<PAGE>
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, 2000 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, 2000, 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)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Assets:
Cash and short-term investments $ 285,379 $ 389,018
Investments:
Fixed maturities - at market
(amortized cost - $10,306,884 and $10,101,005) 10,039,884 9,862,205
Other stocks - at market
(cost - $233,168 and $229,201) 399,568 409,701
Investment in investee corporation 171,019 159,984
Policy loans 215,247 217,171
Real estate and other investments 270,315 265,288
----------- -----------
Total investments 11,096,033 10,914,349
Recoverables from reinsurers and prepaid
reinsurance premiums 1,898,066 2,105,818
Agents' balances and premiums receivable 708,443 656,924
Deferred acquisition costs 705,695 660,672
Other receivables 255,593 222,438
Variable annuity assets (separate accounts) 466,359 354,371
Prepaid expenses, deferred charges and other assets 376,291 384,567
Cost in excess of net assets acquired 332,239 335,652
----------- -----------
$16,124,098 $16,023,809
=========== ===========
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,656,193 $ 4,795,449
Unearned premiums 1,410,459 1,325,766
Annuity benefits accumulated 5,494,318 5,519,528
Life, accident and health reserves 525,750 520,644
Payable to American Financial Group, Inc. 356,809 370,965
Long-term debt:
Holding companies 155,009 112,557
Subsidiaries 240,850 239,733
Variable annuity liabilities (separate accounts) 466,359 354,371
Accounts payable, accrued expenses and other
liabilities 979,261 970,495
----------- -----------
Total liabilities 14,285,008 14,209,508
<PAGE>
Minority interest 486,119 490,194
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 963,896 960,782
Retained earnings 344,596 296,246
Unrealized loss on marketable securities, net (37,300) (14,700)
----------- -----------
Total shareholders' equity 1,352,971 1,324,107
----------- -----------
$16,124,098 $16,023,809
=========== ===========
</TABLE>
2
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Income:
Property and casualty insurance premiums $572,137 $537,466
Life, accident and health premiums 49,919 25,588
Investment income 209,605 205,460
Realized gains (losses) on sales of securities (1,433) 4,449
Other income 50,307 27,805
-------- --------
880,535 800,768
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 417,651 365,829
Commissions and other underwriting expenses 178,432 168,221
Annuity benefits 66,161 64,941
Life, accident and health benefits 36,724 18,879
Interest charges on borrowed money 15,554 16,847
Other operating and general expenses 92,376 76,227
-------- --------
806,898 710,944
-------- --------
Operating earnings before income taxes 73,637 89,824
Provision for income taxes 24,255 30,214
-------- --------
Net operating earnings 49,382 59,610
Minority interest expense, net of tax (8,207) (11,962)
Equity in net earnings of investee, net of tax 7,175 10,606
-------- --------
Earnings before accounting change 48,350 58,254
Cumulative effect of accounting change - (3,854)
-------- --------
Net Earnings $ 48,350 $ 54,400
======== ========
</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 (Loss)
Stock Surplus Earnings on Securities Total
---------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $72,154 $970,407 $296,246 ($14,700) $1,324,107
Net earnings - - 48,350 - 48,350
Change in unrealized - - - (22,600) (22,600)
----------
Comprehensive income (loss) 25,750
Capital contribution from parent - 3,067 - - 3,067
Other - 47 - - 47
------- -------- -------- ------- ----------
Balance at March 31, 2000 $72,154 $973,521 $344,596 ($37,300) $1,352,971
======= ======== ======== ======= ==========
Balance at January 1, 1999 72,154 $952,984 $157,218 $348,300 $1,530,656
Net earnings - - 54,400 - 54,400
Change in unrealized - - - (71,400) (71,400)
----------
Comprehensive income (loss) (17,000)
Capital contribution from parent - 3,067 - - 3,067
Other - 1,716 - - 1,716
------- -------- -------- -------- ----------
Balance at March 31, 1999 $72,154 $957,767 $211,618 $276,900 $1,518,439
======= ======== ======== ======== ==========
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Operating Activities:
Net earnings $ 48,350 $ 54,400
Adjustments:
Cumulative effect of accounting change - 3,854
Equity in net earnings of investee (7,175) (10,606)
Depreciation and amortization 30,498 21,947
Annuity benefits 66,161 64,941
Realized gains on investing activities (7,611) (7,247)
Deferred annuity and life policy acquisition costs (33,668) (28,236)
Decrease in reinsurance and other receivables 124,640 61,589
Decrease (increase) in other assets 13,710 (10,838)
Decrease in insurance claims and reserves (50,957) (15,614)
Increase in other liabilities 2,454 20,224
Increase (decrease) in minority interest (285) 4,634
Dividends from investee - 1,200
Other, net (2,393) (1,111)
-------- --------
183,724 159,137
-------- --------
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (601,115) (535,513)
Equity securities (14,786) (19,183)
Subsidiaries - (26,636)
Real estate, property and equipment (18,935) (18,541)
Maturities and redemptions of fixed maturity
investments 154,704 340,961
Sales of:
Fixed maturity investments 227,797 180,604
Equity securities 19,265 15,763
Real estate, property and equipment 1,504 2,990
Cash and short-term investments of acquired
subsidiaries, net - 11,740
Decrease in other investments 5,486 21,563
-------- --------
(226,080) (26,252)
-------- --------
<PAGE>
Financing Activities:
Fixed annuity receipts 126,416 107,487
Annuity surrenders, benefits and withdrawals (192,820) (189,980)
Net transfers from fixed to variable annuity assets (21,453) (3,063)
Additional long-term borrowings 44,091 69,150
Reductions of long-term debt (610) (549)
Borrowings from AFG - 3,000
Repayments of borrowings from AFG (20,313) (64,800)
Capital contribution 4,667 4,667
Repurchases of trust preferred securities (1,261) (5,509)
-------- --------
(61,283) (79,597)
-------- --------
Net Increase (Decrease) in Cash and Short-term Investments (103,639) 53,288
Cash and short-term investments at beginning
of period 389,018 289,944
-------- --------
Cash and short-term investments at end of period $285,379 $343,232
======== ========
</TABLE>
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 considered "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 periods of 20 to 40 years.
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.
<PAGE>
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
6
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and 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.
VARIABLE ANNUITY ASSETS AND LIABILITIES Separate accounts related to
variable annuities represent deposits invested in underlying investment funds
on which American Annuity Group, Inc. ("AAG") earns a fee. The investment
funds are selected and may be changed only by the policyholder.
<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.
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
(i) the interests of noncontrolling shareholders in AFC subsidiaries,
including preferred securities issued by trust subsidiaries of AAG, and (ii)
the American Financial Group, Inc. ("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.
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 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.
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) or $.06
per diluted share, 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. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments that
are embedded in other contracts, and for hedging activities and must be
implemented no later than January 1, 2001. 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 acquired Worldwide Insurance
Company for $157 million in cash. Worldwide is a provider of direct response
private passenger automobile insurance.
UNITED TEACHER ASSOCIATES In October 1999, AAG acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA") for $81 million in
cash, pending post-closing adjustments under which AAG may receive as much as
several million dollars. UTA provides supplemental health products and
retirement annuities, and purchases blocks of insurance policies from other
insurers.
GREAT AMERICAN LIFE INSURANCE COMPANY OF NEW YORK AND CONSOLIDATED FINANCIAL
In February 1999, AAG acquired Great American Life Insurance Company of New
York, formerly Old Republic Life Insurance Company of New York, for $27
million in cash. In July 1999, AAG acquired Consolidated Financial
Corporation, an insurance agency, for $21 million in cash.
COMMERCIAL LINES DIVISION In connection with the 1998 sale of its Commercial
lines division to Ohio Casualty Corporation, AFC deferred a gain of $103
million related to the insurance business ceded which 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 mid-2000 based upon the retention and growth through May 31, 2000 of the
insurance businesses sold.
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. SEGMENTS OF OPERATIONS AFC's property and casualty group is engaged primarily
in private passenger automobile and specialty insurance businesses. The
Personal group writes nonstandard and preferred/standard private passenger
auto and other personal insurance coverage. The Specialty group includes a
highly diversified group of specialty business units. Some of the more
significant areas are inland and ocean marine, California workers'
compensation, agricultural- related coverages, executive and professional
liability, U.S.-based operations of Japanese companies, fidelity and surety
bonds, collateral protection, and umbrella and excess coverages. 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).
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
March 31,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Revenues (a)
Property and casualty insurance:
Premiums earned:
Personal $297,313 $285,817
Specialty 274,823 250,588
Other lines - primarily discontinued 1 1,061
-------- --------
572,137 537,466
Investment and other income 121,167 102,268
-------- --------
693,304 639,734
Annuities and life (b) 181,488 154,016
Other 5,743 7,018
-------- --------
$880,535 $800,768
======== ========
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($10,933) $ 4,480
Specialty (10,498) 349
Other lines - primarily discontinued (2,515) (1,413)
-------- --------
(23,946) 3,416
Investment and other income 89,365 68,689
-------- --------
65,419 72,105
Annuities and life 27,988 35,409
Other (c) (19,770) (17,690)
-------- --------
$ 73,637 $ 89,824
======== ========
</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 $114 million at March 31, 2000 and
December 31, 1999. 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):
Three months ended March 31,
----------------------------
2000 1999
---- ----
Net Sales $658 $693
Operating Income 68 77
Net Income 35 49
E. PAYABLE TO AMERICAN FINANCIAL GROUP AFC has a reciprocal Master Credit
Agreement with various AFG holding companies under which these companies make
funds available to each other for general corporate purposes.
F. LONG-TERM DEBT The carrying value of long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Holding Companies:
AFC notes payable under bank line $110,000 $ 68,000
APU 10-5/8% Subordinated Notes due April 2000 23,684 23,786
APU 10-7/8% Subordinated Notes due May 2011 11,648 11,661
Other 9,677 9,110
-------- --------
$155,009 $112,557
======== ========
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $100,000
AAG notes payable under bank line 97,000 97,000
Notes payable secured by real estate 31,582 31,704
Other 12,268 11,029
-------- --------
$240,850 $239,733
======== ========
</TABLE>
<PAGE>
At March 31, 2000, sinking fund and other scheduled principal payments on
debt for the balance of 2000 and the subsequent five years were as follows
(in millions):
Holding
Companies Subsidiaries Total
--------- ------------ --------
2000 $ 23.7 $ 2.8 $ 26.5
2001 - 1.4 1.4
2002 116.7 38.3 155.0
2003 - 61.3 61.3
2004 - 14.2 14.2
2005 - 9.6 9.6
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.
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. MINORITY INTEREST Minority interest in AFC's balance sheet is
comprised of the following (in thousands):
March 31, December 31,
2000 1999
-------- -----------
Interest of AFG (parent) and noncontrolling
shareholders in subsidiaries' common stock $268,009 $270,594
Preferred securities issued by
subsidiary trusts 218,110 219,600
-------- --------
$486,119 $490,194
======== ========
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 March 31, December 31, Optional
Issuance Issue (Maturity Date) 2000 1999 Redemption Dates
------------- ------------------------ -------- ----------- ----------------------
<S> <C> <C> <C> <C>
November 1996 AAG 9-1/4% TOPrS (2026) $73,110 $74,600 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 70,000 70,000 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 2000, AAG repurchased $1.5 million of its trust
preferred securities for $1.3 million in cash.
<PAGE>
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
Three months ended
March 31,
-------------------
2000 1999
---- ----
Interest of AFG (parent) and noncontrolling
shareholders in earnings of subsidiaries $5,192 $ 8,886
Accrued distributions by subsidiaries on trust
issued preferred securities, net of tax 3,015 3,076
------ -------
$8,207 $11,962
====== =======
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. SHAREHOLDERS' EQUITY At March 31, 2000 and December 31, 1999, AFG
beneficially owned all of the outstanding shares of AFC's Common Stock.
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. At March 31, 2000 and
December 31, 1999, the outstanding voting shares of 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 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 $72.2 million).
UNREALIZED LOSS ON MARKETABLE SECURITIES The change in unrealized gain (loss)
on marketable securities for the three months ended March 31 included the
following (in millions):
<TABLE>
<CAPTION>
Minority
Pretax Taxes Interest Net
------ ----- -------- ------
<S> <C> <C> <C> <C>
2000
----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($ 40.3) $14.5 $2.4 ($23.4)
Reclassification adjustment for
realized losses included in net income 1.4 (.5) (.1) .8
------ ----- ---- -----
Change in unrealized gain (loss) on
marketable securities, net ($ 38.9) $14.0 $2.3 ($22.6)
====== ===== ==== =====
1999
----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($120.5) $41.4 $ 9.8 ($69.3)
Reclassification adjustment for
realized gains included in net income (4.4) 1.6 .7 (2.1)
------ ----- ----- -----
Change in unrealized gain (loss) on
marketable securities, net ($124.9) $43.0 $10.5 ($71.4)
====== ===== ===== =====
</TABLE>
I. COMMITMENTS AND CONTINGENCIES There have been no significant changes to the
matters discussed and referred to in Note L "Commitments and Contingencies"
of AFC's Annual Report on Form 10-K for 1999.
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, 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.
IT INITIATIVE In the third quarter of 1999, AFC 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, 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 10% at March 31, 2000 and 8% at
December 31, 1999. Including amounts due AFG, the ratio was 27% at March 31,
2000 and December 31, 1999.
AFC's ratio of earnings to fixed charges, excluding and including preferred
dividends, (on a total enterprise basis) was 3.95 and 3.61 for the first
three months of 2000 and 4.01 and 3.67 for the entire year of 1999.
<PAGE>
SOURCES OF FUNDS Management believes the parent holding companies have
sufficient resources to meet their liquidity requirements through operations.
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.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
AFC has a revolving credit agreement with several banks under which it can
borrow up to $300 million. This 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, 2000, there was $110 million borrowed under
the line.
In April 1999, AFC used funds borrowed under its credit agreement with AFG to
retire outstanding holding company public debt and borrowings under its
credit line.
Dividend payments from subsidiaries have been very important to the liquidity
and cash flow of the individual holding companies during certain periods in
the past. However, the reliance on such dividend payments has been lessened
in recent years by the combination of (i) reductions in the amounts and cost
of debt at the holding companies from historical levels (and the related
decrease in ongoing cash needs for interest and principal payments), (ii)
AFC's ability to obtain financing in capital markets, as well as (iii) the
sales of certain 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 March 31, 2000. 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 operating earnings for the first quarter of 2000 were $73.6
million compared to $89.8 million for the first quarter of 1999. A decline in
property and casualty underwriting results and the absence of realized gains
were partially offset by increased investment income and other income,
including sales of certain assets.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFC's property and casualty
group consists of two major business groups: Personal and Specialty.
The Personal group sells nonstandard and preferred/standard private passenger
auto insurance and, to a lesser extent, homeowners' insurance. Nonstandard
automobile insurance covers risk 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 inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, U.S.-based operations of Japanese companies, fidelity
and surety bonds, collateral protection, and umbrella and excess coverages.
15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Underwriting profitability is measured by the combined ratio which is a sum
of the ratios of underwriting losses, loss adjustment expenses, underwriting
expenses and policyholder dividends to premiums. When the combined ratio is
under 100%, underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally considered
unprofitable. The combined ratio does not reflect investment income, other
income or federal income taxes.
For certain lines of business and products where the credibility of the range
of loss projections is less certain (primarily the various specialty
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
March 31,
-------------------
2000 1999
---- ----
Net Written Premiums (GAAP)
---------------------------
Personal $349.8 $276.5
Specialty 297.7 248.1
Other lines - .2
------ ------
$647.5 $524.8
====== ======
Combined Ratios (GAAP)(*)
----------------------
Personal 103.7% 98.5%
Specialty 103.8 99.8
Aggregate (including discontinued lines) 104.2 99.4
(*) Combined ratios for the entire year of 1999 were: Personal - 100.7%,
Specialty - 102.7% and aggregate - 102.0%.
PERSONAL The Personal group's 26% increase in net written premiums
reflects $27.5 million in premiums generated by Worldwide (AFC's direct
marketing channel acquired in April 1999) and expanded writings in certain
private passenger automobile markets. The combined ratio for 2000 increased
due to (i) losses from severe storms in certain southern and western states,
(ii) the impact of a very competitive pricing environment on policies written
during 1999 and (iii) increased underwriting expenses associated with the
expansion of the direct and Internet marketing initiatives.
<PAGE>
SPECIALTY The Specialty group's 20% increase in net written premiums
reflects the effect of (i) the January 2000 commutation of reinsurance
agreements relating to the California workers' compensation business which
were in effect throughout 1999, (ii) rate increases in certain casualty
markets (particularly California workers' compensation) and (iii) the
realization of growth opportunities in certain commercial markets. The
combined ratio for 2000 reflects the effect of a highly competitive pricing
environment on policies written in 1999.
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS The increase in life,
accident and health premiums and benefits is due primarily to the acquisition
of UTA in October 1999.
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 $4.1 million (2%) in the first
three months of 2000 compared to 1999 due primarily to higher average
investments held.
OTHER INCOME Other income increased $22.5 million (81%) in the first three
months of 2000 compared to 1999 due primarily to increased fee income
generated by certain insurance operations and income from the sale of
operating assets and lease residuals.
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.
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.
INTEREST ON BORROWED MONEY Interest expense decreased $1.3 million (8%) in
the first quarter of 2000 compared to 1999 due to lower average indebtedness.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
increased $16.1 million (21%) in the first three months of 2000 compared to
1999 due primarily to the inclusion of the operations of UTA following its
acquisition in late 1999 and increased expenses from certain start-up
insurance operations.
INVESTEE CORPORATION Equity in net earnings of investee represents AFC's
proportionate share of Chiquita's earnings. Chiquita reported net income for
the first three months of 2000 and 1999 of $35 million and $49 million,
respectively.
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.
----------------------------------------
Item 3
Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
As of March 31, 2000, there were no material changes to the information
provided in AFC's Form 10-K for 1999 under the caption "Exposure to Market
Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
17
<PAGE>
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule as of March 31, 2000. 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
May 12, 2000 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 Form 10-Q for the three months ended
March 31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> $285,379
<SECURITIES> 10,610,471<F1>
<RECEIVABLES> 708,443
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,124,098
<CURRENT-LIABILITIES> 0
<BONDS> 395,859
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,271,192
<TOTAL-LIABILITY-AND-EQUITY> 16,124,098
<SALES> 0
<TOTAL-REVENUES> 880,535
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 92,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,554
<INCOME-PRETAX> 73,637
<INCOME-TAX> 24,255
<INCOME-CONTINUING> 48,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $48,350
<EPS-BASIC> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investee corporation of $171 million.
<F2>Not applicable since all common shares are owned by American Financial
Group, Inc.
</FN>
</TABLE>