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, 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 May 1, 1997, there were 59,376,548 shares of the
Registrant's Common Stock outstanding, excluding 18,666,614 shares
owned by subsidiaries.
Page 1 of 17
<PAGE>
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,
1997 1996
Assets
Cash and short-term investments $ 406,760 $ 448,296
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,412,300 and $3,528,100) 3,439,287 3,491,126
Available for sale - at market
(amortized cost - $6,681,142 and $6,362,597) 6,674,942 6,494,597
Other stocks - principally at market
(cost - $144,270 and $142,364) 340,670 327,664
Investment in investee corporation 213,234 199,651
Loans receivable 541,124 568,765
Real estate and other investments 211,079 208,765
Total investments 11,420,336 11,290,568
Recoverables from reinsurers and prepaid
reinsurance premiums 932,704 942,450
Agents' balances and premiums receivable 638,718 609,403
Deferred acquisition costs 468,143 452,041
Other receivables 256,333 272,595
Deferred tax asset 154,429 137,284
Assets held in separate accounts 253,544 247,579
Prepaid expenses, deferred charges and other assets 378,011 372,321
Cost in excess of net assets acquired 274,971 278,581
$15,183,949 $15,051,118
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,028,032 $ 4,123,701
Unearned premiums 1,311,851 1,247,806
Annuity benefits accumulated 5,423,164 5,365,612
Life, accident and health reserves 581,431 575,380
Long-term debt:
Holding companies 338,214 339,504
Subsidiaries 184,848 178,415
Liabilities related to separate accounts 253,544 247,579
Accounts payable, accrued expenses and other
liabilities 1,022,552 924,244
Total liabilities 13,143,636 13,002,241
<PAGE>
Minority interest 565,002 494,440
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 59,517,320 and 61,071,626 shares outstanding 59,517 61,072
Capital surplus 727,955 745,649
Retained earnings 568,439 559,716
Net unrealized gain on marketable securities,
net of deferred income taxes 119,400 188,000
Total shareholders' equity 1,475,311 1,554,437
$15,183,949 $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)
Three months ended
March 31,
1997 1996
Income:
Property and casualty insurance premiums $663,762 $ 713,389
Life, accident and health premiums 25,365 24,253
Investment income 212,872 202,816
Realized gains on sales of securities 1,813 18,718
Equity in net earnings of investee corporations 14,780 8,522
Gains on sales of subsidiaries 731 33,891
Other income 26,447 29,333
945,770 1,030,922
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 469,324 509,157
Commissions and other underwriting expenses 184,301 200,679
Annuity benefits 68,830 68,015
Life, accident and health benefits 24,163 21,593
Interest charges on borrowed money 13,710 21,866
Other operating and general expenses 83,946 86,789
844,274 908,099
Earnings before income taxes and extraordinary items 101,496 122,823
Provision for income taxes 38,281 41,625
Earnings before extraordinary items 63,215 81,198
Extraordinary items - loss on prepayment of debt (55) (7,633)
Net Earnings $ 63,160 $ 73,565
Earnings (loss) per Common Share:
Before extraordinary items $1.03 $1.35
Extraordinary items - (.13)
Net earnings $1.03 $1.22
Average number of Common Shares 61,109 60,329
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,
1997 1996
Operating Activities:
Net earnings $ 63,160 $ 73,565
Adjustments:
Extraordinary items 55 7,633
Depreciation and amortization 17,979 15,414
Annuity benefits 68,830 68,015
Equity in net earnings of investee corporations (14,780) (8,522)
Changes in reserves on assets 418 3,752
Realized gains on investing activities (2,544) (51,582)
Decrease (increase) in reinsurance and
other receivables (24,451) 17,388
Increase in other assets (48,885) (22,793)
Decrease in insurance claims and reserves (25,573) (82,242)
Increase (decrease) in other liabilities (8,524) 9,293
Increase (decrease) in minority interest 3,162 (900)
Dividends from investees 1,200 1,200
Other, net 622 (2,654)
30,669 27,567
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (616,982) (726,351)
Equity securities (9,408) (8,573)
Real estate, property and equipment (8,764) (7,898)
Maturities and redemptions of fixed maturity
investments 155,184 176,536
Sales of:
Fixed maturity investments 332,008 242,365
Equity securities 7,943 20,845
Investees and subsidiaries 2,500 59,585
Real estate, property and equipment 396 1,206
Cash and short-term investments of former
subsidiaries (70) (4,589)
Increase in other investments (1,119) (3,252)
(138,312) (250,126)
Financing Activities:
Annuity receipts 133,402 137,241
Annuity payments (134,699) (113,852)
Additional long-term borrowings 7,053 111,200
Reductions of long-term debt (1,718) (197,918)
Issuances of Common Stock 2,585 5,533
Issuance of trust preferred securities 74,687 -
Cash dividends paid (15,203) (15,001)
66,107 (72,797)
Net Decrease in Cash and Short-term Investments (41,536) (295,356)
Cash and short-term investments at beginning
of period 448,296 544,408
Cash and short-term investments at end of period $ 406,760 $ 249,052
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:
March 31, December 31,
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
Chiquita Brands International, Inc. 43% 43% 44%
Citicasters Inc. (a) (a) 38%
(a) Sold in September 1996.
<PAGE>
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.
5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investment in Investee Corporation 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 21%
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.
<PAGE>
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.
Three months ended March 31,
Revenues 1997 1996
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $288,659 $ 304,392
Specialty lines 232,590 229,292
Commercial and personal lines 142,485 179,547
Other lines 28 158
663,762 713,389
Investment and other income 110,150 121,364
773,912 834,753
Annuities and life (*) 148,706 139,414
Other 8,372 48,233
930,990 1,022,400
Equity in net earnings of investee
corporations 14,780 8,522
$945,770 $1,030,922
(*) Represents primarily investment income.
C. Investment in Investee Corporation AFG owned 24 million shares
(43%) of Chiquita common stock at March 31, 1997 and December
31, 1996. The market value of AFG's investment in Chiquita was
$372 million and $306 million at March 31, 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):
Three months ended March 31,
1997 1996
Net Sales $631 $625
Operating Income 71 58
Net Income 43 24
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):
March 31, December 31,
1997 1996
Holding Companies:
9-3/4% AFC Debentures due April 2004 $163,968 $164,368
9-3/4% APU Subordinated Notes due August 1999 93,101 93,604
10-5/8% APU Subordinated Notes due April 2000 54,193 54,595
10-7/8% APU Subordinated Notes due May 2011 18,381 18,496
Other 8,571 8,441
$338,214 $339,504
Subsidiaries:
AAG notes payable to banks due September 1999 $ 51,700 $ 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 68,223 68,790
$184,848 $178,415
At March 31, 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 $ 5,735 $ 1,933 $ 7,668
1998 - 2,846 2,846
1999 91,361 54,137 145,498
2000 51,744 8,752 60,496
2001 - 42,304 42,304
2002 - 1,411 1,411
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.
<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 wholly-
owned 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.
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.
In a private offering in March 1997, a wholly-owned subsidiary
trust of AAG issued $75 million of 8-7/8% preferred securities
similar to the TOPrS issued in November 1996 with related
debentures due in 2027.
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
March 31, 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 March 31, 1997 and
December 31, 1996.
F. Capital Stock At March 31, 1997, there were 59,517,320 shares
of AFG Common Stock outstanding, including 1,371,203 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 March 31, 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 non-
employee directors of AFG are generally fully exercisable upon
grant. All options expire ten years after the date of grant.
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 - - 63,160 -
Change in unrealized - - - (68,600)
Dividends on Common Stock - - (15,269) -
Shares issued:
Exercise of stock options 84,593 1,890 - -
Dividend reinvestment plan 1,781 66 - -
Employee stock purchase plan 18,854 695 - -
Portion of bonuses paid in stock 40,500 1,521 - -
Shares repurchased (1,700,034) (22,458) (39,168) -
Capital transactions of subsidiaries - (490) - -
Change in foreign currency translation - (473) - -
Balance at March 31, 1997 59,517,320 $787,472 $568,439 $119,400
</TABLE>
<PAGE>
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):
Three months ended
March 31,
1997 1996
AFC (parent) ($17) ($4,198)
APU (parent) (38) (1,257)
AAG - (2,178)
($55) ($7,633)
11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Cash Flows - Fixed Maturity Investments "Investing activities" related to
fixed maturity investments in AFG's Statement of Cash Flows consisted
of the following (in thousands):
Held to Available
1997 Maturity For Sale Total
Purchases $ 1,314 $615,668 $616,982
Maturities and redemptions 81,185 73,999 155,184
Sales - 332,008 332,008
1996
Purchases $86,900 $639,451 $726,351
Maturities and redemptions 81,847 94,689 176,536
Sales - 242,365 242,365
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 April 1997, AFG announced two transactions intended
to reduce its corporate expenses and simplify the public company structure
of certain subsidiaries.
AFG has proposed a merger transaction in which AFC's Series F and Series G
preferred stock would be retired for $21.50 and $10.50 per share in cash,
respectively. Under the proposal, holders of Series F and G preferred
stock will have as an option the right to receive shares of a new issue of
AFC preferred stock. The new preferred will be redeemable at AFC's option
after the eighth anniversary of its issuance, have a liquidation value of
$21.50 per share and an annual dividend of $1.8275 per share, paid
semi-annually.
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 2.3 million shares of AFEI common stock
outstanding which are not beneficially owned by AFG.
The transactions would be subject to the negotiation of final
documentation, the approval of the Board of Directors of each of
AFG, AFC, and AFEI, and the receipt of all required shareholder,
stock exchange listing and regulatory approvals.
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. 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 March 31, 1997 and December
31, 1996. AFG's ratio of earnings to fixed charges on a total
enterprise basis was 3.95 for the first three 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, $52 million of which was
borrowed at March 31, 1997.
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
13
<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
March 31, 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 were
$101.5 million for the first quarter of 1997 and $122.8 million for
the first quarter of 1996. While results included (i) an increase
of $6.6 million in underwriting profit in the property and casualty
operations, (ii) an increase of $10.1 million in investment income
primarily in the annuity, life and health operations, (iii) an
increase of $6.3 million in investee earnings and (iv) a reduction
of $8.2 million in interest expense resulting from debt retirements
in 1996, these improvements were more than offset by reductions of
$50.1 million in realized gains.
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.
<PAGE>
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.
14
<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
March 31,
1997 1996
Net Written Premiums (GAAP)
NSA Group $329.7 $295.5
Specialty Operations 264.4 217.7
Commercial and Personal Operations 94.8 165.3
Other Lines - .1
$688.9 $678.6
Combined Ratios (GAAP)
NSA Group 97.1% 101.9%
Specialty Operations 92.7 90.0
Commercial and Personal Operations 102.9 103.7
Aggregate (including other lines) 98.5 99.6
NSA Group For the first three months of 1997, net written
premiums of the NSA Group increased 12% from the comparable 1996
period 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 increased 21% during the first three months of 1997 from
the comparable 1996 period due to the impact of $30 million of
premiums assumed on general aviation policies under a reinsurance
agreement with American Eagle Insurance Company and the return of
premiums related to the withdrawal from a voluntary pool in 1996.
The combined ratio for the first three months of 1997 increased
from the comparable 1996 period due in part to a reduction in
underwriting profit in the California workers' compensation
business. Underwriting results for the 1996 first quarter included
reserve reductions prompted by fundamental changes in the California
workers' compensation market and actuarial evaluations. Excluding
the effects of such reserve reductions, first quarter 1997 underwriting
results improved moderately as compared to 1996.
Commercial and Personal Operations The 43% decrease in net
written premiums for the commercial and personal operations from
the comparable 1996 period was 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 13%.
<PAGE>
Investment Income Investment income increased $10.1 million (5%)
for the first quarter 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.
15
<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 first quarter net income of
$43.3 million for 1997 and $24.2 million for 1996. 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 losses of $330,000
attributable to AFG's investment in Citicasters which was sold in
September 1996.
Gains on Sales of Subsidiaries Gains on sales of subsidiaries
represent pretax gains on the sales of a travel agency in 1997 and
Buckeye Management Company in 1996.
Annuity Benefits Annuity benefits expense increased slightly in
the first three months of 1997 due 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 $8.2 million
(37%) for the first quarter of 1997 from the comparable 1996
period. The decrease reflects significant debt reductions in 1996.
Other Operating and General Expenses Included in other operating
and general expenses are charges for minority interest of $14.4
million for the first quarter of 1997 compared to $10 million for
the same period in 1996. The increase in minority interest is due
primarily to accrued distributions on the trust preferred
securities.
____________________________________________________________
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) Reports 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.
May 12, 1997 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
(In Thousands, Except Per Share Data)
Three months ended
March 31,
1997 1996
Net earnings before extraordinary items
available to common shareholders $63,215 $81,198
Extraordinary items (55) (7,633)
Net earnings available to common shareholders $63,160 $73,565
Computation of primary earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 61,109 60,329
Dilutive effect of assumed exercise of
certain stock options 926 705
Weighted average common shares used to
calculate primary earnings per share 62,035 61,034
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 61,109 60,329
Dilutive effect of assumed exercise of
certain stock options 926 734
Weighted average common shares used to
calculate fully diluted earnings per share 62,035 61,063
Fully diluted earnings per common share (*) (*)
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $1.03 $1.35
Extraordinary items - (.13)
Net earnings $1.03 $1.22
(*) Dilution less than 3%
E-1
<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, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> $406,760
<SECURITIES> 10,668,133<F1>
<RECEIVABLES> 638,718
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,183,949
<CURRENT-LIABILITIES> 0
<BONDS> 523,062
0
0
<COMMON> 59,517
<OTHER-SE> 1,415,794
<TOTAL-LIABILITY-AND-EQUITY> 15,183,949
<SALES> 0
<TOTAL-REVENUES> 945,770
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 83,946
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,710
<INCOME-PRETAX> 101,496
<INCOME-TAX> 38,281
<INCOME-CONTINUING> 63,215
<DISCONTINUED> 0
<EXTRAORDINARY> (55)
<CHANGES> 0
<NET-INCOME> $63,160
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
<FN>
<F1>Includes an investment in investee corporation of $213 million.
</FN>
</TABLE>
