty Operations The Specialty Operations' net written
premiums increased 6% during the second quarter from the comparable
1997 period due primarily to the acquisition of a general aviation
division during 1997. Net written premiums for the first six
months of 1998 were down slightly from 1997 due to the inclusion in
1997 of certain in-force amounts obtained under a reinsurance
agreement at the beginning of that year. Underwriting results for
the second quarter and first six months of 1998 worsened from the
comparable periods in 1997 due to (i) losses from the midwestern
<PAGE>
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 executive liability and non-
profit organization lines.
Commercial and Personal Operations The Commercial and Personal
Operations' net written premiums declined 11% in the second quarter
from the comparable period in 1997 primarily due to a decrease in
personal automobile coverages in certain states and intense price
competition in the commercial casualty markets. Net written
premiums were 4% higher in the first six months of 1998 due to the
initial impact of a reinsurance agreement for AFC's homeowners'
business (which is still in effect) which made first quarter 1997
premiums unusually low. Excluding this impact, premiums declined
approximately 9% during the first six months of 1998. The combined
ratio for the second quarter of 1998 includes 17 percentage points
due to losses from the midwestern storms.
17
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects primarily
AAG's acquisition of General Accident Life Assurance Company in
December 1997 and increased sales of pre-need life insurance.
Investment Income Investment income increased $14.6 million (7%)
for the second quarter of 1998 and $22.1 million (5%) for the first
six 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 for the second quarter and
first six months of 1998 of $53 million and $94 million,
respectively, compared to $41 million and $84 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.
Gain on Sale of Investee and Subsidiary 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.
Other Income Other income increased $11.6 million (22%) during the
first six months of 1998 due primarily to income of $10.4 million
from the sale of operating real estate assets in the first quarter
of 1998.
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.
Interest on Borrowed Money Interest expense decreased $4.5 million
(20%) during the second quarter and $11.1 million (24%) during the
first six 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
$6.7 million (156%) during the second quarter and $9.4 million
(68%) during the first six 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.
<PAGE>
Other Operating and General Expenses Other operating and general
expenses increased $9.8 million (7%) during the first six months of
1998 compared to 1997 due primarily to the inclusion of the
operations of General Accident following its acquisition in late
1997.
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 $11 million in
capitalized start-up costs at June 30, 1998.
18
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
Since 1994, AFC and its subsidiary, American Premier, have
disclosed the existence of lawsuits which had been filed by USX
Corporation and one of its former subsidiaries seeking $600
million. The disclosures stated that the companies believed they
had sufficient defenses and did not expect to suffer any material
loss from the litigation.
On May 29, 1998, AFC's subsidiary, American Premier, received
notice that the largest and last of the lawsuits had been dismissed
in state court. This decision is similar to one issued earlier in
the year by the United States District Court for the Northern
District of Ohio granting American Premier's Motion for Summary
Judgment in separate cases based on the same facts. All of USX's
claims against American Premier have now been dismissed with
prejudice. Although USX has appealed the earlier District Court
decision and will likely appeal the May 1998 state court decision,
AFC and American Premier continue to believe that they will not
suffer a material loss from this litigation.
Item 4
Submission of Matters to a Vote of Security Holders
AFC's Annual Meeting of Shareholders was held on May 28, 1998; the
only issue voted upon was the election of a Board of Directors.
All of the eight nominees were elected. The votes cast for and
those withheld are set forth below:
Name For Against Withheld Abstain
Theodore H. Emmerich 12,962,032 N/A 18,638 N/A
James E. Evans 12,962,131 N/A 18,539 N/A
Thomas M. Hunt 12,962,230 N/A 18,440 N/A
Carl H. Lindner 12,962,032 N/A 18,638 N/A
Carl H. Lindner III 12,962,230 N/A 18,440 N/A
Keith E. Lindner 12,962,131 N/A 18,539 N/A
S. Craig Lindner 12,962,131 N/A 18,539 N/A
William R. Martin 12,962,131 N/A 18,539 N/A
____________________
N/A - Not Applicable
<PAGE>
Item 5
Other Information
Shareholder Proposals
The Proxy Form used by the Company for its Annual Meeting of
Shareholders typically grants authority to management's proxies to
vote in their discretion on any matters that come before the
Meeting as to which adequate notice has not been received. In
order for a notice to be deemed adequate for the 1999 Annual
Meeting, it must be received by March 7, 1999. In order for a
proposal to be considered for inclusion in the Company's proxy
statement for that Meeting, it must be received by December 31,
1998.
19
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION - CONTINUED
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: None.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, American Financial Corporation has duly caused this Report to
be signed on its behalf by the undersigned duly authorized.
American Financial Corporation
August 12, 1998 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation 10-Q for the six months ended June 30,
1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 274,984
<SECURITIES> 11,648,155<F1>
<RECEIVABLES> 729,577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,164,475
<CURRENT-LIABILITIES> 0
<BONDS> 549,857
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,412,167
<TOTAL-LIABILITY-AND-EQUITY> 16,164,475
<SALES> 0
<TOTAL-REVENUES> 2,054,795
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 159,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,054
<INCOME-PRETAX> 173,405
<INCOME-TAX> 67,409
<INCOME-CONTINUING> 105,996
<DISCONTINUED> 0
<EXTRAORDINARY> (721)
<CHANGES> 0
<NET-INCOME> 105,275
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investee of $240 million.
<F2>Not applicable since all common shares are owned by American Financial
Group, Inc.
</FN>
</TABLE>
