SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 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 August 1, 1998, there were 61,427,374 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)
June 30, December 31,
1998 1997
Assets:
Cash and short-term investments $ 283,256 $ 257,117
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $2,910,700 and $3,202,300) 2,822,029 3,120,106
Available for sale - at market
(amortized cost - $7,819,968 and $7,225,736) 8,149,168 7,532,836
Other stocks - principally at market
(cost - $182,109 and $153,322) 437,309 446,222
Investment in investee corporation 239,649 200,714
Loans receivable 409,584 513,694
Real estate and other investments 222,635 219,216
Total investments 12,280,374 12,032,788
Recoverables from reinsurers and prepaid
reinsurance premiums 1,076,346 998,743
Agents' balances and premiums receivable 729,577 691,005
Deferred acquisition costs 558,029 521,898
Other receivables 266,776 243,330
Deferred tax asset 17,141 41,413
Assets held in separate accounts 343,590 300,491
Prepaid expenses, deferred charges and other assets 341,101 369,156
Cost in excess of net assets acquired 298,327 299,408
$16,194,517 $15,755,349
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,368,302 $ 4,225,336
Unearned premiums 1,323,952 1,328,910
Annuity benefits accumulated 5,589,107 5,528,111
Life, accident and health reserves 752,671 709,899
Long-term debt:
Holding companies 435,877 386,661
Subsidiaries 213,980 194,084
Liabilities related to separate accounts 343,590 300,491
Accounts payable, accrued expenses and other
liabilities 907,680 906,151
Total liabilities 13,935,159 13,579,643
Minority interest 521,875 512,997
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 61,388,349 and 61,048,904 shares outstanding 61,388 61,049
Capital surplus 785,903 775,689
Retained earnings 553,192 477,071
Net unrealized gain on marketable securities,
net of deferred income taxes 337,000 348,900
Total shareholders' equity 1,737,483 1,662,709
$16,194,517 $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 Six months ended
June 30, June 30,
1998 1997 1998 1997
Income:
Property and casualty insurance
premiums $ 707,294 $698,381 $1,383,466 $1,362,143
Life, accident and health premiums 48,460 27,331 95,276 52,696
Investment income 228,912 214,622 449,240 427,494
Equity in net earnings of investee 17,996 17,228 31,914 32,008
Realized gains on sales of:
Securities 7,142 4,198 14,588 6,011
Investee and subsidiary 1,716 - 9,420 731
Other investments - - 6,843 -
Other income 26,326 25,839 63,877 52,286
1,037,846 987,599 2,054,624 1,933,369
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 564,078 495,187 1,063,903 964,511
Commissions and other underwriting
expenses 191,027 193,304 384,632 377,605
Annuity benefits 69,111 70,607 140,221 139,437
Life, accident and health benefits 36,555 25,825 74,661 49,988
Interest charges on borrowed money 13,995 13,844 27,946 27,554
Minority interest expense 12,908 15,652 27,167 30,057
Other operating and general expenses 83,607 77,684 160,800 147,225
971,281 892,103 1,879,330 1,736,377
Earnings before income taxes and
extraordinary items 66,565 95,496 175,294 196,992
Provision for income taxes 26,000 34,314 67,842 72,595
Earnings before extraordinary items 40,565 61,182 107,452 124,397
Extraordinary items - loss on prepayment
of debt (40) (23) (727) (78)
Net Earnings $ 40,525 $ 61,159 $ 106,725 $ 124,319
Basic earnings (loss) per Common Share:
Before extraordinary items $.66 $1.03 $1.75 $2.07
Loss on prepayment of debt - - (.01) -
Net earnings available to Common Shares $.66 $1.03 $1.74 $2.07
Diluted earnings (loss) per Common Share:
Before extraordinary items $.65 $1.02 $1.72 $2.04
Loss on prepayment of debt - - (.01) -
Net earnings available to Common Shares $.65 $1.02 $1.71 $2.04
Average number of Common Shares:
Basic 61,353 59,217 61,229 60,158
Diluted 62,595 60,151 62,376 61,085
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 - - 106,725 - $106,725
Dividends on Common Stock - - (30,604) - -
Shares issued:
Exercise of stock options 235,190 7,012 - - -
Dividend reinvestment plan 5,030 211 - - -
Employee stock purchase plan 33,830 1,408 - - -
401-K plan company match 44,035 1,783 - - -
Portion of bonuses paid in stock 20,300 816 - - -
Directors fees paid in stock 1,099 45 - - -
Shares repurchased (39) - - - -
Capital transactions of subsidiaries - (980) - - -
Change in unrealized - - - (11,900) (11,900)
Other - 258 - - -
Balance at June 30, 1998 61,388,349 $847,291 $553,192 $337,000 $ 94,825
Balance at January 1, 1997 61,071,626 $806,721 $559,716 $188,000
Net earnings - - 124,319 - $124,319
Dividends on Common Stock - - (30,112) - -
Shares issued:
Exercise of stock options 88,557 1,985 - - -
Dividend reinvestment plan 5,143 187 - - -
Employee stock purchase plan 35,793 1,309 - - -
Portion of bonuses paid in stock 40,500 1,521 - - -
Directors fees paid in stock 613 22 - - -
Shares repurchased (2,327,927) (30,774) (53,452) - -
Capital transactions of subsidiaries - (980) - - -
Change in unrealized - - - 50,600 50,600
Other - (187) - - -
Balance at June 30, 1997 58,914,305 $779,804 $600,471 $238,600 $174,919
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended
June 30,
1998 1997
Operating Activities:
Net earnings $ 106,725 $ 124,319
Adjustments:
Extraordinary items 727 78
Depreciation and amortization 51,233 36,057
Annuity benefits 140,221 139,437
Equity in net earnings of investee (31,914) (32,008)
Changes in reserves on assets 1,083 506
Realized gains on investing activities (44,411) (6,742)
Increase in reinsurance and other receivables (138,770) (77,372)
Increase in other assets (56,446) (18,523)
Increase in insurance claims and reserves 167,165 65,484
Increase (decrease) in other liabilities 51,508 (110,026)
Increase in minority interest 8,030 9,158
Dividends from investee 2,400 2,400
Other, net (8,897) (2,372)
248,654 130,396
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,243,852) (1,206,131)
Equity securities (33,137) (16,555)
Subsidiaries (30,325) (4,900)
Real estate, property and equipment (34,932) (22,872)
Maturities and redemptions of fixed maturity
investments 772,645 360,774
Sales of:
Fixed maturity investments 358,597 698,990
Equity securities 12,194 9,552
Subsidiary - 2,500
Real estate, property and equipment 30,989 1,914
Cash and short-term investments of acquired (former)
subsidiaries 20,841 (70)
Increase in other investments (4,843) (2,233)
(151,823) (179,031)
Financing Activities:
Fixed annuity receipts 238,198 259,708
Annuity surrenders, benefits and withdrawals (354,790) (288,531)
Additional long-term borrowings 202,248 7,053
Reductions of long-term debt (134,164) (54,820)
Issuances of Common Stock 8,209 3,294
Repurchases of Common Stock - (84,226)
Issuances of trust preferred securities - 149,353
Cash dividends paid (30,393) (29,925)
(70,692) (38,094)
Net Increase (Decrease) in Cash and Short-term Investments 26,139 (86,729)
Cash and short-term investments at beginning of period 257,117 448,296
Cash and short-term investments at end of period $ 283,256 $ 361,567
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:
June 30, 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 AmericanPremier 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.
Start-up Costs Costs associated with introducing new products and
distribution channels are deferred by AAG until normal operations
are reached. These deferred costs are amortized on a straight-line
basis over 5 years. See Management's Discussion and Analysis -
"New Accounting Standard to be Implemented."
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.
Six months ended June 30,
1998 1997
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 580,565 $ 574,604
Specialty lines 517,875 482,711
Commercial and personal lines 263,332 286,647
Other lines (a) 21,694 18,181
1,383,466 1,362,143
Investment and other income 253,556 216,274
1,637,022 1,578,417
Annuities and life (b) 373,992 302,426
Other 11,696 20,518
2,022,710 1,901,361
Equity in net earnings of investee 31,914 32,008
$2,054,624 $1,933,369
(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
$337 million and $391 million at June 30, 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):
Six months ended June 30,
1998 1997
Net Sales $1,461 $1,278
Operating Income 144 139
Net Income 94 84
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):
June 30, December 31,
1998 1997
Holding Companies:
AFG 7-1/8% Senior Debentures due December 2007 $100,000 $100,000
AFC notes payable to banks due December 2002 97,000 45,000
AFC 9-3/4% Debentures due April 2004 79,049 79,792
APU 9-3/4% Subordinated Notes due August 1999 90,733 92,127
APU 10-5/8% Subordinated Notes due April 2000 43,299 43,889
APU 10-7/8% Subordinated Notes due May 2011 17,558 17,586
Other 8,238 8,267
$435,877 $386,661
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $ -
AAG notes payable to banks due in
installments to December 2003 57,000 107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 44,114 49,525
Other 12,866 13,479
$213,980 $194,084
At June 30, 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 $ - $ 967 $ 967
1999 89,853 2,039 91,892
2000 42,042 8,751 50,793
2001 - 1,473 1,473
2002 102,349 1,364 103,713
2003 - 58,402 58,402
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 Eurodollar rates.
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 Eurodollar rates. 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). In June 1998, AAG sold $100 million principal
amount of 6-7/8% Senior Notes due 2008 to the public and used the
net proceeds to reduce outstanding indebtedness under the credit
agreement.
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):
June 30, December 31,
1998 1997
Interest of noncontrolling shareholders
in subsidiaries' common stock $124,721 $115,843
Preferred securities issued by
subsidiary trusts 325,000 325,000
AFC preferred stock 72,154 72,154
$521,875 $512,997
Preferred Securities Wholly-owned subsidiary trusts of AFC Holding
("AFCH") and AAG have issued $325 million of preferred securities
and, in turn, purchased $325 million of newly authorized AFC X
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 AFCH 9-1/8% TOPrS (2026) $100,000,000 On or after 10/22/2001
November 1996 AAG 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
AFC Holding and AAG effectively provide unconditional guarantees of their
respective trusts' obligations and AFG guarantees AFC Holding's obligation.
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
June 30, 1998 and December 31, 1997.
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
Six months ended
June 30,
1998 1997
Interest of noncontrolling shareholders
in earnings of subsidiaries $10,177 $ 7,743
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities 14,104 10,571
AFC preferred stock 2,886 11,743
$27,167 $30,057
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Shareholders' Equity At June 30, 1998, there were 61,388,349
shares of AFG Common Stock outstanding, including 1,368,346 shares
held by American Premier for distribution to certain creditors and
other claimants pursuant to a plan of reorganization relating to
American Premier's predecessor. AFG is authorized to issue 12.5
million shares of Voting Preferred Stock and 12.5 million shares of
Nonvoting Preferred Stock, each without par value.
At June 30, 1998, there were 4.7 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that
date, AFG had options for 3.9 million shares outstanding. Options
become exercisable at the rate of 20% per year commencing one year
after grant; those granted to non-employee directors of AFG are
generally fully exercisable upon grant. All options expire ten
years after the date of grant.
The change in net unrealized gain on marketable securities for the
six months ended June 30 included the following (in millions):
Minority
Pretax Taxes Interest Net
1998
Unrealized holding gains (losses) on
securities arising during the period ($ 6.8) $ 2.5 ($1.3) ($ 5.6)
Less reclassification adjustment for
realized gains included in net income (10.1) 3.5 .3 (6.3)
Change in net unrealized gain on
marketable securities ($16.9) $ 6.0 ($1.0) ($11.9)
1997
Unrealized holding gains (losses) on
securities arising during the period $87.2 ($30.6) ($2.5) $54.1
Less reclassification adjustment for
realized gains included in net income (5.4) 1.9 - (3.5)
Change in net unrealized gain on
marketable securities $81.8 ($28.7) ($2.5) $50.6
G. Extraordinary Items Extraordinary items represent AFG's
proportionate share of losses related to debt retirements by the
following companies. Amounts shown are net of minority interest
and income tax benefits (in thousands):
Six months ended
June 30,
1998 1997
Holding Companies:
AFC (parent) ($ 35) ($36)
APU (parent) (43) (42)
Subsidiaries:
AAG (649) -
($727) ($78)
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):
Held to Available
Maturity For Sale Total
1998
Purchases $ 826 $1,243,026 $1,243,852
Maturities and redemptions 374,774 397,871 772,645
Sales 31,940(*) 326,657 358,597
1997
Purchases $ 2,018 $1,204,113 $1,206,131
Maturities and redemptions 197,546 163,228 360,774
Sales - 698,990 698,990
(*) Sold (at a gain of $.2 million) due to significant
deterioration in the issuers' creditworthiness.
I. Commitments and Contingencies Other than as disclosed in "Legal
Proceedings" in Part II of this report, 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.
J. Subsequent Event In July 1998, AAG reached a definitive agreement
to sell its funeral services division for $164 million in cash. At
June 30, 1998, the carrying value of the funeral services division
was approximately $125 million. Completion of the sale, which is
expected to occur in the fourth quarter of 1998, is subject to
certain conditions, including receipt of regulatory approval.
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 19% at June 30, 1998 and 17% at
December 31, 1997. AFG's ratio of earnings to fixed charges (on a
total enterprise basis) was 3.93 for the first six 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 June 30, 1998, there was $97 million
borrowed under the credit line.
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
June 30, 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 for the three
months and six months ended June 30, 1998 were $66.6 million and
$175.3 million, respectively, compared to $95.5 million and $197.0
million in the comparable 1997 periods. The decrease reflects a
deterioration in underwriting results in the property and casualty
operations due primarily to severe storms in the midwestern part of
the country during the 1998 second quarter and a continuation of
the adverse claims environment in the California workers'
compensation business. These items were partially offset by growth
in investment income, higher realized gains on sales of certain
investments and income from the sale of real estate properties
(primarily in the first quarter).
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 Six months ended
June 30, June 30,
1998 1997 1998 1997
Net Written Premiums (GAAP)
NSA Group $284.3 $320.9 $ 606.7 $ 642.1
Specialty Operations 272.6 257.6 519.5 522.0
Commercial and Personal
Operations 121.3 135.8 239.2 230.6
Other Lines 7.9 7.3 15.6 15.8
$686.1 $721.6 $1,381.0 $1,410.5
Combined Ratios (GAAP)
NSA Group 97.0% 96.9% 96.4% 96.8%
Specialty Operations 110.0 88.0 105.9 90.3
Commercial and Personal
Operations 116.7 102.7 110.4 102.9
Aggregate (including
other lines) 106.8 98.6 104.7 98.5
(*) NSA operations in the United Kingdom have been reclassified
to other lines.
NSA Group The NSA Group's net written premiums decreased 11% in
the second quarter and 5.5% in the first six months of the year
compared to the same 1997 periods. The decline is due primarily to
stronger price competition in the industry. Underwriting results
for the second quarter and the first six months of the year were
comparable to the previous periods.
Specialty Operations The Specialty Operations' net written
premiums increased 6% during the second quarter from the comparable
1997 period due primarily to the acquisition of a general aviation
division during 1997. Net written premiums for the first six
months of 1998 were down slightly from 1997 due to the inclusion in
1997 of certain in-force amounts obtained under a reinsurance
agreement at the beginning of that year. Underwriting results for
the second quarter and first six months of 1998 worsened from the
comparable periods in 1997 due to (i) losses from the midwestern
storms in the second quarter of 1998, (ii) the continuation of the
adverse claims environment in the California workers' compensation
business, (iii) weak results in the general aviation business and
(iv) unusually good results in 1997 in the executive liability and
non-profit organization lines.
Commercial and Personal Operations The Commercial and Personal
Operations' net written premiums declined 11% in the second quarter
from the comparable period in 1997 primarily due to a decrease in
personal automobile coverages in certain states and intense price
competition in the commercial casualty markets. Net written
premiums were 4% higher in the first six months of 1998 due to the
initial impact of a reinsurance agreement for AFG's homeowners'
business (which is still in effect) which made first quarter 1997
premiums unusually low. Excluding this impact, premiums declined
approximately 9% during the first six months of 1998. The combined
ratio for the second quarter of 1998 includes 17 percentage points
due to losses from the midwestern storms.
Life, Accident and Health Premiums and Benefits The increase in
life, accident and health premiums and benefits reflects primarily
AAG's acquisition of General Accident Life Assurance Company in
December 1997 and increased sales of pre-need life insurance.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investment Income Investment income increased approximately
$14.3 million (7%) for the second quarter of 1998 and $21.7 million
(5%) in the first six months of 1998 compared to 1997 due primarily
to an increase in the average amount of investments held partially
offset by decreasing market interest rates.
Investee Corporations Equity in net earnings of investee
corporations represents AFG's proportionate share of Chiquita's
earnings. Chiquita reported net income for the second quarter and
first six months of 1998 of $53 million and $94 million,
respectively, compared to $41 million and $84 million for the same
periods 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 shares of its common stock in the first and second quarters of
1998 resulted in pretax gains to AFG of $7.7 million and $1.7
million in those periods.
Other Income Other income increased $11.6 million (22%) in the
first six months of 1998 compared to 1997 due primarily to income
of $10.4 million from the sale of operating real estate assets in
the first quarter of 1998.
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.
Other Operating and General Expenses Other operating and general
expenses increased $5.9 million (8%) during the second quarter and
$13.6 million (9%) in the first six months of 1998 compared to 1997
due primarily to inclusion of the operations of General Accident
following its acquisition in late 1997.
New Accounting Standard to be Implemented Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," was issued
during the second quarter of 1998. The SOP is effective for fiscal
years beginning after December 15, 1998, and requires that costs of
start-up activities be expensed as incurred. The SOP requires that
unamortized balances of previously deferred costs be expensed no
later than the first quarter of 1999 and reported as the cumulative
effect of a change in accounting principle. AAG had $11 million in
capitalized start-up costs at June 30, 1998.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Precedings
Since 1994, AFG and its subsidiary, American Premier, have
disclosed the existence of lawsuits which had been filed by USX
Corporation and one of its former subsidiaries seeking $600
million. The disclosures stated that the companies believed they
had sufficient defenses and did not expect to suffer any material
loss from the litigation.
On May 29, 1998, AFG's subsidiary, American Premier, received
notice that the largest and last of the lawsuits had been dismissed
in state court. This decision is similar to one issued earlier in
the year by the United States District Court for the Northern
District of Ohio granting American Premier's Motion for Summary
Judgment in separate cases based on the same facts. All of USX's
claims against American Premier have now been dismissed with
prejudice. Although USX has appealed the earlier District Court
decision and will likely appeal the May 1998 state court decision,
AFG and American Premier continue to believe that they will not
suffer a material loss from this litigation.
Item 4
Submission of Matters to a Vote of Security Holders
AFG's Annual Meeting of Shareholders was held on May 28, 1998; the
only issue voted upon was the election of a Board of Directors.
All of the eight nominees were elected. The votes cast for and
those withheld are set forth below:
Name For Against Withheld Abstain
Theodore H. Emmerich 55,334,146 N/A 305,799 N/A
James E. Evans 55,336,602 N/A 303,343 N/A
Thomas M. Hunt 55,329,047 N/A 310,898 N/A
Carl H. Lindner 55,283,556 N/A 356,389 N/A
Carl H. Lindner III 55,322,851 N/A 317,094 N/A
Keith E. Lindner 55,325,197 N/A 314,748 N/A
S. Craig Lindner 55,322,413 N/A 317,532 N/A
William R. Martin 55,334,832 N/A 305,113 N/A
N/A - Not Applicable
Item 5
Other Information
Shareholder Proposals
The Proxy Form used by the Company for its Annual Meeting of
Shareholders typically grants authority to management's proxies to
vote in their discretion on any matters that come before the
Meeting as to which adequate notice has not been received. In
order for a notice to be deemed adequate for the 1999 Annual
Meeting, it must be received by March 7, 1999. In order for a
proposal to be considered for inclusion in the Company's proxy
statement for that Meeting, it must be received by December 31, 1998.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION - CONTINUED
Item 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule as of June 30, 1998.
For submission in electronic filing only.
(b) Reports on Form 8-K: None.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, American Financial Group, Inc. has duly caused this Report to
be signed on its behalf by the undersigned duly authorized.
American Financial Group, Inc.
August 12, 1998 BY: Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
20
5
1,000
6-MOS
DEC-31-1998
JUN-30-1998
$283,256
11,648,155
729,577
0
0
0
0
0
16,194,517
0
649,857
0
0
61,388
1,676,095
16,194,517
0
2,054,624
0
0
160,800
0
27,946
175,294
67,842
107,452
0
(727)
0
$106,725
1.74
1.71
Includes an investment in investee corporation of $240 million.
