SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 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 August 1, 1996, there were 60,948,201 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)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and short-term investments $ 228,384 $ 544,408
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,597,400 and $3,729,300) 3,606,621 3,588,943
Available for sale - at market
(amortized cost - $6,019,049 and $5,648,060) 6,038,249 5,949,260
Other stocks - principally at market
(cost - $136,635 and $136,944) 264,535 252,244
Investment in investee corporations 327,848 306,545
Loans receivable 626,226 631,408
Real estate and other investments 214,853 220,135
Total investments 11,078,332 10,948,535
Recoverables from reinsurers and prepaid
reinsurance premiums 1,058,409 923,080
Agents' balances and premiums receivable 680,978 703,274
Deferred acquisition costs 436,310 419,919
Other receivables 291,349 270,263
Deferred tax asset 174,987 200,392
Assets held in separate accounts 241,867 238,524
Prepaid expenses, deferred charges and other assets 343,003 391,339
Cost in excess of net assets acquired 287,304 314,136
$14,820,923 $14,953,870
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 4,136,254 $ 4,096,703
Unearned premiums 1,315,066 1,294,054
Annuity benefits accumulated 5,208,348 5,051,959
Life, accident and health reserves 556,301 538,274
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 175,324 311,202
American Premier Underwriters (parent only) 267,888 337,334
American Annuity Group 170,397 167,734
Other subsidiaries 64,366 65,793
Liabilities related to separate accounts 241,867 238,524
Accounts payable, accrued expenses and other
liabilities 987,728 1,097,766
Minority interest 301,871 314,390
Total liabilities 13,425,410 13,513,733
<PAGE>
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 60,940,278 and 60,139,303 shares outstanding 60,940 60,139
Capital surplus 755,336 741,355
Retained earnings 478,937 387,143
Net unrealized gain on marketable securities,
net of deferred income taxes 100,300 251,500
Total shareholders' equity 1,395,513 1,440,137
$14,820,923 $14,953,870
</TABLE>
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 Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 730,419 $ 753,658 $1,443,808 $1,102,791
Life, accident and health premiums 31,261 456 55,514 1,195
Investment income 212,059 201,829 414,875 354,163
Realized gains on sales of
securities 2,725 7,856 21,443 11,332
Equity in net earnings of investee
corporations 17,344 15,099 25,866 38,000
Gain on sales of subsidiaries 2,946 - 36,837 -
Other income 36,003 27,697 65,336 52,721
1,032,757 1,006,595 2,063,679 1,560,202
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 530,183 578,351 1,039,340 821,994
Commissions and other underwriting
expenses 208,340 204,384 409,019 323,995
Annuity benefits 68,790 64,259 136,805 128,521
Life, accident and health benefits 26,877 665 48,470 1,080
Interest charges on borrowed money 21,534 35,709 43,400 64,838
Other operating and general expenses 95,027 77,277 181,816 134,722
950,751 960,645 1,858,850 1,475,150
Earnings before income taxes and
extraordinary items 82,006 45,950 204,829 85,052
Provision for income taxes 23,663 12,982 65,288 22,219
Earnings before extraordinary items 58,343 32,968 139,541 62,833
Extraordinary items - gain (loss) on
prepayment of debt (9,868) 532 (17,501) 532
Net Earnings $ 48,475 $ 33,500 $ 122,040 $ 63,365
Preferred dividend requirement of
predecessor company - - - 6,349
Net earnings available to Common
Shares $ 48,475 $ 33,500 $ 122,040 $ 57,016
Earnings (loss) per Common Share:
Before extraordinary items $ .96 $.63 $2.30 $1.39
Extraordinary items (.16) .01 (.29) .01
Net earnings $ .80 $.64 $2.01 $1.40
Average number of Common Shares 60,880 52,714 60,605 40,586
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
<S> <C> <C>
Operating Activities:
Net earnings $ 122,040 $ 63,365
Adjustments:
Extraordinary items 17,501 (532)
Depreciation and amortization 33,653 18,685
Annuity benefits 136,805 128,521
Equity in net earnings of investee
corporations (25,866) (38,000)
Changes in reserves on assets 11,755 (670)
Realized gains on investing activities (54,991) (11,248)
Decrease (increase) in reinsurance and
other receivables (142,307) 65,942
Decrease (increase) in other assets 40,891 (41,004)
Increase in insurance claims and reserves 78,590 59,169
Decrease in other liabilities (82,808) (109,991)
Increase (decrease) in minority interest 3,485 (1,868)
Dividends from investees 2,400 6,964
Other, net (3,064) (11,969)
138,084 127,364
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,161,557) (887,074)
Equity securities (13,997) (298)
Investees and subsidiaries - (13,400)
Real estate, property and equipment (16,012) (22,706)
Maturities and redemptions of fixed maturity
investments 323,418 137,421
Sales of:
Fixed maturity investments 490,604 666,502
Equity securities 26,940 13,208
Investees and subsidiaries 64,856 -
Real estate, property and equipment 2,995 3,811
Cash and short-term investments of acquired
(former) subsidiaries (4,589) 392,100
Increase in other investments (6,676) (3,641)
(294,018) 285,923
<PAGE>
Financing Activities:
Annuity receipts 280,579 245,111
Annuity payments (241,706) (214,603)
Additional long-term borrowings 197,561 80,590
Reductions of long-term debt (372,036) (482,319)
Issuances of common stock 14,174 9,550
Repurchase of stock (8,561) -
Cash dividends paid (30,101) (13,348)
(160,090) (375,019)
Net Increase (Decrease) in Cash and
Short-term Investments (316,024) 38,268
Cash and short-term investments at beginning
of period 544,408 171,335
Cash and short-term investments at end
of period $ 228,384 $209,603
</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).
Six months ended
June 30, 1995
Revenues $1,978
Earnings before Extraordinary Items 86
Extraordinary Items 1
Net Earnings 87
Earnings per Share $1.65
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:
June 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. 38% 38% 37%
(a) Became a 100%-owned subsidiary on April 3, 1995.
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.
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.
<PAGE>
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.
7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Premium Recognition Property and casualty premiums are
earned over the terms of the policies on a pro rata basis.
Unearned premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in
force. On reinsurance assumed from other insurance companies
or written through various underwriting organizations,
unearned premiums are based on reports received from such
companies and organizations. For traditional life, accident
and health products, premiums are recognized as revenue when
legally collectible from policyholders. For interest-
sensitive life and universal life products, premiums are
recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed
against the policyholder account for mortality coverage and
contract expenses.
Policyholder Dividends Dividends payable to policyholders
are included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period
in which the related premium is earned. Changes in estimates
are included in income in the period determined.
Policyholder dividends do not become legal liabilities unless
and until declared by the boards of directors of the
insurance companies.
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, through
contributory and noncontributory defined contribution plans,
to qualified employees of participating companies.
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.
8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
<PAGE>
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 also
owns 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.
<TABLE>
<CAPTION>
Six months ended June 30,
Revenues 1996 1995
<S> <C> <C>
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 609,198 $ 322,525
Specialty lines 476,109 432,504
Commercial and personal lines 358,076 346,943
Other lines 425 819
1,443,808 1,102,791
Investment and other income 232,971 191,951
1,676,779 1,294,742
Annuities and life (*) 290,339 198,736
Other 70,695 28,724
2,037,813 1,522,202
Equity in net earnings
of investee corporations 25,866 38,000
$2,063,679 $1,560,202
</TABLE>
(*) 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 named in
the following table are subject to the rules and regulations
of the SEC. Market value of the investments was
approximately $548 million and $509 million at June 30, 1996
and December 31, 1995, respectively. AFG's investment (and
common stock ownership percentage) in these investees was as
follows (dollars in thousands):
June 30, 1996 December 31, 1995
Chiquita $252,310 (43%) $232,466 (44%)
Citicasters 75,538 (38%) 74,079 (38%)
$327,848 $306,545
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 February 1996, Citicasters and Jacor Communications, Inc.
entered into a merger agreement under which AFG and its
subsidiaries would receive approximately $220 million in cash
plus warrants to buy approximately 1.5 million shares of
Jacor common stock at $28 per share. AFG expects to realize
a pretax gain of approximately $160 million on the sale which
is expected to close in the third quarter. Consummation of
the transaction is subject to regulatory approvals, and
certain adjustments to the price will be made if the
transaction closes after September 30, 1996.
Summarized financial information for AFG's investees follows
(in millions):
Six months ended June 30,
Chiquita 1996 1995
Net Sales $1,339 $1,402
Operating Income 133 146
Income from Continuing Operations 67 66
Discontinued Operations - 6
Extraordinary Item (5) (5)
Net Income 62 67
Six months ended June 30,
Citicasters 1996 1995
Net Revenues $71 $66
Operating Income 17 16
Net Earnings 5 7
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Long-Term Debt During the first six months of 1996, AFC
(parent) repurchased $135.5 million of its debentures for
$145.0 million; American Premier repurchased $64.2 million of
its Notes for $71.0 million; and AAG repurchased $60.1
million of its Notes for $65.0 million.
At June 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 $ - $ - $10,010 $ 10,010
1997 5,439 - 2,570 8,009
1998 - - 2,838 2,838
1999 - 133,202 75,631 208,833
2000 - 95,400 8,698 104,098
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.
F. Capital Stock At June 30, 1996, there were 60,940,278 shares
of AFG Common Stock outstanding, including 1,372,633 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 June 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.
<PAGE>
A progression of AFG's Shareholders' Equity is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
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 - - 122,040 -
Change in unrealized - - - (151,200)
Dividends on Common Stock - - (30,246) -
Shares issued:
Exercise of stock options 577,858 12,825 - -
Dividend reinvestment plan 4,684 145 - -
Employee stock purchase plan 43,494 1,349 - -
Employee stock bonus 4,300 131 - -
Conversion of Preferred Stock 446,799 8,908 - -
Shares repurchased (276,160) (8,561) - -
Change in foreign currency
translation - (15) - -
Balance at June 30, 1996 60,940,278 $816,276 $478,937 $100,300
</TABLE>
11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are
net of minority interest and income tax benefits (in
thousands):
Six months ended
June 30,
1996 1995
Subsidiaries:
AFC (parent) ($ 9,499) ($1,713)
APU (parent) (563) 3,807
AAG (5,605) 30
Other 110 -
Investee:
Chiquita (1,944) (1,592)
($17,501) $ 532
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):
<TABLE>
<CAPTION>
Held to Available
1996 Maturity For Sale Total
<S> <C> <C> <C>
Purchases $149,665 $1,011,892 $1,161,557
Maturities and redemptions 145,138 178,280 323,418
Sales - 490,604 490,604
1995
Purchases $420,193 $466,881 $887,074
Maturities and redemptions 88,786 48,635 137,421
Sales 9,040 657,462 666,502
</TABLE>
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. See Part II Item 1 - Legal Proceedings
(herein) for an update of the USX Litigation.
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 holding company level improved from nearly 60% at
the date of the Mergers to less than 25% at June 30, 1996. These
debt reductions and replacements will also reduce AFG's interest
expense by approximately $98 million annually.
AFG's ratio of earnings to fixed charges on a total enterprise
basis was 3.77 for the first six 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 June 30, 1996, $715 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 May 1996, Standard and Poor's ("S&P") raised debt ratings on
AFC's 9-3/4% Debentures and AAG's senior debt to an investment
grade rating of "BBB-". In addition, S&P raised its debt ratings
on AAG's and American Premier's subordinated debt to "BB+". S&P
stated that the upgrade reflects the sizable reduction in
consolidated debt since April 1995 and the continued financial
strength of AFG's property and casualty and annuity insurance
operations.
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
13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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, $82
million of which was borrowed at June 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 94% 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 June 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, six-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 $48.5 million, or $.80 per share,
for the second quarter of 1996. Net earnings before realized
gains and extraordinary items were $53.6 million, or $.88 per
share. AFG's earnings for the first six months of 1996 were
$122.0 million, or $2.01 per share ($1.78 per share before
realized gains and the extraordinary charge).
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.
14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 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.
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 Six months ended
June 30, June 30,
1996 1995 1996 1995
Net Written Premiums (GAAP)
NSA Group $296.2 $336.5 $ 591.6 $ 665.6
Specialty Operations 267.4 258.7 485.1 532.3
Commercial and Personal
Operations 162.9 182.8 328.2 338.7
Other Lines .1 .1 .3 .7
$726.6 $778.1 $1,405.2 $1,537.3
Combined Ratios (GAAP)
NSA Group 100.8% 107.4% 101.4% 104.2%
Specialty Operations 97.4 97.0 93.9 98.3
Commercial and Personal
Operations 104.7 102.1 104.2 100.9
Aggregate 101.2 104.0 100.4 102.8
NSA Group The NSA Group's 11% decline in net written premiums
is due primarily to volume reductions resulting from 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.
<PAGE>
Specialty Operations The specialty operations' 9% decrease in
net written premiums for the six 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 $32 million (18%) in the 1996
second quarter and $40 million (11%) for the first six months of 1996.
The improvement in the combined ratio for the first six months of
1996 is due primarily to large losses in 1995 from (i)
participation in the voluntary pool and (ii) prior accident year
development on coverages of U.S.-based operations of Japanese
companies.
Commercial and Personal Operations The 3% decrease in net
written premiums for the six months of 1996 is due primarily to
significant decreases in personal lines business partially offset
by increases in workers' compensation business. The 11% decrease
in net written premiums for the second 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 are due to less favorable loss experience in
commercial lines as well as weather-related losses.
15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects AAG's
acquisition of Laurentian Capital Corporation in November 1995.
Investment Income Investment income increased $10.2 million (5%)
for the second quarter of 1996 compared to 1995. Adjusting the
effects of the Mergers retroactively to January 1, 1995,
investment income increased $20.3 million (5%) for the six 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.
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.
Gain on Sales of Subsidiaries The gain on sales of subsidiaries
includes 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 six 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 $14.2
million (40%) for the second quarter of 1996 and, adjusted for
the Mergers, $16.9 million (28%) for the six 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 second quarter and first six months of 1996
include approximately $9.8 million and $17.3 million,
respectively, attributable to the operations of Laurentian.
Included in operating and general expenses in the first six
months of 1996 and 1995 are charges of $20.3 million and
$12.9 million, respectively, for minority interest. Minority
interest for periods subsequent to the Mergers includes AFC's
quarterly preferred dividend requirement of $6.3 million.
16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
Reference is made to Item 3 - "Legal Proceedings" of AFG's
Annual Report on Form 10-K for 1995 for a description of an
action filed against American Premier by USX Corporation and one
of its former subsidiaries. In May 1996, the U.S. Supreme Court
declined to hear American Premier's petition with respect to the
bankruptcy bar issue, thereby permitting USX's lawsuits to proceed.
American Premier and its outside counsel continue to believe that
American Premier has substantial defenses to these lawsuits, besides
the bankruptcy bar issue, and should not suffer a material loss as a
result of this litigation.
Item 4
Submission of Matters to a Vote of Security Holders
AFG's Annual Meeting of Shareholders was held on June 4, 1996;
there were two matters voted upon: (Item 1) election of eight
directors, and (Item 2) approval of the Non-Employee Directors'
Compensation Plan.
The votes cast for, against, withheld and the number of
abstentions as to each matter voted on at the 1996 Annual Meeting is
set forth below:
<TABLE>
<CAPTION>
Name For Against Withheld Abstain
<S> <C> <C> <C> <C>
Item 1
Theodore H. Emmerich 51,826,375 NA 396,291 NA
James E. Evans 51,759,221 NA 463,445 NA
Thomas M. Hunt 51,817,102 NA 405,564 NA
Carl H. Lindner 51,734,177 NA 488,489 NA
Carl H. Lindner III 51,743,279 NA 479,387 NA
Keith E. Lindner 51,739,863 NA 482,803 NA
S. Craig Lindner 51,741,597 NA 481,069 NA
William R. Martin 51,820,965 NA 401,701 NA
Item 2 51,486,837 624,271 NA 111,558
</TABLE>
________________________
N/A - Not Applicable
17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
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) Report on Form 8-K None
____________________________________________________________
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.
August 13, 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 Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Earnings before extraordinary items $58,343 $32,968 $139,541 $62,833
Preferred dividend requirement of
predecessor company - - - (6,349)
Net earnings before extraordinary items
available to common shareholders 58,343 32,968 139,541 56,484
Extraordinary items (9,868) 532 (17,501) 532
Net earnings available to common shareholders $48,475 $33,500 $122,040 $57,016
Computation of primary earnings
per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,880 52,714 60,605 40,586
Dilutive effect of assumed exercise of
certain stock options 513 328 618 308
Dilutive effect of assumed conversion of
certain preferred shares - 90 66 87
Weighted average common shares used to
calculate primary earnings per share 61,393 53,132 61,289 40,981
Primary earnings per common share (*) (*) (*) (*)
<PAGE>
Computation of fully diluted earnings
per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,880 52,714 60,605 40,586
Dilutive effect of assumed exercise of
certain stock options 516 432 623 434
Dilutive effect of assumed conversion of
certain preferred shares - 104 67 104
Weighted average common shares used to
calculate fully diluted earnings per share 61,396 53,250 61,295 41,124
Fully diluted earnings per common share (*) (*) (*) (*)
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $.96 $.63 $2.30 $1.39
Extraordinary items (.16) .01 (.29) .01
Net earnings $.80 $.64 $2.01 $1.40
</TABLE>
(*) Dilution less than 3%
E-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
American Financial Group, Inc. 10-Q for the six months ended June 30, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 228,384
<SECURITIES> 10,237,253<F1>
<RECEIVABLES> 680,978
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,820,923
<CURRENT-LIABILITIES> 0
<BONDS> 677,975
0
0
<COMMON> 60,940
<OTHER-SE> 1,334,573
<TOTAL-LIABILITY-AND-EQUITY> 14,820,923
<SALES> 0
<TOTAL-REVENUES> 2,063,679
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 181,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,400
<INCOME-PRETAX> 204,829
<INCOME-TAX> 65,288
<INCOME-CONTINUING> 139,541
<DISCONTINUED> 0
<EXTRAORDINARY> (17,501)
<CHANGES> 0
<NET-INCOME> 122,040
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<FN>
<F1>Includes an investment in investees of $328 million.
</FN>
</TABLE>
