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 EndedMarch 31, 2008
Commission File
AMERICAN FINANCIAL GROUP, INC.
Incorporated underthe Laws of Ohio
IRS Employer I.D.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) ofthe Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days. Yes X No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company: Large Accelerated Filer X Accelerated Filer Non-Accelerated Filer Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company. Yes No X
As of May 1, 2008, there were 112,418,122 shares of the Registrant's Common Stock outstanding, excluding14.9 million shares owned by subsidiaries.
TABLE OF CONTENTS
Page
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM I - FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited)
(Dollars In Millions)
March 31,
December 31,
2008
2007
Assets:
Cash and cash equivalents
$ 983.4
$ 815.9
Investments:
Fixed maturities:
Available for sale - at fair value
(amortized cost - $15,350.6 and $15,188.1)
15,187.4
15,140.7
Trading - at fair value
349.2
274.1
Equity securities - at fair value
(cost - $839.0 and $914.5)
841.3
923.3
Mortgage loans
354.2
358.8
Policy loans
275.9
273.2
Real estate and other investments
245.6
268.1
Total cash and investments
18,237.0
18,054.1
Recoverables from reinsurers and prepaid
reinsurance premiums
3,638.7
3,664.1
Agents' balances and premiums receivable
655.7
560.6
Deferred policy acquisition costs
1,454.3
1,394.4
Other receivables
344.7
475.4
Variable annuity assets (separate accounts)
619.4
692.5
Prepaid expenses and other assets
842.8
762.0
Goodwill
209.7
204.4
$26,002.3
$25,807.5
Liabilities and Capital:
Unpaid losses and loss adjustment expenses
$ 6,219.4
$ 6,168.4
Unearned premiums
1,742.4
1,668.2
Annuity benefits accumulated
10,140.5
10,096.6
Life, accident and health reserves
1,489.9
1,483.7
Payable to reinsurers
359.2
363.8
Long-term debt
990.7
936.9
Variable annuity liabilities (separate accounts)
Accounts payable, accrued expenses and other
liabilities
1,298.4
1,251.4
Total liabilities
22,859.9
22,661.5
Minority interest
122.3
99.9
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 112,944,341 and 113,499,080 shares outstanding
112.9
113.5
Capital surplus
1,191.4
1,186.5
Retained earnings
1,776.9
1,733.5
Accumulated other comprehensive income (loss),
net of tax
(61.1
12.6
Total shareholders' equity
3,020.1
3,046.1
2
CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
(In Millions, Except Per Share Data)
Three months ended
Income:
Property and casualty insurance premiums
$ 635.0
$ 639.8
Life, accident and health premiums
108.7
106.6
Investment income
266.3
245.8
Realized gains (losses) on securities
(80.3)
4.7
Other income
84.5
82.7
1,014.2
1,079.6
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses
290.9
326.9
Commissions and other underwriting expenses
222.0
210.2
Annuity benefits
104.9
88.8
Life, accident and health benefits
87.4
85.5
Annuity and supplemental insurance
acquisition expenses
40.1
44.5
Interest charges on borrowed money
18.7
18.1
Other operating and general expenses
124.2
111.5
888.2
885.5
Operating earnings before income taxes
126.0
194.1
Provision for income taxes
44.9
72.0
Net operating earnings
81.1
122.1
Minority interest expense
(5.1
(8.5
Net Earnings
$ 76.0
$ 113.6
Earnings per Common Share:
Basic
$.67
$.95
Diluted
$.64
$.92
Average number of Common Shares:
119.5
117.2
122.4
Cash dividends per Common Share
$.125
$.10
3
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(Dollars in Millions)
Accumulated
Common Stock
Other
Common
and Capital
Retained
Comprehensive
Shares
Surplus
Earnings
Income (Loss)
Total
Balance at December 31, 2007
113,499,080
$1,300.0
$1,733.5
$12.6
$3,046.1
Net earnings
-
76.0
Other comprehensive income, net of tax:
Change in unrealized gain (loss)
on securities
(70.5)
Change in foreign currency translation
(3.2)
(3.2
Total comprehensive income
2.3
Dividends on Common Stock
(14.2)
Shares issued:
Exercise of stock options
483,265
9.6
Dividend reinvestment plan
70,172
1.8
Employee stock purchase plan
16,265
.4
Deferred compensation distributions
48,884
1.4
Stock incentive plan
70,000
2.0
Other stock-based compensation expense
2.4
Shares acquired and retired
(1,003,000)
(11.5)
(14.9)
(26.4)
Shares tendered in option exercises
(240,325)
(2.7)
(3.5)
(6.2)
Capital transactions of subsidiaries
.9
Balance at March 31, 2008
112,944,341
$1,304.3
$1,776.9
($61.1)
$3,020.1
Balance at December 31, 2006
119,303,928
$1,339.8
$1,533.6
$55.5
$2,928.9
Cumulative effect of accounting change
113.6
Change in unrealized gains on securities
20.1
.6
Change in unrealized pension and other
postretirement benefits
2.7
137.0
(11.9)
376,062
8.6
40,276
7,991
.3
31,863
1.1
114,594
3.9
(411,639)
(4.5)
(8.9)
(13.4)
(25,430)
(.3)
(.6)
(.9)
(.9
Balance at March 31, 2007
119,437,645
$1,351.2
$1,610.9
$78.9
$3,041.0
4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Millions)
Operating Activities:
Adjustments:
5.1
8.5
Depreciation and amortization
49.0
Realized (gains) losses on investing activities
80.0
(10.7)
Net purchases/sales of trading securities
1.6
.2
Deferred annuity and life policy acquisition costs
(42.5)
(49.7)
Decrease in reinsurance and other receivables
171.4
102.3
Decrease (increase) in other assets
22.6
(104.9)
Increase (decrease) in insurance claims and reserves
(35.7)
24.6
Increase (decrease) in payable to reinsurers
7.8
Decrease in other liabilities
(65.4)
(58.1)
Other, net
8.9
Net cash provided by operating activities
369.7
179.9
Investing Activities
Purchases of and additional investments in:
Fixed maturity investments
(1,823.9)
(1,031.1)
Equity securities
(75.7)
(101.7)
Subsidiaries
(111.8)
Real estate, property and equipment
(12.6)
Maturities and redemptions of fixed maturity investments
603.9
324.5
Sales of:
1,077.9
335.1
75.1
46.2
14.3
Decrease (increase) in securities lending collateral
4.8
(16.7)
Cash and cash equivalents of businesses acquired
90.8
Increase in other investments
(3.9
(32.8
Net cash used in investing activities
(170.7
(468.4
Financing Activities
Annuity receipts
286.0
378.8
Annuity surrenders, benefits and withdrawals
(351.8)
(329.7)
Net transfers from variable annuity assets
19.3
Additional long-term borrowings
270.0
92.0
Reductions of long-term debt
(216.2)
(90.0)
Increase (decrease) in securities lending obligation
(4.8)
16.7
Issuances of Common Stock
4.6
7.7
Repurchases of Common Stock
Cash dividends paid on Common Stock
(12.4)
(10.5)
1.9
Net cash provided by (used in) financing activities
(31.5
62.4
Net Increase (Decrease) in Cash and Cash Equivalents
167.5
(226.1)
Cash and cash equivalents at beginning of period
815.9
1,329.0
Cash and cash equivalents at end of period
$1,102.9
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________________________
INDEX TO NOTES
A.
F.
B.
G.
C.
H.
D.
I.
E.
________________________________________________________________________________
Basis of Presentation
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.
Fair Value Measurements
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which became effective January 1, 2008, permits entities to irrevocably elect to report certain financial assets and liabilities (including most insurance contracts) at fair value and recognize the unrealized gains and losses on such items in earnings. AFG did not elect the fair value option for any of its eligible assets or liabilities through March 31, 2008.
Investments
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
unrealized holding gains or losses during the period included in investment income. Loans receivable are carried primarily at the aggregate unpaid balance.
Premiums and discounts on fixed maturity securities are amortized using the interest method; mortgage-backed securities are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
Gains or losses on securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other than temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses)) and the cost basis of that investment is reduced.
Certain AFG subsidiaries loan fixed maturity and equity securities to other institutions for short periods of time. The borrower is required to provide collateral on which AFG earns investment income, net of a fee to the lending agent. AFG records the collateral held (included in other assets) in its Balance Sheet at fair value. The obligation to return the collateral is included in other liabilities. The securities loaned remain a recorded asset on AFG's Balance Sheet. The fair value of collateral held was approximately $130 million at March 31, 2008, and $139 million at December 31, 2007. The fair value of securities loaned plus accrued interest was approximately $134 million and $139 million at those dates.
Derivatives
Reinsurance
Certain annuity and supplemental insurance subsidiaries cede life insurance policies to a third party on a funds withheld basis whereby the subsidiaries retain the assets (securities) associated with the reinsurance contracts. Interest is credited to the reinsurer based on the actual investment performance of the retained assets. These reinsurance contracts are considered to contain embedded derivatives (that must be adjusted to fair value) because the yield on the payables is based on specific blocks of the ceding companies'
7
assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolios of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to these transactions are classified as "trading." The adjustment to fair value on the embedded derivatives offsets the investment income recorded on the adjustment to fair value of the related trading portfolios.
Deferred Policy Acquisition Costs ("DPAC")
DPAC related to annuities and universal life insurance products is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains. DPAC related to annuities is also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of "Accumulated Other Comprehensive Income (Loss), net of tax" in the shareholders' equity section of the Balance Sheet.
DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues.
DPAC includes the present value of future profits on business in force of annuity and supplemental insurance companies acquired ("PVFP"). PVFP represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. PVFP is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.
Unpaid Losses and Loss Adjustment Expenses
8
claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.
Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. 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. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.
Annuity Benefits Accumulated
Life, Accident and Health Reserves
Variable Annuity Assets and Liabilities
Premium Recognition
Minority Interest
Income Taxes
AFG records a liability for the inherent uncertainty in quantifying its income tax provisions. Related interest and penalties are recognized as a component of tax expense.
AFG implemented FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" ("FIN 48") on
9
January 1, 2007. FIN 48 sets forth criteria for recognition and measurement
of tax positions taken or expected to be taken in a tax return. FIN 48 requires that companies recognize the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure. The cumulative effect of applying FIN 48 was recorded as a reduction to retained earnings at January 1, 2007 and is shown separately in the Statement of Changes in Shareholders' Equity.
Stock-Based Compensation
Benefit Plans
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 employees earn such benefits.
Earnings Per Share
Adjustments to net earnings:
Dilution of majority-owned subsidiaries
($.1)
($.5)
Assumed issuance of shares under
deferred compensation plan
(.2)
Adjustments to weighted average common shares:
Stock-based compensation plans
3.0
Convertible notes
AFG's weighted average diluted shares outstanding excludes the following anti-dilutive potential common shares related to stock compensation plans: first quarter of 2008 and 2007 - 3.9 million and .6 million, respectively.
Statement of Cash Flows
10
Marketform Group
Strategic Comp Holdings
Great American Financial Resources
AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses, trucks and recreational vehicles, inland and ocean marine, agricultural-related products and other property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, general liability, executive and professional liability and customized programs for small to mid-sized businesses, (iii) Specialty financial, which includes risk management insurance programs for lending and leasing institutions, surety and fidelity products and trade credit insurance, and (iv) California workers' compensation. AFG's annuity and supplemental insurance business markets traditional fixed, indexed and variable annuities and a variety of supplemental insurance products. AFG's reportable segments and their components were determined based primarily upon si milar economic characteristics, products and services.
11
The following tables (in millions) show AFG's revenues and operating earnings before income taxes by significant business segment and sub-segment.
Revenues
Premiums earned:
Specialty
Property and transportation
$ 236.1
$ 228.6
Specialty casualty
211.8
211.2
Specialty financial
119.6
114.4
California workers' compensation
51.4
62.8
15.9
Other lines
635.0
639.8
100.0
83.9
Realized gains (losses)
(33.5)
52.0
50.4
753.5
776.8
Annuity and supplemental insurance:
168.1
158.8
(43.8)
29.1
27.1
262.1
294.4
(1.4
8.4
$1,014.2
$1,079.6
Operating Earnings Before Income Taxes
Underwriting:
$ 38.7
$ 38.6
53.3
59.0
3.7
10.2
13.5
Other (a)
1.2
(11.4)
(.7
102.7
Investment and other operating income
87.6
81.9
(33.5
176.2
187.3
Operations (b)
26.5
34.9
Other (b)
(32.9
(30.0
$ 126.0
$ 194.1
(a) Includes a benefit of $3.0 million in the first quarter of 2008 and a charge of $14.2 million in the 2007 quarter to adjust retroactive reinsurance gains.
(b) GAFRI holding company interest and debt expense of $5.7 million for the 2007 quarter was reclassified from "Annuity and supplemental insurance" to "Other" to be consistent with the current year presentation.
12
D.Fair Value Measurements
Level 1 - Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis).
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. The unobservable inputs may include management's own assumptions about the assumptions market participants would use based on the best information available in the circumstances.
AFG's Level 1 financial instruments consist primarily of publicly traded equity securities, highly liquid government bonds, certain mortgage-backed securities and separate account assets and liabilities for which quoted market prices in active markets are available. AFG's Level 2 financial instruments include primarily corporate and municipal fixed maturity securities and mortgage-backed securities priced by independent pricing services using observable inputs. Level 2 also includes securities priced using non-binding broker quotes which AFG has corroborated with observable market data. AFG's Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, readily available market information.
Assets and liabilities measured at fair value on March 31, 2008, are summarized below (in millions):
Level 1
Level 2
Level 3
Available for sale ("AFS")
$ 772
$13,750
$665
$15,187
Trading
339
349
624
171
46
841
Separate account assets (a)
619
Other investments
Other assets
57
69
130
Total assets accounted for at fair value
$2,072
$14,341
$725
$17,138
Liabilities:
Derivatives embedded in annuity
benefits accumulated
$ -
$146
$ 146
(a) Separate account liabilities equal the fair value for separate account assets.
Approximately 4% of the total assets measured at fair value were Level 3 assets measured using unobservable market inputs. Approximately 40% of these assets were mortgage-backed securities whose fair values were determined using primarily non-binding broker quotes; the balance was primarily private placement debt and equity securities whose fair values were determined internally using significant unobservable inputs, including the evaluation of underlying collateral and issuer creditworthiness, as well as certain Level 2 inputs such as comparable yields and multiples on similar publicly traded issues.
13
Changes in balances of Level 3 financial assets and liabilities during the first three months of 2008 are presented below (in millions):
Fixed Maturities
Equity
Embedded
AFS
Secur.
Assets
Balance at January 1, 2008
$527
$11
$56
$5
$155
Total realized/unrealized gains (losses)
Included in net income
23
(1)
(16)
Included in other comprehensive
income (loss)
(2)
Purchases, issuances and settlements
117
(10)
Transfers in (out) of Level 3
$10
$46
$4
Included in other assets in AFG's Balance Sheet at March 31, 2008, is $95.1 million in amortizable intangible assets (net of accumulated amortization of $19 million) related to property and casualty insurance acquisitions, primarily the 2008 acquisitions of Marketform and Strategic Comp. Amortization of these intangibles was $5.2 million and $1.4 million for the first three months of 2008 and 2007, respectively.
Direct obligations of AFG:
7-1/8% Senior Debentures due April 2009
$173.2
Senior Convertible Notes due June 2033
189.7
7-1/8% Senior Debentures due February 2034
115.0
Borrowings under bank credit facility
170.0
95.0
2.9
650.8
575.8
Obligations of AAG Holding (guaranteed by AFG):
7-1/2% Senior Debentures due November 2033
112.5
7-1/4% Senior Debentures due January 2034
86.3
6-7/8% Senior Notes due June 2008
28.5
21.0
Notes payable secured by real estate
due 2008 through 2016
67.4
67.5
American Premier Underwriters 10-7/8% Subordinated
Notes due May 2011
8.0
2.2
304.9
326.1
Payable to Subsidiary Trusts:
AAG Holding 7.35% Subordinated Debentures due May 2033
20.0
National Interstate Variable Rate Subordinated
Debentures due May 2033
15.0
35.0
$990.7
$936.9
14
At March 31, 2008, scheduled principal payments on debt for the balance of 2008 and the subsequent five years were as follows: 2008 - $233.8 million; 2009 - $174.6 million; 2010 - $2.8 million; 2011 - $179.1 million; 2012 - $1.4 million; and 2013 - $1.5 million. AFG's Convertible Notes and the National Interstate Subordinated Debentures are included in scheduled principal payments at their 2008 call dates.
As shown below (in millions), the majority of AFG's long-term debt is unsecured obligations of the holding company and its subsidiaries:
Unsecured obligations
$923.3
$869.4
Obligations secured by real estate
AFG has a revolving credit facility under which it can borrow up to $500 million through March 2011. Amounts borrowed bear interest at rates ranging from .5% to 1.25% (currently .75%) over LIBOR based on AFG's credit rating. At March 31, 2008, AFG had $170 million in borrowings outstanding under the credit facility (interest rate of 3.8% at March 31, 2008).
In April 2008, AFG called its Senior Convertible Notes for redemption on June 2, 2008 at a price of $371.53 per note (equal to the March 31, 2008 carrying value) plus accrued interest. Alternatively, holders may convert each $1,000 principal amount of the Notes into 17.2524 shares of AFG Common Stock. Based upon recent closing prices of AFG stock, the value received upon conversion will likely exceed $371.53 per note. Accordingly, AFG anticipates virtually all of the Notes will be presented for conversion. For each $1,000 principal amount of Notes converted, AFG will pay $371.53 in cash and issue shares for the amount in excess of $371.53. AFG intends to use borrowings under its bank credit facility to fund the cash payments to be made upon conversion and/or redemption of the Notes. Through March 31, 2008, AFG delivered cash in lieu of Common Stock upon conversion. Since AFG intends to pay a combination of cash and stock for Notes converted in connection with the 2008 redemption , shares issuable for amounts in excess of $371.53 per Note are included in AFG's calculation of diluted earnings per share for the first quarter of 2008.
During the first quarter of 2008, AFG repurchased approximately one million shares of its Common Stock for $26.4 million. In April 2008, AFG repurchased 800,000 additional shares for approximately $21 million.
Accumulated Other Comprehensive Income (Loss), Net of Tax
Net unrealized loss on securities
($88.9)
($18.4)
Foreign currency translation adjustment
24.7
27.9
Unrealized pension and other postretirement benefits
3.1
Total accumulated other comprehensive income (loss)
15
Stock Incentive Plans
AFG uses the Black-Scholes option pricing model to calculate the "fair value" of its option grants. Expected volatility is based on historical volatility over a period equal to the expected term. The expected term was estimated based on historical exercise patterns and post vesting cancellations. The fair value of options granted during 2008 was $7.92 per share based on the following assumptions: expected dividend yield - 1.8%; expected volatility - 28%; expected term - 7.5 years; risk-free rate - 3.2%.
Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $5.1 million for the first quarter of 2008 compared to $6.6 million for the 2007 quarter. Stock-based compensation expense for the first three months of 2008 and 2007 includes $2.0 million and $3.9 million, respectively, in non-deductible stock awards.
16
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
AAG
All Other
Consol.
March 31, 2008
AFG
GAFRI
Holding
Subs
Entries
Consolidated
Cash and investments
$ 73.1
$ 5.3
$18,160.3
($ 1.7)
$18,237.0
Recoverables from reinsurers and
prepaid reinsurance premiums
17.2
19.5
3.2
1,887.8
88.9
2,016.6
Investment in subsidiaries and
affiliates
3,818.5
1,102.6
1,230.8
1,111.9
(7,263.8
$3,908.8
$1,127.4
$1,234.0
$26,908.7
($7,176.6)
Unpaid losses, loss adjustment expenses
and unearned premiums
$ 7,961.8
Annuity, life, accident and health
benefits and reserves
11,632.2
(1.8)
11,630.4
.7
319.4
91.6
(71.8)
Other liabilities
237.9
74.4
106.8
2,270.6
(290.4
2,399.3
888.7
426.2
21,956.2
(364.0)
22,982.2
1,052.3
807.8
4,952.5
(6,812.6
December 31, 2007
$ 52.8
$ 4.6
$17,998.5
($ 1.8)
$18,054.1
14.0
18.4
6.5
2,003.4
2,134.3
3,764.5
1,168.5
1,316.6
(7,361.5
$3,831.3
$1,191.5
$1,323.1
$26,732.9
($7,271.3)
$ 7,836.6
11,582.1
11,580.3
.8
340.4
91.7
209.4
75.5
108.9
2,269.0
(255.2
2,407.6
785.2
76.3
449.3
21,779.4
(328.8)
22,761.4
1,115.2
873.8
4,953.5
(6,942.5
17
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THREE MONTHS ENDED
MARCH 31, 2008
Income
(3.0)
(77.1)
Investment and other income
(2.0)
3.5
361.5
(12.2)
350.8
Equity in earnings of subsidiaries
149.6
(22.4
(13.2
(114.0
144.6
(18.9)
(13.2)
1,028.1
(126.4)
Insurance benefits and expenses
745.3
18.0
4.5
(12.3)
Other expenses
5.7
119.1
(.4
129.3
23.7
9.7
868.9
(12.7
893.3
Earnings before income taxes
120.9
(22.6)
(22.9)
159.2
(113.7)
(8.0
(8.4
57.2
(40.8
Net Earnings (Loss)
($14.6)
($14.5)
$ 102.0
($ 72.9)
MARCH 31, 2007
.1
(.1)
6.0
(3.4)
334.7
(11.8)
328.5
214.3
24.4
11.7
(285.3
217.4
30.3
31.5
1,097.5
(297.1)
755.9
18.8
10.0
4.0
(14.7)
13.0
1.0
100.8
120.0
31.8
11.0
860.7
(10.1
894.0
185.6
29.7
20.5
236.8
(287.0)
7.0
82.9
(99.6
$113.6
$20.0
$13.5
$ 153.9
($187.4)
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Net earnings (loss)
Equity in net (earnings) loss
of subsidiaries
(95.4)
8.2
73.2
Dividends from subsidiaries
(105.3)
Other adjustments, net
(4.4
1.7
294.9
(.3
293.7
Net cash provided by (used in)
operating activities
77.4
(4.7
5.4
396.9
(105.3
Investing Activities:
Purchase of investments, property and
equipment
(1,912.1)
(1,912.2)
Purchase of subsidiaries
Capital contributions to subsidiaries
(95.0)
(15.6)
110.6
Maturities and redemptions of fixed
maturity investments
603.8
Sale of investments, property and
1,157.7
investing activities
(94.9
(15.6
(170.8
Financing Activities:
Annuity surrenders, benefits and
withdrawals
(195.1)
(21.0)
4.4
Capital contribution from parent
15.6
74.0
(110.6)
Cash dividends paid
105.3
(4.6
financing activities
40.5
(5.4
(82.3
(5.3
Net Increase (Decrease) in cash and
cash equivalents
23.0
143.8
Cash and cash equivalents at beginning
of period
2.6
797.7
$ 3.3
$ 941.5
19
$ 20.0
$ 13.5
Equity in net earnings of subsidiaries
(133.6)
(16.1)
(11.7)
184.3
98.5
(102.5)
(1.8
57.4
66.3
(13.1
107.0
(11.2
199.6
(102.4
(0.5)
(1,158.8)
20.3
(1,139.0)
(4.0)
(154.7)
158.7
32.2
345.3
(55.4)
17.8
17.3
377.8
(17.3)
395.6
(49.5
15.7
(105.2
(485.2
106.3
(0.2)
(137.3)
52.3
7.2
0.5
Capital contributions from parent
154.7
(158.7)
(98.2)
(4.3)
102.5
2.1
16.5
18.6
(16.9
11.2
69.9
Net increase (decrease) in cash and
(14.3)
(215.7)
146.0
2.8
1,180.2
$131.7
$ 6.7
$ 964.5
20
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
INDEX TO MD&A
Forward-Looking Statements
21
Uncertainties
28
Overview
22
Results of Operations
Critical Accounting Policies
General
Liquidity and Capital Resources
Income Items
Sources of Funds
Expense Items
32
24
Recent Accounting Standards
33
_____________________________________________________________________________________________________
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as "anticipates", "believes", "expects", "estimates", "intends", "plans", "seeks", "could", "may", "should", "will" or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings and investment activities; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate increases; and improved loss experience.
Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including:
The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.
of Financial Condition and Results of Operations - Continued
OVERVIEW
Financial Condition
AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has 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, because 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.
At March 31, 2008, AFG (parent) had approximately $70 million in cash and securities and had borrowed $170 million under the bank line of credit.
Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses and in the sale of traditional fixed, indexed and variable annuities and a variety of supplemental insurance products.
AFG's net earnings for the first three months of 2008 were $76.0 million ($.64 per share, diluted) compared to $113.6 million ($.92 per share, diluted) reported in the same period of 2007, reflecting significantly improved results within the specialty property and casualty insurance operations offset by realized losses on securities and lower operating earnings in the annuity and supplemental insurance operations.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A to the financial statements. The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and thus impact amounts reported in the future. The areas where management believes the degree of judgment required to determine amounts recorded in the financial statements make accounting policies critical are as follows:
For a discussion of these policies, see Management's Discussion and Analysis - "Critical Accounting Policies" in AFG's 2007 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Ratios
2006
$ 991
$ 937
$ 921
Total capital (*)
4,225
4,108
4,160
Ratio of debt to total capital:
Including debt secured by real estate
23.5%
22.8%
22.1%
Excluding debt secured by real estate
22.2%
21.5%
20.9%
(*) Includes long-term debt, minority interest and
shareholders' equity (excluding unrealized gains (losses)
related to fixed maturity investments).
AFG's ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.99 for the three months ended March 31, 2008 and 2.40 for the entire year of 2007. Excluding annuity benefits, this ratio was 6.66 and 8.49, respectively. Although the ratio excluding interest on annuities is not required or encouraged to be disclosed under Securities and Exchange Commission rules, it is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.
Parent Holding Company Liquidity
AFG can borrow up to $500 million under its revolving credit facility, which expires in 2011. AFG had $170 million in borrowings outstanding under this agreement at March 31, 2008, bearing interest at a rate of 3.8%.
AFG intends to borrow under its revolving credit facility to fund payments upon conversion or redemption of its Senior Convertible Notes, which have been called for redemption in June 2008. Holders who choose to convert will be paid cash for the accreted value of the Notes (approximately $190 million) and stock for the conversion premium (amount to be based on the market price of AFG Common Stock).
During the first three months of 2008, AFG repurchased approximately one million shares of its common stock for $26.4 million. In April, AFG repurchased an additional 800,000 shares for approximately $21 million.
Under tax allocation agreements with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary's contribution to amounts due under AFG's consolidated tax return.
Subsidiary Liquidity
The liquidity requirements of AFG's insurance subsidiaries relate primarily to the liabilities associated with their products as well as operating costs and expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from premiums and investment income have provided more than sufficient funds to meet these requirements without requiring a sale of investments or contributions from AFG. Funds received in excess of cash requirements are generally invested in additional marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short-term investments.
The excess cash flow of AFG's property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves.
In the annuity business, where profitability is largely dependent on earning a "spread" between invested assets and annuity liabilities, the duration of investments is generally maintained close to that of liabilities. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to guaranteed minimums. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG's annuity products.
AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses, as well as meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies.
$15.2 billion in "Fixed maturities" classified as available for sale and $841 million in "Equity securities," all carried at fair value with unrealized gains and losses included in a separate component of shareholders' equity on an after-tax basis. At March 31, 2008, AFG had a pretax net unrealized loss of $163.2 million on fixed maturities and a pretax net unrealized gain of $2.3 million on equity securities.
Approximately 94% of the fixed maturities held by AFG at March 31, 2008, were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and noninvestment grade. Management believes that a high quality investment portfolio should generate a stable and predictable investment return.
AFG's $5.3 billion investment in mortgage-backed securities ("MBSs") represented approximately one-third of its fixed maturities at March 31, 2008. MBSs are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates. Approximately 98% of AFG's mortgage-backed securities are rated "AAA." At March 31, 2008, AFG owned $470 million (representing 3% of AFG's total fixed maturity portfolio) of mortgage-backed securities in which the underlying collateral is subprime mortgages. At that date, the net unrealized loss on these securities was approximately $35.8 million. The securities are collateralized by fixed-rate mortgages and have an overall average life of approximately 4 years. At March 31, 2008, AFG owned approximately $699 in Alt-A securities (risk profile between prime and subprime) with an average life of approximately 5 years, the vast majority of which are backed by fixed rate mortgages. AFG's portfolio of Alt-A securities increased by approximately $340 million during the first
quarter, as AFG made opportunistic purchases. The unrealized loss on Alt-A securities was $34.5 million at March 31, 2008. Based on current information, management does not believe that AFG's risk of loss on the subprime or Alt-A securities would be material to its financial condition.
At March 31, 2008, AFG owned approximately $1 billion in securities with credit enhancement provided by bond insurers, including $763 million of insured municipal bonds, $139 million in insured subprime securities (included in the $470 million in total subprime exposure discussed above) and $94 million in insured corporate bonds. Approximately 91% of the insured municipal bonds carry an explicit underlying rating (i.e. without credit enhancement) with an average of A+, and 53% of the corporate bonds carry an explicit underlying rating with an average of A-. None of the insured subprime securities carry an explicit underlying rating. Management does not believe the risk of loss on the securities without underlying credit ratings is material to AFG's financial condition.
The upheaval in the housing and credit markets in the second half of 2007 and continuing in 2008 has caused many financial institutions to record significant asset writedowns. This has had an adverse impact on AFG's investment portfolio.
Since fixed maturities and stocks are carried at fair value in the balance sheet, there is virtually no effect on financial condition upon the sale and ultimate realization of unrealized gains and losses.
25
Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet at March 31, 2008, is shown in the following table (dollars in millions). Approximately $658 million of available for sale "Fixed maturities" and $159 million of "Equity securities" had no unrealized gains or losses at March 31, 2008.
Securities
With
Unrealized
Gains
Losses
Available for Sale Fixed Maturities
Fair value of securities
$7,766
$6,764
Amortized cost of securities
$7,520
$7,173
Gross unrealized gain (loss)
$ 246
($ 409)
Fair value as % of amortized cost
103%
94%
Number of security positions
1,756
982
Number individually exceeding
$2 million gain or loss
27
Concentration of gains (losses) by type or
industry (exceeding 5% of unrealized):
Mortgage-backed securities
$ 51.3
($198.8)
Banks, savings and credit institutions
26.6
(80.5)
Insurance companies
(7.9)
Gas and electric services
28.1
(7.5)
Direct obligations of the U.S. Government
States and municipalities
(5.5)
Percentage rated investment grade
98%
91%
Equity Securities
$ 272
$ 410
Cost of securities
$ 159
$ 521
$ 113
($ 111)
Fair value as % of cost
171%
79%
65
150
Number of individually exceeding
26
The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities at March 31, 2008, based on their fair values. Asset-backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Maturity
One year or less
5%
2%
After one year through five years
37
After five years through ten years
31
After ten years
79
50
Mortgage-backed securities (average
life of six years)
100
The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount.
Fair
Aggregate
Value as
% of Cost
Value
Gain (Loss)
Basis
Fixed Maturities at March 31, 2008
Securities with unrealized gains:
Exceeding $500,000 (110 issues)
$1,639
$ 96
106%
Less than $500,000 (1,646 issues)
6,127
103
$246
Securities with unrealized losses:
Exceeding $500,000 (243 issues)
$3,297
($313)
Less than $500,000 (739 issues)
3,467
(96
97
($409
The following table summarizes (dollars in millions) the unrealized loss for all fixed maturity securities with unrealized losses by issuer quality and length of time those securities have been in an unrealized loss position.
Loss
Fixed Maturities with Unrealized
Losses at March 31, 2008
Investment grade with losses for:
One year or less (530 issues)
$4,127
($193)
96%
Greater than one year (277 issues)
1,993
(146
93
$6,120
($339)
95%
Non-investment grade with losses for:
One year or less (143 issues)
$ 491
($ 57)
90%
Greater than one year (32 issues)
153
(13
92
$ 644
($ 70
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 (accounted for as a realized loss) and the cost basis of that investment is reduced. The determination of whether unrealized losses are "other than temporary" requires judgment based on subjective as well as objective factors. A listing of factors considered and resources used is contained in the discussion of "Investments" under Management's Discussion and Analysis in AFG's 2007 Form 10-K.
Based on its analysis, management believes (i) AFG will recover its cost basis in the securities with unrealized losses and (ii) that AFG has the ability and intent to hold the securities until they mature or recover in value. Although AFG has the ability to continue holding its investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers' creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG's ability or intent change with regard to a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other than temporary impairment could be material to results of operations in future periods. Management believe s it is not likely that future impairment charges will have a significant effect on AFG's liquidity.
RESULTS OF OPERATIONS
AFG reported operating earnings before income taxes of $126.0 million for the first quarter of 2008 compared to $194.1 million for the 2007 quarter. A $16.7 million improvement in specialty property and casualty underwriting results and $20.5 million increase in investment income were more than offset by realized losses on securities, largely attributable to other than temporary impairment charges of $109.1 million, and lower annuity and supplemental insurance earnings. The lower annuity and supplemental earnings were due primarily to (i) the impact of declines in interest rates and the stock market on the indexed annuity business and (ii) costs associated with certain new business initiatives.
Property and Casualty Insurance - Underwriting
Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company's performance. See Note C - "Segments of Operations" for the detail of AFG's operating profit by significant business segment.
Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses, loss adjustment expenses, underwriting expenses and policyholder dividends to premiums. A combined ratio under 100% is indicative of
an underwriting profit. The combined ratio does not reflect investment income, other income or federal income taxes.
Premiums and combined ratios for AFG's property and casualty insurance operations were as follows (dollars in millions):
Gross Written Premiums (GAAP)
$318
$323
361
136
138
68
(2
(1
$859
$889
Net Written Premiums (GAAP)
$247
$245
222
216
111
115
63
$658
$657
Combined Ratios (GAAP)
83.6%
83.1%
74.9
86.0
96.7
80.3
78.5
Total Specialty
83.8
Aggregate (including discontinued lines)
80.8%
84.0%
The property and casualty group's net written premiums for the 2008 first quarter were slightly higher than the 2007 first quarter. Premium growth in the Property and transportation and Specialty casualty groups was partly offset by declines in the Specialty financial and California workers' compensation groups. Overall average renewal rates in the 2008 first quarter were down about 4% compared with the same prior year period. Excluding the rate decreases in the California workers' compensation business, average renewal rates in the other specialty operations were down about 3% compared to the 2007 first quarter.
The specialty insurance operations generated an underwriting profit of $120.1 million in the 2008 first quarter, $16.7 million higher than the same quarter a year earlier. The 2008 combined ratio was 81.1%, 2.7 points better than in the 2007 first quarter. These results continue to reflect the positive effect of rate adequacy and favorable reserve development. The 2008 results benefited from $65.2 million (10.3 points) of favorable reserve development compared to $53.9 million (8.4 points) in the 2007 first quarter.
29
and inland marine operations resulting from pricing pressure in those markets. This group's 2008 results include $19.3 million (8.2 points) of favorable reserve development compared to $19.6 million (8.6 points) in the first quarter of last year.
Specialty casualty gross written premiums were 6% below the same 2007 period resulting primarily from volume reductions in the excess and surplus lines, reflecting continuing competitive pressure in those commercial casualty markets and lower general liability coverages resulting from the softening in the homebuilders market. These decreases were partially offset by additional premium resulting from the Marketform acquisition. Net written premiums for the 2008 first quarter were 2% higher than in the 2007 first quarter as the Marketform premiums and the effect of the Strategic Comp acquisition more than offset the declines in the excess and surplus lines, which are heavily reinsured. This group generated an underwriting profit of $53.3 million in the 2008 first quarter, $5.7 million lower than the same quarter a year earlier. The combined ratio was 74.9%, 2.9 points higher than in the 2007 first quarter. These results included $31.5 million (14.9 points) of favorable reserve development compared to $41.5 million (19.7 points) for the year earlier. Nearly all of the business units in this group generated significant underwriting profits. The executive liability operations and targeted insurance programs reported improved results while the general liability operations were impacted by a lower level of favorable reserve development compared to the 2007 first quarter. The excess and surplus lines generated about the same level of underwriting profit as the year before on a lower level of premium.
Specialty financial gross and net written premiums for the 2008 first quarter were down 2% and 4%, respectively, from the same period in 2007. The decline in the gross written premiums was primarily attributable to the fidelity and crime and surety operations while higher premium cessions within certain of the lease and loan operations impacted this group's net written premiums. These businesses reported solid underwriting profitability in the first quarter of 2008. The group's combined ratio was 86.0%, an improvement of 10.7 points compared to the 2007 first quarter. The run-off automobile residual value insurance business generated an underwriting profit versus an underwriting loss the year earlier. The surety and fidelity and crime operations also reported higher underwriting profits and the trade credit and financial institutions operations continued to generate strong profitability.
California workers' compensation net written premiums for the 2008 quarter were 3% below the 2007 first quarter, reflecting the effect of lower workers' compensation rates in California partly offset by this group's expansion of its excess workers' compensation products. The California rate reductions averaged about 18% for the 2008 first quarter and are continuing evidence of the positive effects of the reform legislation in lowering workers' compensation costs for employers. This business reported strong profitability with a combined ratio of 80.3% in the 2008 quarter compared to 78.5% in the same period a year earlier. Underwriting margins continue to benefit from an improved claims environment resulting from workers' compensation reforms enacted in California. The 2008 results benefited from favorable prior year reserve development of $5.9 million (11.5 points) compared to $5.3 million (8.4 points) in the same 2007 period.
Due to the long-tail nature of this business, AFG has been conservative in reserving for the favorable effects of the reform legislation until a higher percentage of claims are paid and the ultimate impact of reforms can be estimated with more precision.
30
Statutory Annuity Premiums
403(b) Fixed and Indexed Annuities:
First Year
$ 12
$ 16
Renewal
40
35
Single Sum
Subtotal
77
Non-403(b) Indexed Annuities
140
213
Non-403(b) Fixed Annuities
47
64
Variable Annuities
Total Annuity Premiums
$287
$379
Non-403(b) annuity premiums were lower in the first quarter of 2008 compared to the same period in 2007 due primarily to volatile market conditions and our continued emphasis on receiving adequate returns.
Life, Accident and Health Premiums and Benefits
Premiums
Supplemental insurance operations
First year
$ 20
$ 13
81
85
Life operations (in run-off)
$109
$107
Benefits
$ 75
$ 73
$ 87
$ 85
Investment Income
Realized Gains (Losses) on Securities
Net realized gains (losses) on securities sold and charges for "other than temporary" impairment on securities were as follows (in millions):
Net realized gains (losses) on disposals
($ 6.8)
$13.8
Charges for impairment
(109.1)
(9.1)
Changes in the fair value of derivatives
29.3
Other(*)
6.3
($ 80.3)
$ 4.7
(*) Adjustments to the amortization of annuity deferred policy
acquisition costs included in realized gains.
Approximately $61 million of the other than temporary impairments in the first quarter of 2008 were attributable to equity investments, primarily in financial institutions including $24.4 million for National City Corporation. Charges of approximately $21 million on our mortgage-backed securities resulted primarily from the recent downgrade of Financial Guaranty Insurance Company, which provided credit guarantees for those securities.
Real Estate Operations
$16.6
$20.9
16.1
15.2
Minority interest expense (benefit)
Income from real estate operations includes net pretax gains on the sale of real estate assets of $.4 million in the first quarter of 2008 compared to $6.0 million for the 2007 quarter.
Annuity Benefits
The $16.1 million increase in annuity benefits compared to the first quarter of 2007 is due primarily to the impact of declines in interest rates and the stock market on indexed annuities.
Annuity and Supplemental Insurance Acquisition Expenses
The vast majority of the annuity and supplemental insurance group's DPAC asset relates to its fixed annuity, variable annuity and life insurance lines of business. Unanticipated spread compression, decreases in the stock market, adverse mortality experience and higher than expected lapse rates could lead to write-offs of DPAC or PVFP in the future.
Other Operating and General Expenses
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," which is effective January 1, 2009, for calendar year companies. Under SFAS No. 160, noncontrolling (minority) interest ($122.3 million at March 31, 2008) will be reported in AFG's Balance Sheet as a separate component of shareholders' equity; net earnings attributable to noncontrolling (minority) interests will be reported in AFG's Statement of Earnings as a deduction from net income (instead of as an expense) in deriving net income attributable to AFG. In addition, SFAS No. 160 requires that purchases and sales of equity interests in less than 100%-owned subsidiaries that do not result in a change of control be accounted for as equity transactions and, upon loss of control, requires any interest retained to be recorded at fair value with a gain or loss recognized in earnings.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which requires the recognition of assets acquired, liabilities assumed and any noncontrolling interests at fair value as of the acquisition date, and the immediate expense recognition of acquisition-related transaction and restructuring costs. SFAS No. 141(R) is to be applied prospectively to business combinations after January 1, 2009, except that adjustments to an acquired company's valuation allowance on deferred tax assets and tax contingency liability are to be recorded as a component of income tax expense for all business combinations, regardless of the consummation date.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," which is effective January 1, 2009, for calendar year companies. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
As of March 31, 2008, there were no material changes to the information provided in Item 7A - "Quantitative and Qualitative Disclosure of Market Risk" of AFG's 2007 Form 10-K.
ITEM 4
Controls and Procedures
AFG's management, with participation of its Co-Chief Executive Officers and its principal financial officer, has evaluated AFG's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG's Co-CEOs and principal financial officer concluded that the controls and procedures are effective. There have been no changes in AFG's internal control over financial reporting during the first fiscal quarter of 2008 that materially affected, or are reasonably likely to materially affect, AFG's internal control over financial reporting. AFG acquired Marketform Group Limited and Strategic Comp Holdings, LLC effective January 1, 2008. These companies have been excluded from management's assessment of internal control over financial reporting.
In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new systems. There has been no change in AFG's business processes and procedures during the first fiscal quarter of 2008 that has materially affected, or is reasonably likely to materially affect, AFG's internal controls over financial reporting.
34
PART II
OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number
Maximum Number
of Shares
Purchased as
that May
Number
Average
Part of Publicly
Yet be Purchased
Price Paid
Announced Plans
Under the Plans
Purchased
Per Share
or Programs
Or Programs (a)
January
February
350,000
$27.19
2,712,100
March
653,000
$25.93
2,059,100
(a)
Represents the remaining shares that may be repurchased under the Plan authorized by AFG's Board of Directors in 2007.
ITEM 5
Other Information
As of April 28, 2008, American Premier Underwriters, Inc. (a wholly-owned subsidiary) paid a $46.9 million extraordinary dividend consisting of approximately 12% of its assets, to its immediate parent, APU Holding Company, and retained sufficient assets to enable it to meet its estimated liabilities.
OTHER INFORMATION - CONTINUED
ITEM 6
Exhibits
Exhibit Description
Computation of ratios of earnings to fixed charges.
Certification of the Co-Chief Executive Officer pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to
section 302(a) of the Sarbanes-Oxley Act of 2002.
Certification of the Co-Chief Executive Officers and Chief
Financial Officer pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
_____________________________________________________________
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 8, 2008
BY: s/Keith A. Jensen
Keith A. Jensen
Senior Vice President
(principal financial and
accounting officer)
36