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
March 31, 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 May 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 18
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
1998 1997
Assets:
Cash and short-term investments $ 203,303 $ 231,227
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,044,700 and $3,202,300) 2,964,973 3,120,106
Available for sale - at market
(amortized cost - $7,653,679 and $7,225,736) 7,960,179 7,532,836
Other stocks - principally at market
(cost - $174,538 and $153,322) 478,338 446,222
Investment in investee corporation 221,138 200,714
Loans receivable 475,631 512,608
Real estate and other investments 209,907 215,472
Total investments 12,310,166 12,027,958
Recoverables from reinsurers and prepaid
reinsurance premiums 1,029,672 998,743
Agents' balances and premiums receivable 714,286 691,005
Deferred acquisition costs 537,986 521,898
Other receivables 250,757 261,454
Deferred tax asset 4,588 41,413
Assets held in separate accounts 315,918 300,491
Prepaid expenses, deferred charges and
other assets 327,639 364,385
Cost in excess of net assets acquired 300,907 299,408
$15,995,222 $15,737,982
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,230,907 $ 4,225,336
Unearned premiums 1,348,557 1,328,910
Annuity benefits accumulated 5,540,268 5,528,111
Life, accident and health reserves 778,056 709,899
Payable to American Financial Group, Inc. 344,500 352,766
Other long-term debt:
Holding companies 285,514 286,661
Subsidiaries 214,472 194,084
Liabilities related to separate accounts 315,918 300,491
Accounts payable, accrued expenses and other
liabilities 951,941 908,622
Total liabilities 14,010,133 13,834,880
Minority interest 513,309 509,619
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 940,426 936,154
Retained earnings 100,075 34,350
Net unrealized gain on marketable securities,
net of deferred income taxes 349,500 341,200
Total shareholders' equity 1,471,780 1,393,483
$15,995,222 $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)
Three months ended
March 31,
1998 1997
Income:
Property and casualty insurance premiums $ 676,172 $663,762
Life, accident and health premiums 46,816 25,365
Investment income 220,231 212,752
Equity in net earnings of investee 13,918 14,780
Realized gains on sales of:
Securities 7,446 1,813
Investee and subsidiary 7,704 731
Other investments 6,843 -
Other income 37,533 26,424
1,016,663 945,627
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 499,825 469,324
Commissions and other underwriting expenses 193,605 184,301
Annuity benefits 71,110 68,830
Life, accident and health benefits 38,106 24,163
Interest charges on borrowed money 17,031 23,611
Minority interest expense 12,141 9,453
Other operating and general expenses 76,699 67,734
908,517 847,416
Earnings before income taxes and extraordinary items 108,146 98,211
Provision for income taxes 41,736 36,221
Earnings before extraordinary items 66,410 61,990
Extraordinary items - loss on prepayment of debt (685) (55)
Net Earnings $ 65,725 $ 61,935
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 $945,779 $ 34,350 $341,200
Net earnings - - 65,725 - $65,725
Capital contribution from parent - 4,177 - - -
Change in unrealized - - - 8,300 8,300
Other - 95 - - -
Balance at March 31, 1998 $72,154 $950,051 $100,075 $349,500 $74,025
Balance at January 1, 1997 $162,760 $929,371 $ 1,364 $183,400
Net earnings - - 61,935 - $61,935
Dividends on Preferred Stock - - (1,031) - -
Capital contribution from parent - 4,177 - - -
Change in unrealized - - - (66,200) (66,200)
Other - (404) - - -
Balance at March 31, 1997 $162,760 $933,144 $ 62,268 $117,200 ($ 4,265)
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
1998 1997
Operating Activities:
Net earnings $ 65,725 $ 61,935
Adjustments:
Extraordinary items 685 55
Depreciation and amortization 24,582 17,979
Annuity benefits 71,110 68,830
Equity in net earnings of investee (13,918) (14,780)
Changes in reserves on assets 110 418
Realized gains on investing activities (35,299) (2,544)
Increase in reinsurance and other
receivables (34,832) (24,175)
Decrease (increase) in other assets 43,426 (49,036)
Increase (decrease) in insurance claims
and reserves 41,375 (25,573)
Decrease in other liabilities (5,942) (26,180)
Increase in minority interest 5,144 6,293
Dividends from investee 1,200 1,200
Other, net (6,250) (830)
157,116 13,592
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (631,793) (616,655)
Equity securities (19,297) (9,408)
Subsidiaries (31,000) -
Real estate, property and equipment (16,621) (8,762)
Maturities and redemptions of fixed maturity
investments 284,517 155,184
Sales of:
Fixed maturity investments 206,843 332,008
Equity securities 2,781 7,943
Subsidiary - 2,500
Real estate, property and equipment 30,043 396
Cash and short-term investments of acquired
(former) subsidiaries 21,678 (70)
Increase (decrease) in other investments 1,281 (1,119)
(151,568) (137,983)
<PAGE>
Financing Activities:
Fixed annuity receipts 107,832 133,402
Annuity surrenders, benefits and withdrawals (164,034) (134,699)
Additional long-term borrowings 50,248 7,053
Reductions of long-term debt (32,185) (1,718)
Borrowings from AFG - 42,000
Capital contribution 4,667 4,667
Issuances of trust preferred securities - 74,687
Cash dividends paid - (1,031)
(33,472) 124,361
Net Decrease in Cash and Short-term Investments (27,924) (30)
Cash and short-term investments at beginning
of period 231,227 404,831
Cash and short-term investments at end of period $ 203,303 $ 404,801
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 ownership of subsidiaries and significant affiliates was as
follows:
March 31, 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%
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.
<PAGE>
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.
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.
<PAGE>
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 American Financial Group, Inc. ("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.
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.
<PAGE>
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.
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.
Three months ended March 31,
1998 1997
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 287,364 $279,031
Specialty lines 244,972 232,590
Commercial and personal lines 132,545 142,485
Other lines (a) 11,291 9,656
676,172 663,762
Investment and other income 132,301 110,150
808,473 773,912
Annuities and life (b) 188,557 148,706
Other 5,715 8,229
1,002,745 930,847
Equity in net earnings of investee 13,918 14,780
$1,016,663 $945,627
(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
$328 million and $391 million at March 31, 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):
Three months ended March 31,
1998 1997
Net Sales $717 $631
Operating Income 70 71
Net Income 41 43
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
March 31, 1998 and December 31, 1997, AFC and APU had outstanding
borrowings due AFG and AFC Holding under the Master Credit
Agreement of $344.5 million and $352.8 million (including accrued
interest of $8.3 million), 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):
March 31, December 31,
1998 1997
Holding Companies:
AFC 9-3/4% Debentures due April 2004 $ 79,396 $ 79,792
AFC notes payable to banks due December 2002 45,000 45,000
APU 9-3/4% Subordinated Notes due August 1999 91,623 92,127
APU 10-5/8% Subordinated Notes due April 2000 43,638 43,889
APU 10-7/8% Subordinated Notes due May 2011 17,572 17,586
Other 8,285 8,267
$285,514 $286,661
Subsidiaries:
AAG notes payable to banks due
in installments to December 2003 $157,000 $107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 44,268 49,525
Other 13,204 13,479
$214,472 $194,084
At March 31, 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 $ - $ 1,450 $ 1,450
1999 90,571 2,039 92,610
2000 42,230 8,751 50,981
2001 - 38,474 38,474
2002 50,407 61,367 111,774
2003 - 61,402 61,402
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 LIBOR.
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 LIBOR. 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).
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):
March 31, December 31,
1998 1997
Interest of AFG (parent) and of
noncontrolling shareholders
in subsidiaries' common stock $288,309 $284,619
Preferred securities issued by
subsidiary trusts 225,000 225,000
$513,309 $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):
Three months ended
March 31,
1998 1997
Interest of AFG (parent) and
noncontrolling shareholders in
earnings of subsidiaries $ 7,383 $7,368
Accrued distributions on trust issued
preferred securities 4,758 2,085
$12,141 $9,453
<PAGE>
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:
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 March 31, 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 three months ended
March 31 included the following (in millions):
Minority
Pretax Taxes Interest Net
1998
Unrealized holding gains (losses) on
securities arising during the period $ 14.8 ($ 5.0) $1.0 $10.8
Less reclassification adjustment for
realized gains included in net income (4.3) 1.5 .3 (2.5)
Change in net unrealized gain on
marketable securities $ 10.5 ($ 3.5) $1.3 $ 8.3
1997
Unrealized holding gains (losses) on
securities arising during the period ($115.8) $40.5 $ 9.9 ($65.4)
Less reclassification adjustment for
realized gains included in net income (1.3) .4 .1 (.8)
Change in net unrealized gain on
marketable securities ($117.1) $40.9 $10.0 ($66.2)
I. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses related to debt retirements by the
following companies. Amounts shown are net of minority interest
and income tax benefits (in thousands):
Three months ended
March 31,
1998 1997
Holding Companies:
AFC (parent) ($ 22) ($17)
APU (parent) (14) (38)
Subsidiaries:
AAG (649) -
($685) ($55)
<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 $ 76 $631,717 $631,793
Maturities and redemptions 170,562 113,955 284,517
Sales 23,960(*) 182,883 206,843
1997
Purchases $ 987 $615,668 $616,655
Maturities and redemptions 81,185 73,999 155,184
Sales - 332,008 332,008
(*) Sold (at a gain of $.5 million) due to significant deterioration
in the issuers' creditworthiness.
K. Commitments and Contingencies There have been no significant
changes to the matters discussed and referred to in Note O
"Commitments and Contingencies" in AFC's Annual Report on Form 10-K
for 1997.
13
<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 (excluding amounts due AFG) was approximately 16% at
March 31, 1998 and 17% at December 31, 1997. Including amounts due
AFG, the ratio was 30% and 31% at March 31, 1998 and December 31,
1997, respectively.
AFC's ratio of earnings to fixed charges, excluding and including
preferred dividends, on a total enterprise basis are shown below.
Three months Year Ended
Ended March 31, December 31,
1998 1997
Earnings to fixed charges 5.15 4.20
Earnings to fixed charges plus
preferred dividends 4.70 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 $345 million at March 31,
1998 and 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 March 31, 1998, there was $45 million
borrowed under the credit line.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
In the past, funds have been borrowed under bank facilities and
used for working capital, capital infusions into subsidiaries, and
to retire other issues of short-term or high-rate debt and
preferred stock. Also, AFC believes it may be prudent and
advisable to utilize portions of the bank debt in the normal course
over the next year or two.
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
March 31, 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 were
$108 million for the first quarter of 1998 and $98 million for the
first quarter of 1997. The increase in the 1998 period was due
primarily to higher realized gains on sales of certain investments,
income from the sale of real estate properties, and growth in
investment income. These improvements were partially offset by a
decrease in underwriting results in the property and casualty
operations.
Property and Casualty Insurance - Underwriting AFC manages and
operates its property and casualty business as three major sectors.
The nonstandard automobile insurance companies (the "NSA Group")
insure risks not typically accepted for standard automobile
coverage because of the applicant's driving record, type of
vehicle, age or other criteria. The specialty lines are a
diversified group of over twenty-five business lines that offer a
wide variety of specialty insurance products. Some of the more
significant areas are California workers' compensation, executive
liability, inland and ocean marine, U.S.-based operations of
Japanese companies, agricultural-related coverages, 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.
<PAGE>
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.
15
<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
March 31,
1998 1997
Net Written Premiums (GAAP)
NSA Group $322.4 $321.2
Specialty Operations 246.9 264.4
Commercial and Personal Operations 117.9 94.8
Other Lines (*) 7.7 8.5
$694.9 $688.9
Combined Ratios (GAAP)
NSA Group 95.9% 96.8%
Specialty Operations 101.4 92.7
Commercial and Personal Operations 104.2 102.9
Aggregate (including other lines) 102.6 98.5
(*) NSA operations in the United Kingdom have been reclassified to
other lines.
NSA Group The NSA Group's net written premiums for the first
three months of 1998 were substantially the same as compared to the
1997 period; underwriting profit increased $2.6 million due
primarily to a reduction in underwriting expenses resulting from
cost efficiencies during the same period.
Specialty Operations For the first three months of 1998, net
written premiums for the specialty operations decreased 7% from the
comparable 1997 period. The 1997 premiums included certain in-
force amounts related to general aviation policies obtained under a
reinsurance agreement at the beginning of that year. Excluding
this impact, premiums were essentially the same as a year ago.
Underwriting results for the first three months of 1998 declined
due primarily to a continuation of the adverse claims environment
in the California workers' compensation business. The other
specialty businesses reported a solid underwriting profit.
<PAGE>
Commercial and Personal Operations Net written premiums for the
commercial and personal operations increased 24% during the first
three months of 1998 from the comparable 1997 period. Net written
premiums in the 1997 period had been unusually low due to the
initial impact of a reinsurance agreement for AFC's homeowners'
business. This reinsurance agreement became effective at the
beginning of 1997 and is still in effect. Excluding this impact,
premiums declined approximately 7% due primarily to a decrease in
personal automobile coverages in certain states. Underwriting
results declined slightly during the first three months of 1998
from the comparable 1997 period as improved performance in personal
lines was offset by higher loss adjustment costs in commercial
lines.
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects AAG's
acquisition of General Accident Life Assurance Company in December
1997 and increases in pre-need life insurance sales.
16
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investment Income Investment income increased approximately
$7.5 million (4%) for the first quarter of 1998 compared to 1997
due primarily to an increase in the average amount of investments
held.
Investee Corporations Equity in net earnings of investee
corporations represents AFC's proportionate share of Chiquita's
earnings. Chiquita reported first quarter net earnings of
$41 million in 1998 and $43 million 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 3.1 million shares of its common stock in 1998 resulted in a
pretax gain to AFC of $7.7 million.
Other Income Other income increased $11.1 million (42%) in the
first three months of 1998 compared to 1997 due primarily to income
of $10.4 million from the sale of operating real estate assets.
Annuity Benefits Annuity benefits reflect interest credited to
annuity policyholders' funds accumulated. The majority of AAG's
fixed rate annuity products permit AAG to change the crediting rate
at any time (subject to minimum interest rate guarantees of 3% or
4% per annum). As a result, management has been able to react to
changes in market interest rates and maintain a desired interest
rate spread without a substantial effect on persistency. Annuity
benefits increased 3% in the first three months of 1998 due
primarily to an increase in average annuity benefits accumulated.
Interest on Borrowed Money Interest expense decreased $6.6 million
(28%) during the first three months of 1998 from the comparable
1997 period. The decrease reflects a decrease in average amounts
borrowed and a decrease in average rates.
Minority Interest Expense Minority interest expense increased
$2.7 million (28%) during the first quarter of 1998 compared to
1997. Dividends paid by subsidiaries on their trust issued
preferred securities have varied as the securities were issued over
the past few years.
Other Operating and General Expenses Other operating and general
expenses increased $9.0 million (13%) during the first quarter of
1998 compared to 1997 due primarily to the operations of General
Accident which recorded $5.3 million of expenses in 1998.
17
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report
filed electronically with the Securities and Exchange
Commission.
(b) Reports on Form 8-K: 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
May 14, 1998 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation 10-Q for the three months ended March 31,
1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 203,303
<SECURITIES> 11,624,628<F1>
<RECEIVABLES> 714,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,995,222
<CURRENT-LIABILITIES> 0
<BONDS> 499,986
0
0
<COMMON> 9,625
<OTHER-SE> 1,462,155
<TOTAL-LIABILITY-AND-EQUITY> 15,995,222
<SALES> 0
<TOTAL-REVENUES> 1,016,663
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,031
<INCOME-PRETAX> 108,146
<INCOME-TAX> 41,736
<INCOME-CONTINUING> 66,410
<DISCONTINUED> 0
<EXTRAORDINARY> (685)
<CHANGES> 0
<NET-INCOME> $65,725
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Included an investment in investee of $221 million.
<F2>Not applicable since all common shares are owned by American
Financial Group, Inc.
</FN>
</TABLE>
