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, 1999 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, 1999, there were 60,015,210 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by
subsidiaries.
Page 1 of 20
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,
1999 1998
Assets:
Cash and short-term investments $ 343,281 $ 296,721
Investments:
Fixed maturities - at market
(amortized cost - $9,987,367 and $9,921,344) 10,248,767 10,324,344
Other stocks - at market
(cost - $214,321 and $207,345) 442,521 430,345
Investment in investee corporation 207,255 192,138
Policy loans 219,341 220,496
Real estate and other investments 254,713 271,915
Total investments 11,372,597 11,439,238
Recoverables from reinsurers and prepaid
reinsurance premiums 1,854,355 1,973,895
Agents' balances and premiums receivable 596,952 618,198
Deferred acquisition costs 489,682 464,047
Other receivables 274,850 306,821
Assets held in separate accounts 162,252 120,049
Prepaid expenses, deferred charges and other assets 336,667 344,465
Cost in excess of net assets acquired 278,724 281,769
$15,709,360 $15,845,203
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,684,377 $ 4,773,377
Unearned premiums 1,084,399 1,232,848
Annuity benefits accumulated 5,482,277 5,449,633
Life, accident and health reserves 350,814 341,595
Long-term debt:
Holding companies 465,384 415,536
Subsidiaries 195,497 176,896
Liabilities related to separate accounts 162,252 120,049
Accounts payable, accrued expenses and other
liabilities 1,127,952 1,097,316
Total liabilities 13,552,952 13,607,250
Minority interest 507,707 521,776
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 59,979,251 and 60,928,322 shares outstanding 59,979 60,928
Capital surplus 761,338 770,721
Retained earnings 543,284 527,028
Net unrealized gain on marketable securities,
net of deferred income taxes 284,100 357,500
Total shareholders' equity 1,648,701 1,716,177
$15,709,360 $15,845,203
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,
1999 1998
Income:
Property and casualty insurance premiums $537,466 $ 676,172
Life, accident and health premiums 25,588 46,816
Investment income 203,910 220,328
Equity in net earnings of investee 16,317 13,918
Realized gains on sales of:
Securities 4,449 7,446
Investee - 7,704
Other investments - 6,843
Other income 26,057 37,551
813,787 1,016,778
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 365,829 499,825
Commissions and other underwriting expenses 168,221 193,605
Annuity benefits 64,941 71,110
Life, accident and health benefits 18,879 38,106
Interest charges on borrowed money 13,434 13,951
Minority interest expense 13,421 14,259
Other operating and general expenses 76,609 77,193
721,334 908,049
Earnings before income taxes, extraordinary items
and cumulative effect of accounting change 92,453 108,729
Provision for income taxes 33,339 41,842
Earnings before extraordinary items and cumulative
effect of accounting change 59,114 66,887
Extraordinary items - loss on prepayment of debt - (687)
Cumulative effect of accounting change (3,854) -
Net Earnings $ 55,260 $ 66,200
Basic earnings (loss) per Common Share:
Before extraordinary items and cumulative effect
of accounting change $.97 $1.09
Loss on prepayment of debt - (.01)
Cumulative effect of accounting change (.06) -
Net earnings available to Common Shares $.91 $1.08
Diluted earnings (loss) per Common Share:
Before extraordinary items and cumulative effect
of accounting change $.96 $1.08
Loss on prepayment of debt - (.01)
Cumulative effect of accounting change (.06) -
Net earnings available to Common Shares $.90 $1.07
Average number of Common Shares:
Basic 60,962 61,103
Diluted 61,722 62,147
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 (Loss)
Balance at January 1, 1999 60,928,322 $831,649 $527,028 $357,500
Net earnings - - 55,260 - $55,260
Dividends on Common Stock - - (15,229) - -
Shares issued:
Exercise of stock options 55,000 1,532 - - -
Dividend reinvestment plan 2,276 84 - - -
Employee stock purchase plan 16,500 634 - - -
401-K plan company match 57,888 2,171 - - -
Directors fees paid in stock 577 22 - - -
Shares repurchased (1,081,312) (14,760) (23,775) - -
Capital transactions of subsidiaries - (1,600) - - -
Change in unrealized - - - (73,400) (73,400)
Other - 1,585 - - -
Balance at March 31, 1999 59,979,251 $821,317 $543,284 $284,100 ($18,140)
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
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,
1999 1998
Operating Activities:
Net earnings $ 55,260 $ 66,200
Adjustments:
Extraordinary items - 687
Cumulative effect of accounting change 3,854 -
Depreciation and amortization 21,949 24,582
Annuity benefits 64,941 71,110
Equity in net earnings of investee (16,317) (13,918)
Realized gains on investing activities (7,247) (35,299)
Deferred annuity and life policy acquisition costs (28,236) (24,263)
Decrease (increase) in reinsurance and other
receivables 168,584 (46,690)
Decrease (increase) in other assets (14,351) 54,593
Increase (decrease) in insurance claims and reserves (133,449) 41,375
Increase in other liabilities 29,002 16,901
Increase in minority interest 649 3,497
Dividends from investee 1,200 1,200
Other, net (679) (4,318)
145,160 155,657
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (535,513) (631,793)
Equity securities (19,183) (19,297)
Subsidiaries (26,636) (31,000)
Real estate, property and equipment (18,541) (16,621)
Maturities and redemptions of fixed maturity
investments 340,961 284,666
Sales of:
Fixed maturity investments 180,604 206,843
Equity securities 15,763 2,781
Real estate, property and equipment 2,990 30,043
Cash and short-term investments of acquired
subsidiaries, net 11,740 21,678
Decrease in other investments 21,563 1,281
(26,252) (151,419)
Financing Activities:
Fixed annuity receipts 107,487 107,832
Annuity surrenders, benefits and withdrawals (191,124) (164,034)
Additional long-term borrowings 69,150 50,248
Reductions of long-term debt (549) (32,185)
Issuances of Common Stock 1,877 7,090
Repurchases of Common Stock (38,535) -
Repurchases of trust preferred securities (5,509) -
Cash dividends paid (15,145) (15,188)
(72,348) (46,237)
Net Increase (Decrease) in Cash and Short-term
Investments 46,560 (41,999)
Cash and short-term investments at beginning
of period 296,721 257,117
Cash and short-term investments at end of period $343,281 $215,118
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.
Investments All fixed maturity securities are "available for sale" and
reported at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity. Short-term investments are
carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. 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.
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
reinsured 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.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 life, accident and health policies are
computed using the 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.
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent variable
annuity deposits.
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.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFG
subsidiaries, 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 a part of a broader reorganization.
Income Taxes AFC files 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
Preferred Stock hold in excess of 20% of AFC's voting rights, AFG
(parent) and its direct subsidiary, AFC Holding Company ("AFC Holding" or
"AFCH"), own less than 80% of AFC, and therefore, 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.
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 1998) 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.
Start-up Costs Prior to 1999, American Annuity Group, Inc. ("AAG"), an
83%-owned subsidiary, deferred certain costs associated with
introducing new products and distribution channels and amortized them
on a straight-line basis over 5 years. In 1999, AAG implemented
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires that (i) costs of start-up activities be
expensed as incurred and (ii) unamortized balances of previously
deferred costs be expensed and reported as the cumulative effect of a
change in accounting principle. Accordingly, AFG expensed previously
capitalized start-up costs of $3.8 million (net of minority interest
and taxes) or $.06 per diluted share, effective January 1, 1999.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Derivatives The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," during
the second quarter of 1998. AFG must implement SFAS No. 133 nolater
than January 1, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of all derivatives
(both assets and liabilities) in the balance sheet at fair value.
Changes in fair value of derivative instruments are included in current
income or as a component of comprehensive income (outside current
income) depending on the type of derivative. Implementation of SFAS
No. 133 is not expected to have a material effect on AFG's financial
position or results of operations.
Earnings Per Share Basic earnings per share is 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.
Comprehensive Income Comprehensive income represents 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.
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 Having sold substantially all of its Commercial
lines division in December 1998, AFG's property and casualty group is
engaged primarily in private passenger automobile and specialty
insurance businesses. The Personal group consists of the nonstandard
auto group along with the preferred/standard private passenger auto and
other personal insurance business. The Specialty group includes a
highly diversified group of specialty business units. AFG's annuity
and life business markets primarily retirement products as well as life
and supplemental health insurance. In addition, AFG has owned
significant portions of the voting equity securities of Chiquita Brands
International, Inc. (an investee corporation - see Note C).
The following table (in thousands) shows AFG's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
Three months ended March 31,
1999 1998
Revenues (a)
Property and casualty insurance:
Premiums earned:
Personal $ 285,817 $ 327,972
Specialty 250,588 336,909
Other lines (primarily discontinued) 1,061 11,291
537,466 676,172
Investment and other income 102,268 132,301
639,734 808,473
Annuities and life (b) 154,016 188,557
Other 3,720 5,830
797,470 1,002,860
Equity in net earnings of investee 16,317 13,918
$ 813,787 $1,016,778
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal $ 4,480 $ 11,974
Specialty 349 (9,313)
Other lines (primarily discont inued) (1,413) (19,919)
3,416 (17,258)
Investment and other income 67,641 104,879
71,057 87,621
Annuities and life 26,760 32,054
Other (c) (21,681) (24,864)
76,136 94,811
Equity in net earnings of investee 16,317 13,918
$ 92,453 $ 108,729
(a) Revenues include sales of products and services as well as other
income earned by the respective segments.
(b) Represents primarily investment income.
(c) Includes holding company expenses.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. Investment in Investee Corporation Investment in investee corporation
reflects AFG's ownership of 24 million shares (37%) of Chiquita common
stock. The market value of this investment was $244 million and
$229 million at March 31, 1999 and December 31, 1998, respectively.
Chiquita is a leading international marketer, producer and distributor
of quality fresh fruits and vegetables and processed foods. Summarized
financial information for Chiquita follows (in millions):
Three months ended March 31,
1999 1998
Net Sales $693 $717
Operating Income 77 70
Net Income 49 41
D. Long-Term Debt The carrying value of long-term debt consisted of the
following (in thousands):
March 31, December 31,
1999 1998
Holding Companies:
AFG 7-1/8% Senior Debentures due December 2007 $100,000 $100,000
AFC notes payable under bank line 130,000 80,000
AFC 9-3/4% Debentures due April 2004 78,575 78,560
American Premier Underwriters, Inc. ("APU")
9-3/4% Subordinated Notes due August 1999 89,258 89,467
APU 10-5/8% Subordinated Notes due April 2000 41,350 41,518
APU 10-7/8% Subordinated Notes due May 2011 17,457 17,473
Other 8,744 8,518
$465,384 $415,536
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $100,000
AAG notes payable under bank line 46,000 27,000
Notes payable secured by real estate 37,457 37,602
Other 12,040 12,294
$195,497 $176,896
In April 1999, AFG issued $350 million principal amount of 7-1/8%
senior debentures due 2009. The net proceeds from this offering will
be used to retire (in May) the AFC 9-3/4% debentures due 2004 and to
retire (at maturity) the APU subordinated notes due in 1999 and 2000.
The remainder of the proceeds were used to reduce AFC's revolving bank
line of credit. In the interim, funds available from the proceeds are
invested in short-term instruments.
At March 31, 1999, sinking fund and other scheduled principal payments
on debt for the balance of 1999 and the subsequent five years, adjusted
to reflect the April 1999 issuance of debt and subsequent planned debt
retirements, were as follows (in thousands):
Holding
Companies Subsidiaries Total
1999 $ - $ 1,568 $ 1,568
2000 - 8,685 8,685
2001 - 1,383 1,383
2002 5,823 1,267 7,090
2003 - 47,294 47,294
2004 - 14,241 14,241
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
AFC and AAG each have an unsecured credit agreement with a group of
banks under which they can borrow up to $300 million and $200 million,
respectively. Borrowings bear interest at floating rates based on
prime or Eurodollar rates. Loans mature December 2002 under the AFC
credit agreement and from 2000 to 2003 under the AAG credit agreement.
E. Minority Interest Minority interest in AFG's balance sheet is
comprised of the following (in thousands):
March 31, December 31,
1999 1998
Interest of noncontrolling shareholders
in subsidiaries' common stock $115,953 $124,622
Preferred securities issued by
subsidiary trusts 319,600 325,000
AFC preferred stock 72,154 72,154
$507,707 $521,776
Preferred Securities Wholly-owned subsidiary trusts of AFCH and AAG
have issued $325 million of preferred securities and, in turn,
purchased a like amount of AFCH and AAG subordinated debt which
provides interest and principal payments to fund the respective trusts'
obligations. The preferred securities must be redeemed upon maturity
or redemption of the subordinated debt. AFCH and AAG effectively
provide unconditional guarantees of their respective trusts'
obligations and AFG guarantees AFCH's obligations.
The preferred securities consisted of the following (in thousands):
Date of March 31, December 31, Optional
Issuance Issue (Maturity Date) 1999 1998 Redemption Dates
October 1996 AFCH 9-1/8% TOPrS (2026) $100,000 $100,000 On or after 10/22/2001
November 1996 AAG 9-1/4% TOPrS (2026) 74,600 75,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 70,000 75,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000 75,000 Prior to 9/28/2000 and
after 9/28/2001
In the first quarter of 1999, AAG retired $5.4 million of its preferred
securities for $5.5 million in cash.
AFC Preferred Stock AFC's Preferred Stock is voting, cumulative, and
consists 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, 1999 and December 31, 1998.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Minority Interest Expense Minority interest expense is comprised of
(in thousands):
Three months ended
March 31,
1999 1998
Interest of noncontrolling shareholders
in earnings of subsidiaries $ 4,964 $ 5,751
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities 7,014 7,065
AFC preferred stock 1,443 1,443
$13,421 $14,259
F. Shareholders' Equity At March 31, 1999, there were 59,979,251 shares
of AFG Common Stock outstanding, including 1,367,075 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, 1999, there were 4.6 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date,
AFG had options for 4.6 million shares outstanding. Options generally
become exercisable at the rate of 20% per year commencing one year
after grant; those granted to non-employee directors of AFG are 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
1999
Unrealized holding gains (losses) on
securities arising during the period ($120.5) $41.4 $8.1 ($71.0)
Less reclassification adjustment for
realized gains included in net income (4.4) 1.6 .4 (2.4)
Change in net unrealized gain on
marketable securities ($124.9) $43.0 $8.5 ($73.4)
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
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
Holding Companies:
AFC (parent) ($ 22)
APU (parent) (16)
Subsidiaries:
AAG (649)
($687)
13
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):
Available Held to
For Sale Maturity (a) Total
1999
Purchases $535,513 $ - $535,513
Maturities and redemptions 340,961 - 340,961
Sales 180,604 - 180,604
1998
Purchases $631,717 $ 76 $631,793
Maturities and redemptions 113,955 170,711 284,666
Sales 182,883 23,960 (b) 206,843
(a) At December 31, 1998, AFG reclassified all of its "held to
maturity" fixed maturity securities to "available for sale."
(b) Sold (at a gain of $.5 million) due to significant deterioration
in the issuers' creditworthiness.
I. Commitments and Contingencies There have been no significant changes
to the matters discussed and referred to in Note L "Commitments and
Contingencies" in AFG's Annual Report on Form 10-K for 1998.
J. Subsequent Event In April 1999, AFG completed the acquisition of
Worldwide Insurance Company (formerly Providian Auto and Home Insurance
Company) for approximately $160 million. Worldwide is a provider of
direct response private passenger automobile insurance.
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.
Year 2000 Status AFG's Year 2000 Project is a corporate-wide program
designed to ensure that its computer systems and other equipment using
date-sensitive computer chips will function properly in the year 2000.
The Project also encompasses communicating with agents, vendors,
financial institutions and others with which the companies conduct
business to determine their Year 2000 readiness and resulting effects
on AFG. AFG's Year 2000 Project Office monitors and coordinates the
work being performed by the various business units and reports monthly
to the Audit Committee of the Board of Directors and more frequently to
senior management.
To address the Year 2000 issue, AFG's operations have been divided into
separate systems groups. At March 31, 1999, these groups were in the
process of either (i) modifying their software programs or
(ii) replacing programs with new software that is Year 2000 compliant.
A majority of the groups have met AFG's goal of having program
modifications and new software installations substantially completed by
the end of 1998, with testing continuing in and through 1999. About
one-fourth of the groups are being "closely watched" because there is
some degree of risk that critical dates in the project schedule may be
missed. AFG's goal is to have Year 2000 testing and new installations
for these groups completed during mid-1999. A few groups have
experienced significant delays in meeting internal project deadlines.
Plans are being modified and resources are being redirected towards
these groups which are now expected to be completed during the third
quarter of 1999.
Contingency plans are being developed for certain business processes
and systems deemed most critical to operations. These plans provide a
documented order of actions necessary to keep the business functions
operating. Such plans typically include procedures and workflow
processes for developing and operating contingent databases.
Contingency planning for other business processes and systems deemed
critical to operations and reasonably likely not to be modified on
schedule will be completed by mid-1999.
Many of the systems being replaced were planned replacements which were
accelerated due to the Year 2000 considerations. In addition, a
significant portion of AFG's Year 2000 Project is being completed using
internal staff. Therefore, cost estimates for the Year 2000 Project do
not represent solely incremental costs.
From the inception of the Year 2000 Project in the early 1990s through
March 31, 1999, AFG estimates that it has incurred approximately
$56 million in costs related to the Project, including capitalized
costs of $13 million for new systems. During the first three months of
1999, $7 million in such costs have been expensed. AFG estimates that
it will incur an additional $18 million of such costs in completing the
Project, about three-fourths of which is projected to be expensed.
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Projected Year 2000 costs and completion dates are based on
management's best estimates. However, there can be no assurances that
these estimates will be achieved. Should software modifications and
new software installations not be completed on a timely basis, the
resulting disruptions could have a material adverse affect on
operations.
AFG's operations could also be affected by the inability of third parties
such as agents and vendors to become Year 2000 compliant. While
assessments of independent agents and evaluations of third party vendors
are progressing slowly, efforts are being intensified to complete these
assessments in the second quarter of 1999. In addition, AFG's property
and casualty insurance subsidiaries are reviewing the potential impact of
the Year 2000 issue on insureds as part of their underwriting process.
They are also reviewing policy forms, issuing clarifying endorsements
where appropriate and examining coverage issues for Year 2000 exposures.
While it is possible that Year 2000 claims may emerge in future periods,
it is not possible to estimate any such amounts.
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 especially with regard
to availability of and returns on capital, regulatory actions, changes in
legal environment, levels of catastrophe and other major losses,
availability of reinsurance, the Year 2000 issue, 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 20% at March 31, 1999 and 18% at
December 31, 1998. AFG's ratio of earnings to fixed charges (on a
total enterprise basis) was 3.88 for the first three months of 1999 and
3.22 for the entire year of 1998.
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.
AFC has a revolving credit agreement with several banks under which it
can borrow up to $300 million. The 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, 1999, there
was $130 million borrowed under the credit line. This amount was
repaid in May 1999.
In April 1999, AFG issued $350 million principal amount of 7-1/8% senior
debentures due 2009; the proceeds are to be used to retire outstanding
subsidiary public debt and borrowings under AFC's credit line.
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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 reduction of debt at the
holding companies from historical levels (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 noncore investments.
Investments Approximately 91% of the fixed maturities held by AFG were
rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at March 31, 1999. Investment grade
securities generally bear lower yields and lower degrees of risk than
those that are unrated and noninvestment 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 and cumulative
effect of accounting change for the first quarter of 1999 were
$92 million compared to $109 million for the first quarter of 1998.
While results included improvements in underwriting profitability in
the property and casualty operations and investee earnings, these were
more than offset by reductions in investment income, realized gains and
income from the sale of real estate properties.
Property and Casualty Insurance - Underwriting AFG's property and
casualty group consists of two major business groups: Personal and
Specialty.
The Personal group consists of the nonstandard auto group along with
the preferred/standard private passenger auto and other personal
insurance business. The nonstandard automobile insurance companies
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 group includes a highly diversified group of business
lines. Some of the more significant areas are executive liability,
inland and ocean marine, U.S.-based operations of Japanese companies,
agricultural-related coverages, California workers' compensation,
nonprofit liability, general aviation coverages, fidelity and surety
bonds, and umbrella and excess coverages. Commercial lines businesses
sold included certain coverages in workers' compensation, commercial
multi-peril, commercial automobile, and umbrella.
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.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various
specialty businesses 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.
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,
1999 1998
Net Written Premiums (GAAP)
Personal $276.5 $358.2
Specialty 248.1 329.0
Other lines .2 7.7
$524.8 $694.9
Combined Ratios (GAAP)
Personal 98.5% 96.3%
Specialty 99.8 102.8
Aggregate (including other lines) 99.4 102.6
Personal The Personal group's net written premiums for the first
three months of 1999 were substantially equivalent to the fourth
quarter of 1998 but $81.7 million (23%) lower than the first quarter of
1998. The decline is due primarily to stronger price competition in
the personal automobile market over the last twelve months.
Specialty For the first three months of 1999, net written premiums
for the Specialty group were $80.9 million (25%) below that of the
comparable 1998 period due primarily to the sale of the Commercial
lines division in December 1998 and the effect on California workers'
compensation premiums of a reinsurance agreement implemented during the
third quarter of 1998. Excluding these items, the net written premiums
increased 2% during the first quarter of 1999.
A deferred gain of $103 million on the Commercial lines business ceded
to Ohio Casualty in December 1998 is being recognized over the
estimated settlement period (weighted average 4.25 years) of the claims
ceded. The Specialty group's underwriting results for the first
quarter of 1999 include $6.7 million in earnings recognized on the
ceded business. Underwriting results for the first quarter of 1999
also benefited from improved underwriting margins in the California
workers' compensation business and the absence of underwriting losses
included in the 1998 period attributable to the commercial lines sold.
Life, Accident and Health Premiums and Benefits The decrease in life,
accident and health premiums and benefits reflects primarily the sale
of AAG's Funeral Services division in September 1998.
Investment Income Investment income decreased approximately
$16.4 million (7%) in the first three months of 1999 compared to 1998
due primarily to the transfer of investment assets in connection with
the sales of the Commercial lines division and Funeral Services
division in 1998.
Investee Corporation Equity in net earnings of investee corporation
represents AFG's proportionate share of Chiquita's earnings. Chiquita
reported net income for the first three months of 1999 of $48.7 million
compared to $41.1 million for the same period in 1998.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Realized Gains Realized capital gains have been an important part of the
return on investments in marketable securities. Individual securities
are sold creating gains and losses as market opportunities exist.
Gain on Sale of Investee Chiquita's public issuance of shares of its
common stock in the first quarter of 1998 resulted in a pretax gain to
AFG of $7.7 million.
Other Income Other income decreased $11.5 million (31%) in the first
three months of 1999 compared to 1998 due primarily to a reduction in
income from the sale of operating real estate assets.
Annuity Benefits Annuity benefits reflect amounts accrued on 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.
Annuity benefits decreased $6.2 million (9%) in the first quarter of
1999 compared to the same period in 1998 due primarily to (i) decreases
in crediting rates, (ii) changes in actuarial assumptions, (iii) the
sale of the Funeral Services division and (iv) decreased sales and
persistency of fixed annuities.
Cumulative Effect of Accounting Change In the first quarter of 1999,
AAG implemented Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires that costs of start-up
activities be expensed as incurred and that unamortized balances of
previously deferred costs be expensed and reported as the cumulative
effect of a change in accounting principle. Accordingly, AFG expensed
previously capitalized start-up costs of $3.8 million (net of minority
interest and taxes) in the first quarter of 1999.
Item 3
Quantitative and Qualitative Disclosure of Market Risk
As of March 31, 1999, there were no material changes to the information
provided in AFG's Form 10-K for 1998 under the caption "Exposure to
Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
19
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 as of March 31, 1999. For
submission in electronic filing only.
(b) Reports on Form 8-K:
Date of Report Item Reported
April 13, 1999 Filing of exhibits relating to the issuance of 7-1/8%
Senior Debentures due 2009.
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 13, 1999 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
20
5
1,000
3-MOS
DEC-31-1999
MAR-31-1999
$343,281
10,898,543
596,952
0
0
0
0
0
15,709,360
0
660,881
0
0
59,979
1,588,722
15,709,360
0
813,787
0
0
76,609
0
13,434
92,453
33,339
59,114
0
0
(3,854)
$55,260
.91
.90
Includes an investment in investee corporation of $207 million.
