SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 1999 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 1, 1999, 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 21
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Assets:
Cash and short-term investments $ 311,061 $ 289,944
Investments:
Fixed maturities - at market
(amortized cost - $10,040,299 and $9,920,407) 9,952,899 10,323,407
Other stocks - at market
(cost - $231,533 and $207,345) 427,733 430,345
Investment in investee corporation 191,179 192,138
Policy loans 217,205 220,496
Real estate and other investments 268,085 268,171
Total investments 11,057,101 11,434,557
Recoverables from reinsurers and prepaid
reinsurance premiums 2,124,232 1,973,895
Agents' balances and premiums receivable 709,348 618,198
Deferred acquisition costs 563,537 464,047
Other receivables 214,727 318,154
Assets held in separate accounts 243,444 120,049
Prepaid expenses, deferred charges and other assets 420,003 343,554
Cost in excess of net assets acquired 332,594 285,469
$15,976,047 $15,847,867
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,876,564 $ 4,773,377
Unearned premiums 1,260,249 1,232,848
Annuity benefits accumulated 5,473,639 5,449,633
Life, accident and health reserves 369,370 341,595
Payable to American Financial Group, Inc. 407,768 270,500
Long-term debt:
Holding companies 104,544 315,536
Subsidiaries 239,188 176,896
Liabilities related to separate accounts 243,444 120,049
Accounts payable, accrued expenses and other
liabilities 1,109,753 1,112,442
Total liabilities 14,084,519 13,792,876
Minority interest 497,296 524,335
Shareholders' Equity:
Preferred Stock (liquidation value $72,154) 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 956,621 943,359
Retained earnings 282,032 157,218
Unrealized gains on marketable securities, net 73,800 348,300
Total shareholders' equity 1,394,232 1,530,656
$15,976,047 $15,847,867
</TABLE>
2
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $585,560 $ 696,537 $1,680,561 $2,080,003
Life, accident and health premiums 26,463 50,434 77,418 145,710
Investment income 215,872 223,322 632,048 672,760
Equity in net earnings (loss) of investee (14,797) (5,518) 2,639 26,396
Realized gains (losses) on sales of:
Securities (5,744) 14,302 5,981 28,890
Investee and subsidiaries - 11,090 - 20,510
Other investments - - - 6,843
Other income 47,374 42,262 105,501 106,112
854,728 1,032,429 2,504,148 3,087,224
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 423,402 513,537 1,188,050 1,577,440
Commissions and other underwriting
expenses 171,824 201,777 506,646 586,409
Annuity benefits 66,516 64,514 194,977 204,735
Life, accident and health benefits 17,365 40,547 52,238 115,208
Interest charges on borrowed money 16,494 19,005 49,715 54,059
Minority interest expense 10,626 15,048 35,778 38,135
Other operating and general expenses 99,161 88,823 263,084 248,655
805,388 943,251 2,290,488 2,824,641
Earnings before income taxes,
extraordinary items and cumulative
effect of accounting change 49,340 89,178 213,660 262,583
Provision for income taxes 18,460 31,185 78,257 98,594
Earnings before extraordinary items and
cumulative effect of accounting change 30,880 57,993 135,403 163,989
Extraordinary items - loss on
prepayment of debt - (33) (3,849) (754)
Cumulative effect of accounting change - - (3,854) -
Net Earnings $ 30,880 $ 57,960 $ 127,700 $ 163,235
</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
Stock Surplus Earnings Securities Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $72,154 $952,984 $157,218 $348,300 $1,530,656
Net earnings - - 127,700 - 127,700
Change in unrealized - - - (274,500) (274,500)
Comprehensive income (loss) (146,800)
Dividends on Preferred Stock - - (2,886) - (2,886)
Capital contribution from parent - 9,200 - - 9,200
Other - 4,062 - - 4,062
Balance at September 30, 1999 $72,154 $966,246 $282,032 $ 73,800 $1,394,232
Balance at January 1, 1998 $72,154 $936,154 $ 34,350 $341,200 $1,383,858
Net earnings - - 163,235 - 163,235
Change in unrealized - - - 12,300 12,300
Comprehensive income (loss) 175,535
Dividends on Preferred Stock - - (2,886) - (2,886)
Capital contribution from parent - 12,530 - - 12,530
Other - 56 - - 56
Balance at September 30, 1998 $72,154 $948,740 $194,699 $353,500 $1,569,093
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended
September 30,
1999 1998
Operating Activities:
Net earnings $ 127,700 $ 163,235
Adjustments:
Extraordinary items 3,849 754
Cumulative effect of accounting change 3,854 -
Depreciation and amortization 68,548 71,589
Annuity benefits 194,977 204,735
Equity in net earnings of investee (2,639) (26,396)
Realized gains on investing activities (20,733) (80,357)
Deferred annuity and life policy acquisition costs (87,009) (87,459)
Increase in reinsurance and other receivables (123,522) (229,730)
Increase in other assets (58,870) (37,893)
Increase in insurance claims and reserves 116,590 293,264
Increase in other liabilities 81,495 111,765
Increase in minority interest 17,026 14,743
Dividends from investee 3,600 3,600
Other, net (13,082) (12,022)
311,784 389,828
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,547,160) (1,682,077)
Equity securities (56,041) (54,971)
Subsidiaries (204,942) (31,825)
Real estate, property and equipment (63,496) (49,425)
Maturities and redemptions of fixed maturity
investments 801,833 1,017,004
Sales of:
Fixed maturity investments 885,901 544,722
Equity securities 45,887 19,119
Subsidiaries - 164,589
Real estate, property and equipment 24,394 48,634
Cash and short-term investments of acquired (former)
subsidiaries, net 19,454 (18,146)
Decrease (increase) in other investments 12,734 (9,363)
(81,436) (51,739)
<PAGE>
Financing Activities:
Fixed annuity receipts 330,744 358,659
Annuity surrenders, benefits and withdrawals (524,148) (538,912)
Additional long-term borrowings 212,232 217,537
Reductions of long-term debt (366,464) (159,383)
Borrowings from AFG 254,100 -
Payments to AFG (121,300) (52,500)
Capital contribution 14,000 14,000
Repurchases of trust preferred securities (5,509) -
Cash dividends paid (2,886) (2,886)
(209,231) (163,485)
Net Increase in Cash and Short-term Investments 21,117 174,604
Cash and short-term investments at beginning
of period 289,944 231,227
Cash and short-term investments at end of period $ 311,061 $ 405,831
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.
Investments All fixed maturity securities are "available for sale" and
reported at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity. Short-term investments are
carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. Premiums and discounts on mortgage-backed
securities are amortized over their expected average lives using the
interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific
investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of that
investment is reduced.
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.
<PAGE>
Insurance As discussed under "Reinsurance" below, unpaid losses and
loss adjustment expenses and unearned premiums have not been reduced
for reinsurance recoverable. To the extent that unrealized gains
(losses) from securities classified as "available for sale" would
result in adjustments to deferred acquisition costs and policyholder
liabilities had those gains (losses) actually been realized, such
balance sheet amounts are adjusted, net of deferred taxes.
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
reinsured 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
6
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Annuity Benefits Accumulated Annuity receipts and benefit payments
are recorded as increases or decreases in "annuity benefits
accumulated" rather than as revenue and expense. Increases in this
liability for interest credited are charged to expense and decreases
for surrender charges are credited to other income.
Life, Accident and Health Reserves Liabilities for future policy
benefits under traditional life, accident and health policies are
computed using the net level premium method. Computations are based on
anticipated investment yield, mortality, morbidity and surrenders and
include provisions for unfavorable deviations. Reserves established
for accident and health claims are modified as necessary to reflect
actual experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent variable
annuity deposits.
<PAGE>
Premium Recognition Property and casualty premiums are earned over
the terms of the policies on a pro rata basis. Unearned premiums
represent that portion of premiums written which is 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.
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest For balance sheet purposes, minority interest
represents (i) the interests of noncontrolling shareholders in AFC
subsidiaries, including preferred securities issued by trust
subsidiaries of American Annuity Group ("AAG"), and (ii) the American
Financial Group ("AFG") direct ownership interest in American Premier
Underwriters, Inc. ("American Premier" or "APU") and American Financial
Enterprises, Inc. 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 a part of a broader reorganization.
Income Taxes AFC files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries, except for certain life
insurance subsidiaries and their subsidiaries. Deferred income taxes
are calculated using the liability method. Under this method, deferred
income tax assets and liabilities are determined based on differences
between financial reporting and tax bases and are measured using
enacted tax rates. Deferred tax assets are recognized if it is more
likely than not that a benefit will be realized.
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 1998) are invested
primarily in securities of AFC 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.
<PAGE>
Start-up Costs Prior to 1999, AAG, an 83%-owned subsidiary, deferred
certain costs associated with introducing new products and distribution
channels and amortized them on a straight-line basis over 5 years. In
1999, AAG implemented Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities." The SOP requires that (i) costs of
start-up activities be expensed as incurred and (ii) unamortized
balances of previously deferred costs be expensed and reported as the
cumulative effect of a change in accounting principle. Accordingly,
AFC expensed previously capitalized start-up costs of $3.8 million (net
of minority interest and taxes), effective January 1, 1999.
8
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Derivatives The Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," during the second quarter of 1998. AFC must implement
SFAS No. 133 no later than January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including derivative instruments that are embedded in other contracts,
and for hedging activities. SFAS No. 133 requires the recognition of
all derivatives (both assets and liabilities) in the balance sheet at
fair value. Changes in fair value of derivative instruments are
included in current income or as a component of comprehensive income
(outside current income) depending on the type of derivative.
Implementation of SFAS No. 133 is not expected to have a material
effect on AFC's financial position or results of operations.
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.
B. Acquisitions and Sales of Subsidiaries
Worldwide Insurance Company In April 1999, AFC completed the purchase
of Worldwide Insurance Company (formerly Providian Auto and Home
Insurance Company) for $157 million in cash. Worldwide is a provider
of direct response private passenger automobile insurance.
Old Republic and Consolidated Financial In February 1999, AAG acquired
Old Republic Life Insurance Company of New York for $27 million in
cash. In July 1999, AAG acquired Consolidated Financial Corp., an
insurance agency, for $21 million in cash.
United Teacher Associates In October 1999, AAG acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA") for $81 million
in cash subject to post-closing adjustments. UTA provides supplemental
health products and retirement annuities, and purchases blocks of
insurance policies from other insurers.
<PAGE>
Commercial lines division In December 1998, AFC completed the sale of
substantially all of its Commercial lines division to Ohio Casualty
Corporation for $300 million plus warrants to purchase 6 million (post
split) shares of Ohio Casualty common stock. AFC deferred a gain of
$103 million on the insurance ceded to Ohio Casualty and recognized a
pretax gain of $153 million on the sale of the other net assets. The
deferred gain is being recognized over the estimated remaining
settlement period (weighted average of 4.25 years) of the claims ceded.
AFC may receive up to an additional $40 million in the year 2000 based
upon the retention and growth of the insurance businesses acquired by
Ohio Casualty. The commercial lines sold generated net written
premiums of $210 million for the nine months ended September 30, 1998.
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Funeral Services division In September 1998, AAG sold its Funeral
Services division for approximately $165 million in cash. The division
held assets of approximately $1 billion at the sale date. AFG realized
a pretax gain of $21.6 million, before $2.7 million of minority
interest, on this sale.
C. Segments of Operations Having sold substantially all of its Commercial
lines division in December 1998, AFC's property and casualty group is
engaged primarily in private passenger automobile and specialty
insurance businesses. The Personal group consists of the nonstandard
auto group along with the preferred/standard private passenger auto and
other personal insurance business. The Specialty group includes a
highly diversified group of specialty business units. AFC's annuity
and life business markets primarily retirement products as well as life
and supplemental health insurance. In addition, AFC owns a significant
portion of the voting equity securities of Chiquita Brands
International, Inc. (an investee corporation - see Note D).
<PAGE>
The following table (in thousands) shows AFC's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues (a)
Property and casualty insurance:
Premiums earned:
Personal $288,454 $ 321,701 $ 875,036 $ 980,288
Specialty 296,254 365,670 804,957 1,068,854
Other lines - primarily
discontinued 852 9,166 568 30,861
585,560 696,537 1,680,561 2,080,003
Investment and other income 110,923 123,128 329,885 376,684
696,483 819,665 2,010,446 2,456,687
Annuities and life (b) 161,474 210,842 465,348 584,834
Other 11,568 7,440 25,715 19,307
869,525 1,037,947 2,501,509 3,060,828
Equity in net earnings (loss)
of investee (14,797) (5,518) 2,639 26,396
$854,728 $1,032,429 $2,504,148 $3,087,224
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($ 3,167) $ 8,860 ($ 1,121) $ 30,129
Specialty (9,246) (21,781) (7,925) (80,886)
Other lines - primarily
discontinued 2,747 (5,856) (5,089) (33,089)
(9,666) (18,777) (14,135) (83,846)
Investment and other income 68,452 88,193 206,074 282,239
58,786 69,416 191,939 198,393
Annuities and life 21,250 48,977 71,681 107,649
Other (c) (15,899) (23,697) (52,599) (69,855)
64,137 94,696 211,021 236,187
Equity in net earnings (loss)
of investee (14,797) (5,518) 2,639 26,396
$ 49,340 $ 89,178 $ 213,660 $ 262,583
</TABLE>
(a) Revenues include sales of products and services as well as other
income earned by the respective segments.
(b) Represents primarily investment income.
(c) Includes holding company expenses.
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investee Corporation Investment in investee corporation
reflects AFC's ownership of 24 million shares (36%) of Chiquita common
stock. The market value of this investment was $142 million and
$229 million at September 30, 1999 and December 31, 1998, respectively.
Chiquita is a leading international marketer, producer and distributor
of quality fresh fruits and vegetables and processed foods. Summarized
financial information for Chiquita follows (in millions):
Nine months ended September 30,
1999 1998
Net Sales $1,937 $2,094
Operating Income 93 157
Net Income 19 83
E. Payable to American Financial Group In 1997, AFC entered into a ten-
year reciprocal Master Credit Agreement among AFG and several of AFG's
subsidiary holding companies, including APU and AFC's direct parent,
AFC Holding Company, under which funds are made available to each other
at one percent over LIBOR.
F. Long-Term Debt The carrying value of long-term debt consisted of the
following (in thousands):
September 30, December 31,
1999 1998
Holding Companies:
AFC notes payable under bank line $ 60,000 $ 80,000
AFC 9-3/4% Debentures due April 2004 - 78,560
American Premier Underwriters, Inc. ("APU")
9-3/4% Subordinated Notes due August 1999 - 89,467
APU 10-5/8% Subordinated Notes due April 2000 23,885 41,518
APU 10-7/8% Subordinated Notes due May 2011 11,673 17,473
Other 8,986 8,518
$104,544 $315,536
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $100,000
AAG notes payable under bank line 95,000 27,000
Notes payable secured by real estate 31,823 37,602
Other 12,365 12,294
$239,188 $176,896
In the second quarter of 1999, AFC used funds borrowed under its credit
agreement with AFG to (i) repay $155 million borrowed under its bank
line; (ii) redeem its 9-3/4% Debentures for $82.9 million and
(iii) repurchase $22.2 million of APU Notes for $24.5 million.
In August 1999, APU redeemed its 9-3/4% Notes at maturity and AFC
borrowed $60 million under the bank line.
<PAGE>
At September 30, 1999, sinking fund and other scheduled principal
payments on debt for the balance of 1999 and the subsequent five years
were as follows (in thousands):
Holding
Companies Subsidiaries Total
1999 $ - $ 596 $ 596
2000 23,667 3,501 27,168
2001 - 1,512 1,512
2002 66,044 36,405 102,449
2003 - 61,438 61,438
2004 - 14,391 14,391
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
AFC and AAG each have an unsecured credit agreement with a group of
banks under which they can borrow up to $300 million and $200 million,
respectively. Borrowings bear interest at floating rates based on
prime or Eurodollar rates. Loans mature December 2002 under the AFC
credit agreement and from 2000 to 2003 under the AAG credit agreement.
G. Minority Interest Minority interest in AFC's balance sheet is
comprised of the following (in thousands):
September 30, December 31,
1999 1998
Interest of AFG (parent) and noncontrolling
shareholders in subsidiaries' common stock $277,696 $299,335
Preferred securities issued by
subsidiary trusts 219,600 225,000
$497,296 $524,335
Trust Issued Preferred Securities Wholly-owned subsidiary trusts of
AAG have issued $225 million of preferred securities and, in turn,
purchased a like amount of AAG subordinated debt which provides
interest and principal payments to fund the respective trusts'
obligations. The preferred securities must be redeemed upon maturity
or redemption of the subordinated debt. AAG effectively provides
unconditional guarantees of its trusts' obligations.
The preferred securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
Date of September 30, December 31, Optional
Issuance Issue (Maturity Date) 1999 1998 Redemption Dates
<S> <C> <C> <C> <C>
November 1996 AAG 9-1/4% TOPrS (2026) 74,600 75,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 70,000 75,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000 75,000 Prior to 9/28/2000 and
after 9/28/2001
</TABLE>
In the first quarter of 1999, AAG repurchased $5.4 million of its
preferred securities for $5.5 million in cash.
<PAGE>
Minority Interest Expense Minority interest expense is comprised of
(in thousands):
Nine months ended
September 30,
1999 1998
Interest of AFG (parent) and noncontrolling
shareholders in earnings of subsidiaries $21,842 $23,861
Accrued distributions by subsidiaries
on trust issued preferred securities 13,936 14,274
$35,778 $38,135
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Shareholders' Equity
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. The outstanding voting shares of AFC's Preferred Stock
consisted of the following:
Series J, no par value; $25.00 liquidation value per share; annual
dividends per share $2.00; redeemable at AFC's option at $25.75 per
share beginning December 2005 declining to $25.00 at December 2007
and thereafter; 2,886,161 shares (stated value $72.2 million)
outstanding at September 30, 1999 and December 31, 1998.
Unrealized Gain on Marketable Securities The change in unrealized
gains on marketable securities for the nine months ended September 30
included the following (in millions):
<TABLE>
<CAPTION>
Minority
Pretax Taxes Interest Net
<S> <C> <C> <C> <C>
1999
Unrealized holding gains (losses) on
securities arising during the period ($471.7) $163.4 $36.9 ($271.4)
Reclassification adjustment for
realized gains included in net income (6.0) 2.1 .8 (3.1)
Change in unrealized gains on
marketable securities, net ($477.7) $165.5 $37.7 ($274.5)
1998
Unrealized holding gains (losses) on
securities arising during the period $ 67.2 ($ 22.0) ($ 8.1) $ 37.1
Reclassification adjustment for
realized gains included in net income
and unrealized gains of subsidiaries sold (45.1) 15.8 4.5 (24.8)
Change in unrealized gains on
marketable securities, net $ 22.1 ($ 6.2) ($ 3.6) $ 12.3
</TABLE>
<PAGE>
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 taxes (in
thousands):
Nine months ended
September 30,
1999 1998
Holding Companies:
AFC (parent) ($2,993) ($ 51)
APU (parent) (856) (54)
Subsidiaries:
AAG - (649)
($3,849) ($754)
13
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Cash Flows - Fixed Maturity Investments "Investing activities" related
to fixed maturity investments in AFC's Statement of Cash Flows
consisted of the following (in thousands):
Available Held to
For Sale Maturity(a) Total
1999
Purchases $1,547,160 $ - $1,547,160
Maturities and redemptions 801,833 - 801,833
Sales 885,901 - 885,901
1998
Purchases $1,681,251 $ 826 $1,682,077
Maturities and redemptions 538,293 478,711 1,017,004
Sales 506,819 37,903(b) 544,722
(a) At December 31, 1998, AFC reclassified all of its "held to
maturity" fixed maturity securities to "available for sale."
(b) Sold (at a gain of $.7 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 Part II of AFC's June 30,
1999 Form 10-Q and Note L "Commitments and Contingencies" in AFC's
Annual Report on Form 10-K for 1998.
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,
shareholder dividends, and taxes. Therefore, certain analyses are best
done on a parent only basis while others are best done on a total
enterprise basis. In addition, since most of its businesses are
financial in nature, AFC does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
Year 2000 Status AFC's Year 2000 Project is a corporate-wide program
designed to ensure that its computer systems and other equipment using
date-sensitive computer chips will function properly in the year 2000.
The Project also encompasses communicating with agents, vendors,
financial institutions and others with which the companies conduct
business to determine their Year 2000 readiness and resulting effects
on AFC. AFC's Year 2000 Project Office monitors and coordinates the
work being performed by the various business units and reports monthly
to the Audit Committee of the Board of Directors and more frequently to
senior management.
To address the Year 2000 issue, AFC's operations were divided into
separate systems groups. All groups have completed Year 2000 program
modifications and software installations, about 98% of the tests to be
performed, and are engaged in test documentation activities.
Contingency plans are being developed for certain business processes
and systems deemed most critical to operations. These plans provide a
documented order of actions necessary to keep the business functions
operating. Such plans typically include procedures and workflow
processes for operating in a failed environment. Contingency planning
is expected to be substantially completed by November 30, 1999.
Many of the systems being replaced were planned replacements which were
accelerated due to the Year 2000 considerations. In addition, a
significant portion of AFC's Year 2000 Project is being completed using
internal staff. Therefore, cost estimates for the Year 2000 Project do
not represent solely incremental costs.
During the first nine months of 1999, AFC incurred $23 million for Year
2000 costs, of which $6 million was capitalized and $17 million was
expensed. From the inception of the Year 2000 Project in the early
1990s, AFC estimates that it has incurred approximately $70 million of
such costs, including capitalized costs of $16 million. AFC expects
that an additional $7 million will be incurred, of which about half
will be capitalized.
<PAGE>
Projected Year 2000 costs and completion dates are based on
management's best estimates. However, there can be no assurances that
these estimates will be achieved. Should software modifications and
new software installations not be completed on a timely basis, the
resulting disruptions could have a material adverse affect on
operations.
AFC's operations could also be affected by the inability of third
parties such as agents and vendors to become Year 2000 compliant.
Assessments of property and casualty agents and life and annuity agents
have been completed. Efforts to evaluate third party vendors have been
intensified and will continue to be
15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
updated through the fourth quarter. In addition, AFC's property and
casualty insurance subsidiaries are reviewing the potential impact of
the Year 2000 issue on insureds as part of their underwriting process.
They are also reviewing policy forms, issuing clarifying endorsements
where appropriate and examining coverage issues for Year 2000
exposures. While it is possible that Year 2000 claims may emerge in
future periods, it is not possible to estimate any such amounts.
IT Initiative In the third quarter of 1999, AFC's newly hired Chief
Information Officer initiated an enterprise-wide study of its
information technology ("IT") resources, needs and opportunities. AFC
expects that the initiative will entail extensive effort and costs and
may lead to substantial changes in the area, which should result in
significant cost savings, efficiencies and effectiveness in the future.
While the costs (most of which will be expensed) will precede any
savings to be realized, management expects benefits to greatly exceed
the costs incurred, all of which will be funded through available
working capital.
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 especially with regard to availability
of and returns on capital, regulatory actions, changes in legal
environment, levels of catastrophe and other major losses, availability
of reinsurance, the Year 2000 issue, and competitive pressures. AFC
undertakes no obligation to update any forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFG's debt to total capital ratio at the parent holding company
level (excluding amounts due AFG) was approximately 7% at September 30,
1999 and 17% at December 31, 1998. Including amounts due AFG, the
ratio was 27% at September 30, 1999 and 28% at December 31, 1998.
AFG's ratio of earnings to fixed charges, excluding and including
preferred dividends, (on a total enterprise basis) was 4.06 and 3.71
for the first nine months of 1999 and 3.44 and 3.15 for the entire year
of 1998.
<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 has a revolving credit agreement with several banks under which it
can borrow up to $300 million. The credit line provides ample
liquidity and can be used to obtain funds for operating subsidiaries
or, if necessary, for the parent companies. At September 30, 1999,
there was $60 million borrowed under the credit line.
In April 1999, AFG issued $350 million principal amount of 7-1/8%
senior debentures due 2009; the proceeds were used primarily to retire
outstanding holding company public debt and borrowings under AFC's
credit line.
16
<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 reduction of debt at the
holding companies from historical levels (and the related decrease in
ongoing cash needs for interest and principal payments), (iii) AFC's
ability to obtain financing in capital markets, as well as (iv) the
sales of noncore investments.
Investments Approximately 90% of the fixed maturities held by AFC were
rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at September 30, 1999. Investment grade
securities generally bear lower yields and lower degrees of risk than
those that are unrated and noninvestment 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 and cumulative
effect of accounting change for the three months and nine months ended
September 30, 1999 were $49.3 million and $214 million, respectively,
compared to $89.2 million and $262.6 million in the comparable 1998
periods. Improved underwriting results for both the three and nine
month periods were more than offset by decreases in realized gains,
investment income and investee earnings.
Property and Casualty Insurance - Underwriting AFC's property and
casualty group consists of two major business groups: Personal and
Specialty.
The Personal group consists of the nonstandard auto group along with
the preferred/standard private passenger auto and other personal
insurance business. The nonstandard automobile insurance companies
insure risks not typically accepted for standard automobile coverage
because of the applicant's driving record, type of vehicle, age or
other criteria.
The Specialty group includes a highly diversified group of business
lines. Some of the more significant areas are executive liability,
inland and ocean marine, U.S.-based operations of Japanese companies,
agricultural-related coverages, California workers' compensation,
nonprofit liability, general aviation coverages, fidelity and surety
bonds, and umbrella and excess coverages. Commercial lines businesses
sold included certain coverages in workers' compensation, commercial
multi-peril, commercial automobile, and umbrella.
<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.
17
<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 businesses listed above), management believes that it is
prudent and appropriate to use conservative assumptions until such time
as the data, experience and projections have more credibility, as
evidenced by data volume, consistency and maturity of the data. While
this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
Net written premiums and combined ratios for AFC's property and
casualty insurance subsidiaries were as follows (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
Net Written Premiums (GAAP)
Personal $287.3 $314.3 $ 839.2 $ 998.0
Specialty 323.7 357.9 850.4 1,039.6
Other lines .7 2.1 (.8) 17.7
$611.7 $674.3 $1,688.8 $2,055.3
Combined Ratios (GAAP)
Personal 101.1% 97.3% 100.2% 96.9%
Specialty 103.2 106.0 101.0 107.5
Aggregate (including
discontinued lines) 101.7 102.8 100.8 104.1
Personal The Personal group's net written premiums for the third
quarter and first nine months of 1999 includes $22.1 million and
$42.9 million, respectively, in net premiums written by Worldwide since
its acquisition in April. The decrease in written premiums reflects
continuing strong price competition in the private passenger automobile
market. The combined ratios for 1999 increased as loss and
underwriting expenses declined at a slower rate than premiums.
Specialty The Specialty Group's net written premiums for the third
quarter and first nine months of 1999 increased slightly compared to
the 1998 periods, excluding premiums of the commercial lines division
sold in December 1998 and the effect of ceding approximately 30% of
California workers' compensation premiums under a reinsurance agreement
implemented during the third quarter of 1998.
<PAGE>
A deferred gain of $103 million on the Commercial lines business ceded
to Ohio Casualty in December 1998 is being recognized over the
estimated settlement period (weighted average 4.25 years) of the claims
ceded. The Specialty group's underwriting results for the third
quarter and first nine months of 1999 include $6.7 million and
$20.1 million, respectively, in earnings recognized on the ceded
business. In addition, the improvement in the combined ratios for the
1999 periods reflects (i) a decrease in losses from severe weather for
the nine-month period (ii) improved underwriting margins in California
workers' compensation business largely due to favorable reinsurance
agreements and (iii) the absence of losses included in the 1998 periods
attributable to the commercial lines sold.
18
<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 decrease in life,
accident and health premiums and benefits reflects primarily the sale
of AAG's Funeral Services division in September 1998.
Investment Income Investment income decreased approximately
$7.5 million (3%) in the third quarter of 1999 and $40.7 million (6%)
in the first nine months of 1999 compared to 1998 due primarily to the
transfer of investment assets in connection with the sales of the
Commercial lines division and Funeral Services division in 1998,
partially offset by the effect of the purchase of Worldwide in April
1999.
Investee Corporation Equity in net earnings of investee corporation
represents AFC's proportionate share of Chiquita's earnings. Chiquita
reported net losses for the third quarter of 1999 and 1998 of
$37 million and $11 million, respectively. For the first nine months
of 1999 and 1998, Chiquita reported net income of $19 million and
$83 million, respectively.
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 Subsidiaries The gains on sales of
investees and subsidiaries in 1998 include (i) pretax gains of
$7.7 million and $1.7 million in the first and second quarters as a
result of Chiquita's public issuance of shares of its common stock,
(ii) a pretax gain of $21.6 million on AAG's sale of its Funeral
Services division in September and (iii) a third quarter charge of
$10.5 million relating to operations expected to be sold or otherwise
disposed of.
Annuity Benefits Annuity benefits reflect amounts accrued on 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.
Cumulative Effect of Accounting Change In the first quarter of 1999,
AAG implemented Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires that costs of start-up
activities be expensed as incurred and that unamortized balances of
previously deferred costs be expensed and reported as the cumulative
effect of a change in accounting principle. Accordingly, AFC expensed
previously capitalized start-up costs of $3.8 million (net of minority
interest and taxes) in the first quarter of 1999.
19
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Item 3
Quantitative and Qualitative Disclosure of Market Risk
The tables below show scheduled principal payments (in millions) on
fixed-rate and variable-rate long-term debt of AFC and its subsidiaries
and related average interest rates as of September 30, 1999 and
December 31, 1998.
September 30, 1999
Fixed-Rate Debt Variable-Rate Debt
Weighted Weighted
Scheduled Average Scheduled Average
Principal Interest Principal Interest
Payments Rate Payments Rate
1999 (remainder) $ .4 6.78% $ .1 7.26%
2000 27.0 9.96 .2 7.13
2001 1.4 6.81 .1 7.00
2002 1.3 6.50 101.2 6.08
2003 1.3 6.38 60.2 5.89
2004 14.2 8.38 .2 7.00
Thereafter 135.2 7.25 .1 7.00
Total $180.8 7.74% $162.1 6.01%
Market Value $175.7 $162.1
December 31, 1998
Fixed-Rate Debt Variable-Rate Debt
Weighted Weighted
Scheduled Average Scheduled Average
Principal Interest Principal Interest
Payments Rate Payments Rate
1999 $ 90.7 9.69% $ .3 5.86%
2000 49.1 9.85 .2 5.80
2001 1.2 7.13 .1 5.58
2002 1.1 6.81 85.7 5.95
2003 1.1 6.68 27.2 6.09
Thereafter 233.3 8.26 .2 5.58
Total $376.5 8.80% $113.7 5.98%
Market Value $388.9 $113.7
As of September 30, 1999, there were no material changes to the other
information provided in AFC's Form 10-K for 1998 under the caption
"Exposure to Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
20
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule as of September 30, 1999.
For submission in electronic filing only.
(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
November 12, 1999 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation 10-Q for the nine months ended September 30,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> $311,061
<SECURITIES> 10,571,811<F1>
<RECEIVABLES> 709,348
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,976,047
<CURRENT-LIABILITIES> 0
<BONDS> 343,732
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,312,453
<TOTAL-LIABILITY-AND-EQUITY> 15,976,047
<SALES> 0
<TOTAL-REVENUES> 2,504,148
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 263,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,715
<INCOME-PRETAX> 213,660
<INCOME-TAX> 78,257
<INCOME-CONTINUING> 135,403
<DISCONTINUED> 0
<EXTRAORDINARY> (3,849)
<CHANGES> (3,854)
<NET-INCOME> 127,700
<EPS-BASIC> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investee of $191 million.
<F2>Not applicable since all common shares are owned by American
Financial Group, Inc.
</FN>
</TABLE>
