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, 1996 No. 1-11453
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1422526
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, 1996, there were 61,039,600 shares of the
Registrant's Common Stock outstanding, excluding 18,666,614
shares owned by subsidiaries.
Page 1 of 18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
September 30, December 31,
1996 1995
Assets
Cash and short-term investments $ 402,491 $ 544,408
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,563,100 and $3,729,300) 3,562,177 3,588,943
Available for sale - at market
(amortized cost - $6,222,763 and $5,648,060) 6,274,663 5,949,260
Other stocks - principally at market
(cost - $154,133 and $136,944) 311,833 252,244
Investment in investee corporations 240,310 306,545
Loans receivable 608,660 631,408
Real estate and other investments 209,948 220,135
Total investments 11,207,591 10,948,535
Recoverables from reinsurers and prepaid
reinsurance premiums 947,640 923,080
Agents' balances and premiums receivable 642,673 703,274
Deferred acquisition costs 444,224 419,919
Other receivables 263,884 270,263
Deferred tax asset 149,742 200,392
Assets held in separate accounts 243,339 238,524
Prepaid expenses, deferred charges and other assets 367,732 391,339
Cost in excess of net assets acquired 285,034 314,136
$14,954,350 $14,953,870
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 4,180,577 $ 4,096,703
Unearned premiums 1,249,757 1,294,054
Annuity benefits accumulated 5,279,208 5,051,959
Life, accident and health reserves 561,150 538,274
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 173,566 311,202
American Premier Underwriters (parent only) 266,847 337,334
American Annuity Group 159,456 167,734
Other subsidiaries 63,943 65,793
Liabilities related to separate accounts 243,339 238,524
Accounts payable, accrued expenses and other
liabilities 929,845 1,097,766
Minority interest 315,351 314,390
Total liabilities 13,423,039 13,513,733
<PAGE>
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 60,977,845 and 60,139,303 shares outstanding 60,978 60,139
Capital surplus 756,367 741,355
Retained earnings 576,866 387,143
Net unrealized gain on marketable securities,
net of deferred income taxes 137,100 251,500
Total shareholders' equity 1,531,311 1,440,137
$14,954,350 $14,953,870
2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 718,826 $ 753,910 $2,162,634 $1,856,701
Life, accident and health premiums 24,809 403 80,323 1,598
Investment income 212,614 198,177 627,489 552,340
Realized gains on sales of securities 3,161 23,646 24,604 34,978
Equity in net earnings (losses) of
investee corporations (3,361) (4,452) 22,505 33,548
Gains on sales of investee corporations 169,376 95 169,376 95
Gains on sales of subsidiaries - - 36,837 -
Other income 38,088 30,919 103,424 83,640
1,163,513 1,002,698 3,227,192 2,562,900
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 616,294 565,626 1,655,634 1,387,620
Commissions and other underwriting
expenses 187,486 196,002 596,505 519,997
Annuity benefits 69,514 65,631 206,319 194,152
Life, accident and health benefits 21,742 230 70,212 1,310
Interest charges on borrowed money 17,843 30,635 61,243 95,473
Other operating and general expenses 99,862 75,973 281,678 210,695
1,012,741 934,097 2,871,591 2,409,247
Earnings before income taxes and
extraordinary items 150,772 68,601 355,601 153,653
Provision for income taxes 29,196 17,641 94,484 39,860
Earnings before extraordinary items 121,576 50,960 261,117 113,793
Extraordinary items - gain (loss) on
prepayment of debt (8,411) 2,025 (25,912) 2,557
Net Earnings $ 113,165 $ 52,985 $ 235,205 $ 116,350
Preferred dividend requirement of
predecessor company - - - 6,349
Net earnings available to Common Shares $ 113,165 $ 52,985 $ 235,205 $ 110,001
Earnings (loss) per Common Share:
Before extraordinary items $2.00 $.95 $4.30 $2.39
Extraordinary items (.14) .04 (.43) .06
Net earnings $1.86 $.99 $3.87 $2.45
Average number of Common Shares 60,954 53,423 60,722 44,912
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
<S> <C> <C>
Operating Activities:
Net earnings $ 235,205 $ 116,350
Adjustments:
Extraordinary items 25,912 (2,557)
Depreciation and amortization 50,724 30,009
Annuity benefits 206,319 194,152
Equity in net earnings of investee corporations (22,505) (33,548)
Changes in reserves on assets 11,866 2,932
Realized gains on investing activities (230,142) (35,728)
Decrease (increase) in reinsurance and
other receivables 47,854 (38,717)
Decrease (increase) in other assets 31,117 (65,850)
Increase in insurance claims and reserves 62,453 159,269
Decrease in other liabilities (131,959) (71,801)
Increase in minority interest 13,993 8,428
Dividends from investees 3,600 8,115
Other, net (7,014) (14,104)
297,423 256,950
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,522,674) (1,630,954)
Equity securities (9,270) (4,902)
Investees and subsidiaries - (13,355)
Real estate, property and equipment (25,629) (30,216)
Maturities and redemptions of fixed maturity
investments 455,315 248,001
Sales of:
Fixed maturity investments 587,677 1,267,275
Equity securities 32,687 17,418
Investees and subsidiaries 286,648 -
Real estate, property and equipment 7,438 6,120
Cash and short-term investments of acquired
(former) subsidiaries (4,589) 392,100
Increase in other investments (9,438) (11,421)
(201,835) 240,066
<PAGE>
Financing Activities:
Annuity receipts 410,203 338,353
Annuity payments (372,005) (302,486)
Additional long-term borrowings 278,275 145,128
Reductions of long-term debt (515,253) (639,415)
Issuances of common stock 15,320 77,304
Repurchase of stock (8,563) (14)
Cash dividends paid (45,482) (26,855)
(237,505) (407,985)
Net Increase (Decrease) in Cash and Short-term Investments (141,917) 89,031
Cash and short-term investments at beginning
of period 544,408 171,335
Cash and short-term investments at end of period $ 402,491 $ 260,366
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Mergers American Financial Group, Inc. ("AFG") was formed in
December 1994 for the purpose of acquiring American Financial
Corporation ("AFC") and American Premier Underwriters, Inc.
("American Premier"). In Mergers completed on April 3, 1995,
AFG issued 71.4 million shares of its Common Stock in
exchange for all of the outstanding common stock of AFC and
American Premier. AFC received 18.7 million shares of AFG
for its investment in American Premier. These shares are
accounted for herein as retired.
For financial reporting purposes, because the former
shareholders of AFC owned more than 50% of AFG following the
Mergers, the Mergers were accounted for as a reverse
acquisition whereby AFC was deemed to have acquired American
Premier. Financial statements for periods prior to the
Mergers are those of AFC. The operations of American Premier
are included in AFG's financial statements from the date of
the Mergers.
The valuation of American Premier's net assets was determined
based on the fair market value of the AFG shares issued to
shareholders other than AFC and was allocated to American
Premier's assets and liabilities based on their fair values
at the date of acquisition. The following pro forma data is
presented as if the Mergers occurred on January 1, 1995 (in
millions, except per share data).
Nine months ended
September 30, 1995
Revenues $2,981
Earnings before Extraordinary Items 139
Extraordinary Items 3
Net Earnings 142
Earnings per Share $2.68
B. Accounting Policies
Basis of Presentation The accompanying consolidated
financial statements for AFG 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.
<PAGE>
Mergers and changes in ownership levels of subsidiaries and
investees have resulted in certain differences in the
financial statements and have affected comparability between
years. 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.
5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG's ownership of subsidiaries and significant investees
with publicly traded common shares was as follows:
September 30, December 31,
1996 1995 1994
American Annuity Group, Inc. ("AAG") 81% 81% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) (a) 42%
Chiquita Brands International, Inc. 43% 44% 46%
Citicasters Inc. (b) 38% 37%
(a) Became a 100%-owned subsidiary on April 3, 1995.
(b) Sold in September 1996.
Investments Debt securities are classified as "held to
maturity" and reported at amortized cost if AFG has the
positive intent and ability to hold them to maturity. Debt
and equity securities are classified as "available for sale"
and reported at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity if
the securities are not classified as held to maturity or
bought and held principally for selling in the near term.
Only in certain limited circumstances, such as significant
issuer credit deterioration or if required by insurance or
other regulators, may a company change its intent to hold a
certain security to maturity without calling into question
its intent to hold other debt securities to maturity in the
future.
Premiums and discounts on mortgage-backed securities are
amortized over their expected average lives using the
interest method. Gains or losses on sales of securities are
recognized at the time of disposition with the amount of gain
or loss determined on the specific identification basis.
When a decline in the value of a specific investment is
considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of
that investment is reduced.
Short-term investments are carried at cost; loans receivable
are stated primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in
securities of 20%- to 50%-owned companies are carried at
cost, adjusted for AFG's proportionate share of their
undistributed earnings or losses. Investments in less than
20%-owned companies are accounted for by the equity method
when, in the opinion of management, AFG can exercise
significant influence over operating and financial policies
of the investee.
<PAGE>
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFG's equity in the
underlying net assets ("goodwill") is being amortized over 40 years.
The excess of AFG's equity in the net assets of other
subsidiaries and investees over its cost of acquiring these
companies ("negative goodwill") is allocated to AFG's basis
in these companies' fixed assets, goodwill and other
long-term assets and is amortized on a 10- to 40-year basis.
Insurance As discussed under "Reinsurance" below, unpaid
losses and loss adjustment expenses and unearned premiums
have not been reduced for reinsurance recoverable.
Reinsurance In the normal course of business, AFG'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, AFG's insurance subsidiaries would remain
6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
liable. Amounts recoverable from reinsurers are estimated in
a manner consistent with the claim liability associated with
the reinsurance policies. AFG'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. AFG's insurance
subsidiaries also assume reinsurance from other companies.
Income on reinsurance assumed is recognized based on reports
received from ceding reinsurers.
Deferred Acquisition Costs Policy acquisition costs
(principally commissions, premium taxes and other
underwriting expenses) related to the production of new
business are deferred ("DPAC"). For the property and
casualty companies, the deferral of acquisition costs is
limited based upon their recoverability without any
consideration for anticipated investment income. DPAC is
charged against income ratably over the terms of the related
policies. For the annuity companies, DPAC is amortized, with
interest, in relation to the present value of expected gross
profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net
liabilities stated for unpaid claims and for expenses of
investigation and adjustment of unpaid claims are based upon
(a) the accumulation of case estimates for losses reported
prior to the close of the accounting period on the direct
business written; (b) estimates received from ceding
reinsurers and insurance pools and associations; (c)
estimates of unreported losses based on past experience;
(d) estimates based on experience of expenses for investigating
and adjusting claims and (e) the current state of the law and
coverage litigation. These liabilities are subject to the
impact of changes in claim amounts and frequency and other
factors. In spite of the variability inherent in such
estimates, management believes that the liabilities for
unpaid losses and loss adjustment expenses are adequate.
Changes in estimates of the liabilities for losses and loss
adjustment expenses are reflected in the Statement of
Earnings in the period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are generally 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.
<PAGE>
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional ordinary life, accident and
health policies are computed using a net level premium
method. Computations are based on anticipated investment
yields, mortality, morbidity and surrenders and include
provisions for unfavorable deviations. Reserves are modified
as necessary to reflect actual experience and developing
trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
deposits maintained by several banks under a previously
offered tax deferred annuity program. AAG receives an annual
fee from each bank for sponsoring the program; depositors can
elect to purchase an annuity from AAG with funds in their
account.
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
7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Income Taxes AFC and American Premier each file consolidated
federal income tax returns which include all 80%-owned U.S.
subsidiaries, except for certain life insurance subsidiaries.
Because voting rights aggregating 21% were extended to
holders of AFC Series F and G Preferred Stock in connection
with the Mergers, AFC continues to file a separate
consolidated return. AFG (parent) is included in American
Premier's consolidated return. 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 AFG provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans. Contributions to
benefit plans are charged against earnings in the year for
which they are declared. Both AFC and American Premier have
Employee Stock Ownership Retirement Plans ("ESORP") which are
noncontributory, qualified plans invested in securities of
AFG and affiliates for the benefit of their employees.
<PAGE>
AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG 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 qualify for such benefits.
Under AFG's stock option plan, options are granted to
officers, directors and key employees at exercise prices
equal to the fair value of the shares at the dates of grant.
No compensation expense is recognized for stock option
grants.
Debt Discount and Premium Debt discount, premium and
expenses are amortized over the lives of respective
borrowings, generally on the interest method.
Minority Interest For balance sheet purposes, minority
interest represents the interests of noncontrolling
shareholders in AFG subsidiaries and includes AFC preferred
stock. For income statement purposes, minority interest
(included in "Other operating and general expenses")
represents those shareholders' interest in the earnings of
AFG subsidiaries and includes AFC preferred dividends
following the Mergers.
8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Earnings Per Share Earnings per share are calculated on the
basis of the weighted average number of shares of common
stock outstanding during the period and the dilutive effect,
if material, of assumed conversion of common stock options.
The weighted average number of shares used for periods prior
to April 3, 1995, is based upon the 28.3 million shares issued in
exchange for AFC common shares in the Mergers discussed in Note A.
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.
C. Segments of Operations AFG operates its property and
casualty insurance business in three major segments:
nonstandard automobile, specialty lines and commercial and
personal lines. AFG's annuity business sells tax-deferred a
nnuities principally to employees of primary and secondary e
ducational institutions and hospitals. These insurance
businesses operate throughout the United States. AFG has
owned significant portions of the voting equity securities of
certain companies (investee corporations - see Note D). The
following table (in thousands) shows AFG's revenues by
significant business segment. Intersegment transactions are not
significant.
Nine months ended September 30,
Revenues 1996 1995
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 900,989 $ 638,586
Specialty lines 742,075 695,992
Commercial and personal lines 519,112 520,984
Other lines 458 1,139
2,162,634 1,856,701
Investment and other income 423,294 317,974
2,585,928 2,174,675
Annuities and life (*) 437,763 310,128
Other 180,996 44,549
3,204,687 2,529,352
Equity in net earnings
of investee corporations 22,505 33,548
$3,227,192 $2,562,900
(*) Represents primarily investment income.
9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investee Corporations The companies in the
following table are subject to the rules and regulations of
the SEC. The market value of the investments was
approximately $294 million and $509 million at September 30, 1996
and December 31, 1995, respectively. AFG's investment
(and common stock ownership percentage) in these investees
was as follows (dollars in thousands):
September 30, 1996 December 31, 1995
Chiquita $240,310 (43%) $232,466 (44%)
Citicasters (*) 74,079 (38%)
$240,310 $306,545
(*) Sold in September 1996.
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed
food products. Citicasters owns and operates radio and
television stations in major markets throughout the country.
In September 1996, AFG sold its investment in Citicasters to
Jacor Communications for approximately $220 million in cash
plus warrants to purchase Jacor common stock. AFG realized a
pretax gain of approximately $169 million, before minority
interest of $6.5 million, on the sale.
Summarized financial information for Chiquita follows (in millions):
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Net Sales $1,880 $1,971
Operating Income 149 172
Income from Continuing Operations 60 57
Discontinued Operations - 4
Extraordinary Item - Loss on Debt Prepayments (23) (5)
Net Income 37 56
</TABLE>
E. Long-Term Debt During the first nine months of 1996, AFC
(parent) repurchased $137.4 million of its debentures for $147.0 million;
American Premier (parent) repurchased $64.6 million of its Notes for
$71.4 million; and AAG repurchased $78.0 million of its Notes
for $84.2 million.
<PAGE>
At September 30, 1996, sinking fund and other scheduled
principal payments on debt for the balance of 1996 and the
subsequent five years were as follows (in thousands):
American
AFC Premier
(Parent) (Parent) Other Total
1996 $ - $ - $ 502 $ 502
1997 5,604 - 17,070 22,674
1998 - - 2,838 2,838
1999 - 132,774 77,132 209,906
2000 - 95,380 8,698 104,078
2001 - - 42,321 42,321
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 purchased are applied to the earliest scheduled
retirements.
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Capital Stock At September 30, 1996, there were 60,977,845
shares of AFG Common Stock outstanding, including 1,371,982
shares held by American Premier for distribution to certain
creditors and other claimants pursuant to a plan of
reorganization relating to American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting
Preferred Stock and 12.5 million shares of Nonvoting
Preferred Stock, each without par value. At December 31,
1995, AFG had 212,698 shares of convertible preferred stock
outstanding with a stated value of $469,000 (included in
Capital Surplus, net of related notes receivable). These
shares were converted into 446,799 shares of AFG Common Stock
in March 1996.
At September 30, 1996, there were 5.5 million shares of AFG
Common Stock reserved for issuance upon exercise of stock
options. As of that date, AFG had options for 3.4 million
shares outstanding. Options become exercisable at the rate
of 20% per year commencing one year after grant; those
granted to non-employee directors of AFG are generally fully
exercisable upon grant. All options expire ten years after
the date of grant.
<TABLE>
<CAPTION>
A progression of AFG's Shareholders' Equity is as follows (dollars in thousands):
Common Stock
Common and Capital Retained
Shares Surplus Earnings Unrealized
<S> <C> <C> <C> <C>
Balance at December 31, 1995 60,139,303 $801,494 $387,143 $251,500
Net earnings - - 235,205 -
Change in unrealized - - - (114,400)
Dividends on Common Stock - - (45,482) -
Shares issued:
Exercise of stock options 591,404 13,127 - -
Dividend reinvestment plan 6,856 210 - -
Employee stock purchase plan 64,722 1,983 - -
Employee stock bonus 4,300 131 - -
Directors fees paid in common shares 697 23 - -
Conversion of Preferred Stock 446,799 8,908 - -
Shares repurchased (276,236) (8,563) - -
Change in foreign currency translation - 32 - -
Balance at September 30, 1996 60,977,845 $817,345 $576,866 $137,100
</TABLE>
<PAGE>
G. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are
net of minority interest and income tax benefits (in
thousands):
Nine months ended
September 30,
1996 1995
Subsidiaries:
AFC (parent) ($ 9,605) ($1,713)
APU (parent) (566) 5,746
AAG (7,159) 30
Other 57 -
Investee:
Chiquita (8,639) (1,506)
($25,912) $2,557
11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Cash Flows - Fixed Maturity Investments "Investing activities"
related to fixed maturity investments in AFG's Statement of Cash Flows
consisted of the following (in thousands):
Held to Available
1996 Maturity For Sale Total
Purchases $176,177 $1,346,497 $1,522,674
Maturities and redemptions 230,746 224,569 455,315
Sales 9,310 578,367 587,677
1995
Purchases $548,670 $1,082,284 $1,630,954
Maturities and redemptions 153,990 94,011 248,001
Sales 9,040 1,258,235 1,267,275
Securities classified as "held to maturity" having an amortized cost of
$9.5 million and $9.0 million were sold in 1996 and 1995, respectively,
due to significant deterioration in the issuers' creditworthiness.
I. Commitments and Contingencies There have been no significant changes
to the matters discussed and referred to in Note L "Commitments and
Contingencies" in AFG's Annual Report on Form 10-K for 1995 and in
Part II, Item 1 "Legal Proceedings" in AFG's Quarterly Report on Form 10-Q
for June 30, 1996.
J. Subsequent Event In October 1996, a wholly-owned trust
subsidiary of AFG issued 4 million units of 9-1/8% Trust
Originated Preferred Securities ("TOPrS") for $100 million
cash. The Trust then purchased $100 million of newly issued
AFG 9-1/8% Subordinated Debentures due 2026, which, along with
related interest and principal payments received, will be the
only assets of the Trust. AFG intends to use the proceeds
from this transaction to retire $50 million of outstanding
debt of subsidiaries and the remainder for general corporate
purposes, which may include the retirement of additional fixed
rate securities of AFG subsidiaries and investment in
insurance businesses.
Holders of the TOPrS are entitled to quarterly cash
distributions of $.57 per unit. Payment dates and amounts for
the TOPrS correspond to those on the Subordinated Debentures.
The TOPrS are mandatorily redeemable upon maturity or
redemption of the Subordinated Debentures. The Subordinated
Debentures are redeemable by AFG on or after October 22, 2001.
Distribution and redemption payments on the TOPrS are
guaranteed by AFG to the extent the Trust has funds available
therefor.
In addition, in November 1996, a wholly-owned trust subsidiary
of AAG issued $75 million of similar TOPrS.
12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFG and its subsidiaries, AFC and American Premier, are organized
as holding companies with almost all of their operations being
conducted by subsidiaries. The parent corporations, however,
have continuing cash needs for administrative expenses, the
payment of principal and interest on borrowings, and shareholder
dividends.
As discussed in Note A, financial statements for periods prior to
the April 1995 mergers are those of AFC. Since many of its
businesses are financial in nature, AFG does not prepare its
consolidated financial statements using a current-noncurrent
format. Consequently, certain traditional ratios and financial
analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios Since the Mergers, approximately $1.0 billion of AFC and
American Premier debt has been retired or replaced with lower
cost debt, resulting in a net reduction of aggregate debt by
approximately 70%. Consequently, AFG's debt to total capital
ratio at the parent holding company level improved from nearly
60% at the date of the Mergers to just over 20% at September 30, 1996.
These debt reductions and replacements will also reduce AFG's
interest expense by approximately $100 million annually.
AFG's ratio of earnings to fixed charges on a total enterprise
basis was 4.78 for the first nine months of 1996 compared to 2.60
for the entire year of 1995. Assuming the Mergers and related
transactions discussed in Note A had occurred on January 1, 1995,
the ratio for the year 1995 would have been 2.93.
Sources of Funds Management believes AFG has sufficient
resources to meet the liquidity requirements of AFG, AFC and
American Premier through operations in the short-term and long-
term future. If funds generated from operations, including
dividends 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.
<PAGE>
Prior to the Mergers, American Premier had substantial cash and
short-term investments at the parent company level. Subsequent
to the Mergers, AFC and its subsidiaries entered into credit
agreements with American Premier. At September 30, 1996, $705 million
had been borrowed under these agreements and used for debt retirements,
capital contributions to subsidiaries, and other corporate purposes.
In addition, AFG and American Premier entered into a reciprocal
credit agreement under which these companies will make funds available
to each other for general corporate purposes.
In recent months, three nationally recognized rating agencies
issued or upgraded ratings on AFC, American Premier and AAG
public debentures. All of the AFC and AAG senior debentures are
now rated investment grade; the APU and AAG subordinated
debentures are rated investment grade by two of the agencies.
Generally, the upgrades reflect the expectation that AFG's
consolidated debt to total capital will remain conservative and
that coverage ratios will benefit from higher subsidiary earnings
and a lower level of fixed charges at AFG's subsidiaries.
Additionally, two of the agencies gave the TOPrS an investment
grade rating as well.
13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Bank credit lines at several subsidiary holding companies provide
ample liquidity which can be used to obtain funds for the
operating subsidiaries or, if necessary, for the parent companies,
AFC, American Premier and ultimately AFG. Agreements with the banks
generally run for three to seven years and are renewed before maturity.
While it is highly unlikely that all such amounts would ever be borrowed
at one time, a maximum of $490 million is available under these bank
facilities, $89 million of which was borrowed at September 30, 1996.
In the past, funds have been borrowed under certain of these bank
facilities and used for working capital, capital infusions into
subsidiaries, and to retire other issues of short-term or high-
rate debt. Also, AFG believes it may be prudent and advisable to
carry borrowings of up to $200 million of bank debt in the normal course
in order to retire public or privately held fixed rate debt over the
next year or two.
Dividend payments from subsidiaries have been very important to
the liquidity and cash flow of the individual holding companies
in the past. However, the combination of (i) strong capital at
AFG's insurance subsidiaries (and the related decreased
likelihood of a need for investment in those companies), (ii) the
reductions of debt at the holding companies (and the related
decrease in ongoing cash needs for interest and principal
payments), (iii) AFG's ability to obtain financing in capital
markets, as well as (iv) the sales of Buckeye Management Company
and Citicasters, should lessen the reliance on such dividend
payments in the future.
Investments Approximately 93% of the bonds and redeemable
preferred stocks held by AFG were rated "investment grade"
(credit rating of AAA to BBB) by nationally recognized rating
agencies at September 30, 1996. Investment grade securities
generally bear lower yields and lower degrees of risk than those
that are unrated and non-investment grade. Management believes
that the high quality investment portfolio should generate a
stable and predictable investment return.
AFG's equity securities are concentrated in a relatively limited
number of major positions. This approach allows management to
more closely monitor these companies and the industries in which
they operate.
RESULTS OF OPERATIONS
General The operations of American Premier are included in AFG's
financial statements from the date of acquisition. Accordingly,
nine-month 1996 and 1995 income statements are not comparable.
Results of interim periods are not necessarily indicative of
future results of operations.
<PAGE>
AFG reported net earnings of $113.2 million, or $1.86 per share,
for the third quarter of 1996. Results include net realized
gains of $165.9 million ($2.72 per share), after minority
interest of $6.5 million, primarily from AFG's sale of its
investment in Citicasters, reduced by a charge of $80 million
($1.31 per share) resulting from a decision to strengthen
insurance reserves relating to asbestos and other environmental
matters ("A&E"). Net earnings before realized gains and
nonrecurring and extraordinary items were $35.7 million, or $.59 per share.
Net earnings before realized gains and extraordinary items were
$32.3 million, or $.60 per share, for the third quarter of 1995.
AFG's net earnings for the first nine months of 1996 were $235.2 million,
or $3.87 per share ($2.37 per share before realized gains and
nonrecurring and extraordinary items).
14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Property and Casualty Insurance AFG manages and operates its
property and casualty business as three major sectors. The
nonstandard automobile insurance companies (the "NSA Group")
insure risks not typically accepted for standard automobile
coverage because of the applicant's driving record, type of
vehicle, age or other criteria. The specialty lines are a
diversified group of over twenty-five business lines that offer a
wide variety of specialty insurance products. Some of the more
significant lines are California workers' compensation, executive
liability, inland and ocean marine, U.S.-based operations of
Japanese companies, agricultural-related coverages, excess and
surplus lines and fidelity and surety bonds. The commercial and
personal lines provide coverages in commercial multi-peril,
workers' compensation, umbrella and commercial automobile,
standard private passenger automobile and homeowners insurance.
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting losses, loss
adjustment expenses, underwriting expenses and policyholder
dividends to premiums. When the combined ratio is under 100%,
underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
Comparisons made in the following discussion of AFG's insurance
operations include American Premier's insurance operations even
though they were not consolidated in the financial statements
prior to the Mergers.
Net written premiums and combined ratios for AFG's property and
casualty insurance subsidiaries were as follows (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Net Written Premiums (GAAP)
NSA Group $277.2 $316.7 $ 868.8 $ 982.3
Specialty Operations 270.5 277.4 755.6 809.7
Commercial and Personal
Operations 160.7 186.8 488.9 525.5
Other Lines - .1 .3 .8
$708.4 $781.0 $2,113.6 $2,318.3
Combined Ratios (GAAP)
NSA Group 98.2% 106.1% 100.3% 104.8%
Specialty Operations 69.2 94.9 85.0 97.1
Commercial and Personal
Operations 126.7 99.6 111.2 100.5
Aggregate (including A&E
and other lines) 111.8 101.0 104.2 102.2
<PAGE>
Operating results for the third quarter and first nine months of 1996 were
adversely impacted by two unusual items: (i) approximately $30 million in
losses due to Hurricane Fran and (ii) the strengthening of A&E reserves
(exposures for which AFG has been held liable under general liability
policies written years ago). AFG increased A&E reserves of its discontinued
insurance lines by $120 million by recording a third quarter, non-cash,
pretax charge of $80 million and reallocating $40 million in reserves
from its Specialty Operations. A&E reserves at September 30, 1996 were
approximately $340 million, an amount expected to be approximately 11 times
the preceding three years' average claim payments.
15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
NSA Group The NSA Group's 12% decline in net written premiums
is due primarily to significant rate increases implemented in
1995 and early 1996. These rate increases contributed to an
improvement in the 1996 combined ratios. In addition, the 1995
combined ratios were impacted by weather- related losses,
principally from hailstorms in Texas in late April and early May.
Specialty Operations The specialty operations' 7% decrease in
net written premiums for the nine months of 1996 is due to the
extremely competitive pricing environment in the California
workers' compensation market and withdrawal from an unprofitable
voluntary pool. Excluding the impact of the decreases in the
California workers' compensation business and the withdrawal from
the voluntary pool, specialty net written premiums increased
$16 million (8%) in the 1996 third quarter and $56 million (10%) for
the first nine months of 1996. The increases are due in part to
increases in specialized coverages for U.S.-based operations of
Japanese companies, agricultural-related businesses, animal
mortality and collateral protection exposures. The improvement
in the combined ratio for the third quarter and first nine months
of 1996 is due primarily to (i) improved results in certain niche
businesses, (ii) the reallocation of $40 million in reserves to
A&E reserves (a combined ratio impact of 15.0 points and 5.4
points for the third quarter and first nine months of 1996,
respectively), (iii) reductions in loss, loss adjustment expense
and policyholder dividend reserves prompted by fundamental
changes in the California workers' compensation market and
actuarial evaluations, and (iv) losses in 1995 from participation
in the voluntary pool.
Commercial and Personal Operations The 7% decrease in net
written premiums for the nine months of 1996 is due primarily to
significant decreases in personal lines business. The 14% decrease
in net written premiums for the third quarter is due to
price competition in the commercial casualty lines and reduced
writings of homeowners' insurance in certain states. Increases
in the combined ratio reflect the impact of losses due to
Hurricane Fran as well as other weather-related losses.
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects AAG's
acquisition of Laurentian Capital Corporation in November 1995.
Investment Income Investment income increased $14.4 million (7%)
for the third quarter of 1996 compared to 1995. Adjusting the
effects of the Mergers retroactively to January 1, 1995,
investment income increased $34.8 million (6%) for the nine
months of 1996 compared to 1995. The acquisition of Laurentian
and an increase in the average amount of investments held were
the primary factors contributing to the increase.
<PAGE>
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.
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFG owns a significant portion
of the voting stock) represents AFG's proportionate share of the
investees' earnings and losses. AFG's equity in net earnings of
investee corporations in the first quarter of 1995 includes AFC's
share ($6.9 million) of American Premier's earnings prior to the
Mergers.
16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Gains on Sales of Investee Corporations The gains on sales of
investees for the third quarter and first nine months of 1996 and
1995 represent pretax gains, before minority interest, on the
sales of Citicasters common stock.
Gains on Sales of Subsidiaries The gains on sales of
subsidiaries include a pretax gain of $33.9 on the sale of
Buckeye Management Company and the settlement of litigation
related to a subsidiary sold in 1993.
Annuity Benefits Annuity benefits expense increased 6% in the
first nine months of 1996 due primarily to an increase in average
funds accumulated. The rate at which interest is credited on
annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Interest on Borrowed Money Interest expense decreased
$12.8 million (42%) for the third quarter of 1996 and, adjusted for the
Mergers, $28.2 million (32%) for the nine months of 1996 compared
to the respective periods of 1995. The decrease reflects
significant debt repayments after the Mergers and continuing in
1996.
Other Operating and General Expenses Operating and general
expenses for the third quarter and first nine months of 1996
include approximately $8.9 million and $26.2 million, respectively,
attributable to the operations of Laurentian. Included in operating
and general expenses in the first nine months of 1996 and 1995 are
charges of $37.3 million and $23.5 million, respectively, for minority
interest. Minority interest for periods subsequent to the Mergers
includes AFC's quarterly preferred dividend requirement of $6.3 million.
____________________________________________________________
17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
11 Computation of earnings per share.
27 Financial Data Schedule - Included in Report
filed electronically with the Securities and
Exchange Commission.
(b) Reports on Form 8-K:
Date of Reports Items Reported
September 20, 1996 Sale of Citicasters Common Stock
October 21, 1996 Terms of Preferred and Common Securities
of American Financial Capital Trust I
____________________________________________________________
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Group, Inc. has duly caused this Report to be signed on its behalf
by the undersigned duly authorized.
American Financial Group, Inc.
November 11, 1996 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Earnings before extraordinary items $121,576 $50,960 $261,117 $113,793
Preferred dividend requirement of
predecessor company - - - (6,349)
Net earnings before extraordinary items
available to common shareholders 121,576 50,960 261,117 107,444
Extraordinary items (8,411) 2,025 (25,912) 2,557
Net earnings available to common shareholders $113,165 $52,985 $235,205 $110,001
Computation of primary earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,954 53,423 60,722 44,912
Dilutive effect of assumed exercise of
certain stock options 481 527 570 420
Dilutive effect of assumed conversion of
certain preferred shares - 130 44 103
Weighted average common shares used to
calculate primary earnings per share 61,435 54,080 61,336 45,435
Primary earnings per common share (*) (*) (*) (*)
Computation of fully diluted earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,954 53,423 60,722 44,912
Dilutive effect of assumed exercise of
certain stock options 548 701 610 785
Dilutive effect of assumed conversion of
certain preferred shares - 150 45 150
Weighted average common shares used to
calculate fully diluted earnings per share 61,502 54,274 61,377 45,847
Fully diluted earnings per common share (*) (*) (*) (*)
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $2.00 $.95 $4.30 $2.39
Extraordinary items (.14) .04 (.43) .06
Net earnings $1.86 $.99 $3.87 $2.45
(*) Dilution less than 3%
</TABLE>
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from American
Financial Group, Inc. 10-Q for the nine months ended September 30, 1996 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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> $402,491
<SECURITIES> 10,388,983<F1>
<RECEIVABLES> 642,673
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,954,650
<CURRENT-LIABILITIES> 0
<BONDS> 663,812
0
0
<COMMON> 60,978
<OTHER-SE> 1,470,333
<TOTAL-LIABILITY-AND-EQUITY> 14,954,650
<SALES> 0
<TOTAL-REVENUES> 3,227,192
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 281,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,243
<INCOME-PRETAX> 355,601
<INCOME-TAX> 94,484
<INCOME-CONTINUING> 261,117
<DISCONTINUED> 0
<EXTRAORDINARY> (25,912)
<CHANGES> 0
<NET-INCOME> $235,205
<EPS-PRIMARY> 3.87
<EPS-DILUTED> 3.87
<FN>
<F1>Includes an investment in investees of $240 million.
</FN>
</TABLE>
