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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, 1998 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
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, 1998, there were 61,349,558 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 19
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,
1998 1997
Assets:
Cash and short-term investments $ 215,118 $ 257,117
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,044,700 and $3,202,300) 2,964,973 3,120,106
Available for sale - at market
(amortized cost - $7,653,679 and $7,225,736) 7,960,179 7,532,836
Other stocks - principally at market
(cost - $174,538 and $153,322) 478,338 446,222
Investment in investee corporation 221,138 200,714
Loans receivable 476,568 513,694
Real estate and other investments 213,651 219,216
Total investments 12,314,847 12,032,788
Recoverables from reinsurers and prepaid
reinsurance premiums 1,029,672 998,743
Agents' balances and premiums receivable 714,286 691,005
Deferred acquisition costs 537,986 521,898
Other receivables 244,491 243,330
Deferred tax asset 17,686 41,413
Assets held in separate accounts 315,918 300,491
Prepaid expenses, deferred charges and other assets 332,408 369,156
Cost in excess of net assets acquired 300,907 299,408
$16,023,319 $15,755,349
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,230,907 $ 4,225,336
Unearned premiums 1,348,557 1,328,910
Annuity benefits accumulated 5,540,268 5,528,111
Life, accident and health reserves 778,056 709,899
Long-term debt:
Holding companies 385,514 386,661
Subsidiaries 214,472 194,084
Liabilities related to separate accounts 315,918 300,491
Accounts payable, accrued expenses and other
liabilities 964,047 906,151
Total liabilities 13,777,739 13,579,643
Minority interest 516,642 512,997
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 61,316,468 and 61,048,904 shares outstanding 61,316 61,049
Capital surplus 784,017 775,689
Retained earnings 528,005 477,071
Net unrealized gain on marketable securities,
net of deferred income taxes 355,600 348,900
Total shareholders' equity 1,728,938 1,662,709
$16,023,319 $15,755,349
2
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,
1998 1997
Income:
Property and casualty insurance premiums $ 676,172 $663,762
Life, accident and health premiums 46,816 25,365
Investment income 220,328 212,872
Equity in net earnings of investee 13,918 14,780
Realized gains on sales of:
Securities 7,446 1,813
Investee and subsidiary 7,704 731
Other investments 6,843 -
Other income 37,551 26,447
1,016,778 945,770
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 499,825 469,324
Commissions and other underwriting expenses 193,605 184,301
Annuity benefits 71,110 68,830
Life, accident and health benefits 38,106 24,163
Interest charges on borrowed money 13,951 13,710
Minority interest expense 14,259 14,405
Other operating and general expenses 77,193 69,541
908,049 844,274
Earnings before income taxes and extraordinary items 108,729 101,496
Provision for income taxes 41,842 38,281
Earnings before extraordinary items 66,887 63,215
Extraordinary items - loss on prepayment of debt (687) (55)
Net Earnings $ 66,200 $ 63,160
Basic earnings (loss) per Common Share:
Before extraordinary items $1.09 $1.03
Loss on prepayment of debt (.01) -
Net earnings available to Common Shares $1.08 $1.03
Diluted earnings (loss) per Common Share:
Before extraordinary items $1.08 $1.02
Loss on prepayment of debt (.01) -
Net earnings available to Common Shares $1.07 $1.02
Average number of Common Shares:
Basic 61,103 61,109
Diluted 62,147 62,029
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Common Stock Unrealized
Common and Capital Retained Gain on Comprehensive
Shares Surplus Earnings Securities Income
Balance at January 1, 1998 61,048,904 $836,738 $477,071 $348,900
Net earnings - - 66,200 - $66,200
Dividends on Common Stock - - (15,266) - -
Shares issued:
Exercise of stock options 201,627 6,321 - - -
Dividend reinvestment plan 1,960 78 - - -
Employee stock purchase plan 19,383 769 - - -
401-K plan company match 44,035 1,783 - - -
Directors fees paid in stock 576 23 - - -
Shares repurchased (17) - - - -
Capital transactions of subsidiaries - (490) - - -
Change in unrealized - - - 6,700 6,700
Other - 111 - - -
Balance at March 31, 1998 61,316,468 $845,333 $528,005 $355,600 $72,900
Balance at January 1, 1997 61,071,626 $806,721 $559,716 $188,000
Net earnings - - 63,160 - $63,160
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 unrealized - - - (68,600) (68,600)
Other - (473) - - -
Balance at March 31, 1997 59,517,320 $787,472 $568,439 $119,400 ($ 5,440)
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
1998 1997
Operating Activities:
Net earnings $ 66,200 $ 63,160
Adjustments:
Extraordinary items 687 55
Depreciation and amortization 24,582 17,979
Annuity benefits 71,110 68,830
Equity in net earnings of investee (13,918) (14,780)
Changes in reserves on assets 110 418
Realized gains on investing activities (35,299) (2,544)
Increase in reinsurance and other receivables (46,690) (24,451)
Decrease (increase) in other assets 30,330 (48,885)
Increase (decrease) in insurance claims and
reserves 41,375 (25,573)
Increase (decrease) in other liabilities 16,901 (8,524)
Increase in minority interest 3,497 3,162
Dividends from investee 1,200 1,200
Other, net (4,428) 622
155,657 30,669
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (631,793) (616,982)
Equity securities (19,297) (9,408)
Subsidiaries (31,000) -
Real estate, property and equipment (16,621) (8,764)
Maturities and redemptions of fixed maturity
investments 284,666 155,184
Sales of:
Fixed maturity investments 206,843 332,008
Equity securities 2,781 7,943
Subsidiary - 2,500
Real estate, property and equipment 30,043 396
Cash and short-term investments of acquired
(former) subsidiaries 21,678 (70)
Decrease (increase) in other investments 1,281 (1,119)
(151,419) (138,312)
Financing Activities:
Fixed annuity receipts 107,832 133,402
Annuity surrenders, benefits and withdrawals (164,034) (134,699)
Additional long-term borrowings 50,248 7,053
Reductions of long-term debt (32,185) (1,718)
Issuances of Common Stock 7,090 2,585
Issuances of trust preferred securities - 74,687
Cash dividends paid (15,188) (15,203)
(46,237) 66,107
Net Decrease in Cash and Short-term Investments (41,999) (41,536)
Cash and short-term investments at beginning
of period 257,117 448,296
Cash and short-term investments at end of period $215,118 $406,760
5
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,
1998 1997 1996
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") - (*) 83%
Chiquita Brands International, Inc. 37% 39% 43%
(*) Became a 100%-owned subsidiary in December 1997.
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.
6
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 generally carried at cost, adjusted
for AFG's proportionate share of their undistributed earnings or losses.
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.
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.
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 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 yield, mortality, morbidity and surrenders and
include provisions for unfavorable deviations. Reserves are modified as
necessary to reflect actual experience and developing trends.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent deposits
maintained by several banks under a previously offered tax-deferred
annuity program and, to a lesser extent, variable annuity deposits.
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.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFG
subsidiaries, including American Financial Corporation ("AFC")
preferred stock and preferred securities issued by trust
subsidiaries of AFG. For income statement purposes, minority
interest expense represents those shareholders' interest in the
earnings of AFG subsidiaries as well as AFC preferred dividends and
accrued distributions on the trust preferred securities.
Issuances of Stock by Subsidiaries and Investees Changes in AFG's
equity in a subsidiary or an investee caused by issuances of the
subsidiary's or investee's stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization.
Income Taxes 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. AFG (parent) was 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
consolidated return for 1997. Because holders of AFC Preferred
Stock hold in excess of 20% of AFC's voting rights, AFG (parent)
and AFC Holding Company own less than 80% of AFC, and therefore,
will file separate returns.
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.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock-Based Compensation As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", AFG accounts for stock options and other stock-based
compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
Benefit Plans AFG provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans contained in AFG's
Retirement and Savings Plan. Under the retirement portion of the
plan, company contributions (approximately 6% of covered
compensation in 1997) are invested primarily in securities of AFG
and affiliates. Under the savings portion of the plan, AFG matches
a specific portion of employee contributions. Contributions to
benefit plans are charged against earnings in the year for which
they are declared.
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 earn 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.
Earnings Per Share In 1997, AFG implemented SFAS No. 128,
"Earnings Per Share". This standard requires the presentation of
basic and diluted earnings per share. Basic earnings per share are
calculated using the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share
include the effect of the assumed exercise of dilutive common stock
options. Per share amounts for prior periods have been restated to
conform to the current presentation.
Comprehensive Income Effective January 1, 1998, AFG implemented
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 uses
the term "comprehensive income" to describe the total of net
earnings plus other comprehensive income. For AFG, other
comprehensive income represents the change in net unrealized gain
on marketable securities net of deferred taxes and a
reclassification adjustment for gains and losses included in net
earnings. Implementation of this statement had no impact on net
earnings or shareholders' equity. Prior periods have been restated
to conform to the current presentation.
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.
9
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 corporation - see Note C).
The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is scheduled to become effective during the
fourth quarter of 1998. The implementation of SFAS No. 131 is not
expected to have a material effect on the segments currently
disclosed by AFG.
The following table (in thousands) shows AFG's revenues by
significant business segment.
Three months ended March 31,
1998 1997
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 287,364 $279,031
Specialty lines 244,972 232,590
Commercial and personal lines 132,545 142,485
Other lines (a) 11,291 9,656
676,172 663,762
Investment and other income 132,301 110,150
808,473 773,912
Annuities and life (b) 188,557 148,706
Other 5,830 8,372
1,002,860 930,990
Equity in net earnings of investee 13,918 14,780
$1,016,778 $945,770
(a) NSA operations in the United Kingdom have been
reclassified to other lines.
(b) Represents primarily investment income.
C. Investment in Investee Corporation Investment in investee
corporation reflects AFG's ownership of 24 million shares of
Chiquita common stock. The market value of this investment was
$328 million and $391 million at March 31, 1998 and December 31,
1997, 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,
1998 1997
Net Sales $717 $631
Operating Income 70 71
Net Income 41 43
10
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,
1998 1997
Holding Companies:
AFG 7-1/8% Senior Debentures due December 2007 $100,000 $100,000
AFC 9-3/4% Debentures due April 2004 79,396 79,792
AFC notes payable to banks due December 2002 45,000 45,000
APU 9-3/4% Subordinated Notes due August 1999 91,623 92,127
APU 10-5/8% Subordinated Notes due April 2000 43,638 43,889
APU 10-7/8% Subordinated Notes due May 2011 17,572 17,586
Other 8,285 8,267
$385,514 $386,661
Subsidiaries:
AAG notes payable to banks due in
installments to December 2003 $157,000 $107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 44,268 49,525
Other 13,204 13,479
$214,472 $194,084
At March 31, 1998, sinking fund and other scheduled principal
payments on debt for the balance of 1998 and the subsequent five
years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1998 $ - $ 1,450 $ 1,450
1999 90,571 2,039 92,610
2000 42,230 8,751 50,981
2001 - 38,474 38,474
2002 50,407 61,367 111,774
2003 - 61,402 61,402
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.
In February 1998, AFC entered into a new unsecured credit agreement
with a group of banks under which AFC can borrow up to $300 million
through December 2002. Borrowings bear interest at floating rates
based on prime or LIBOR.
In January 1998, AAG replaced its existing bank lines with a new
$200 million unsecured credit agreement. Loans under the credit
agreement mature from 2000 to 2003 and bear interest at floating
rates based on prime or LIBOR. In February 1998, AAG borrowed
$50 million under the line and retired its 11-1/8% Notes (including
$24.3 million principal amount held by AAG and its subsidiaries).
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Minority Interest Minority interest in AFG's balance sheet is
comprised of the following (in thousands):
March 31, December 31,
1998 1997
Interest of noncontrolling shareholders
in subsidiaries' common stock $119,488 $115,843
Preferred securities issued by
subsidiary trusts 325,000 325,000
AFC preferred stock 72,154 72,154
$516,642 $512,997
Preferred Securities Wholly-owned subsidiary trusts of AFC Holding and AAG
have issued $325 million of preferred securities and, in turn, purchased
$325 million of newly authorized AFC Holding and AAG subordinated debt issues
which provide interest and principal payments to fund the respective trusts'
obligations. The preferred securities are mandatorily redeemable upon
maturity or redemption of the subordinated debt.
The preferred securities are summarized as follows:
Date of Optional
Issuance Issue (Maturity Date) Amount Redemption Dates
October 1996 9-1/8% TOPrS (2026) $100,000,000 On or after 10/22/2001
November 1996 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001
March 1997 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
AFG, AFC Holding and AAG effectively provide unconditional guarantees
of their respective trusts' obligations.
AFC Preferred Stock AFC's Preferred Stock was voting, cumulative,
and consisted of the following:
Series J, no par value; $25.00 liquidating value per share; annual
dividends per share $2.00; redeemable at $25.75 per share beginning
December 2005 declining to $25.00 at December 2007; 2,886,161 shares
(stated value $72.2 million) outstanding at March 31, 1998 and
December 31, 1997.
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
Three months ended
March 31,
1998 1997
Interest of noncontrolling shareholders
in earnings of subsidiaries $ 5,751 $ 4,168
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities 7,065 4,366
AFC preferred stock 1,443 5,871
$14,259 $14,405
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Shareholders' Equity At March 31, 1998, there were 61,316,468
shares of AFG Common Stock outstanding, including 1,368,965 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, 1998, there were 4.8 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.
The change in net unrealized gain on marketable securities for the
three months ended March 31 included the following (in millions):
Minority
Pretax Taxes Interest Net
1998
Unrealized holding gains (losses) on
securities arising during the period $ 14.8 ($ 5.0) ($ .5) $ 9.3
Less reclassification adjustment for
realized gains included in net income (4.3) 1.5 .2 (2.6)
Change in net unrealized gain on
marketable securities $ 10.5 ($ 3.5) ($ .3) $ 6.7
1997
Unrealized holding gains (losses) on
securities arising during the period ($115.8) $40.5 $7.6 ($67.7)
Less reclassification adjustment for
realized gains included in net income (1.3) .4 - (.9)
Change in net unrealized gain on
marketable securities ($117.1) $40.9 $7.6 ($68.6)
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,
1998 1997
Holding Companies:
AFC (parent) ($22) ($17)
APU (parent) (16) (38)
Subsidiaries:
AAG (649) -
($687) ($55)
H. Earnings Per Share Weighted average shares outstanding for the
three months ended were adjusted for the following dilutive effects
of stock options in calculating diluted per share amounts: 1998 -
1.0 million shares and 1997 - .9 million shares.
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. 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
Maturity For Sale Total
1998
Purchases $ 76 $631,717 $631,793
Maturities and redemptions 170,711 113,955 284,666
Sales 23,960 (*) 182,883 206,843
1997
Purchases $ 1,314 $615,668 $616,982
Maturities and redemptions 81,185 73,999 155,184
Sales - 332,008 332,008
(*) Sold (at a gain of $.5 million) due to significant
deterioration in the issuers' creditworthiness.
J. Commitments and Contingencies There have been no significant changes
to the matters discussed and referred to in Note N "Commitments and
Contingencies" in AFG's Annual Report on Form 10-K for 1997.
14
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 Holding, 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.
Forward-Looking Statements The Private Securities Litigation
Reform Act of 1995 encourages corporations to provide investors
with information about the company's anticipated performance and
provides protection from liability if future results are not the
same as management's expectations. This document contains certain
forward-looking statements that are based on assumptions which
management believes are reasonable, but by their nature, inherently
uncertain. Future results could differ materially from those
projected. Factors that could cause such differences include, but
are not limited to: changes in economic conditions, regulatory
actions, level of catastrophe losses, and competitive pressures.
AFG undertakes no obligation to update any forward-looking
statements.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFG's debt to total capital ratio at the parent holding
company level was approximately 17% at March 31, 1998 and December
31, 1997. AFG's ratio of earnings to fixed charges on a total
enterprise basis was 4.87 for the first three months of 1998 and
3.98 for the entire year of 1997.
Sources of Funds Management believes the parent holding companies
have sufficient resources to meet their liquidity requirements
through operations in the short-term and long-term future. If
funds generated from operations, including dividends and tax
payments 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.
A new five-year, $300 million bank credit line was established by
AFC in February 1998 replacing two subsidiary holding company
lines. The new credit line provides ample liquidity and can be
used to obtain funds for operating subsidiaries or, if necessary,
for the parent companies. At March 31, 1998, there was $45 million
borrowed under the credit line.
In the past, funds have been borrowed under bank facilities and
used for working capital, capital infusions into subsidiaries, and
to retire other issues of short-term or high-rate debt and
preferred stock. Also, AFG believes it may be prudent and
advisable to utilize portions of the bank debt in the normal course
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 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 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-core investments.
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments Approximately 91% 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, 1998. 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
$109 million for the first quarter of 1998 and $101 million for the
first quarter of 1997. The increase in the 1998 period was due
primarily to higher realized gains on sales of certain investments,
income from the sale of real estate properties, and growth in
investment income. These improvements were partially offset by a decrease
in underwriting results in the property and casualty operations.
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, non-profit
liability, general aviation coverages, fidelity and surety bonds,
and umbrella and excess coverages. The commercial and personal
lines provide coverages in workers' compensation, commercial multi-
peril, umbrella, 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.
For certain lines of business and products where the credibility of
the range of loss projections is less certain (primarily the
various specialty lines listed above), management believes that it
is prudent and appropriate to use conservative assumptions until
such time as the data, experience and projections have more
credibility, as evidenced by data volume, consistency and maturity
of the data. While this practice mitigates the risk of adverse
development on this business, it does not eliminate it.
16
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,
1998 1997
Net Written Premiums (GAAP)
NSA Group $322.4 $321.2
Specialty Operations 246.9 264.4
Commercial and Personal Operations 117.9 94.8
Other Lines (*) 7.7 8.5
$694.9 $688.9
Combined Ratios (GAAP)
NSA Group 95.9% 96.8%
Specialty Operations 101.4 92.7
Commercial and Personal Operations 104.2 102.9
Aggregate (including other lines) 102.6 98.5
(*) NSA operations in the United Kingdom have been reclassified
to other lines.
NSA Group The NSA Group's net written premiums for the first three months
of 1998 were substantially the same as compared to the 1997 period;
underwriting profit increased $2.6 million due primarily to a reduction
in underwriting expenses resulting from cost efficiencies during the same
period.
Specialty Operations For the first three months of 1998, net written
premiums for the specialty operations decreased 7% from the comparable 1997
period. The 1997 premiums included certain in-force amounts related to
general aviation policies obtained under a reinsurance agreement at the
beginning of that year. Excluding this impact, premiums were essentially
the same as a year ago. Underwriting results for the first three months
of 1998 declined due primarily to a continuation of the adverse claims
environment in the California workers' compensation business. The other
specialty businesses reported a solid underwriting profit.
Commercial and Personal Operations Net written premiums for the
commercial and personal operations increased 24% during the first
three months of 1998 from the comparable 1997 period. Net written
premiums in the 1997 period had been unusually low due to the
initial impact of a reinsurance agreement for AFG's homeowners'
business. This reinsurance agreement became effective at the
beginning of 1997 and is still in effect. Excluding this impact,
premiums declined approximately 7% due primarily to a decrease in
personal automobile coverages in certain states. Underwriting
results declined slightly during the first three months of 1998
from the comparable 1997 period as improved performance in personal
lines was offset by higher loss and loss adjustment costs in
commercial lines.
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects AAG's
acquisition of General Accident Life Assurance Company in December
1997 and increases in pre-need life insurance sales.
Investment Income Investment income increased approximately
$7.5 million (4%) for the first quarter of 1998 compared to 1997
due primarily to an increase in the average amount of investments held.
17
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 represents AFG's proportionate share of Chiquita's
earnings. Chiquita reported first quarter net earnings of
$41 million in 1998 and $43 million in 1997.
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.
Gain on Sale of Investee and Subsidiary Chiquita's public issuance
of 3.1 million shares of its common stock in 1998 resulted in a
pretax gain to AFG of $7.7 million.
Other Income Other income increased $11.1 million (42%) in the
first three months of 1998 compared to 1997 due primarily to income
of $10.4 million from the sale of operating real estate assets.
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 first three months of 1998 due
primarily to an increase in average annuity benefits accumulated.
Other Operating and General Expenses Other operating and general
expenses increased $7.7 million (11%) during the first quarter of
1998 compared to 1997 due primarily to the operations of General
Accident which recorded $5.3 million of expenses in 1998.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule for the three months ended
March 31, 1998(*)
Exhibit 27.2 - Restated Financial Data Schedule for 1996 and 1995(*)
Exhibit 27.3 - Restated Financial Data Schedule for the first three
quarters of 1996(*)
Exhibit 27.4 - Restated Financial Data Schedule for the first three
quarters of 1997(*)
(b) Reports on Form 8-K: None.
- -----------------------
(*) Included in Report filed electronically with the Securities and
Exchange Commission.
____________________________________________________________
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, 1998 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
19