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

June 30, 2001

Commission File

No. 1-11632

GREAT AMERICAN FINANCIAL RESOURCES, INC.


Incorporated under

the Laws of Delaware

IRS Employer I.D.

No. 06-1356481


250 East Fifth Street, Cincinnati, Ohio  45202

(513) 333-5300






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, 2001, there were 42,311,906 shares of the Registrant's Common Stock outstanding.


Page 1 of 25

 

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

PART I

FINANCIAL INFORMATION

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in millions)

 

 

 

 

 

 

 

June 30,

December 31,

 

    2001 

       2000 

Assets

 

 

  Investments:

 

 

    Fixed maturities - at market

 

 

      (amortized cost - $6,186.3 and $6,088.0)

$6,252.9 

$6,117.1 

    Equity securities - at market 

 

 

      (cost - $37.8 and $30.5)

65.0 

67.9 

    Investment in affiliate

-  

2.7 

    Mortgage loans on real estate

24.4 

24.4 

    Real estate 

68.1 

72.2 

    Policy loans 

210.7 

213.5 

    Short-term investments

    58.2 

    49.5 

      Total investments  

6,679.3 

6,547.3 

 

 

 

  Cash

16.2 

38.0 

  Accrued investment income

97.0 

99.2 

  Unamortized insurance acquisition costs, net

527.5 

487.9 

  Other assets

246.3 

269.8 

  Variable annuity assets (separate accounts)

   530.7 

   533.7 

 

 

 

 

$8,097.0 

$7,975.9 

 

 

 

Liabilities and Capital

 

 

  Annuity benefits accumulated 

$5,603.6 

$5,543.7 

  Life, accident and health reserves

602.0 

599.4 

  Notes payable

144.4 

151.9 

  Payable to affiliates, net

100.9 

85.8 

  Deferred taxes on unrealized gains

31.5 

22.6 

  Accounts payable, accrued expenses and other

 

 

    liabilities

154.5 

149.2 

  Variable annuity liabilities (separate accounts)

   530.7 

   533.7 

      Total liabilities

7,167.6 

7,086.3 

 

 

 

  

 

 

  Mandatorily redeemable preferred securities

 

 

    of subsidiary trusts

217.9 

217.9 

 

 

 

 

 

 

  Stockholders' Equity:

 

 

    Common Stock, $1 par value

 

 

      -100,000,000 shares authorized

 

 

      - 42,303,906 and 42,302,788 shares outstanding

42.3 

42.3 

    Capital surplus

348.6 

348.5 

    Retained earnings 

260.5 

237.0 

    Unrealized gains on marketable securities, net  

    60.1 

    43.9 

      Total stockholders' equity

   711.5 

   671.7 

 

 

 

   

$8,097.0 

$7,975.9 

 

 

 

2

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(In millions, except per share amounts)

 

Three months ended 

Six months ended

      June 30,    

    June 30,    

 

2001

2000

2001

2000

Revenues:

 

 

 

 

Life, accident and health premiums

$ 70.5

$ 49.7

$139.7

$ 99.6

Net investment income

124.9

123.9

247.7

248.0

Realized losses

(22.7)

(0.8)

 (24.5)

(3.7)

Other income

  23.9

23.1

  50.7

39.0

 

196.6

195.9

413.6

382.9

Costs and Expenses:

 

 

 

 

Annuity benefits

70.7

79.6

140.0

145.8

Life, accident and health benefits

52.3

36.9

106.3

73.6

Insurance acquisition expenses

19.8

18.8

41.1

34.0

Trust preferred distribution requirement

4.7

4.6

9.2

9.2

Interest and other debt expenses

2.7

3.7

5.5

7.3

Other expenses

  39.3

  58.4

  78.2

  96.0

 

 189.5

202.0

 380.3

365.9

 

 

 

 

 

Operating earnings (loss) before income taxes

7.1

(6.1)

33.3

17.0

Provision (credit) for income taxes

   1.5

(4.0)

   9.8

2.5

 

 

 

 

 

Net operating earnings (loss)

5.6

(2.1)

23.5

14.5

 

 

 

 

 

Equity in earnings of affiliate, net of tax

   - 

0.2

    - 

1.0

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

$  5.6

($  1.9)

$ 23.5

$ 15.5

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

Basic

$0.13

($0.04)

$0.55

$0.37

Diluted

$0.13

($0.05)

$0.55

$0.36

 

 

 

 

 

 

 

 

 

 

Average number of common shares:

 

 

 

 

Basic

42.3

42.3

42.3

42.3

Diluted

42.7

42.6

42.7

42.6

 

 

 

 

 

3

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(In millions)

 

Six months ended  

 

    June 30,      

 

2001 

2000  

Common Stock:

 

 

  Balance at beginning of period

$ 42.3 

$ 42.4  

  Common Stock retired

    -  

   (0.1

    Balance at end of period

$ 42.3 

$ 42.3  

 

 

 

 

 

 

Capital Surplus:

 

 

  Balance at beginning of period

$348.5 

$349.7  

  Common Stock issued

 0.4 

0.6  

  Common Stock retired

  (0.3)

  (1.8

    Balance at end of period

$348.6 

$348.5  

 

 

 

 

 

 

 

 

 

Retained Earnings: 

 

 

  Balance at beginning of period

$237.0 

$186.5  

  Net income

  23.5 

  15.5  

    Balance at end of period

$260.5 

 $202.0  

 

 

 

 

 

 

Unrealized Gains (Losses), Net:

 

 

  Balance at beginning of period

$ 43.9 

($ 52.9) 

  Change during period

  16.2 

  (30.5

    Balance at end of period

$ 60.1 

($ 83.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

  Net income

$ 23.5 

$ 15.5  

  Other comprehensive income (loss) - change in net

 

 

    unrealized gains (losses) 

    16.2 

 (30.5

    Comprehensive income (loss)

$ 39.7 

($ 15.0

 

 

 

4

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(In millions)

 

Six months ended  

 

     June 30,     

 

2001 

2000  

Cash Flows from Operating Activities:

 

 

  Net income

$ 23.5 

$ 15.5  

  Adjustments:

 

 

    Equity in earnings of affiliate, net of tax

-  

 (1.0) 

    Increase in life, accident and health reserves

21.5 

26.2  

    Benefits to annuity policyholders

140.0 

145.8  

    Amortization of insurance acquisition costs

41.1 

34.0  

    Depreciation and amortization

4.8 

5.5  

    Realized losses

24.5 

3.7  

    Increase in insurance acquisition costs

(73.5)

(70.6) 

    Other, net

 (25.2)

 (22.6

 

 156.7 

 136.5  

 

 

 

Cash Flows from Investing Activities:

 

 

  Purchases of and additional investments in:

 

 

    Fixed maturity investments

(539.4)

(439.9) 

    Equity securities

(2.0)

(3.1) 

    Real estate, mortgage loans and other assets

(7.5)

(11.3) 

  Maturities and redemptions of fixed maturity investments

234.5 

199.9  

  Sales of:

 

 

    Fixed maturity investments

199.9 

216.9  

    Equity securities

1.2 

9.4  

    Real estate, mortgage loans and other assets

19.0 

0.3  

  Decrease in policy loans

   2.8 

   2.6  

 

 (91.5)

 (25.2

 

 

 

Cash Flows from Financing Activities:

 

 

  Fixed annuity receipts

271.8 

251.1  

  Annuity surrenders, benefits and withdrawals

(341.3)

(387.6) 

  Net transfers to variable annuity assets

(1.4)

(34.2) 

  Additions to notes payable

4.7 

2.0  

  Reductions of notes payable

(12.2)

(0.5) 

  Issuance of Common Stock

0.4 

0.6  

  Retirement of Common Stock

(0.3)

(1.9) 

  Repurchase of trust preferred securities

    -  

  (1.4

  

 (78.3)

(171.9

 

 

 

Net decrease in cash and short-term investments

(13.1)

(60.6) 

Beginning cash and short-term investments

  87.5 

 119.6  

Ending cash and short-term investments 

$ 74.4 

$ 59.0  

 

 

 

5

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A. Description of the Company

Great American Financial Resources, Inc. ("GAFRI" or "the Company") markets retirement products, primarily fixed and variable annuities, and various forms of life and supplemental health insurance through independent agents, payroll deduction plans, financial institutions and in-home sales.

American Financial Group, Inc. ("AFG") and its subsidiaries owned 83% of GAFRI's Common Stock at August 1, 2001.

B. Accounting Policies

Basis of Presentation The accompanying Consolidated Financial Statements for GAFRI and its 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 periods to conform to the current period's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

Investments All fixed maturity securities are considered "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Short-term investments are carried at cost; mortgage loans on real estate are generally carried at amortized cost; policy loans are stated at the aggregate unpaid balance. Premiums and discounts on mortgage-backed securities are amortized over a period based on estimated future principal prepayments and adjusted to reflect actual prepayments.

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, a provision for impairment is charged to earnings and the carrying value of that investment is reduced.

Investment in Affiliate GAFRI's investments in equity securities of companies that are 20% to 50% owned by AFG and its subsidiaries are generally carried at cost, adjusted for a proportionate share of their undistributed earnings or losses.

Due to Chiquita's announced intention to pursue a plan to restructure its public debt, GAFRI wrote down its investment in Chiquita common stock to market value at December 31, 2000. In 2001, GAFRI suspended accounting for the investment under the equity method due to the expected restructuring.

6

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Insurance Acquisition Costs and Expenses Insurance acquisition costs and expenses consist primarily of deferred policy acquisition costs and the present value of future profits on business in force of acquired insurance companies. In addition, certain marketing and commission costs are expensed as paid and included in insurance acquisition expenses.

Deferred Policy Acquisition Costs ("DPAC") DPAC (principally commissions, advertising, underwriting, policy issuance and sales expenses that vary with and are primarily related to the production of new business) is deferred to the extent that such costs are deemed recoverable.

DPAC related to annuities and universal life insurance products is amortized, with interest, in relation to the present value of expected gross profits on the policies. These expected gross profits consist principally of estimated future net investment income and surrender, mortality and other policy charges, less estimated future interest on policyholders' funds, policy administration expenses and death benefits in excess of account values. DPAC is reported net of unearned revenue relating to certain policy charges that represent compensation for future services. These unearned revenues are recognized as income using the same assumptions and factors used to amortize DPAC.

To the extent that realized gains and losses result in adjustments to the amortization of DPAC, such adjustments are reflected as components of realized gains. To the extent that unrealized gains (losses) from securities would result in adjustments to DPAC, unearned revenues and policyholder liabilities had those gains (losses) actually been realized, such balance sheet amounts are adjusted, net of deferred taxes.

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. Such anticipated premium revenues were estimated using the same assumptions used for computing liabilities for future policy benefits.

Present Value of Future Profits Included in insurance acquisition costs are amounts representing the present value of future profits on business in force of acquired insurance companies, which represent the portion of the costs to acquire such companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition.

These amounts are amortized with interest over the estimated remaining life of the acquired policies for annuities and universal life products and over the expected premium paying period for traditional life and health insurance products.

Annuity Benefits Accumulated Annuity receipts and benefit payments are recorded as increases or decreases in "annuity benefits accumulated" rather than as revenue and expense. Increases in this liability for interest credited are charged to expense and decreases for surrender charges are credited to other income.

Life, Accident and Health Reserves Liabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on anticipated investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations. Reserves established for accident and health claims are modified as necessary to reflect actual experience and developing trends.

7

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The liability for future policy benefits for interest sensitive life and universal life policies is equal to the sum of the accumulated fund balances under such policies.

Variable Annuity Assets and Liabilities Separate accounts related to variable annuities represent deposits invested in underlying investment funds on which GAFRI earns a fee. Investment funds are selected and may be changed only by the policyholder.

Life, Accident and Health Premiums and Benefits For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. Policy reserves have been established in a manner which allocates policy benefits and expenses on a basis consistent with the recognition of related premiums and generally results in the recognition of profits over the premium paying period of the policies.

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. Surrender benefits reduce the account value. Death benefits are expensed when incurred, net of the account value.

Income Taxes GAFRI and Great American Life Insurance Company ("GALIC") have separate tax allocation agreements with American Financial Corporation ("AFC"), a subsidiary of AFG, which designate how tax payments are shared by members of the tax group. In general, both companies compute taxes on a separate return basis. GALIC is obligated to make payments to (or receive benefits from) AFC based on taxable income or loss without regard to temporary differences. If GALIC's taxable income (computed on a statutory accounting basis) exceeds a current period net operating loss of GAFRI, the taxes payable or recoverable by GALIC associated with the excess are payable to or receivable from AFC. If the AFC tax group utilizes any of GAFRI's net operating losses or deductions that originated prior to GAFRI's entering AFC's consolidated tax group, AFC will pay to GAFRI an amount equal to the benefit received. The tax allocation agreements with AFC do not impact the recognition of income tax expense and income tax payable in GAFRI's financial statements.

Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis and are measured using enacted tax rates. The Company recognizes deferred tax assets if it is more likely than not that a benefit will be realized. Current and deferred tax assets and liabilities of companies in AFC's consolidated tax group are aggregated with other amounts receivable from or payable to affiliates.

Stock-Based Compensation As permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", GAFRI 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."

8

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Benefit Plans GAFRI sponsors an Employee Stock Ownership Retirement Plan ("ESORP") covering all employees who are qualified as to age and length of service. The ESORP, which invests primarily in securities of GAFRI, is a trusteed, noncontributory plan for the benefit of the employees of GAFRI and its subsidiaries. Contributions are discretionary by the directors of GAFRI and are charged against earnings in the year for which they are declared.

Qualified employees having vested rights in the plan are entitled to benefit payments at age 60.

GAFRI and certain of its subsidiaries provide certain benefits to eligible retirees. The projected future cost of providing these benefits is expensed over the period the employees earn such benefits.

Derivatives Effective October 1, 2000, GAFRI implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and for hedging activities. Prior year financial statements were not restated. SFAS No. 133 generally requires that derivatives (both assets and liabilities) be recognized in the balance sheet at fair value with changes in fair value included in current earnings.

Derivatives included in GAFRI's balance sheet consist primarily of investments in common stock warrants (included in other stocks), the equity-based component of certain annuity products (included in annuity benefits accumulated) and call options (included in other assets) used to mitigate the risk embedded in the equity-indexed annuity products.

Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of the assumed exercise of dilutive common stock options.

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 annuity receipts, benefits and withdrawals and obtaining resources from owners and providing them with a return on their investments. 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

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

C. Segments of Operations

GAFRI's life and annuity operations offer fixed and variable annuity products and traditional life insurance products.  GAFRI's annuity products are sold through managing general agents and independent agents to employees of primary and secondary educational institutions, hospitals and in the non-qualified markets.  Traditional term, universal and whole life insurance products are sold through national marketing organizations.

GAFRI's supplemental insurance businesses, United Teacher Associates Insurance Company ("UTA") and Loyal American Life Insurance Company, offer a variety of supplemental health and life products.  Loyal's marketing strategy emphasizes third-party sponsorship, including employers and credit unions, while UTA offers its products through independent agents.

GA Life of Puerto Rico sells in-home life and supplemental health products through a network of company-employed agents.  Sales in Puerto Rico accounted for approximately 20% of GAFRI's life, accident and health premiums in the first six months of 2001 compared to 25% in the comparable period in 2000.

Corporate and other consists primarily of GAFRI (parent) and AAG Holding.

The following table shows GAFRI's revenues and operating profit (loss) by significant business segment (in millions):

 

Three months ended 

Six months ended 

 

     June 30,    

     June 30,    

 

2001 

2000 

2001 

2000 

 

 

 

 

 

Revenues

 

 

 

 

Life and annuity products

$141.5 

$138.4 

$283.6 

$270.6 

Supplemental insurance products

59.5 

41.9 

118.7 

82.7 

GA Life of Puerto Rico

15.8 

14.4 

31.3 

29.0 

Corporate and other

   2.5 

   2.0 

   4.5 

   4.3 

  Total operating revenues

219.3 

196.7 

438.1 

386.6 

 

 

 

 

 

Realized losses

(22.7)

  (0.8)

(24.5)

  (3.7)

Total revenues per statement of

     operations

$196.6 

$195.9 

$413.6 

$382.9 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss) - pretax

 

 

 

 

Life and annuity products (excluding

  litigation charges)

$ 35.7 

$ 36.9 

$ 71.0 

$ 69.6 

Supplemental insurance products

0.3 

(2.5)

(0.9)

(2.7)

GA Life of Puerto Rico

2.5 

2.2 

5.0 

4.2 

Litigation charges

-  

(32.5)

-  

(32.5)

Corporate and other

  (8.7)

  (9.4)

 (17.3)

(17.9)

  Pretax earnings (loss) from

     operations

29.8 

(5.3)

57.8 

20.7 

 

 

 

 

 

Realized losses

(22.7)

 (0.8)

(24.5)

(3.7)

  Total pretax income (loss) per

 

 

 

 

     statement of operations

$  7.1 

($  6.1)

$ 33.3 

$ 17.0 

10

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

D. Investment in Affiliate

Investment in affiliate reflects GAFRI's 4% ownership (2.7 million shares) of the common stock of Chiquita Brands International. AFG and its other subsidiaries own an additional 29% interest in the common stock of Chiquita. Chiquita is a leading international marketer, producer and distributor of quality fresh fruits and vegetables and processed foods.

In January 2001, Chiquita announced a restructuring initiative that included discontinuing all interest and principal payments on its public debt. A restructuring is expected to result in the conversion of a significant portion of Chiquita's $862 million in public debt into common equity.

The market value of GAFRI's investment in Chiquita was approximately $2.7 million at December 31, 2000.

E. Unamortized Insurance Acquisition Costs

Unamortized insurance acquisition costs consisted of the following (in millions):

 

June 30,

December 31,

 

   2001 

       2000 

 

 

Deferred policy acquisition costs

$581.6 

$536.9 

Present value of future profits acquired

87.6 

93.4 

Unearned revenues

(141.7)

(142.4)

 

$527.5 

$487.9 

F. Notes Payable

Notes payable consisted of the following (in millions):

 

 

June 30,

December 31,

 

   2001 

       2000 

 

 

Direct obligations of GAFRI

$  2.0 

$  2.0 

Obligations of AAG Holding (guaranteed by GAFRI):

 

 

  6-7/8% Senior Notes due 2008

100.0 

100.0 

  Bank Credit Line

41.3 

48.5 

Other subsidiary debt

   1.1 

   1.4 

     Total

$144.4 

$151.9 

In January 2001, AAG Holding replaced its existing bank line with a $155 million unsecured credit agreement. Loans under the credit agreement mature on December 31, 2004. At June 30, 2001, the weighted-average interest rate on amounts borrowed under its credit line was 4.81%.

At June 30, 2001, scheduled principal payments on debt for the remainder of 2001 and the subsequent five years were as follows (in millions):

2001

2002

2003

 2004

2005

2006

$0.3 

$0.7 

$0.6 

$41.5 

$0.2 

$0.2 

11

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

G. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts

Wholly-owned subsidiary trusts of GAFRI issued $225 million of preferred securities and, in turn, purchased a like amount of subordinated debt which provides interest and principal payments to fund the Trusts' obligations. The preferred securities are mandatorily redeemable upon maturity or redemption of the subordinated debt.  GAFRI effectively provides an unconditional guarantee of the Trusts' obligations. The three preferred securities issues are summarized as follows:

Date of

 

 

 

Optional

Issuance     

Issue (Maturity Date)

  06/30/01

  12/31/00

Redemption Dates

November 1996

9-1/4% TOPrS*  (2026)

$72,912,500

$72,912,500

On or after 11/7/2001

March 1997

8-7/8% Pfd     (2027)

 70,000,000

 70,000,000

On or after 3/1/2007

May 1997

7-1/4% ROPES** (2041)

 75,000,000

 75,000,000

After 9/28/2001

 

*  Trust Originated Preferred Securities

** Remarketed Par Securities

Until September 28, 2001 (the "Remarketing Date"), the obligations of GAFRI under the ROPES indenture and guarantee are senior unsecured obligations of the Company. On that date, the distribution rate on the ROPES will be reset to current market rates (not to exceed 8.8%) and the ROPES will become subordinate to all senior indebtedness of the Company.  Given the current interest rate environment for these types of securities, GAFRI expects to redeem its ROPES in September 2001 using bank borrowings.

H. Stockholders' Equity

The Company is authorized to issue 25,000,000 shares of Preferred Stock, par value $1.00 per share.

At June 30, 2001, there were 4.0 million shares of GAFRI Common Stock reserved for issuance under GAFRI's stock option plans. Under the plans, the exercise price of each option equals the market price of GAFRI Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant. All options expire ten years after the date of grant.

The change in net unrealized gains (losses) on marketable securities for the six months ended June 30 included the following (in millions):

 

         2001            

         2000             

 

Pretax

Taxes

Net

Pretax

Taxes

Net 

Unrealized holding gains (losses) on

 

 

 

 

 

 

  securities arising during the period

$ 2.1

($0.8)

$ 1.3 

($51.2)

$18.3 

($32.9)

Realized losses on securities

 23.0

(8.1)

 14.9 

  3.7 

 (1.3)

2.4 

Change in net unrealized gains (losses) on

 

 

 

 

 

 

  marketable securities

$25.1

($8.9)

$16.2 

($47.5)

$17.0 

($30.5)

12

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

I. Earnings Per Share

The number of common shares outstanding used in calculating diluted earnings per share in both the second quarter and first six months of 2001 includes 0.4 million shares compared to 0.3 million shares for the same periods in 2000 for the effect of the assumed exercise of GAFRI's dilutive stock options.

J. Contingencies

In March 2000, a jury in Dallas, Texas, returned a verdict against GALIC with total damages of $11.2 million in a lawsuit brought by two former agents of GALIC. The former agents had alleged that their agency agreement with GALIC had been wrongfully terminated. The Company believes the verdict was contrary to both the facts and the law and expects to prevail on appeal. The ultimate outcome of this case will not have a material adverse impact on the financial condition of the Company.

K. Additional Information

Statutory Information of Great American Life Insurance Company Insurance companies are required to file financial statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). Certain statutory amounts for GALIC, GAFRI's primary insurance subsidiary, were as follows (in millions):

 

June 30,

December 31,

 

   2001 

      2000 

   Capital and surplus

$338.0 

$362.5 

   Asset valuation reserve

71.3 

75.6 

   Interest maintenance reserve

2.6 

3.3 

 

 

 

Six months ended June 30,

 

2001 

2000 

   Pretax income from operations

$30.7 

$38.2 

   Net income from operations

23.0 

29.7 

   Net income

14.4 

32.1 

The amount of dividends which can be paid by GALIC without prior approval of regulatory authorities is subject to restrictions relating to capital and surplus and statutory net income. Based on net income for the year ended December 31, 2000, GALIC may pay $52.1 million in dividends in 2001 without prior approval. In the first six months of 2001, GALIC paid $8.0 million in dividends.

13

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Condensed Consolidating Information GAFRI has guaranteed all of the outstanding debt of AAG Holding and the preferred securities of the Trusts. Condensed consolidating financial statements for GAFRI are as follows (in millions):

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2001

(In millions)

 

 

 

AAG

TOTAL

ALL OTHER 

CONS

TOTAL

 

GAFRI

HOLDING

TRUSTS

     SUBS 

ENTRIES

 CONS

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

  Cash and investments

$ 30.2

$     - 

$   - 

$6,681.1 

($   15.8)

$6,695.5

  Investment in subsidiaries

626.9

1,021.0

 - 

1.0 

(1,648.9)

 - 

  Notes receivable from AAG   Holding

102.4

 - 

232.0

 -  

(334.4)

 - 

  Unamortized insurance   acquisition costs, net

 - 

 - 

 - 

527.5 

 -  

527.5

  Other assets

20.8

9.8

6.0

268.0 

38.7 

343.3

  Variable annuity assets   (separate accounts)

    - 

      - 

    - 

   530.7 

      -  

   530.7

 

$780.3

$1,030.8

$238.0

$8,008.3 

($1,960.4)

$8,097.0

 

 

 

 

 

 

 

Liabilities and Capital

 

 

 

 

 

 

  Insurance liabilities

 - 

 - 

 - 

6,210.2 

(4.6)

6,205.6

  Notes payable to GAFRI

 - 

102.4

 - 

0.1 

(102.5)

 - 

  Notes payable to Trusts

 - 

232.0

 - 

 -  

(232.0)

 - 

  Other notes payable

2.0

141.3

 - 

1.1 

 -  

144.4

  Other liabilities

66.8

 - 

6.0

229.3 

(15.2)

286.9

  Variable annuity liabilities

    (separate accounts)

    - 

      - 

    - 

   530.7 

      -  

   530.7

 

68.8

475.7

6.0

6,971.4 

(354.3)

$7,167.6

 

 

 

 

 

 

 

  Mandatorily redeemable   preferred securities of   subsidiary trusts

 - 

 - 

225.0

 -  

(7.1)

217.9

 

 

 

 

 

 

 

  Total stockholders' equity

 711.5

   555.1

   7.0

 1,036.9 

(1,599.0)

   711.5

 

$780.3

$1,030.8

$238.0

$8,008.3 

($1,960.4)

$8,097.0

14

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2000

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL

 

GAFRI

HOLDING 

TRUSTS 

     SUBS 

ENTRIES

 CONS

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

  Cash and investments

$ 30.0

$   -  

$   -  

$6,571.4 

($   16.1)

$6,585.3

  Investment in subsidiaries

580.6

978.8 

 -  

1.0 

(1,560.4)

 - 

  Notes receivable from AAG   Holding

102.4

 -  

232.0 

 -  

(334.4)

 - 

  Unamortized insurance   acquisition costs, net

 - 

 -  

 -  

487.9 

 -  

487.9

  Other assets

30.5

11.8 

6.0 

291.7 

29.0 

369.0

  Variable annuity assets   (separate accounts)

    - 

    -  

    -  

   533.7 

     -  

   533.7

 

$743.5

$990.6 

$238.0 

$7,885.7 

($1,881.9)

$7,975.9

 

 

 

 

 

 

 

Liabilities and Capital

 

 

 

 

 

 

  Insurance liabilities

 - 

 -  

 -  

6,147.8 

(4.7)

6,143.1

  Notes payable to GAFRI

 - 

102.4 

 -  

0.1 

(102.5)

 - 

  Notes payable to Trusts

 - 

232.0 

 -  

 -  

(232.0)

 - 

  Other notes payable

2.0

148.5 

 -  

1.4 

 -  

151.9

  Other liabilities

69.8

 -  

6.1 

208.8 

(27.1)

257.6

  Variable annuity liabilities

    (separate accounts)

    - 

    -  

    -  

   533.7 

     -  

   533.7

 

71.8

482.9 

6.1 

6,891.8 

(366.3)

$7,086.3

 

 

 

 

 

 

 

  Mandatorily redeemable   preferred securities of   subsidiary trusts

 - 

 -  

225.0 

 -  

(7.1)

217.9

 

 

 

 

 

 

 

  Total stockholders' equity

 671.7

 507.7 

   6.9 

   993.9 

(1,508.5)

   671.7

 

$743.5

$990.6 

$238.0 

$7,885.7 

($1,881.9)

$7,975.9

15

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDING JUNE 30, 2001

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

  Life, accident and health premiums

$  - 

$  -  

$ -  

$ 70.5 

$  -  

$ 70.5 

  Net investment income and other   revenue

6.5

 -  

 -  

124.2 

(4.6)

126.1 

  Interest income on AAG Holding notes

 - 

 -  

4.9 

 -  

(4.9)

 -  

  Equity in earnings of subsidiaries

  4.9

 14.5 

  -  

    -  

(19.4)

    -  

 

11.4

14.5 

4.9 

194.7 

(28.9)

196.6 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

  Insurance benefits and expenses

  - 

 -  

 -  

142.8 

 -  

142.8 

  Interest expense on AAG Holding   notes

 - 

4.9 

 -  

 -  

(4.9)

 -  

  Other interest and debt expenses

0.1

5.0 

 -  

 -  

2.3 

7.4 

  Other expenses

  4.2

  2.1 

  -  

  35.1 

 (2.1)

  39.3 

 

4.3

12.0 

 -  

177.9 

(4.7)

189.5 

 

 

 

 

 

 

 

  Earnings before income taxes

7.1

2.5 

4.9 

16.8 

(24.2)

7.1 

  Provision for income taxes

  1.5

  0.7 

  -  

   4.5 

 (5.2)

   1.5 

 

 

 

 

 

 

 

  Net income

$ 5.6

$ 1.8 

$4.9 

$ 12.3 

($19.0)

$  5.6 

 

 

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDING JUNE 30, 2001

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

  Life, accident and health premiums

$  - 

$  -  

$ -  

$139.7 

$  -  

$139.7 

  Net investment income and other   revenue

13.4

 -  

 -  

270.1 

(9.6)

273.9 

  Interest income on AAG Holding notes

 - 

 -  

9.8 

 -  

(9.8)

 -  

  Equity in earnings of subsidiaries

 27.3

 47.0 

  -  

    -  

(74.3)

   -  

 

40.7

47.0 

9.8 

409.8 

(93.7)

413.6 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

  Insurance benefits and expenses

  - 

 -  

 -  

287.4 

 -  

287.4 

  Interest expense on AAG Holding   notes

 - 

9.8 

 -  

 -  

(9.8)

 -  

  Other interest and debt expenses

0.1

10.2 

 -  

-  

4.4 

14.7 

  Other expenses

  7.3

  4.7 

  -  

  70.6 

 (4.4)

  78.2 

 

7.4

24.7 

 -  

358.0 

(9.8)

380.3 

 

 

 

 

 

 

 

  Earnings before income taxes

33.3

22.3 

9.8 

51.8 

(83.9)

33.3 

  Provision for income taxes

  9.8

  7.5 

  -  

  15.3 

(22.8)

   9.8 

 

 

 

 

 

 

 

  Net income

$23.5

$14.8 

$9.8 

$ 36.5 

($61.1)

$ 23.5 

 

16

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDING JUNE 30, 2000

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI 

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

  Life, accident and health premiums

$  -  

$  -  

$ -  

$ 49.7 

$ -  

$ 49.7 

  Net investment income and other   revenue

6.7 

 -  

 -  

145.1 

(5.6)

146.2 

  Interest income on AAG Holding   notes

 -  

 -  

4.9 

 -  

(4.9)

 -  

  Equity in earnings of subsidiaries

(10.0)

  1.1 

  -  

    -  

 8.9 

    -  

 

(3.3)

1.1 

4.9 

194.8 

(1.6)

195.9 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

  Insurance benefits and expenses

  -  

 -  

 -  

135.3 

 -  

135.3 

  Interest expense on AAG Holding   notes

 -  

4.9 

 -  

 -  

(4.9)

 -  

  Other interest and debt expenses

0.1 

6.0 

 -  

 -  

2.2 

8.3 

  Other expenses

  2.7 

  3.5 

  -  

  55.0 

(2.8)

  58.4 

 

2.8 

14.4 

 -  

190.3 

(5.5)

202.0 

 

 

 

 

 

 

 

  Operating earnings (loss) before

    income taxes

(6.1)

(13.3)

4.9 

4.5 

3.9 

(6.1)

  Provision (credit)for income taxes

 (4.0)

 (4.9)

  -  

   0.6 

 4.3 

  (4.0)

 

 

 

 

 

 

 

  Net operating earnings (loss)

(2.1)

(8.4)

4.9 

3.9 

(0.4)

(2.1)

 

 

 

 

 

 

 

  Equity in earnings of affiliate,   net of tax

  0.2 

   -  

  -  

    -  

  -  

   0.2 

 

 

 

 

 

 

 

  Net income (loss)

($ 1.9)

($ 8.4)

$4.9 

$  3.9 

($0.4)

($  1.9)

 

 

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDING JUNE 30, 2000

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

  Life, accident and health premiums

$  - 

$  -  

$ -  

$ 99.6 

$  -  

$ 99.6 

  Net investment income and other   revenue

14.2

 -  

 -  

280.3 

(11.2)

283.3 

  Interest income on AAG Holding notes

 - 

 -  

9.8 

 -  

(9.8)

 -  

  Equity in earnings of subsidiaries

  9.2

 30.6 

  -  

    -  

(39.8)

    -  

 

23.4

30.6 

9.8 

379.9 

(60.8)

382.9 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

  Insurance benefits and expenses

  - 

 -  

 -  

253.4 

 -  

253.4 

  Interest expense on AAG Holding   notes

 - 

9.8 

 -  

 -  

(9.8)

 -  

  Other interest and debt expenses

0.1

12.0 

 -  

0.1 

4.3 

16.5 

  Other expenses

  6.3

  5.5 

  -  

  89.9 

 (5.7)

  96.0 

 

6.4

27.3 

 -  

343.4 

(11.2)

365.9 

 

 

 

 

 

 

 

  Operating earnings before income   taxes

17.0

3.3 

9.8 

36.5 

(49.6)

17.0 

  Provision for income taxes

  2.5

  1.0 

  -  

  11.2 

(12.2)

   2.5 

 

 

 

 

 

 

 

  Net operating earnings

14.5

2.3 

9.8 

25.3 

(37.4)

14.5 

 

 

 

 

 

 

 

  Equity in earnings of affiliate, net   of tax

  1.0

   -  

  -  

    -  

   -  

   1.0 

 

 

 

 

 

 

 

  Net income

$15.5

$ 2.3 

$9.8 

$ 25.3 

($37.4)

$ 15.5 

17

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDING JUNE 30, 2001

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

  Net income

$23.5 

$14.8 

$9.8 

$ 36.5 

($61.1)

$ 23.5 

  Adjustments:

 

 

 

 

 

 

    Equity in undistributed earnings     of subsidiaries and affiliates

(19.6)

(23.7)

-  

-  

43.3 

-  

    Increase in life, accident and     health reserves

-  

-  

-  

21.5 

-  

21.5 

    Benefits to annuity policyholders

-  

-  

-  

140.0 

-  

140.0 

    Amortization of insurance     acquisition costs

-  

-  

-  

41.1 

-  

41.1 

    Depreciation and amortization

0.3 

2.4 

-  

2.1 

-  

4.8 

    Realized losses

1.2 

-  

-  

23.3 

-  

24.5 

    Increase in insurance acquisition

      costs

-  

-  

-  

(73.5)

-  

(73.5)

    Other, net

  6.9 

  1.1 

  -  

 (33.4)

  0.2 

 (25.2)

 

 12.3 

 (5.4)

 9.8 

 157.6 

(17.6)

 156.7 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

  Purchases of investments and other

    assets

-  

 -  

 -  

(548.9)

-  

(548.9)

  Maturities and redemptions of fixed

    investments

-  

-  

 -  

234.5 

-  

234.5 

  Sales of investments and other   assets

-  

-  

 -  

220.1 

-  

220.1 

  Decrease in policy loans

  -  

   -  

  -  

   2.8 

   -  

   2.8 

 

  -  

   -  

  -  

 (91.5)

   -  

 (91.5)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

  Fixed annuity receipts

-  

-  

-  

271.8 

-  

271.8 

  Annuity surrenders, benefits and

    withdrawals

-  

-  

-  

(341.3)

-  

(341.3)

  Net transfers to variable annuity

    assets

-  

-  

-  

(1.4)

-  

(1.4)

  Additions to notes payable

-  

4.7 

-  

-  

-  

4.7 

  Reductions of notes payable

-  

(11.9)

-  

(0.3)

-  

(12.2)

  Issuance of Common Stock

0.4 

-  

-  

-  

-  

0.4 

  Capital contribution from parent (to

    subsidiary)

(12.6)

12.6 

-  

(8.0)

8.0 

-  

  Retirement of Common Stock

(0.3)

-  

-  

-  

-  

(0.3)

  Trust dividend requirements

  -  

   -  

(9.8)

    -  

   9.8 

    -  

 

(12.5)

  5.4 

(9.8)

 (79.2)

  17.8 

 (78.3)

 

 

 

 

 

 

 

Net increase (decrease) in cash and

  short-term investments

(0.2)

-  

-  

 (13.1)

0.2 

 (13.1)

Beginning cash and short-term investments

  3.2 

   -  

  -  

  84.5 

 (0.2)

  87.5 

 

 

 

 

 

 

 

Ending cash and short-term investments

$ 3.0 

$  -  

$ -  

$ 71.4 

$  -  

$ 74.4 

18

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

GREAT AMERICAN FINANCIAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDING JUNE 30, 2000

(In millions)

 

 

 

AAG 

TOTAL 

ALL OTHER 

CONS

TOTAL 

 

GAFRI

HOLDING 

TRUSTS 

    SUBS 

ENTRIES

 CONS 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

  Net income

$15.5 

$ 2.3 

$9.8 

$ 25.3 

($37.4)

$ 15.5 

  Adjustments:

 

 

 

 

 

 

    Equity in undistributed earnings     of subsidiaries and affiliates

(5.5)

(1.4)

-  

-  

5.9 

(1.0)

    Increase in life, accident and     health reserves

-  

-  

-  

26.2 

-  

26.2 

    Benefits to annuity policyholders

-  

-  

-  

145.8 

-  

145.8 

    Amortization of insurance     acquisition costs

-  

-  

-  

34.0 

-  

34.0 

    Depreciation and amortization

0.4 

3.9 

-  

1.2 

-  

5.5 

    Realized (gains) losses

(0.4)

-  

-  

4.1 

-  

3.7 

    Increase in insurance acquisition

      costs

-  

-  

-  

(70.6)

-  

(70.6)

    Other, net

 (2.3)

(10.0)

  -  

  (9.7)

 (0.6)

 (22.6)

 

  7.7 

 (5.2)

 9.8 

 156.3 

(32.1)

 136.5 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

  Purchases of investments and other

    assets

(2.5)

 -  

 -  

(451.8)

-  

(454.3)

  Maturities and redemptions of fixed

    investments

0.6 

-  

 -  

199.3 

-  

199.9 

  Sales of investments and other   assets

2.5 

-  

 -  

224.1 

-  

226.6 

  Decrease in policy loans

   -  

   -  

  -  

   2.6 

   -  

   2.6 

 

  0.6 

   -  

  -  

 (25.8)

   -  

 (25.2)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

  Fixed annuity receipts

-  

-  

-  

251.1 

-  

251.1 

  Annuity surrenders, benefits and

    withdrawals

-  

-  

-  

(387.6)

-  

(387.6)

  Net transfers to variable annuity

    assets

-  

-  

-  

(34.2)

-  

(34.2)

  Additions to notes payable

-  

2.0 

-  

-  

-  

2.0 

  Reductions of notes payable

(0.1)

-  

-  

(0.4)

-  

(0.5)

  Issuance of Common Stock

0.6 

-  

-  

-  

-  

0.6 

  Capital contribution from parent (to

    subsidiary)

(3.2)

3.2 

-  

(21.7)

21.7 

-  

  Retirement of Common Stock

(1.9)

-  

-  

-  

-  

(1.9)

  Repurchase of trust preferred

    securities

(1.4)

-  

-  

-  

-  

(1.4)

  Trust dividend requirements

   -  

   -  

(9.8)

    -  

   9.8 

    -  

 

 (6.0)

  5.2 

(9.8)

(192.8)

  31.5 

(171.9)

 

 

 

 

 

 

 

Net increase (decrease) in cash and

  short-term investments

 2.3 

-  

-  

 (62.3)

(0.6)

 (60.6)

Beginning cash and short-term investments

  1.1 

   -  

  -  

 118.5 

   -  

 119.6 

 

 

 

 

 

 

 

Ending cash and short-term investments

$ 3.4 

$  -  

$ -  

$ 56.2 

($ 0.6)

$ 59.0 

19

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations

GENERAL

Great American Financial Resources, Inc. ("GAFRI" or "the Company") and its subsidiary, AAG Holding Company, Inc., are organized as holding companies with nearly all of their operations being conducted by their subsidiaries. These companies, however, have continuing expenditures for administrative expenses, corporate services and for the payment of interest and principal on borrowings and stockholder dividends.

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 forward-looking words such as "believes", "expects", "may", "will", "should", "seeks", "intends", "plans", "estimates", "anticipates" or the negative version of those words or other comparable terminology. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including:

Forward-looking statements included in this Form 10-Q are made only as of the date of this report and under Section 27A of The Securities Act and Section 21E of The Exchange Act; we do not have any obligation to update any forward-looking statement to reflect subsequent events or circumstances.

LIQUIDITY AND CAPITAL RESOURCES

Ratios  GAFRI's consolidated debt to capital ratio was 22% at June 30, 2001, compared to 27% one year ago. Consolidated debt includes the Company's notes payable and its Remarketed Par Securities ("ROPES"). Capital represents the sum of consolidated debt, redeemable preferred securities of subsidiary trusts and stockholders' equity (excluding unrealized gains on marketable securities).

The National Association of Insurance Commissioners' ("NAIC") risk-based capital ("RBC") formulas determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At June 30, 2001, the capital ratio of GAFRI's principal insurance subsidiary was 4.2 times its authorized control level RBC.

20

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

Sources and Uses of Funds To pay interest and principal on borrowings and other holding company costs, GAFRI (parent) and AAG Holding use cash and investments on hand, capital distributions from their principal subsidiary, Great American Life Insurance Company ("GALIC") and bank borrowings.  The amount of capital distributions which can be paid by GALIC is subject to restrictions relating to statutory surplus and earnings. The maximum amount of dividends payable by GALIC in 2001 without prior regulatory approval is $52.1 million. In the first six months of 2001, GALIC paid $8.0 million in dividends.

In the third quarter of 2000, GAFRI paid down approximately $50 million of its bank credit line. In January 2001, the Company replaced its existing agreement with a $155 million unsecured credit agreement which matures on December 31, 2004. At June 30, 2001, GAFRI (parent) had over $100 million available under its bank credit line.

Given the current interest rate environment, GAFRI expects to redeem its ROPES in September 2001 using borrowings under the bank credit line. In May 2001, GAFRI filed to amend its shelf registration statement to provide for the issuance of up to $250 million of debt and preferred securities.

Based upon the current level of operations and anticipated growth, GAFRI believes that it will have sufficient resources to meet its liquidity requirements.

Investments GAFRI invests primarily in fixed income investments which, including loans and short-term investments, comprised 98% of its investment portfolio at June 30, 2001. GAFRI generally invests in securities having intermediate-term maturities with an objective of optimizing interest yields while maintaining an appropriate relationship of maturities between GAFRI's assets and expected liabilities.

The NAIC assigns quality ratings to publicly traded as well as privately placed securities. At June 30, 2001, 92% of GAFRI's fixed maturity portfolio was comprised of investment grade bonds (NAIC rating of "1" or "2"). Management believes that the high credit quality of GAFRI's investment portfolio should generate a stable and predictable investment return.

At June 30, 2001, GAFRI's mortgage-backed securities ("MBSs") portfolio represented approximately one-third of its fixed maturity investments. GAFRI invests primarily in MBSs which have a lower risk of prepayment. In addition, the majority of MBSs held by GAFRI were purchased at a discount. Management believes that the structure and discounted nature of the MBSs will reduce the effect of prepayments on earnings over the anticipated life of the MBS portfolio.

More than 90% of GAFRI's MBSs are rated "AAA" with substantially all being investment grade quality. The market in which these securities trade is highly liquid. Aside from interest rate risk, GAFRI does not believe a material risk (relative to earnings or liquidity) is inherent in holding such investments.

21

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS

General Management believes the concept of net operating earnings (or "core" earnings) is helpful in comparing the operating performance of GAFRI with that of similar companies. However, core earnings should not be considered a substitute for net income as an indication of GAFRI's overall performance. The following table (in millions, except per share amounts) compares the Company's core earnings for the following periods.

 

Three months ended

      June 30,    

Six months ended

    June 30,    

GAFRI (Consolidated):

2001

2000

2001

2000

Revenues per statement of operations

$196.6

$195.9

$413.6

$382.9

Add back realized losses

  22.7

   0.8

 24.5

3.7

Core operating revenues

219.3

196.7

438.1

386.6

 

 

 

 

 

Expenses per statement of operations

189.5

202.0

380.3

365.9

Less litigation charges included in

annuity benefits

14.2

14.2

Less litigation charges included in

other expenses

    - 

  18.3

    - 

  18.3

Core operating expenses

 189.5

 169.5

380.3

333.4

 

 

 

 

 

Core operating earnings before tax

29.8

27.2

57.8

53.2

Income tax expense

   9.5

   7.7

18.4

15.2

Net core operating earnings

$ 20.3

$ 19.5

$ 39.4

$ 38.0

 

 

 

 

 

Net core operating earnings per

common share (diluted)

$ 0.47

$ 0.46

$ 0.92

$ 0.89

Retirement Products The following table summarizes GAFRI's premiums for its retirement annuities (in millions).

Three months ended

Six months ended

      June 30,    

    June 30,    

 

2001

2000

2001

2000

   Annuity Premiums

 

 

 

 

   Single premium fixed rate annuities

$ 96

$ 65

$174

$131

   Flexible premium fixed rate annuities

41

44

79

85

   Single premium variable annuities

23

72

45

145

   Flexible premium variable annuities

  24

  19

  48

  36

 

$184

$200

$346

$397

Sales of annuity products linked to the performance of the stock market (variable and equity-indexed annuities) were down substantially in the second quarter and first six months of 2001 compared to the same periods in 2000. Management believes this decrease was attributable to the volatile equity markets.

 

22

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

Life, Accident and Health Premiums and Benefits The following table summarizes GAFRI's life, accident and health premiums and benefits as shown in the Consolidated Statement of Operations (in millions).

Three months ended

Six months ended

     June 30,    

    June 30,    

 

2001

2000

2001

2000

     Premiums

 

 

 

 

     Supplemental insurance products

$49

$31

$ 97

$ 62

     GA Life of Puerto Rico

13

13

26

25

     Life products

  9

  6

  17

  13

 

$71

$50

$140

$100

 

 

 

 

 

     Benefits

 

 

 

 

     Supplemental insurance products

$40

$25

$ 79

$ 50

     GA Life of Puerto Rico

7

6

14

13

     Life products

  5

  6

  13

  11

 

$52

$37

$106

$ 74

The increase in supplemental insurance premiums reflects the acquisition of a block of business in 2000.

Real Estate Operations GAFRI is engaged in a variety of real estate operations including hotels and a marina; GAFRI also owns various parcels of land. Revenues and expenses of these operations, including gains on disposal, are included in GAFRI's Consolidated Statement of Operations as shown below (in millions).

Three months ended

Six months ended

     June 30,    

    June 30,    

 

2001

2000

2001

2000

     Other income

$11.2

$10.3

$26.0

$15.3

     Other expenses

7.6

7.7

14.3

13.5

Other income included a pretax gain on the sale of real estate assets of $2.1 million in the second quarter of 2001 and $10.6 million in the first six months of 2001.

Other Income Other income increased $11.7 million in the first six months of 2001 compared to the same period in 2000 due primarily to income from the sale of real estate and, to a lesser extent, increased fees earned on GAFRI's variable annuity and life business.

Realized Losses Realized losses on securities includes the following provisions for other than temporary impairment: second quarter of 2001 and 2000 - $20.5 million and $1.2 million; six months of 2001 and 2000 - $23.0 million and $1.2 million, respectively.

Annuity Benefits Annuity benefits reflect amounts accrued on annuity policyholders' funds accumulated. In the second quarter and first six months of 2000, annuity benefits also included $14.2 million related to a class action lawsuit settlement. The majority of GAFRI's fixed rate annuity products permit GAFRI 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.

On its deferred annuities (annuities in the accumulation phase), GAFRI generally credits interest to policyholders' accounts at their current stated "surrender" interest rates. Furthermore, for "two-tier" deferred annuities (annuities under which a higher interest amount can be earned if a policy is annuitized rather than

23

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

surrendered), GAFRI accrues an additional liability to provide for expected deaths and annuitizations. Changes in crediting rates, actual surrender and annuitization experience or modifications in actuarial assumptions can affect this accrual.

GAFRI's equity-indexed fixed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market index. GAFRI attempts to mitigate the risk in the equity-based component of these products through the purchase of call options on the appropriate index. GAFRI's strategy is designed so that an increase in the liabilities due to an increase in the market index will be substantially offset by unrealized gains on the call options. Under SFAS No. 133, both the equity-based component of the annuities and the related call options are considered derivatives and marked to market through current earnings as annuity benefits. Adjusting these derivatives to market value had virtually no net effect on annuity benefits in the first six months of 2001.

Insurance Acquisition Expenses Insurance acquisition expenses include amortization of deferred policy acquisition costs ("DPAC") as well as commissions on sales of life insurance products. Insurance acquisition expenses also include amortization of the present value of future profits of businesses acquired amounting to $5.7 million in the first six months of 2001 and $6.4 million in the first six months of 2000.

Interest and Other Debt Expenses The decrease in interest and other debt expenses in the second quarter and first six months of 2001 compared to the same periods in 2000 is due primarily to lower bank borrowings as well as lower interest rates on these borrowings.

Other Expenses In the second quarter of 2000, the Company recorded a charge of $32.5 million for liabilities related to various litigation in which the Company or one of its subsidiaries is a defendant ($18.3 million of that charge was included in other expenses; $14.2 million of that charge was included in annuity benefits expense). The charge represents amounts that the Company agreed to pay and estimates of the ultimate liability in certain cases not yet finalized. The most significant case included in this charge was a policyholder class action was approved for settlement in the fourth quarter of 2000.

Equity in Earnings of Affiliate Equity in earnings of affiliate in 2000 represents GAFRI's proportionate share of the results of Chiquita Brands International. In 2001, due to Chiquita's restructuring plans, GAFRI suspended accounting for Chiquita under the equity method and reclassified its $2.7 million investment to "Equity securities" in the consolidated balance sheet at June 30, 2001 (See Note B.)

Recent Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 141, business combinations initiated after June 30, 2001 are required to be accounted for using the purchase method of accounting. Under SFAS No. 142, goodwill will no longer be amortized beginning January 1, 2002, but will be subject to an impairment test at least annually. A transitional test for impairment is required to be completed in 2002 with any resulting writedown reported during the first quarter as a cumulative effect of a change in accounting principle. Based on goodwill recorded at June 30, 2001, management expects that goodwill amortization in 2002 would have been less than $2 million.

24

GREAT AMERICAN FINANCIAL RESOURCES, INC. 10-Q

PART II

OTHER INFORMATION

Item 3

Quantitative and Qualitative Disclosure at Market Risk

As of June 30, 2001, there were no material changes to the information provided in GAFRI's Form 10-K for 2000 under the caption "Exposure to Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4

Submission of Matters to a Vote of Security Holders

The Registrant's Annual Stockholders' Meeting was held May 23, 2001. Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. All of the nominees for director proposed by the Registrant were elected to the board of Directors.

In addition to the election of directors, stockholders (representing approximately 95% of the voting shares) also voted to approve an amendment to the GAFRI 1994 Stock Option Plan to increase the maximum number of options to be granted from 3,000,000 to 4,000,000 [Proposal 2.]

The votes cast for, against, and the number withheld or abstentions as to each matter voted on at the 2001 Annual Meeting is set forth below:

 

For

Against

Withheld/Abstain

Election of Directors:

 

 

 

  Carl H. Lindner

40,892,299

NA

36,955

  S. Craig Lindner

40,738,731

NA

190,523

  Robert A. Adams

40,719,395

NA

209,859

  Ronald G. Joseph

40,910,500

NA

18,754

  John T. Lawrence

40,911,259

NA

17,995

  William R. Martin

40,909,528

NA

19,726

  Ronald W. Tysoe

40,909,667

NA

19,587

 

 

 

 

Proposal 2

40,259,277

662,630

7,347

________________

 

 

 

NA - Not Applicable

 

 

 

Item 6

Exhibits and Reports on Form 8-K

(a)  Exhibits:  none

(b)  Reports on Form 8-K:  none


Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

 

 

GREAT AMERICAN FINANCIAL RESOURCES, Inc.

 

 

 

 

 

 

August 14, 2001

 

BY:/s/Christopher P. Miliano

 

 

   Christopher P. Miliano

 

 

   Chief Financial Officer

25