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, 1997 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, 1997, there were 58,933,322 shares of the
Registrant's Common Stock outstanding, excluding 18,666,614
shares owned by subsidiaries.
Page 1 of 19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
June 30, December 31,
1997 1996
Assets
Cash and short-term investments $ 361,567 $ 448,296
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,345,200 and $3,528,100) 3,320,594 3,491,126
Available for sale - at market
(amortized cost - $6,769,104 and $6,362,597) 6,894,904 6,494,597
Other stocks - principally at market
(cost - $150,120 and $142,364) 424,420 327,664
Investment in investee corporations 234,162 199,651
Loans receivable 542,525 568,765
Real estate and other investments 215,666 208,765
Total investments 11,632,271 11,290,568
Recoverables from reinsurers and prepaid
reinsurance premiums 951,470 942,450
Agents' balances and premiums receivable 676,671 609,403
Deferred acquisition costs 475,797 452,041
Other receivables 245,171 272,595
Deferred tax asset 81,303 137,284
Assets held in separate accounts 262,453 247,579
Prepaid expenses, deferred charges and other assets 399,196 372,321
Cost in excess of net assets acquired 272,176 278,581
$15,358,075 $15,051,118
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,086,040 $ 4,123,701
Unearned premiums 1,336,805 1,247,806
Annuity benefits accumulated 5,469,541 5,365,612
Life, accident and health reserves 589,526 575,380
Long-term debt:
Holding companies 337,459 339,504
Subsidiaries 132,607 178,415
Liabilities related to separate accounts 262,453 247,579
Accounts payable, accrued expenses and other
liabilities 868,671 924,244
Total liabilities 13,083,102 13,002,241
Minority interest 656,098 494,440
<PAGE>
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 58,914,305 and 61,071,626 shares outstanding 58,914 61,072
Capital surplus 720,890 745,649
Retained earnings 600,471 559,716
Net unrealized gain on marketable securities,
net of deferred income taxes 238,600 188,000
Total shareholders' equity 1,618,875 1,554,437
$15,358,075 $15,051,118
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $698,381 $ 730,419 $1,362,143 $1,443,808
Life, accident and health premiums 27,331 31,261 52,696 55,514
Investment income 214,622 212,059 427,494 414,875
Realized gains on sales of
securities 4,198 2,725 6,011 21,443
Equity in net earnings of investee
corporations 17,228 17,344 32,008 25,866
Gains on sales of subsidiaries - 2,946 731 36,837
Other income 25,839 36,003 52,286 65,336
987,599 1,032,757 1,933,369 2,063,679
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment
expenses 495,187 530,183 964,511 1,039,340
Commissions and other underwriting
expenses 193,304 208,340 377,605 409,019
Annuity benefits 70,607 68,790 139,437 136,805
Life, accident and health benefits 25,825 26,877 49,988 48,470
Interest charges on borrowed money 13,844 21,534 27,554 43,400
Other operating and general expenses 93,336 95,027 177,282 181,816
892,103 950,751 1,736,377 1,858,850
Earnings before income taxes and
extraordinary items 95,496 82,006 196,992 204,829
Provision for income taxes 34,314 23,663 72,595 65,288
Earnings before extraordinary items 61,182 58,343 124,397 139,541
Extraordinary items - loss on
prepayment of debt (23) (9,868) (78) (17,501)
Net Earnings $ 61,159 $ 48,475 $ 124,319 $ 122,040
Earnings (loss) per Common Share:
Before extraordinary items $1.03 $ .96 $2.07 $2.30
Extraordinary items - (.16) - (.29)
Net earnings $1.03 $ .80 $2.07 $2.01
Average number of Common Shares 59,214 60,880 60,158 60,605
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended
June 30,
1997 1996
Operating Activities:
Net earnings $ 124,319 $ 122,040
Adjustments:
Extraordinary items 78 17,501
Depreciation and amortization 36,057 33,653
Annuity benefits 139,437 136,805
Equity in net earnings of investee corporations (32,008) (25,866)
Changes in reserves on assets 506 11,755
Realized gains on investing activities (6,742) (54,991)
Increase in reinsurance and other receivables (77,372) (142,307)
Decrease (increase) in other assets (18,523) 40,891
Increase in insurance claims and reserves 65,484 78,590
Decrease in other liabilities (110,026) (82,808)
Increase in minority interest 9,158 3,485
Dividends from investees 2,400 2,400
Other, net (2,372) (3,064)
130,396 138,084
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,206,131) (1,161,557)
Equity securities (16,555) (13,997)
Investees and subsidiaries (4,900) -
Real estate, property and equipment (22,872) (16,012)
Maturities and redemptions of fixed maturity
investments 360,774 323,418
Sales of:
Fixed maturity investments 698,990 490,604
Equity securities 9,552 26,940
Investees and subsidiaries 2,500 64,856
Real estate, property and equipment 1,914 2,995
Cash and short-term investments of former
subsidiaries (70) (4,589)
Increase in other investments (2,233) (6,676)
(179,031) (294,018)
<PAGE>
Financing Activities:
Annuity receipts 259,708 280,579
Annuity payments (288,531) (241,706)
Additional long-term borrowings 7,053 197,561
Reductions of long-term debt (54,820) (372,036)
Issuances of Common Stock 3,294 14,174
Repurchases of Common Stock (84,226) (8,561)
Issuances of trust preferred securities 149,353 -
Cash dividends paid (29,925) (30,101)
(38,094) (160,090)
Net Decrease in Cash and Short-term Investments (86,729) (316,024)
Cash and short-term investments at beginning
of period 448,296 544,408
Cash and short-term investments at end of period $ 361,567 $ 228,384
4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Financial Group, Inc. ("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.
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.
AFG's ownership of subsidiaries and significant investees with
publicly traded common shares was as follows:
June 30, December 31,
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") 82% 83% 83%
Chiquita Brands International, Inc. 43% 43% 44%
Citicasters Inc. (a) (a) 38%
(a) 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.
<PAGE>
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.
5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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 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.
<PAGE>
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.
6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged
to expense and decreases for surrender charges are credited to
other income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional 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
primarily 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; if
depositors elect to purchase an annuity from AAG, funds are
transferred to AAG.
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.
<PAGE>
Income Taxes American Financial Corporation ("AFC") and
American Premier Underwriters, Inc. ("American Premier" or
"APU") have each filed consolidated federal income tax returns
which include all 80%-owned U.S. subsidiaries, except for
certain life insurance subsidiaries and their subsidiaries.
Because holders of AFC Series F and G Preferred Stock hold in
excess of 20% of AFC's voting rights, the companies file
separate consolidated returns. AFG (parent) will be included
in American Premier's consolidated return for 1996. At the
close of business on December 31, 1996, AFG contributed 81% of
the common stock of American Premier to AFC. Accordingly, AFC
and American Premier will file a single consolidated return
for 1997 and AFG (parent) will file a separate 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.
7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 had Employee Stock Ownership Retirement
Plans ("ESORP"). In 1997, these ESORP plans were combined into a new plan.
Like the ESORP plan, the new plan is a noncontributory, qualified plan
invested in securities of AFG and affiliates for the benefit of AFG
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.
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.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFG
subsidiaries, including AFC preferred stock and preferred securities
issued by trust subsidiaries of AFG. For income statement purposes,
minority interest expense (included in "Other operating and general
expenses") represents those shareholders' interest in the earnings of AFG
subsidiaries as well as AFC preferred dividends and accrued distributions
on the trust preferred securities.
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.
New accounting standards issued in 1997 revise current rules for computing
and presenting earnings per share beginning with financial statements
issued for periods ending after December 15, 1997. The new rules require
the presentation of basic and diluted earnings per share for entities
with potentially dilutive securities. Implementation of these new rules
will not materially affect AFG's reported earnings per share amounts.
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.
8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. 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 and life business primarily
sells tax-deferred annuities to employees of primary and
secondary educational institutions and hospitals. In
addition, AFG has owned significant portions of the voting
equity securities of certain companies (investee corporations
- see Note C). The following table (in thousands) shows
AFG's revenues by significant business segment.
Six months ended June 30,
Revenues 1997 1996
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 592,761 $ 609,198
Specialty lines 482,711 476,109
Commercial and personal lines 286,647 358,076
Other lines 24 425
1,362,143 1,443,808
Investment and other income 216,274 232,971
1,578,417 1,676,779
Annuities and life (*) 302,426 290,339
Other 20,518 70,695
1,901,361 2,037,813
Equity in net earnings of investee
corporations 32,008 25,866
$1,933,369 $2,063,679
(*) Represents primarily investment income.
C. Investment in Investee Corporations Investment in investee corporations
reflects primarily AFG's 43% ownership (24 million shares; carrying value
of $229.3 million at June 30, 1997) of Chiquita common stock. The market
value of AFG's investment in Chiquita was $330 million and $306 million
at June 30, 1997 and December 31, 1996, respectively. Chiquita is a
leading international marketer, producer and distributor of bananas and
other quality fresh and processed food products.
Summarized financial information for Chiquita follows (in millions):
Six months ended June 30,
1997 1996
Net Sales $1,278 $1,339
Operating Income 139 133
Income before Extraordinary Item 84 67
Extraordinary Loss from Debt Refinancings - (5)
Net Income 84 62
9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Long-Term Debt The carrying value of long-term debt consisted of
the following (in thousands):
June 30, December 31,
1997 1996
Holding Companies:
9-3/4% AFC Debentures due April 2004 $163,725 $164,368
9-3/4% APU Subordinated Notes due August 1999 92,811 93,604
10-5/8% APU Subordinated Notes due April 2000 54,012 54,595
10-7/8% APU Subordinated Notes due May 2011 18,367 18,496
Other 8,544 8,441
$337,459 $339,504
Subsidiaries:
AAG notes payable to banks due September 1999 $ - $ 44,700
9-1/2% AAG Senior Notes due August 2001 40,845 40,845
11-1/8% AAG Senior Subordinated Notes
due February 2003 24,080 24,080
Other 67,682 68,790
$132,607 $178,415
AAG has called for redemption on August 15, 1997 all of its outstanding
9-1/2% Senior Notes at a price of $1,040.71 per $1,000 principal amount.
AFG expects to record a third quarter pretax loss of $2.1 million, net
of minority interest, on the redemption.
At June 30, 1997, sinking fund and other scheduled principal
payments on debt for the balance of 1997 and the subsequent
five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1997 $ 5,698 $ 1,313 $ 7,011
1998 - 2,841 2,841
1999 91,243 2,433 93,676
2000 51,744 8,747 60,491
2001 - 42,298 (*) 42,298
2002 - 1,458 1,458
(*) Includes the AAG 9-1/2% Notes being redeemed in August 1997.
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures previously
purchased are applied to the earliest scheduled retirements.
<PAGE>
E. Minority Interest Included in minority interest in AFG's balance
sheet are the following securities.
Trust Issued Preferred Securities In October 1996, a whollyowned
subsidiary trust 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, are
the only assets of the Trust. 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.
AFG effectively provides an unconditional guarantee of the
Trust's obligations under the TOPrS.
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In November 1996, a wholly-owned subsidiary trust of AAG issued
$75 million of similar TOPrS. The related 9-1/4% Subordinated
Debentures of the AAG subsidiary are due in 2026 and are
redeemable on or after November 7, 2001.
Through private transactions completed in March and May 1997,
wholly-owned subsidiary trusts of AAG issued $75 million of 8-7/8%
preferred securities and $75 million of 7-1/4% Remarketed
Par Securities ("ROPES"), respectively, and used the proceeds
to purchase the related debentures of their parent due in 2027
and 2041. Both of these issues are structured similarly to the
TOPrS issued in November 1996.
AFC Preferred Stock Outstanding shares of AFC voting preferred
stock consisted of the following (see Note J - "Subsequent Event"):
Series F, $1 par value; $20.00 liquidating value per share;
annual dividends per share $1.80; nonredeemable; 11,900,725
shares (stated value $145.4 million) outstanding at
June 30, 1997 and December 31, 1996.
Series G, $1 par value; annual dividends per share $1.05;
redeemable at $10.50 per share; 1,964,158 shares (stated
value $17.4 million) outstanding at June 30, 1997 and
December 31, 1996.
F. Capital Stock At June 30, 1997, there were 58,914,305 shares of
AFG Common Stock outstanding, including 1,369,996 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 June 30, 1997, there were 5.3 million shares of AFG Common
Stock reserved for issuance upon exercise of stock options. As
of that date, AFG had options for 3.9 million shares outstanding.
Options become exercisable at the rate of 20% per year commencing one
year after grant; those granted to nonemployee 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) (see Note J - "Subsequent Event"):
<TABLE>
<CAPTION>
Common Stock
Common and Capital Retained
Shares Surplus Earnings Unrealized
<S> <C> <C> <C> <C>
Balance at December 31, 1996 61,071,626 $806,721 $559,716 $188,000
Net earnings - - 124,319 -
Change in unrealized - - - 50,600
Dividends on Common Stock - - (30,112) -
Shares issued:
Exercise of stock options 88,557 1,985 - -
Dividend reinvestment plan 5,143 187 - -
Employee stock purchase plan 35,793 1,309 - -
Portion of bonuses paid in stock 40,500 1,521 - -
Directors fees paid in stock 613 22 - -
Shares repurchased (2,327,927) (30,774) (53,452) -
Capital transactions of subsidiaries - (980) - -
Change in foreign currency translation - (187) - -
Balance at June 30, 1997 58,914,305 $779,804 $600,471 $238,600
</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 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,
Subsidiaries: 1997 1996
AFC (parent) ($36) ($ 9,499)
APU (parent) (42) (563)
AAG - (5,605)
Other - 110
Investee:
Chiquita - (1,944)
($78) ($17,501)
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
1997 Maturity For Sale Total
Purchases $ 2,018 $1,204,113 $1,206,131
Maturities and redemptions 197,546 163,228 360,774
Sales - 698,990 698,990
1996
Purchases $149,665 $1,011,892 $1,161,557
Maturities and redemptions 145,138 178,280 323,418
Sales - 490,604 490,604
I. Commitments and Contingencies There have been no significant changes
to the matters discussed and referred to in Note M "Commitments and
Contingencies" in AFG's Annual Report on Form 10-K for 1996.
J. Subsequent Event In July 1997, AFG announced that it has entered into
agreements with two of its subsidiaries, AFC and AFEI, pursuant to
previously announced plans to reduce its corporate expenses and improve
its corporate capital structure.
AFG has proposed a merger transaction whereby holders of AFC's Series F
preferred would receive consideration of $22.35 per share and holders of
AFC's Series G preferred would receive consideration of $10.50 per share
plus accrued dividends. Consideration would be payable, at the holder's
election, in shares of a new issue of AFC preferred stock, in cash, or a
combination of the two. It is a condition to the merger that there be
approximately 3.1 million shares of new preferred stock issued,
representing at least 20% of AFC's total voting power. The new
preferred would be redeemable at AFC's option after the eighth
anniversary of its issuance, have a liquidation value of $22.35 per
share and an annual dividend of $1.90 per share, paid semi-annually.
<PAGE>
AFG has also proposed that AFEI engage in a merger transaction whereby all
publicly held shares of AFEI would be exchanged, at the option of AFEI
shareholders, for shares of AFG common stock on a one-for-one basis, or
$37.00 per share in cash. There are approximately 2.7 million shares of
AFEI common stock outstanding (including yet-unexercised employee stock
options) which are not beneficially owned by AFG. In conjunction with the
AFEI merger, AFG shareholders will be asked to approve an AFG plan of
reorganization that provides that a new holding company be formed which
would be the ultimate parent entity of AFG and all
12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of its subsidiaries, and which would be the issuer of the new
AFG stock in exchange for AFEI common stock. No material change
in AFG's financial statements or in the rights of its security
holders would occur as a result of such a reorganization.
These transactions are subject to the receipt of all required
shareholder, stock exchange listing and regulatory approvals.
13
<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. These parent corporations, however,
have continuing cash needs for administrative expenses, the
payment of principal and interest on borrowings, shareholder
dividends, and taxes. Therefore, certain analyses are best done
on a parent only basis while others are best done on a total
enterprise basis. In addition, since most of its businesses are
financial in nature, 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 AFG's debt to total capital ratio at the parent holding
company level was approximately 15% at June 30, 1997 and December
31, 1996. AFG's ratio of earnings to fixed charges on a total
enterprise basis was 3.73 for the first six months of 1997
compared to 4.22 for the entire year of 1996.
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.
Bank credit lines at several subsidiary holding companies provide
ample liquidity and 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 $510 million is
available under these bank facilities. At June 30, 1997 there
were no outstanding borrowings under these credit lines.
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
borrow up to $200 million of bank debt in the normal course in
order to retire public or privately held fixed rate obligations
over the next year or two.
<PAGE>
In February 1997, AFG filed a shelf registration statement for
the future issuance of up to an aggregate of $500 million in
common stock, debt or trust securities, with no more than $200
million of any one security being issued. The filing provides
AFG with greater flexibility to access the capital markets from
time to time as market and other conditions permit.
The cash to be utilized if the proposed transactions discussed in
Note J are completed is expected to come from internally
generated funds and existing credit lines.
Dividend payments from subsidiaries have been very important to
the liquidity and cash flow of the individual holding companies
in the past. However, the reliance on such dividend payments has
been lessened by the combination of (i) strong capital at AFG's
insurance subsidiaries (and the related decreased likelihood of
14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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 non-insurance investments.
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 June 30, 1997. 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 the companies and the industries in which they
operate.
RESULTS OF OPERATIONS
General Pretax earnings before extraordinary items for the three
months ended June 30, 1997 were $95.5 million, an increase of
$13.5 million over the comparable 1996 period. The increase is
attributable to an $18 million improvement in underwriting profit in
the property and casualty operations and a reduction of
$7.7 million in interest expense resulting from debt retirements in
1996. These items were partially offset by an increase of
$5.3 million in minority interest expense relating primarily to trust
preferred securities issued in late 1996 and 1997 and a decrease of
$1.5 million in realized gains.
Pretax earnings before extraordinary items were $197 million for the
first six months of 1997 compared to $204.8 million for the first six
months of 1996. Excluding realized gains, pretax earnings before
extraordinary items were $190.3 million and $146.5 million for the
first six months of 1997 and 1996, respectively. The improvement in
1997 was due primarily to (i) an increase of $24.6 million in
underwriting profit in the property and casualty operations, (ii) an
increase of $12.6 million in investment income primarily in the
annuity, life and health operations, (iii) an increase of $6.1 million
in investee earnings and (iv) a reduction of $15.8 million in interest
expense. These improvements were partially offset by an increase of
$9.8 million in minority interest expense.
<PAGE>
Property and Casualty Insurance - Underwriting 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 operations of Japanese companies, agricultural-related
coverages, excess and surplus lines, aviation coverages 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.
15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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,
1997 1996 1997 1996
Net Written Premiums (GAAP)
NSA Group $328.2 $296.1 $ 657.9 $ 591.6
Specialty Operations 257.6 267.4 522.0 485.1
Commercial and Personal
Operations 135.8 162.9 230.6 328.2
Other Lines - .2 - .3
$721.6 $726.6 $1,410.5 $1,405.2
Combined Ratios (GAAP)
NSA Group 97.1% 100.8% 97.2% 101.4%
Specialty Operations 88.0 97.4 90.3 93.9
Commercial and Personal
Operations 102.7 104.7 102.9 104.2
Aggregate (including
other lines) 98.6 101.2 98.5 100.4
NSA Group The NSA Group's 11% increase in net written premiums in
the second quarter and first half of 1997 is due primarily to
volume increases in California resulting from enactment of
legislation which requires drivers to provide proof of insurance
in order to obtain a valid permit. The improvement in the
combined ratio reflects rate increases in various states over the
last couple of years.
Specialty Operations Net written premiums for the specialty
operations decreased 4% during the second quarter from the
comparable 1996 period due primarily to reductions in executive
liability and agricultural-related coverages. Underwriting
results for the second quarter of 1997 reflect improved results
in certain specialty niche operations. Net written premiums
increased 8% during the first six months of 1997 due primarily to
the impact of $30 million of premiums assumed on general aviation
policies under a reinsurance agreement with American Eagle Insurance
Company in the first quarter of 1997 and the return of premiums related to
the withdrawal from a voluntary pool in 1996.
<PAGE>
Commercial and Personal Operations Net written premiums for the
commercial and personal operations decreased 17% during the
second quarter and 30% during the first six months from the
comparable 1996 periods due primarily to a reinsurance agreement,
effective January 1, 1997, under which 80% of all AFG's
homeowners' business will be reinsured, and reduced writings of
personal automobile coverages in certain states. Excluding the
impact of the reinsurance agreement, premiums decreased 9% and
11%, respectively. Underwriting results for 1997 improved due in
part to the impact in 1996 of weather-related losses.
Investment Income Investment income increased $12.6 million (3%)
for the first six months of 1997 compared to 1996 due primarily
to an increase in the average amount of investments held.
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.
16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investee Corporations Equity in net earnings of investee corporations in
1997 represents AFG's proportionate share of Chiquita's earnings. Chiquita
reported net income of $84.4 million for the first six months of 1997 and
$61.8 million for the comparable 1996 period. Chiquita's results for 1996
include $12 million of charges for damages resulting from industry-wide
flooding in Costa Rica. Included in earnings from investees in
1996 were earnings of $1.5 million attributable to AFG's
investment in Citicasters which was sold in September 1996.
Gains on Sales of Subsidiaries The gain on sale of subsidiaries
in 1997 represents a pretax gain on the sale of a travel agency.
The gains on sales of subsidiaries in 1996 include a pretax gain
of $33.9 million on the sale of Buckeye Management Company and
the settlement of litigation related to a subsidiary sold in 1993.
Other Income Other income decreased $10.2 million (28%) in the
second quarter of 1997 and $13.1 million (20%) in the first six
months of 1997 compared to 1996 due primarily to the sale of a
subsidiary in the first quarter of 1997.
Annuity Benefits Annuity benefits reflect interest credited to
annuity policyholders' funds accumulated. The majority of AAG's
fixed rate annuity products permit AAG to change the crediting
rate at any time (subject to minimum interest rate guarantees of
3% or 4% per annum). As a result, management has been able to
react to changes in market interest rates and maintain a desired
interest rate spread without a substantial effect on persistency.
Annuity benefits increased 3% in the second quarter and 2% in the
first six months of 1997 due primarily to an increase in average
annuity benefits accumulated.
Interest on Borrowed Money Interest expense decreased $7.7 million
(36%) during the second quarter and $15.8 million (37%) during the first
six months of 1997 from the comparable 1996 periods. The decrease
reflects significant debt reductions in 1996.
Other Operating and General Expenses Decreases in other operating and
general expenses resulting from the sale of a subsidiary in 1997 were
partially offset by increases in minority interest due primarily to
distribution requirements on the trust preferred securities.
NEW TAX LEGISLATION
New federal tax legislation was signed into law in August 1997.
Management believes the legislation will not have a material
effect on AFG's financial condition or results of operations.
17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 4
Submission of Matters to a Vote of Security Holders
AFG's Annual Meeting of Shareholders was held on May 29, 1997; the
only issue voted upon was the election of a Board of Directors. All
of the eight nominees were elected. The votes cast for and those
withheld are set forth below:
Name For Against Withheld Abstain
Theodore H. Emmerich 51,701,683 N/A 647,130 N/A
James E. Evans 51,722,187 N/A 626,626 N/A
Thomas M. Hunt 51,689,307 N/A 659,506 N/A
Carl H. Lindner 51,675,065 N/A 673,748 N/A
Carl H. Lindner III 51,708,140 N/A 640,673 N/A
Keith E. Lindner 51,646,075 N/A 702,738 N/A
S. Craig Lindner 51,707,244 N/A 641,569 N/A
William R. Martin 51,700,064 N/A 648,749 N/A
N/A - Not Applicable
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 Report Item Reported
July 14, 1997 Merger agreements involving two
subsidiaries, AFC and AFEI and AFG's
Reorganization.
18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
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 12, 1997 BY:Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
19
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,
1997 1996 1997 1996
<S>
Net earnings before extraordinary items <C> <C> <C> <C>
available to common shareholders $61,182 $58,343 $124,397 $139,541
Extraordinary items (23) (9,868) (78) (17,501)
Net earnings available to common shareholders $61,159 $48,475 $124,319 $122,040
Computation of primary earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 59,214 60,880 60,158 60,605
Dilutive effect of assumed exercise of
certain stock options 934 513 931 618
Dilutive effect of assumed conversion of
certain preferred shares - - - 66
Weighted average common shares used to
calculate primary earnings per share 60,148 61,393 61,089 61,289
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 59,214 60,880 60,158 60,605
Dilutive effect of assumed exercise of
certain stock options 1,223 516 1,232 623
Dilutive effect of assumed conversion of
certain preferred shares - - - 67
Weighted average common shares used to
calculate fully diluted earnings per share 60,437 61,396 61,390 61,295
Fully diluted earnings per common share (*) (*) (*) (*)
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $1.03 $.96 $2.07 $2.30
Extraordinary items - (.16) - (.29)
Net earnings $1.03 $.80 $2.07 $2.01
(*) 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 six months ended June 30, 1997 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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> $361,567
<SECURITIES> 10,874,080<F1>
<RECEIVABLES> 676,671
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,358,075
<CURRENT-LIABILITIES> 0
<BONDS> 470,066
0
0
<COMMON> 58,914
<OTHER-SE> 1,559,961
<TOTAL-LIABILITY-AND-EQUITY> 15,358,075
<SALES> 0
<TOTAL-REVENUES> 1,933,369
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 177,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,554
<INCOME-PRETAX> 196,992
<INCOME-TAX> 72,595
<INCOME-CONTINUING> 124,397
<DISCONTINUED> 0
<EXTRAORDINARY> (78)
<CHANGES> 0
<NET-INCOME> $124,319
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
<FN>
<F1>Includes an investment in investee corporation of $234 million.
</FN>
</TABLE>
