<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 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 May 1, 1996, there were 60,851,697 shares of the Registrant's Common
Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 17
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AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
1996 1995
Assets
Cash and short-term investments $ 249,052 $ 544,408
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,665,300 and $3,729,300) 3,629,854 3,588,943
Available for sale - at market
(amortized cost - $5,986,572 and $5,648,060) 6,095,572 5,949,260
Other stocks - principally at market
(cost - $137,102 and $136,944) 253,302 252,244
Investment in investee corporations 313,865 306,545
Loans receivable 629,297 631,408
Real estate and other investments 216,826 220,135
Total investments 11,138,716 10,948,535
Recoverables from reinsurers and prepaid
reinsurance premiums 899,722 923,080
Agents' balances and premiums receivable 678,019 703,274
Deferred acquisition costs 429,820 419,919
Other receivables 329,397 270,263
Deferred tax asset 186,522 200,392
Assets held in separate accounts 240,551 238,524
Prepaid expenses, deferred charges and other assets 409,831 391,339
Cost in excess of net assets acquired 293,959 314,136
$14,855,589 $14,953,870
<PAGE>
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 4,056,145 $ 4,096,703
Unearned premiums 1,246,463 1,294,054
Annuity benefits accumulated 5,130,239 5,051,959
Life, accident and health reserves 544,181 538,274
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 261,806 311,202
American Premier Underwriters (parent only) 299,706 337,334
American Annuity Group 166,053 167,734
Other subsidiaries 75,883 65,793
Liabilities related to separate accounts 240,551 238,524
Accounts payable, accrued expenses and other
liabilities 1,125,509 1,097,766
Minority interest 302,383 314,390
Total liabilities 13,448,919 13,513,733
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 60,825,162 and 60,139,303 shares outstanding 60,825 60,139
Capital surplus 754,975 741,355
Retained earnings 445,670 387,143
Net unrealized gain on marketable securities,
net of deferred income taxes 145,200 251,500
Total shareholders' equity 1,406,670 1,440,137
$14,855,589 $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)
Three months ended
March 31,
1996 1995
Income:
Property and casualty insurance premiums $ 713,389 $349,133
Life, accident and health premiums 24,253 739
Investment income 202,816 152,334
Realized gains on sales of securities 18,718 3,476
Equity in net earnings of investee corporations 8,522 22,901
Gain on sale of subsidiary 33,891 -
Other income 29,333 25,024
1,030,922 553,607
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 509,157 243,643
Commissions and other underwriting expenses 200,679 119,611
Annuity benefits 68,015 64,262
Life, accident and health benefits 21,593 415
Interest charges on borrowed money 21,866 29,129
Other operating and general expenses 86,789 57,445
908,099 514,505
Earnings before income taxes and extraordinary
items 122,823 39,102
Provision for income taxes 41,625 9,237
Earnings before extraordinary items 81,198 29,865
Extraordinary items - loss on prepayment of debt (7,633) -
Net Earnings $ 73,565 $ 29,865
Preferred dividend requirement of
predecessor company - 6,350
Net earnings available to Common Shares $ 73,565 $ 23,515
Earnings (loss) per Common Share:
Before extraordinary items $1.35 $.83
Extraordinary items (.13) -
Net earnings $1.22 $.83
Average number of Common Shares 60,329 28,324
3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
1996 1995
Operating Activities:
Net earnings $ 73,565 $ 29,865
Adjustments:
Extraordinary losses from retirement of debt 7,633 -
Depreciation and amortization 15,414 7,723
Annuity benefits 68,015 64,262
Equity in net earnings of investee corporations (8,522) (22,901)
Changes in reserves on assets 3,752 (1,154)
Realized gains on investing activities (51,582) (3,568)
Decrease in reinsurance and other receivables 17,388 8,641
Increase in other assets (22,793) (49,619)
Increase (decrease) in insurance claims
and reserves (82,242) 71,072
Increase (decrease) in other liabilities 9,293 (13,960)
Increase (decrease) in minority interest (900) 3,102
Dividends from investees 1,200 5,815
Other, net (2,654) (1,344)
27,567 97,934
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (726,351) (254,863)
Equity securities (8,573) -
Real estate, property and equipment (7,898) (5,331)
Maturities and redemptions of fixed maturity
investments 176,536 49,019
Sales of:
Fixed maturity investments 242,365 54,732
Equity securities 20,845 9,007
Investees and subsidiaries 59,585 -
Real estate, property and equipment 1,206 2,079
Cash of former subsidiaries (4,589) -
Increase in other investments (3,252) (3,574)
(250,126) (148,931)
Financing Activities:
Annuity receipts 137,241 119,420
Annuity payments (113,852) (99,374)
Additional long-term borrowings 111,200 29,750
Reductions of long-term debt (197,918) (13,176)
Issuances of common stock 5,533 -
Cash dividends paid (15,001) (191)
(72,797) 36,429
Net Decrease in Cash and Short-term Investments (295,356) (14,568)
Cash and short-term investments at beginning of period 544,408 171,335
Cash and short-term investments at end of period $249,052 $156,767
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).
Three months ended
March 31, 1995
Revenues $972
Net Earnings 48
Earnings per Share $.90
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.
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.
<PAGE>
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
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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:
March 31, 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
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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.
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 inc
ome 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.
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.
<PAGE>
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 annuities principally to employees of primary and secondary
educational 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.
Three months ended
March 31,
1996 1995
Revenues
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 304,392 $ 9,888
Specialty lines 229,292 171,460
Commercial and personal lines 179,547 167,369
Other lines 158 416
713,389 349,133
Investment and other income 121,364 71,485
834,753 420,618
Annuities and life (*) 139,414 97,922
Other 48,233 12,166
1,022,400 530,706
Equity in net earnings
of investee corporations 8,522 22,901
$1,030,922 $553,607
(*) Represents primarily investment income.
9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investee Corporations Investment in investee corporations
represents AFG's ownership of securities of certain companies.
The companies named in the following table are subject to the rules and
regulations of the SEC. Market value of the investments was approximately
$593 million and $509 million at March 31, 1996 and December 31, 1995,
respectively. AFG's investment (and common stock ownership percentage) in
these investees was as follows (dollars in thousands):
March 31, 1996 December 31, 1995
Chiquita $240,116 (43%) $232,466 (44%)
Citicasters 73,749 (38%) 74,079 (38%)
$313,865 $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 entered into a merger agreement with Jacor
Communications, Inc. providing for the acquisition of Citicasters by
Jacor. Under the agreement, 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 $150 million on the sale.
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):
Three months ended March 31,
Chiquita 1996 1995
Net Sales $625 $674
Operating Income 58 76
Income from Continuing Operations 24 34
Discontinued Operations - 4
Net Income 24 38
Three months ended March 31,
Citicasters 1996 1995
Net Revenues $31 $29
Operating Income 4 5
Net Earnings (Loss) (1) 1
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Long-Term Debt During the first quarter of 1996, AFC (parent) repurchased
$49.0 million of its debentures for $53.2 million; American Premier
repurchased $35.4 million of its Notes for $38.3 million; and AAG
repurchased $22.1 million of its Notes for $24.1 million. During the
second quarter of 1996 (through May 13), these companies repurchased an
aggregate of $59.1 million of debt for $63.9 million.
At March 31, 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 $ - $ - $ 1,604 $ 1,604
1997 5,431 - 2,560 7,991
1998 - - 2,828 2,828
1999 - 136,765 42,121 178,886
2000 - 101,192 19,686 120,878
2001 - - 42,934 42,934
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 March 31, 1996, there were 60,825,162 shares of AFG
Common Stock outstanding or issuable, including 1,372,803 shares held by
American Premier for issuance 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 March 31, 1996, there were 5.8 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date,
AFG had options for 3.7 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.
11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 - - 73,565 -
Change in unrealized - - - (106,300)
Common Stock dividends - - (15,038) -
Shares issued:
Exercise of stock options 217,737 4,891 - -
Dividend reinvestment plan 1,139 37 - -
Employee stock purchase plan 20,214 642 - -
Conversion of Preferred Stock 446,799 8,908 - -
Shares repurchased (30) (1) - -
Change in foreign currency translation - (171) - -
Balance at March 31, 1996 60,825,162 $815,800 $445,670 $145,200
</TABLE>
G. Extraordinary Items Extraordinary items represent AFG's proportionate
share of losses recorded by the following companies from their debt
retirements. Amounts shown are net of minority interest and income tax
benefits (in thousands):
Three months ended
March 31, 1996
Subsidiaries:
AFC (parent) ($4,198)
APU (parent) (1,257)
AAG (2,178)
($7,633)
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 $86,900 $639,451 $726,351
Maturities and redemptions 81,847 94,689 176,536
Sales - 242,365 242,365
1995
Purchases $97,511 $157,352 $254,863
Maturities and redemptions 26,700 22,319 49,019
Sales - 54,732 54,732
<PAGE>
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.
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 $930 million 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 60%. 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 30% at March 31, 1996. These debt
reductions and replacements will also reduce AFG's interest expense by
approximately $84 million annually.
AFG's ratio of earnings to fixed charges on a total enterprise basis was 4.59
for the first three months of 1996 compared to 2.60 for the entire year of 1995.
Assuming the Mergers and related transactions discussed in Note A 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.
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 March 31,
1996, $783 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.
<PAGE>
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, up to $470 million is
available under these bank facilities.
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, while little was
drawn on the bank lines at March 31, 1996, AFG
13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
believes it may be prudent and advisable to borrow up to $200 million of
bank debt in the normal course and use the proceeds to retire additional
amounts of 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 March 31, 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, first quarter 1996 and
1995 income statements are not comparable. Results of interim periods are not
necessarily indicative of future results of operations.
Excluding net realized gains of $26.7 million (primarily from the sale of
Buckeye Management Company) and an extraordinary charge of $7.6 million,
earnings were $54.5 million, or $.90 per share for the first quarter of 1996.
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 areas are California workers'
compensation, executive liability, inland and ocean marine, U.S.-based
<PAGE>
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 expenses, losses, and loss adjustment expenses 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.
14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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
March 31,
1996 1995
Net Written Premiums (GAAP)
NSA Group $295.5 $329.1
Specialty Operations 217.7 273.6
Commercial and Personal Operations 165.3 155.9
Other Lines .1 .6
$678.6 $759.2
Combined Ratios (GAAP)
NSA Group 101.9% 100.8%
Specialty Operations 90.0 99.6
Commercial and Personal Operations 103.7 99.8
Aggregate 99.6 101.5
NSA Group For the first three months of 1996, net written premiums of the NSA
Group decreased 10% from the comparable 1995 period due to significant rate
increases implemented in 1995 and early 1996. While the 1996 combined ratio
increased compared to the first three months of 1995, the results were a
significant improvement from the full year 1995 combined ratio of 105.2%.
Specialty Operations Net written premiums for the specialty operations
declined 20% during the first three months of 1996 from the comparable 1995
period due to effects of the recently enacted open rating system on California
workers' compensation business and withdrawal from a voluntary pool. The
improvement in the combined ratio is due primarily to large losses in 1995 from
(i) participation in a voluntary pool in which AFG is no longer a member and
(ii) prior accident year development on coverages of U.S. based operations of
Japanese companies.
Commercial and Personal Operations The 6% increase in net written premiums
for the commercial and personal operations for the first three months of 1996
over the comparable 1995 period was due principally to commercial lines
writings. The deterioration in the combined ratio is due primarily to increased
winter storm losses partially offset by improved results in the commercial
operations workers' compensation line of business.
<PAGE>
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 Excluding $35.8 million attributable to American Premier,
investment income increased by $14.7 million (10%) from 1995's first quarter due
primarily to the acquisition of Laurentian and an increase in the average amount
of investments held.
15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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 Sale of Subsidiary The gain on sale of subsidiary represents a pretax
gain on the sale of Buckeye Management Company.
Annuity Benefits Annuity benefits increased approximately 6% over those of the
comparable three month period in 1995 due primarily to an increase in average
annuity benefits 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 Excluding $6.7 million attributable to American
Premier, interest expense decreased by $14.0 million (48%) for the quarter ended
March 31, 1996 from the comparable 1995 period. The decrease is due primarily
to the repayments of borrowings by AFC and certain subsidiaries.
Other Operating and General Expenses Operating and general expenses for 1996
include approximately $7.5 million attributable to the acquisition of
Laurentian. Included in operating and general expenses in the first quarter of
1996 and 1995 are charges of $10.0 million and $3.4 million, respectively, for
minority interest. Minority interest for 1996 includes AFC's quarterly
preferred dividend requirement of $6.3 million.
16
<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) Report on Form 8-K:
Date of Report Item Reported
February 14, 1996 Agreement to sell Citicasters Common
Stock
____________________________________________________________
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.
May 14, 1996 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and
Treasurer
17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In Thousands, Except Per Share Amounts)
Net earnings before extraordinary items
available to common shareholders $81,198
Extraordinary items (7,633)
Net earnings available to common shareholders $73,565
Computation of primary earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,329
Dilutive effect of assumed exercise of certain stock options 705
Weighted average common shares used to calculate
primary earnings per share 61,034
Primary earnings per common share Dilution less than 3%
Computation of fully diluted earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 60,329
Dilutive effect of assumed exercise of certain stock options 734
Weighted average common shares used to calculate
fully diluted earnings per share 61,063
Fully diluted earnings per common share Dilution less than 3%
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $1.35
Extraordinary items (.13)
Net earnings $1.22
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 three months ended March 31,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> $249,052
<SECURITIES> 10,292,593<F1>
<RECEIVABLES> 678,019
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,855,589
<CURRENT-LIABILITIES> 0
<BONDS> 803,448
0
0
<COMMON> 60,825
<OTHER-SE> 1,345,845
<TOTAL-LIABILITY-AND-EQUITY> 14,855,589
<SALES> 0
<TOTAL-REVENUES> 1,030,922
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 86,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,866
<INCOME-PRETAX> 122,823
<INCOME-TAX> 41,625
<INCOME-CONTINUING> 81,198
<DISCONTINUED> 0
<EXTRAORDINARY> (7,633)
<CHANGES> 0
<NET-INCOME> 73,565
<EPS-PRIMARY> $1.22
<EPS-DILUTED> $1.22
<FN>
<F1>Includes an investment in investees of $314 million.
</FN>
</TABLE>
