SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1997 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
American Financial Group, Inc.:
Common Stock New York Stock Exchange
American Financial Capital Trust I (Guaranteed by Registrant):
9-1/8% Trust Originated Preferred Securities New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Other securities for which reports are submitted pursuant to Section 15(d)
of the Act:
7-1/8% Senior Debentures due December 15, 2007
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 1998, there were 61,078,720 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
The aggregate market value of the Common Stock held by non-affiliates at that
date, was approximately $1.4 billion (based upon non-affiliate holdings of
35,211,772 shares and a market price of $40.4375 per share.)
_____________
Documents Incorporated by Reference:
Proxy Statement for the 1998 Annual Meeting of Shareholders
(portions of which are incorporated by reference into Part III hereof).
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AMERICAN FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 15
Other Companies 19
Investment Portfolio 19
Regulation 21
Item 2 - Properties 23
Item 3 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of Security Holders 25
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 25
Item 6 - Selected Financial Data 26
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk (a)
Item 8 - Financial Statements and Supplementary Data 36
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (b)
Part III
Item 10 - Directors and Executive Officers of the Registrant 36
Item 11 - Executive Compensation 36
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 36
Item 13 - Certain Relationships and Related Transactions 36
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) Not required - market capitalization on January 28, 1997 was less
than $2.5 billion.
(b)The response to this Item is "none".
Forward-Looking Statements The Private Securities Litigation Reform Act of
1995 encourages corporations to provide investors with information about the
company's anticipated performance and provides protection from liability if
future results are not the same as management's expectations. This document
contains certain forward-looking statements that are based on assumptions
which management believes are reasonable, but by their nature, inherently
uncertain. Future results could differ materially from those projected.
Factors that could cause such differences include, but are not limited to:
changes in economic conditions, regulatory actions, level of catastrophe
losses, and competitive pressures. AFG undertakes no obligation to update
any forward-looking statements.
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PART I
ITEM 1
Business
Introduction
American Financial Group, Inc. ("AFG") was incorporated as an Ohio
corporation in July 1997. Its address is One East Fourth Street,
Cincinnati, Ohio 45202; its phone number is (513) 579-2121. AFG is a
holding company which, through its subsidiaries, is engaged primarily
in specialty and multi-line property and casualty insurance businesses
and in the sale of tax-deferred annuities and certain life and health
insurance products. AFG's property and casualty operations originated
in 1872 and were the 20th largest property and casualty group in the
United States based on 1996 statutory net premiums written of $2.8 billion.
On December 2, 1997, AFG completed several transactions in
furtherance of a plan to reduce corporate expenses and simplify
the public company structure of certain subsidiaries (the "AFG
Reorganization"). In one of these transactions, the shareholders
of AFC Holding Company (formerly known as American Financial
Group, Inc.) approved a plan of reorganization whereby AFG became
the public parent corporation of AFC Holding and all of its
subsidiaries. Shares of AFC Holding common stock were converted
to AFG common stock on a share-for-share basis. No material
change in AFG's financial condition or in the rights of AFG
securityholders occurred as a result of the reorganization. AFC
Holding itself had been formed for the purpose of acquiring
American Financial Corporation ("AFC") and American Premier
Underwriters, Inc. ("American Premier" or "APU") in merger
transactions completed in April 1995 (the "1995 Mergers").
For financial reporting purposes, because the former
shareholders of AFC owned more than 50% of AFG following the
Mergers, the financial statements of AFG for periods prior to the
Mergers are those of AFC. The operations of APU are included in
AFG's financial statements from the effective date of the Mergers.
At December 31, 1997, Carl H. Lindner, members of his immediate
family and trusts for their benefit (collectively the "Lindner
Family") beneficially owned approximately 44% of AFG's outstanding
voting common stock.
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General
Generally, companies have been included in AFG's consolidated
financial statements when the ownership of voting securities has
exceeded 50%; for investments below that level but above 20%, AFG
has accounted for the investments as investees. (See Note F to
AFG's financial statements.) The following table shows AFG's
percentage ownership of voting securities of its significant
affiliates over the past several years:
Voting Ownership at December 31,
1997 1996 1995 1994 1993
American Financial Corporation 79% 76% 79% n/a n/a
American Premier Underwriters 100% 100% 100% 42% 41%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 81% 81% 81% 80% 80%
American Financial Enterprises 100% 83% 83% 83% 83%
Chiquita Brands International 39% 43% 44% 46% 46%
Citicasters - (a) 38% 37% 20%
(a) Sold in September 1996.
The following summarizes the more significant changes in
ownership percentages shown in the above table.
American Financial Corporation For financial reporting
purposes, AFC is the predecessor to AFG. In April 1995, AFC
became a subsidiary of AFG as a result
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of the Mergers. Holders of AFC Series F and G Preferred Stock
were granted voting rights equal to approximately 21% of the total
voting power of AFC shareholders immediately prior to the Mergers.
American Premier Underwriters In April 1995, APU became a subsidiary
of AFG as a result of the Mergers.
American Financial Enterprises In December 1997, AFEI became a
wholly-owned subsidiary of AFG as a result of a transaction whereby AFG
purchased all publicly-held shares of AFEI for cash and AFG Common Stock.
Chiquita Brands International During the second half of 1997,
Chiquita issued an aggregate of 4.6 million shares of its common stock
in connection with the purchase of new businesses.
Citicasters In 1994, AFEI purchased approximately 10% of Citicasters
common stock. In the second half of 1994, Citicasters repurchased and
retired approximately 21% of its common stock. In September 1996, the
investments in Citicasters were sold to an unaffiliated company.
Property and Casualty Insurance Operations
AFG manages and operates its property and casualty business in
three major business segments: Nonstandard Automobile Insurance,
Specialty Lines and Commercial and Personal Lines. Each segment
is comprised of multiple business units which operate autonomously
but with strong central financial controls and full
accountability. Decentralized control allows each unit the
autonomy necessary to respond to local and specialty market
conditions while capitalizing on the efficiencies of centralized
investment, actuarial, financial and legal support functions.
AFG's property and casualty insurance operations employ
approximately 8,100 persons.
AFG operates in a highly competitive industry that is affected
by many factors which can cause significant fluctuations in their
results of operations. The property and casualty insurance
industry has historically been subject to pricing cycles
characterized by periods of intense competition and lower premium
rates (a "downcycle") followed by periods of reduced competition,
reduced underwriting capacity due to lower policyholders' surplus
and higher premium rates (an "upcycle"). The property and
casualty insurance industry is currently in an extended downcycle,
which has lasted nearly a decade. AFG's premiums have been
adversely affected by this downcycle, particularly in the
extremely competitive pricing environment in certain standard
commercial lines of business.
The primary objective of AFG's property and casualty insurance
operations is to achieve underwriting profitability. Underwriting
profitability is measured by the combined ratio which is a sum of
the ratios of underwriting losses, loss adjustment expenses
("LAE"), underwriting expenses and policyholder dividends to
premiums. When the combined ratio is under 100%, underwriting
results are generally considered profitable; when the ratio is over
100%, underwriting results are generally considered unprofitable.
The combined ratio does not reflect investment income, other income
or federal income taxes.
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Management's focus on underwriting performance has resulted in a
statutory combined ratio averaging 101.3% for the period 1993 to 1997, as
compared to 105.8% for the property and casualty industry over the same
period (Source: "Best's Review/Preview - Property/Casualty" - January 1998
Edition). AFG believes that its product line diversification and
underwriting discipline have contributed to the Company's ability to
consistently outperform the industry's underwriting results. Management's
philosophy is to refrain from writing business that is not expected to
produce an underwriting profit even if it is necessary to limit premium
growth to do so.
Generally, while financial data is reported on a statutory
basis for insurance regulatory purposes, it is reported in
accordance with generally accepted accounting principles ("GAAP")
for shareholder and other investment
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purposes. In general, statutory accounting results in lower
capital surplus and net earnings than result from application of
GAAP. Major differences include charging policy acquisition costs
to expense as incurred rather than spreading the costs over the
periods covered by the policies; recording bonds and redeemable
preferred stocks primarily at amortized cost; netting of
reinsurance recoverables and prepaid reinsurance premiums against
the corresponding liability; requiring additional loss reserves;
and charging to surplus certain assets, such as furniture and
fixtures and agents' balances over 90 days old. Unless indicated
otherwise, the financial information presented for the property
and casualty insurance operations herein is presented based on
GAAP and includes the insurance operations of AFC and American
Premier for all periods.
The following table shows (in millions) certain information of
AFG's property and casualty insurance operations.
1997 1996 1995
Statutory Basis
Premiums Earned $2,802 $2,821 $3,006
Admitted Assets 6,983 6,603 6,753
Unearned Premiums 1,133 1,104 1,160
Loss and LAE Reserves 3,475 3,397 3,394
Capital and Surplus 1,916 1,659 1,595
GAAP Basis
Premiums Earned $2,824 $2,845 $3,031
Total Assets 9,212 8,623 9,002
Unearned Premiums 1,329 1,248 1,294
Loss and LAE Reserves 4,225 4,124 4,097
Shareholder's Equity 3,019 2,695 2,893
The following table shows the size (in millions), segment and
A.M. Best rating of AFG's major property and casualty insurance
subsidiaries. AFG continues to focus on growth opportunities in
what it believes to be more profitable specialty lines and
nonstandard auto businesses which represented the bulk of 1997 net
written premiums.
1997 Net Written Premiums
NSA Commercial
Company (A.M. Best Rating) Group Specialty and Personal
Great American (A) $ - $ 724 $507
Republic Indemnity (A) - 224 -
Mid-Continent (A) - 104 -
American Empire Surplus Lines (A+) - 23 -
Atlanta Casualty (A) 399 - -
Windsor (A) 339 - -
Infinity (A) 331 - -
Leader National (A-) 59 - -
Transport (A) 93 - -
Other 27 28 -
$1,248 $1,103 $507
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The following table shows the performance of AFG's property and
casualty insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $2,858 $2,788 $3,092
Net earned premiums $2,824 $2,845 $3,031
Loss and LAE 2,076 2,132 2,265
Underwriting expenses 783 780 792
Policyholder dividends 7 14 8
Underwriting loss ($ 42) ($ 81) ($ 34)
GAAP ratios:
Loss and LAE ratio 73.5% 75.0% 74.8%
Underwriting expense ratio 27.7 27.4 26.1
Policyholder dividend ratio .2 .5 .3
Combined ratio (a) 101.4% 102.9% 101.2%
Statutory ratios:
Loss and LAE ratio 73.4% 74.8% 74.8%
Underwriting expense ratio 27.3 27.2 25.9
Policyholder dividend ratio .7 .4 1.7
Combined ratio (a) 101.4% 102.4% 102.4%
Industry statutory combined ratio (b) 101.6% 105.8% 106.5%
(a) The 1996 combined ratios include an increase of 2.8 percentage
points attributable to the strengthening of insurance reserves
relating to asbestos and other environmental matters ("A&E").
(b) Ratios are derived from "BestWeek" (March 16, 1998 Edition).
As with other property and casualty insurers, AFG's operating
results can be adversely affected by unpredictable catastrophe
losses. Certain natural disasters (hurricanes, tornadoes, floods,
forest fires, etc.) and other incidents of major loss (explosions,
civil disorder, fires, etc.) are classified as catastrophes by
industry associations. Losses from these incidents are usually
tracked separately from other business of insurers because of
their sizable effects on overall operations. AFG generally seeks
to reduce its exposure to such events through individual risk
selection and the purchase of reinsurance. Major catastrophes in
recent years included Hurricane Fran in 1996 and the Texas
hailstorms in 1995. Total net losses to AFG's insurance
operations from catastrophes were $20 million in 1997; $85 million
in 1996; and $70 million in 1995. These amounts are included in
the tables herein.
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Nonstandard Automobile Insurance
General The Nonstandard Automobile Insurance segment ("NSA
Group") underwrites primarily private passenger automobile liability
and physical damage insurance policies for "nonstandard" risks.
Nonstandard insureds are those individuals who are unable to obtain
insurance through standard market carriers due to factors such as
age, record of prior accidents, driving violations, particular
occupation or type of vehicle. Premium rates for nonstandard risks
are generally higher than for standard risks. Total private
passenger automobile insurance net premiums written by insurance
carriers in the United States in 1997 have been estimated by A.M.
Best to be approximately $115 billion. Because it can be viewed as
a residual market, the size of the nonstandard private passenger
automobile insurance market changes with the insurance environment
and grows when standard coverage becomes more restrictive. When
this occurs, the criteria which differentiate standard from
nonstandard insurance risks change. The size of the voluntary
nonstandard market is also affected by rate levels adopted by state
administered involuntary plans. According to A.M. Best, the
voluntary nonstandard market has accounted for about one-sixth of
total private passenger automobile insurance premiums written in
recent years.
While the NSA Group's implementation of significant rate
increases during 1995 and early 1996 led to a reduction of premiums
written in 1996, it also led to improved underwriting profitability
in 1996 and 1997. Premium growth resumed in 1997 as a result of
more moderate rate activity and California's stronger enforcement of
its mandatory insurance law.
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The NSA Group writes business in 42 states and holds licenses
to write policies in 49 states and the District of Columbia. The
U.S. geographic distribution of the NSA Group's statutory direct
written premiums in 1997 compared to 1993, was as follows:
1997 1993 1997 1993
California 15.2% 6.9% Mississippi 2.3% 3.1%
Florida 11.1 13.2 Arizona 2.1 5.8
Georgia 10.2 12.0 Kentucky 2.1 2.0
Pennsylvania 8.3 * Ohio * 4.0
Texas 5.9 5.6 Alabama * 3.7
Connecticut 5.2 3.6 Washington * 3.3
New York 4.3 * Oregon * 3.1
Indiana 3.3 3.7 Utah * 2.7
Tennessee 2.7 4.5 Arkansas * 2.5
Missouri 2.6 3.7 Virginia * 2.4
Oklahoma 2.6 3.0 Other 22.1 11.2
_______________ 100.0% 100.0%
(*) less than 2%
In addition, the NSA Group has written approximately 4% of its
net premiums annually in the United Kingdom.
Management believes that the NSA Group's underwriting success
has been due, in part, to the refinement of various risk profiles,
thereby dividing the consumer market into more defined segments
which can be underwritten or priced properly. The NSA Group also
generally writes policies of short duration which allow more
frequent rating evaluations of individual risks, providing
management greater flexibility in the ongoing assessment of the
business. In addition, the NSA Group has implemented cost control
measures both in the underwriting and claims handling areas.
The following table shows the performance of AFG's NSA Group
insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $1,248 $1,135 $1,277
Net earned premiums $1,205 $1,183 $1,246
Loss and LAE 898 904 1,036
Underwriting expenses 274 278 273
Underwriting profit (loss) $ 33 $ 1 ($ 63)
GAAP ratios:
Loss and LAE ratio 74.5% 76.4% 83.2%
Underwriting expense ratio 22.7 23.5 22.0
Combined ratio 97.2% 99.9% 105.2%
Statutory ratios:
Loss and LAE ratio 74.1% 75.8% 83.1%
Underwriting expense ratio 21.9 22.5 21.6
Combined ratio 96.0% 98.3% 104.7%
Industry statutory combined ratio (a) 98.0% 101.0% 101.3%
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(a) Represents the private passenger automobile industry statutory combined
ratio derived from "Best's Review/Preview - Property/Casualty"
(January 1998 Edition). Although AFG believes that there is no
reliable regularly published combined ratio data for the nonstandard
automobile insurance industry, AFG believes that such a combined ratio
would be lower than the private passenger automobile industry average
shown above.
Marketing Each of the principal units in the NSA Group is responsible
for its own marketing, sales, underwriting and claims processing. Sales
efforts are directed primarily toward independent agents. These units each
write policies through several thousand independent agents.
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The NSA Group had approximately one million policies in force
at December 31, 1997, just under 90% of which had policy limits
of $50,000 or less per occurrence. Most NSA Group policies are
written for policy periods of six months or less.
Competition A large number of national, regional and local
insurers write nonstandard private passenger automobile insurance
coverage. Insurers in this market generally compete on the basis
of price (including differentiation on liability limits, variety of
coverages offered and deductibles), geographic availability and
ease of enrollment and, to a lesser extent, reputation for claims
handling, financial stability and customer service. NSA Group
management believes that sophisticated data analysis for refinement
of risk profiles has helped the NSA Group to compete successfully.
The NSA Group attempts to provide selected pricing for a wider
spectrum of risks and with a greater variety of payment options,
deductibles and limits of liability than are offered by many of its
competitors.
Specialty Lines
General The Specialty Lines segment emphasizes the writing of
specialized insurance coverage where AFG personnel are experts in
particular lines of business or customer groups. The following
are examples of such Specialty Lines and the businesses which they operate:
Workers' Compensation Writes coverage for prescribed benefits
payable to employees (principally in
California) who are injured on the job.
Executive Liability Markets liability coverage for attorneys and
corporate directors and officers.
Inland and Ocean Marine Provides coverage primarily for marine cargo,
boat dealers, marina operators/dealers,
excursion vessels, builder's risk, contractor's
equipment, excess property and transportation
cargo.
Japanese division Provides coverage primarily for workers'
compensation, commercial auto, umbrella, and
general liability of Japanese businesses
operating in the U.S.
Agricultural-related Provides multi-peril crop insurance covering
weather (allied lines) and disease perils as
well as coverage for full-time operating
farms/ranches and agribusiness operations
on a nationwide basis.
Non-profit Liability Provides property, general/professional
liability, automobile, trustee liability,
umbrella and crime coverage for a wide range
of non-profit organizations.
General Aviation Provides coverage for corporate and private
aircraft and airports.
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Fidelity and Surety Bonds Provides surety coverage for various types of
contractors and public and private
corporations and fidelity and crime
coverage for government, mercantile and
financial institutions.
Umbrella and Excess Provides large capacity coverage in excess of
primary layers.
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant
operating autonomy to oversee the important operational functions of its
business such as underwriting, pricing, marketing, policy processing and
claims
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service. These specialty lines are opportunistic and their
premium volume will vary based on current market conditions. AFG
continually evaluates expansion in existing markets and
opportunities in new specialty markets.
The U.S. geographic distribution of the Specialty Lines statutory
direct written premiums in 1997 compared to 1993, was as follows:
1997 1993 1997 1993
California 29.5% 46.7% Oklahoma 3.5% 4.2%
Texas 8.4 5.0 New Jersey 2.2 2.5
Massachusetts 4.7 3.2 Pennsylvania 2.0 *
New York 4.6 5.2 Ohio 2.0 *
Florida 4.5 2.6 Michigan * 2.0
Illinois 3.7 2.9 Other 34.9 25.7
100.0% 100.0%
_______________
(*) less than 2%
The following table sets forth a distribution of statutory net
written premiums for AFG's Specialty Lines by NAIC annual
statement line for 1997 compared to 1993:
1997 1993
Workers' compensation 23.5% 47.2%
Other liability 20.3 16.9
Inland marine 9.2 6.5
Commercial multi-peril 8.4 4.7
Auto physical damage 7.5 2.0
General aviation 7.2 0.1
Allied lines 5.8 4.5
Fidelity and surety 4.1 2.8
Auto liability 3.9 5.7
Ocean marine 3.6 4.2
Other 6.5 5.4
100.0% 100.0%
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The following table shows the performance of AFG's Specialty
Lines insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $1,103 $993 $1,097
Net earned premiums $1,056 $976 $1,085
Loss and LAE 706 527 730
Underwriting expenses 344 295 302
Policyholder dividends (5) - (3)
Underwriting profit $ 11 $154 $ 56
GAAP ratios:
Loss and LAE ratio 66.8% 53.9% 67.2%
Underwriting expense ratio 32.6 30.2 27.9
Policyholder dividend ratio (.4) - (.3)
Combined ratio (a) 99.0% 84.1% 94.8%
Statutory ratios:
Loss and LAE ratio 66.7% 54.1% 67.5%
Underwriting expense ratio 31.9 30.3 28.1
Policyholder dividend ratio 1.0 .5 4.2
Combined ratio (a) 99.6% 84.9% 99.8%
Industry statutory combined ratio (b) 103.7% 108.9% 109.9%
(a) The 1996 combined ratios reflect a reduction of 4.1
percentage points attributable to a reallocation of loss
reserves in connection with the strengthening of A&E
reserves.
(b) Represents the commercial industry statutory combined
ratio derived from "BestWeek" (March 16, 1998 Edition).
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Marketing The Specialty Lines operations direct their sales
efforts primarily toward independent property and casualty
insurance agents and brokers. These businesses write insurance
through several thousand agents and brokers and have nearly
290,000 policies in force.
Competition These businesses compete with other individual
insurers, state funds and insurance groups of varying sizes, some
of which are mutual insurance companies possessing competitive
advantages in that all their profits inure to their policyholders.
Because of the specialty nature of these coverages, competition is
based primarily on service to policyholders and agents, specific
characteristics of products offered and reputation for claims
handling. Price, commissions and profit sharing terms are also
important factors. Management believes that sophisticated data
analysis for refinement of risk profiles, extensive specialized
knowledge and loss prevention service have helped AFG's specialty
lines compete successfully.
Commercial and Personal Lines
General Major commercial lines of business are workers'
compensation, commercial multi-peril, umbrella (including primary
and excess layers) and commercial auto. The workers' compensation
business has experienced solid growth and profitability due to
adequate rate structures and favorable trends in medical care
costs and the success of its Drug-Free Workplace and SafetyWorks
programs.
AFG's Drug-Free Workplace and SafetyWorks programs for workers'
compensation customers assist insureds in setting up drug testing
programs (as permitted by law), drug and alcohol education
programs and work safety programs. In 1997, there were more than
1,400 insureds in 23 states with such programs producing
approximately $83 million in annual net written premiums.
Commercial business is written in 26 states where management
believes adequate rates can be obtained and where assigned risk
costs are not excessive. AFG's approach focuses on specific
customer groups, such as fine restaurants, light manufacturers,
hotels/motels, workers' compensation safety groups and insureds
with large umbrella coverages. The approach also emphasizes site
visits at prospective customers to ensure underwriter familiarity
with risk factors relating to each insured and to avoid those
risks which have unacceptable exposures.
Personal lines business consists primarily of preferred/standard private
passenger automobile and homeowners' insurance and is currently being
marketed in 25 states. AFG's approach is to develop tailored rates for its
personal automobile customers based on a variety of factors, including the
driving record of the insureds. The approach to homeowners business is to
limit exposure in locations which are likely to be unprofitable and those
which have significant catastrophic potential (such as windstorms,
earthquakes and hurricanes). During 1997, AFG had a reinsurance agreement
under which 80% of its homeowners' business was reinsured.
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The U.S. geographic distribution of the Commercial and Personal Lines
statutory direct written premiums in 1997 compared to 1993, was as follows:
1997 1993 1997 1993
Connecticut 13.1% 14.5% Florida 2.7% 4.3%
New Jersey 13.0 8.4 Texas 2.5 3.3
New York 11.8 9.8 Illinois 2.3 2.8
North Carolina 10.5 9.4 Kentucky 2.3 *
Pennsylvania 5.6 6.0 Utah 2.1 *
Maryland 3.9 3.9 Tennessee 2.0 *
Ohio 3.7 4.3 California * 3.9
Massachusetts 3.4 * Washington * 2.4
Michigan 3.4 3.5 Oregon * 2.4
Other 17.7 21.1
_______________ 100.0% 100.0%
(*) less than 2%
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The following table sets forth a distribution of statutory net
written premiums for AFG's Commercial and Personal Lines by NAIC
annual statement line for 1997 compared to 1993:
1997 1993
Auto liability 34.6% 32.0%
Workers' compensation 27.5 12.3
Commercial multi-peril 19.4 19.6
Other liability 8.1 6.2
Auto physical damage 4.5 12.3
Homeowners 2.5 12.1
Other 3.4 5.5
100.0% 100.0%
The following table shows the performance of AFG's Commercial
and Personal Lines insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $ 507 $ 660 $ 717
Net earned premiums $ 563 $ 685 $ 698
Loss and LAE 421 538 468
Underwriting expenses 165 206 214
Policyholder dividends 11 14 11
Underwriting profit (loss) ($ 34) ($ 73) $ 5
GAAP ratios:
Loss and LAE ratio 74.8% 78.5% 66.9%
Underwriting expense ratio 29.2 30.0 30.6
Policyholder dividend ratio 2.0 2.1 1.6
Combined ratio (a) 106.0% 110.6% 99.1%
Statutory ratios:
Loss and LAE ratio 74.6% 78.8% 67.2%
Underwriting expense ratio 30.2 30.4 29.9
Policyholder dividend ratio 1.6 1.0 .6
Combined ratio (a) 106.4% 110.2% 97.7%
Industry statutory combined ratio (b) 101.6% 105.8% 106.5%
(a) The 1996 combined ratios include 3.9 percentage points (GAAP) and
3.8 percentage points (statutory) due to losses from Hurricane Fran.
(b) Ratios are derived from "BestWeek" (March 16, 1998 Edition).
Marketing The Commercial and Personal Lines business units
direct their sales efforts primarily toward independent agents and
brokers. These businesses write insurance through more than 5,000
agents and have approximately 350,000 policies in force.
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Competition These businesses compete with other insurers,
primarily on the basis of price (including differentiation on
policy limits, coverages offered and deductibles), agent
commissions and profit sharing terms. Customer service, loss
prevention and reputation for claims handling are also important
factors. Competitors include individual insurers and insurance
groups of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all their
profits inure to their policyholders. Management believes that
sophisticated data analysis for refinement of risk profiles,
disciplined underwriting practices and aggressive loss prevention
procedures have enabled these businesses to compete on the basis
of price without negatively affecting underwriting profitability.
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Reinsurance
Consistent with standard practice of most insurance companies,
AFG reinsures a portion of its business with other reinsurance
companies and assumes a relatively small amount of business from
other insurers. Ceding reinsurance permits diversification of
risks and limits the maximum loss arising from large or unusually
hazardous risks or catastrophic events. The availability and cost
of reinsurance are subject to prevailing market conditions which
may affect the volume and profitability of business that is
written. AFG is subject to credit risk with respect to its
reinsurers, as the ceding of risk to reinsurers does not relieve
AFG of its liability to its insureds.
Reinsurance is provided on one of two bases, facultative or
treaty. Facultative reinsurance is generally provided on a risk by
risk basis. Individual risks are ceded and assumed based on an
offer and acceptance of risk by each party to the transaction.
Treaty reinsurance provides for risks meeting prescribed criteria
to be automatically ceded and assumed according to contract provisions.
In order to limit the maximum loss arising out of any one
occurrence, AFG's insurance companies reinsure a portion of their
exposure under treaty and facultative reinsurance programs. The
following table presents (by type of coverage) the amount of each
loss above the specified retention maximum generally covered by
treaty reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
California Workers' Compensation $ 1.5 $150.0
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(b)
Property - Catastrophe 20.0 130.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) In 1997, AFG ceded 80% of its homeowners insurance coverage through
a reinsurance agreement; beginning in 1998, it will cede 90%.
AFG purchases facultative reinsurance providing coverage on a risk by
risk basis, both pro rata and excess of loss, depending on the risk and
available reinsurance markets. Due in part to the limited exposure on
individual policies, the NSA Group is not materially involved in reinsuring
risks with third party insurance companies.
<PAGE>
Included in the balance sheet caption "recoverables from
reinsurers and prepaid reinsurance premiums" were $82 million on
paid losses and LAE and $736 million on unpaid losses and LAE at
December 31, 1997. The collectibility of a reinsurance balance is
based upon the financial condition of a reinsurer as well as
individual claim considerations. Market conditions over the past
few years have forced many reinsurers into financial difficulties or
liquidation proceedings. At December 31, 1997, AFG's insurance
subsidiaries had allowances of approximately $78 million for
doubtful collection of reinsurance recoverables, substantially all
related to unpaid losses. AFG regularly monitors the financial
strength of its reinsurers. This process periodically results in
the transfer of risks to more financially secure reinsurers.
Substantially all reinsurance is ceded to reinsurers having more
than $100 million in capital and A.M. Best ratings of "A-" or
better. AFG's major reinsurers include American Re-Insurance
Company, Employers Reinsurance Corporation, NAC Reinsurance
Corporation, Mitsui Marine and Fire Insurance Company, Continental
Casualty Company, Transatlantic Reinsurance Company, General
Reinsurance Corporation and Vesta Fire Insurance Corporation. These
companies have assumed nearly half of AFG's ceded reinsurance.
Premiums written for reinsurance ceded and assumed are
presented in the following table (in millions):
1997 1996 1995
Reinsurance ceded $614 $518 $482
Reinsurance assumed - including
involuntary pools and associations 89 58 98
10
<PAGE>
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of AFG's insurance
subsidiaries. This liability represents estimates of the ultimate
net cost of all unpaid losses and LAE and is determined by using
case-basis evaluations and actuarial projections. These estimates
are subject to the effects of changes in claim amounts and
frequency and are periodically reviewed and adjusted as additional
information becomes known. In accordance with industry practices,
such adjustments are reflected in current year operations.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy provisions,
product mix and other factors. Estimating the liability for
unpaid losses and LAE is inherently judgmental and is influenced
by factors which are subject to significant variation. Through
the use of analytical reserve development techniques, management
monitors items such as the effect of inflation on medical,
hospitalization, material, repair and replacement costs, general
economic trends and the legal environment. Although management
believes that the reserves currently established reflect a
reasonable provision for the ultimate cost of all losses and
claims, actual development may vary materially.
AFG recognizes underwriting profit only when realization is
reasonably determinable and assured. In certain specialty lines,
where experience is limited or where there is potential for
volatile results, AFG holds reasonable "incurred but not reported"
reserves and does not recognize underwriting profit until the
experience matures.
Generally, reserves for reinsurance and involuntary pools and associations
are reflected in AFG's results at the amounts reported by those entities.
Unless otherwise indicated, the following discussion of insurance reserves
includes the reserves of American Premier's subsidiaries for only those
periods following the Mergers. See Note P to the Financial Statements for
an analysis of changes in AFG's estimated liability for losses and LAE, net
and gross of reinsurance, over the past three years on a GAAP basis.
11
<PAGE>
The following table presents the development of AFG's liability
for losses and LAE, net of reinsurance, on a GAAP basis for the
last ten years, excluding reserves of American Premier
subsidiaries prior to the Mergers. The top line of the table
shows the estimated liability (in millions) for unpaid losses and
LAE recorded at the balance sheet date for the indicated years.
The second line shows the re-estimated liability as of December
31, 1997. The remainder of the table presents development as
percentages of the estimated liability. The development results
from additional information and experience in subsequent years.
The middle line shows a cumulative deficiency (redundancy) which
represents the aggregate percentage increase (decrease) in the
liability initially estimated. The lower portion of the table
indicates the cumulative amounts paid as of successive periods as
a percentage of the original loss reserve liability.
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,024 $2,209 $2,246 $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489
As re-estimated at
December 31, 1997 2,482 2,531 2,520 2,337 2,247 2,178 2,089 2,185 3,342 3,435 N/A
Liability re-estimated (*):
One year later 102.5% 99.8% 100.4% 98.6% 99.3% 99.9% 98.2% 95.8% 98.7% 100.9%
Two years later 103.6% 100.0% 99.3% 97.7% 98.7% 98.3% 94.0% 99.3% 98.5%
Three years later 103.1% 99.7% 98.4% 97.4% 98.0% 95.2% 97.4% 99.9%
Four years later 102.5% 98.7% 98.2% 99.2% 97.3% 100.3% 98.9%
Five years later 102.6% 99.1% 101.1% 100.0% 103.0% 102.6%
Six years later 103.5% 103.0% 102.7% 106.3% 105.6%
Seven years later 109.4% 104.7% 109.2% 109.4%
Eight years later 111.7% 111.4% 112.2%
Nine years later 119.2% 114.5%
Ten years later 122.6%
Cumulative deficiency
(redundancy) 22.6% 14.5% 12.2% 9.4% 5.6% 2.6% (1.1%) (0.1%) (1.5%) 0.9% N/A
Cumulative paid as of:
One year later 29.2% 29.4% 32.3% 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8%
Two years later 49.0% 48.6% 48.2% 43.2% 43.0% 43.7% 40.6% 42.5% 51.6%
Three years later 63.5% 59.8% 59.2% 55.3% 55.4% 54.2% 50.9% 54.4%
Four years later 72.2% 67.9% 67.6% 64.8% 63.3% 60.8% 59.1%
Five years later 78.5% 74.0% 74.3% 71.1% 67.8% 67.0%
Six years later 83.6% 79.5% 78.8% 74.5% 72.7%
Seven years later 87.7% 83.2% 81.2% 78.6%
Eight years later 91.1% 85.2% 84.8%
Nine years later 92.7% 88.5%
Ten years later 96.2%
</TABLE>
(*) Reflects significant A&E charges and reallocations in 1994 and 1996 for
prior years losses.
<PAGE>
The following is a reconciliation of the net liability to the gross
liability for unpaid losses and LAE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489
Add reinsurance recoverables 611 730 704 720 736
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225
As re-estimated at
December 31, 1997:
Net liability shown above $2,089 $2,185 $3,342 $3,435
Add reinsurance recoverables 791 782 790 748
Gross liability $2,880 $2,967 $4,132 $4,183 N/A
Gross cumulative deficiency
(redundancy) 5.7% 1.8% .9% 1.5% N/A
</TABLE>
12
<PAGE>
The following table presents certain data from the table above,
adjusted to include reserves of American Premier's subsidiaries for
periods subsequent to their entry into the insurance business in
1989 and prior to the Mergers in 1995.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,616 $2,739 $2,793 $2,886 $3,029 $3,267
As re-estimated at
December 31, 1997 2,831 2,873 2,848 2,824 2,871 3,138
Cumulative deficiency
(redundancy) 8.2% 4.9% 2.0% (2.1%) (5.2%) (3.9%)
Reconciliation of net
liability to gross liability:
As originally estimated:
Net liability shown above $3,029 $3,267
Add reinsurance recoverables 617 742
Gross liability $3,646 $4,009
As re-estimated at
December 31, 1997:
Net liability shown above $2,871 $3,138
Add reinsurance recoverables 800 766
Gross liability $3,671 $3,904
Gross cumulative deficiency
(redundancy) .6% (2.6%)
</TABLE>
These tables do not present accident or policy year development
data. Furthermore, in evaluating the re-estimated liability and
cumulative deficiency (redundancy), it should be noted that each
percentage includes the effects of changes in amounts for prior
periods. For example, AFG's $80 million charge for A&E claims
related to losses recorded in 1996, but incurred before 1987, is
included in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the previous years shown.
Conditions and trends that have affected development of the
liability in the past may not necessarily exist in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
<PAGE>
The adverse development in the tables is due primarily to A&E
exposures for which AFG has been held liable under general liability
policies written years ago where environmental coverage was not
intended. Other factors affecting development included higher than
projected inflation on medical, hospitalization, material, repair
and replacement costs. Additionally, changes in the legal
environment have influenced the development patterns over the past
ten years. For example, changes in the California workers'
compensation law in 1993 and subsequent court decisions, primarily
in late 1996, greatly limited the ability of insurers to challenge
medical assessments and treatments. These limitations, together
with changes in work force characteristics and medical delivery
costs, are contributing to an increase in claims severity. Two
changes influencing development patterns in the 1980s were the trend
towards an adverse litigious climate and the change from
contributory to comparative negligence.
The differences between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
("SAP") and that reported in the accompanying consolidated
financial statements in accordance with GAAP at December 31, 1997,
are as follows (in millions):
Liability reported on a SAP basis $3,475
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (22)
Reserves of foreign operations 37
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables 736
Liability reported on a GAAP basis $4,225
13
<PAGE>
Asbestos and Environmental Reserves ("A&E") In defining
environmental exposures, the insurance industry typically includes
claims relating to polluted waste sites and asbestos as well as
other mass tort claims such as those relating to breast implants,
repetitive stress on keyboards, DES (a drug used in pregnancies
years ago alleged to cause cancer and birth defects) and other
latent injuries.
Establishing reserves for A&E claims is subject to
uncertainties that are greater than those presented by other types
of claims. Factors contributing to those uncertainties include a
lack of sufficiently detailed historical data, long reporting
delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy
coverage, and the extent and timing of any such contractual
liability. Courts have reached different and sometimes
inconsistent conclusions as to when a loss is deemed to have
occurred, what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined and other policy provisions. Management
believes these issues are not likely to be resolved in the near
future.
Significant industrywide information concerning A&E reserves
first became broadly available in mid-1996 following the
publication of new data relating to that subject in the 1995
Annual Statements of insurance companies. During 1995 and 1996, a
number of insurers recorded large reserve increases for A&E
exposures. By the end of 1995, the industry's survival ratio
(reserves divided by annual paid losses) had increased from a
multiple of six times in the early 1990's to more than nine times.
The following table compares AFG's three-year survival ratio for
A&E claims with that of the industry.
December 31,
Survival Ratio: 1997 1996 1995 1994
AFG 10.0 10.5 6.5 7.0
Industry (a) 7.6 8.2 9.4 7.9
(a) Source: 1996-1994 "BestWeek - Property and Casualty Supplement"
(September 15, 1997 Edition); 1997 is an estimate.
Industry actions and statistics in 1995 caused AFG to re-evaluate its
position in relation to its peers as part of the continuing process of
obtaining additional information and revising accounting estimates. This
process led management to conclude that the A&E reserves should be increased
sufficiently to bring AFG's three-year survival ratio in line with those of
the top 50 companies. In the third quarter of 1996, AFG strengthened
its A&E reserve to approximately 10.5 times average annual paid losses based
upon these revised industry standards for reserving such claims. AFG recorded
a non-cash, pretax charge of $80 million and reallocated $40 million in
reserves from its Specialty Operations. Based on known facts, current law,
and current industry practices, management believes that its reserves
for such claims are appropriate.
<PAGE>
The following table (in millions) is a progression of A&E reserves.
1997 1996 1995
Reserves at beginning of year $343.4 $225.7 $224.9
Incurred losses and LAE 43.2 149.0 35.2
Paid losses and LAE (38.7) (31.3) (34.4)
Reserves at end of year, net of
reinsurance recoverable 347.9 343.4 225.7
Reinsurance recoverable 173.2 162.7 164.2
Gross reserves at end of year $521.1 $506.1 $389.9
Since the mid-1980's, AFG has also written certain environmental coverages
(asbestos abatement and underground storage tank liability) in which the
premium charged is intended to provide coverage for the specific
environmental exposures inherent in these policies. The business has been
profitable since its inception. To date, approximately $182 million of
premiums has been written, $23 million in losses and LAE have been paid and
reserves for unpaid losses and LAE aggregated $29 million at
December 31, 1997 (not included in the above table).
14
<PAGE>
Annuity and Life Operations
General
AFG's annuity operations are conducted through American Annuity
Group ("AAG"), a holding company whose primary subsidiary is Great
American Life Insurance Company ("GALIC") which it acquired from
Great American in 1992. GALIC sells (i) flexible premium and
single premium annuities in the qualified (not-for-profit) market
and (ii) single premium annuities in the non-qualified market.
AAG and its subsidiaries employ approximately 1,700 persons.
Acquisitions in recent years have supplemented AAG's internal
growth as the company's assets increased from $4.5 billion at year
end 1992 to over $7.7 billion at year end 1997. In addition, these
acquisitions have expanded AAG's focus from primarily traditional
fixed annuity products to three areas: (i) retirement products
(fixed and variable annuities); (ii) pre-need funding products (life
insurance and fixed annuities) and (iii) other life, accident and
health insurance. Premiums over the last three years were as
follows (in millions):
Premiums*
Insurance Product 1997 1996 1995
Retirement $489 $540 $457
Pre-need Funding 111 97 -
Other Life, Accident and Health 42 43 2
$642 $680 $459
________________
(*) The table does not include premiums of subsidiaries
until their first full year following acquisition.
Retirement Products
Annuities AAG's retirement products consist primarily of
annuities, which are long-term retirement saving instruments that
benefit from income accruing on a tax-deferred basis. The issuer
of the annuity collects premiums, credits interest on the policy
and pays out a benefit upon death, surrender or annuitization.
Annuity contracts are generally classified as either fixed rate
or variable. With a fixed rate annuity, the interest crediting
rate is initially set by the issuer and thereafter may be changed
from time to time by the issuer subject to any guaranteed minimum
interest crediting rates in the policy. With a variable annuity,
the value of the policy is tied to an underlying securities
portfolio or underlying mutual funds.
Employees of qualified not-for-profit organizations are
eligible to save for retirement through contributions made on a
before-tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free
"rollovers" of funds. Federal income taxes are not payable on
contributions or earnings until amounts are withdrawn.
15
<PAGE>
GALIC entered the tax-deferred annuity business in 1976 and currently
sells fixed rate annuities - both traditional and equity-indexed. The
following table (in millions) presents financial information concerning GALIC.
1997 1996 1995
Statutory Basis
Total Assets $5,917 $5,752 $5,414
Annuity Reserves 5,446 5,298 4,974
Capital and Surplus 317 285 273
Asset Valuation Reserve (a) 65 91 90
Interest Maintenance Reserve (a) 24 25 32
Annuity Receipts:
Flexible Premium:
First Year $ 32 $ 35 $ 42
Renewal 160 182 196
192 217 238
Single Premium 241 319 219
Total Annuity Receipts $ 433 $ 536 $ 457
________________
(a) Allocation of surplus.
GAAP Basis
Total Assets $6,223 $5,934 $5,608
Annuity Benefits Accumulated 5,330 5,205 4,917
Stockholder's Equity 770 658 623
GALIC's principal products are Flexible Premium Deferred Annuities
("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). FPDAs are
characterized by premium payments that are flexible in both amount and
timing as determined by the policyholder. SPDAs are issued in exchange
for a one-time lump-sum premium payment.
At December 31, 1997, all of GALIC's annuity reserves consisted of fixed
rate annuities which offered a minimum interest rate guarantee of 3% or 4%.
The majority of GALIC's annuity policies are traditional fixed rate annuities
which permit GALIC to change the crediting rate at any time (subject to the
minimum guaranteed interest rate). In determining the frequency and extent
of changes in the crediting rate, GALIC takes into account the economic
environment and the relative competitive position of its products.
Over the last few years, traditional fixed rate annuities have met
substantial competition from mutual funds and other equity-based investments.
In response, GALIC developed an equity-indexed annuity which provides
policyholders with a crediting rate tied, in part, to the performance of an
existing stock market index while protecting them against the related
downside risk through a guarantee of principal. AAG hedges the equity-based
risk component of this product through the purchase of call options on
the appropriate index. These options are designed to offset substantially
all of the increases in the fair values of the equity-indexed annuities.
Sales of equity-indexed annuities accounted for 9% of GALIC's premiums
in 1997.
<PAGE>
GALIC seeks to maintain a desired spread between the yield on
its investment portfolio and the rate it credits to its policies.
GALIC accomplishes this by: (i) offering crediting rates which it
has the option to change; (ii) designing annuity products that
encourage persistency and (iii) maintaining an appropriate
matching of assets and liabilities. GALIC designs its products
with certain surrender penalties to discourage policyholders from
surrendering or withdrawing funds during the first five to ten
years after issuance of a policy. Partly due to these features,
GALIC's annuity surrenders have averaged approximately 7% of
statutory reserves over the past five years.
16
<PAGE>
Marketing and Distribution Sales of fixed rate annuities are
affected by many factors, including: (i) competitive annuity
products and rates; (ii) the general level of interest rates; (iii)
the favorable tax treatment of annuities; (iv) commissions paid to
agents; (v) services offered; (vi) ratings from independent
insurance rating agencies; (vii) other alternative investments and
(viii) general economic conditions. At December 31, 1997, GALIC
had more than 265,000 annuity policies in force.
GALIC markets its FPDAs principally to employees of educational
institutions in the kindergarten through high school segment.
Written premiums from this market segment represented the majority
of GALIC's total tax-qualified premiums in 1997.
GALIC distributes its annuity products through approximately 80
managing general agents ("MGAs") who, in turn, direct over 1,000
actively producing independent agents. GALIC has developed its
business on the basis of its relationships with MGAs and
independent agents primarily through a consistent marketing
approach and responsive service.
GALIC is licensed to sell its products in all states (except New
York) and in the District of Columbia. The following table
reflects the geographical distribution of GALIC's annuity premiums
in 1997 compared to 1993.
1997 1993 1997 1993
California 21.9% 21.8% New Jersey 3.8% 5.5%
Texas 8.0 3.3 Michigan 3.4 8.5
Washington 7.6 2.4 Indiana 2.9 *
Ohio 6.4 5.5 Connecticut 2.8 5.2
Florida 5.4 9.8 Iowa 2.5 *
Massachusetts 5.0 8.0 Illinois 2.2 3.3
North Carolina 4.4 3.3 Rhode Island * 2.2
Minnesota 3.9 * Other 19.8 21.2
100.0% 100.0%
_______________
(*) less than 2%
AAG began marketing variable annuities in the fourth quarter of
1995 through Annuity Investors Life Insurance Company ("AILIC").
With a variable annuity, the earnings credited to the policy vary
based on the investment results of the underlying investment
options chosen by the policyholder. Policyholders may also choose
to direct all or a portion of their premiums to various fixed rate
options. For these annuity products, all premiums directed to the
variable options are placed in funds managed by third party
investment advisers. AILIC had variable annuity sales of
$43 million in 1997.
<PAGE>
Pre-need Funding Products
Through American Memorial Life Insurance Company, AAG offers a
variety of life insurance and annuity products to finance pre-
arranged funerals. In 1997, American Memorial sold its products
through over 1,200 funeral homes nationwide. In addition to a
general agency force of approximately 200 agents, American
Memorial has approximately 800 actively-producing corporate and
individual funeral home operators who sell its products. Rapid
consolidation is making large chains an important segment of the
funeral home industry. American Memorial is a leader in this
segment, working with several of the major corporations. In 1997,
about one-half of American Memorial's premiums were generated by
the largest owner of funeral homes in the world. The remaining
one-half was split between other funeral homes and the general
agency force. As the funeral home industry continues to
consolidate, increased reliance on large funeral home operators
may be required.
In 1997, American Memorial collected $111 million in life and
annuity premiums. At December 31, 1997, American Memorial had
total statutory assets of approximately $468 million; reserves for
future policy benefits of approximately $424 million; and capital
and surplus of approximately $26 million.
17
<PAGE>
In March 1998, AAG acquired Arkansas National Life Insurance
Company, which also specializes in pre-arranged funeral
insurance products. Arkansas National had statutory assets of
approximately $74 million at December 31, 1997 and 1997
premiums of $5 million.
Life, Accident and Health Products
AAG offers a variety of life, accident and health products
through Loyal American Life Insurance Company, General Accident
Life Assurance Company of Puerto Rico, Inc. and GALIC's life
division, which began offering certain term, universal and whole
life insurance products in December 1997. Also in 1997, Loyal
relocated its home office from Mobile, Alabama to Cincinnati, Ohio
to more closely coordinate its efforts with those of other AAG
operations.
Loyal offers a variety of supplemental life and health
insurance products through payroll deduction plans and credit
unions. Loyal's products are marketed with the endorsement or
consent of the employer or the credit union management. The
products currently being offered include traditional whole life,
universal life, term life, hospital indemnity, cancer and short-
term disability.
In 1997, Loyal collected $40 million in life and accident and
health premiums. At December 31, 1997, Loyal had total statutory
assets of approximately $258 million; reserves for future policy
benefits of approximately $197 million; and capital and surplus of
approximately $39 million.
In December 1997, AAG acquired General Accident which
specializes in home service life and supplemental health products
as well as credit and ordinary life products, including those
utilized in the funeral industry. General Accident had statutory
assets of $110 million at December 31, 1997 and 1997 premiums of
$46 million (excluding premiums of certain operations sold prior to
its acquisition by AAG). General Accident sells its in-home
service life and supplemental health products through a network of
company agents. Its ordinary life and cancer products are sold
through independent agents.
Independent Ratings
AAG's principal insurance subsidiaries are currently rated by
A.M. Best and Duff & Phelps. Such ratings are generally based on
items of concern to policyholders and agents and are not directed
toward the protection of investors.
A.M. Best Duff & Phelps
GALIC A (Excellent) AA- (Very high claims paying ability)
American Memorial A- (Excellent) AA- (Very high claims paying ability)
Loyal A (Excellent) AA- (Very high claims paying ability)
AILIC A (Excellent) Not currently rated
General Accident A (Excellent) Not currently rated
In 1997, A.M. Best increased its ratings of American Memorial (up
two levels) and Loyal (up one level); none of the insurance companies
received a downgrade from either agency.
<PAGE>
AAG believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often
use a company's rating as an initial screening device in considering
annuity products. AAG believes that a rating in the "A" category by
at least one rating agency is necessary for GALIC to successfully
market tax-deferred annuities to public education employees and other
not-for-profit groups.
Although AAG believes that its insurance companies' ratings are
very stable, those companies' operations could be materially
adversely affected by a downgrade in ratings.
18
<PAGE>
Competition
AAG's insurance companies operate in highly competitive markets.
They compete with other insurers and financial institutions based on
many factors, including: (i) ratings; (ii) financial strength; (iii)
reputation; (iv) service to policyholders; (v) product design
(including interest rates credited and premium rates charged); (vi)
commissions; and (vii) service to agents. Since policies are
marketed and distributed primarily through independent agents
(except at General Accident), the insurance companies must also
compete for agents. AAG believes that consistently targeting the
same market and emphasizing service to agents and policyholders
provides a competitive advantage.
No single insurer dominates the annuity marketplace.
Competitors include (i) individual insurers and insurance groups,
(ii) mutual funds and (iii) other financial institutions of
varying sizes. In a broader sense, AAG's insurance companies
compete for retirement savings with a variety of financial
institutions offering a full range of financial services.
Financial institutions have demonstrated a growing interest in
marketing investment and savings products other than traditional
deposit accounts. In addition, recent judicial and regulatory
decisions have expanded powers of financial institutions in this
regard. It is too early to predict what impact, if any, these
developments will have on the insurance companies.
Other Companies
Through subsidiaries, AFG is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and
tennis facility) in the Greater Cincinnati area; commercial real
estate operations in Cincinnati (office buildings and The
Cincinnatian Hotel), Louisiana (Le Pavillon Hotel), Massachusetts
(Chatham Bars Inn), Texas (Driskill Hotel) and apartments in
Florida, Kentucky, Louisiana, Minnesota, Pennsylvania, Texas and
Wisconsin. These operations employ approximately 700 full-time
employees.
In December 1997, AFG sold the assets of its software
solutions and consulting services subsidiary, Millennium
Dynamics, Inc., to a subsidiary of Peritus Software Services,
Inc. for $30 million in cash and 2,175,000 shares of Peritus
common stock.
<PAGE>
Investment Portfolio
General
A breakdown of AFG's December 31, 1997, investment portfolio
by business segment follows (excluding investment in equity
securities of investee corporations) (in millions).
<TABLE>
<CAPTION>
Total
Carrying Value Market
P&C Annuity Other Total Value
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 145 $ 51 $ 61 $ 257 $ 257
Bonds and redeemable preferred
stocks 4,362 6,262 29 10,653 10,735
Other stocks, options and
warrants 321 78 47 446 446
Loans receivable 101 407 6 514 514 (a)
Real estate and other investments 132 58 29 219 219 (a)
$5,061 $6,856 $172 $12,089 $12,171
</TABLE>
(a) Carrying value used since market values are not readily available.
19
<PAGE>
The following tables present the percentage distribution and yields
of AFG's investment portfolio (excluding investment in equity
securities of investee corporations) as reflected in its financial
statements.
1997 1996 1995 1994 1993
Cash and Short-term Investments 2.1% 3.9% 4.9% 2.2% 2.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 5.0 4.1 3.7 4.0 2.8
State and Municipal 1.3 1.0 .7 .8 .8
Public Utilities 6.8 8.2 9.7 9.1 9.3
Mortgage-Backed Securities 21.4 22.2 20.7 21.8 24.7
Corporate and Other 50.6 49.3 46.8 48.6 42.0
Redeemable Preferred Stocks 0.6 0.5 1.0 1.4 1.3
85.7 85.3 82.6 85.7 80.9
Net Unrealized Gains (Losses) on Bonds
and Redeemable Preferred Stocks held
Available for Sale 2.5 1.1 2.7 (1.0) 1.8
88.2 86.4 85.3 84.7 82.7
Other Stocks, Options and Warrants 3.7 2.8 2.3 2.7 4.6
Loans Receivable 4.3 4.9 5.6 8.4 8.5
Real Estate and Other Investments 1.7 2.0 1.9 2.0 1.9
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.8% 7.9% 7.9% 8.1% 8.0%
Including realized gains and losses 7.9% 7.7% 8.8% 8.1% 8.7%
Yield on Stocks:
Excluding realized gains and losses 5.6% 5.8% 3.9% 5.1% 4.4%
Including realized gains and losses 30.2% 15.1% 8.4% 35.4% 16.9%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.8% 7.9% 8.1% 7.9%
Including realized gains and losses 8.2% 7.8% 8.8% 8.8% 9.0%
(*) Excludes "Real Estate and Other Investments".
<PAGE>
Fixed Maturity Investments
Unlike many insurance groups which have portfolios that are
invested heavily in tax-exempt bonds, AFG's bond portfolio is
invested primarily in taxable bonds. The NAIC assigns quality
ratings which range from Class 1 (highest quality) to Class 6
(lowest quality). The following table shows AFG's bonds and
redeemable preferred stocks, by NAIC designation (and comparable
Standard & Poor's Corporation rating) as of December 31, 1997
(dollars in millions).
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $ 6,970 $ 7,223 68%
2 BBB 2,624 2,714 25
Total investment grade 9,594 9,937 93
3 BB 400 417 4
4 B 330 347 3
5 CCC, CC, C 22 34 *
6 D - - -
Total non-investment grade 752 798 7
Total $10,346 $10,735 100%
_______________
(*) Less than 1%
Risks inherent in connection with fixed income securities
include loss upon default and market price volatility. Factors
which can affect the market price of securities include:
creditworthiness, changes in interest rates, the number of market
makers and investors and defaults by major issuers of securities.
20
<PAGE>
AFG's primary investment objective for bonds and redeemable
preferred stocks is to earn interest and dividend income rather
than to realize capital gains. AFG invests in bonds and redeemable
preferred stocks that have primarily short-term and intermediate-
term maturities. This practice allows flexibility in reacting to
fluctuations of interest rates.
Equity Investments
AFG's equity investment practice permits concentration of
attention on a relatively limited number of companies. Some of
the equity investments, because of their size, may not be as
readily marketable as the typical small investment position.
Alternatively, a large equity position may be attractive to
persons seeking to control or influence the policies of a company
and AFG's concentration in a relatively small number of companies
may permit it to identify investments with above average potential
to increase in value.
Chiquita At December 31, 1997, AFG owned 24 million shares of
Chiquita common stock representing 39% of its outstanding shares.
The carrying value and market value of AFG's investment in
Chiquita were approximately $201 million and $391 million,
respectively, at December 31, 1997. Chiquita is a leading
international marketer, producer and distributor of bananas and
other quality fresh and processed food products. In addition to
bananas, these products include other tropical fruit and fresh
produce; fruit and vegetable juices and beverages; processed
fruits and vegetables; salads; and edible oil-based consumer
products.
Citicasters In September 1996, AFG sold its investment in
Citicasters to Jacor Communications for approximately
$220 million in cash plus warrants to purchase Jacor common
stock. Citicasters owned radio and television stations in major
markets throughout the country.
Regulation
AFG's insurance company subsidiaries are subject to regulation in the
jurisdictions where they do business. In general, the insurance laws of the
various states establish regulatory agencies with broad administrative powers
governing, among other things, premium rates, solvency standards, licensing
of insurers, agents and brokers, trade practices, forms of policies,
maintenance of specified reserves and capital for the protection of
policyholders, deposits of securities for the benefit of policyholders,
investment activities and relationships between insurance subsidiaries and
their parents and affiliates. Material transactions between insurance
subsidiaries and their parents and affiliates generally must be disclosed
and prior approval of the applicable insurance regulatory authorities
generally is required for any such transaction which may be deemed to be
material or extraordinary. In addition, while differing from state to state,
these regulations typically restrict the maximum amount of dividends that may
be paid by an insurer to its shareholders in any twelve-month period without
advance regulatory approval. Such limitations are generally based on net
earnings or statutory surplus. Under applicable restrictions, the maximum
amount of dividends available to AFG in 1998 from its insurance subsidiaries
without seeking regulatory clearance is approximately $221 million.
<PAGE>
Changes in state insurance laws and regulations have the potential to
materially affect the revenues and expenses of the insurance operations.
The Company is unable to predict whether or when laws or regulations may be
adopted or enacted in such states or what the impact of such developments
would be on the future operations and revenues of its insurance businesses in
such states.
Prior to 1995, minimum premium rates for California workers' compensation
insurance were determined by the California Commissioner based in part upon
recommendations of the Workers' Compensation Insurance Rating Bureau of
California. In July 1993, California enacted legislation (the "Reform
Legislation") effecting an immediate overall 7% reduction in workers'
compensation insurance premium rates and replaced the workers'
compensation insurance minimum rate law, effective January 1, 1995,
with a procedure
21
<PAGE>
permitting insurers to use any rate within 30 days after its filing with
the California Commissioner unless the rate is disapproved by the
California Commissioner. Between December 1, 1993 and January 1, 1995,
when the "open rating" policy went into effect, the California Commissioner
ordered additional rate decreases totaling more than 25%.
Most states have created insurance guarantee associations to provide for
the payment of claims of insurance companies that become insolvent. Annual
assessments for AFG's insurance companies have not been material. In
addition, many states have created "assigned risk" plans or similar
arrangements to provide state mandated minimum levels of automobile liability
coverage to drivers whose driving records or other relevant characteristics
make it difficult for them to obtain insurance otherwise. Automobile
insurers in those states are required to provide such coverage to a
proportionate number of those drivers applying as assigned risks. Premium
rates for assigned risk business are established by the regulators of the
particular state plan and are frequently inadequate in relation to the risks
insured, resulting in underwriting losses. Assigned risks accounted for
approximately one percent of AFG's net written premiums in 1997.
The NAIC is an organization which is comprised of the chief
insurance regulator for each of the 50 states and the District of
Columbia. In 1990, the NAIC began an accreditation program to
ensure that states have adequate procedures in place for effective
insurance regulation, especially with respect to financial
solvency. The accreditation program requires that a state meet
specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an
ongoing process and once accredited, a state must enact any new or
modified standards approved by the NAIC within two years following
adoption. As of December 31, 1997, the District of Columbia and
48 states were accredited including states which regulate AFG's
largest insurance subsidiaries.
The NAIC model law for Risk Based Capital applies to both
life and property and casualty companies. The risk-based
capital formulas determine the amount of capital that an
insurance company needs to ensure that it has an acceptably low
expectation of becoming financially impaired. The model law
provides for increasing levels of regulatory intervention as
the ratio of an insurer's total adjusted capital and surplus
decreases relative to its risk-based capital, culminating with
mandatory control of the operations of the insurer by the
domiciliary insurance department at the so-called "mandatory
control level". At December 31, 1997, the capital ratios of
all AFG insurance companies substantially exceeded the risk-
based capital requirements.
22
<PAGE>
ITEM 2
Properties
Subsidiaries of AFG own several buildings in downtown Cincinnati. AFG
and its affiliates occupy about three-fifths of the aggregate 650,000
square feet of commercial and office space.
AFG's insurance subsidiaries lease the majority of their office and
storage facilities in numerous cities throughout the United States,
including GAI's and AAG's home offices in Cincinnati. Two AAG subsidiaries
own office buildings in Rapid City, South Dakota and Mobile, Alabama. The
office building in Rapid City contains about 52,000 square feet,
approximately three-fourths of which is utilized for company purposes.
The building in Mobile is being marketed for sale or lease; one-fifth of its
82,000 square feet is company occupied.
AFG subsidiaries own transferable rights to develop approximately one
million square feet of floor space in the Grand Central Terminal area in
New York City. The development rights were derived from ownership of the
land upon which the terminal is constructed.
ITEM 3
Legal Proceedings
AFG and its subsidiaries are involved in various litigation,
most of which arose in the ordinary course of business. Except
for the following, management believes that none of the
litigation meets the threshold for disclosure under this Item.
In May 1994, lawsuits were filed against American Premier by
USX Corporation ("USX") and its former subsidiary, Bessemer and
Lake Erie Railroad Company ("B&LE"), seeking contribution by
American Premier, as the successor to the railroad business
conducted by Penn Central Transportation Company ("PCTC") prior
to 1976, for all or a portion of the approximately $600 million
that USX paid in satisfaction of a judgment against B&LE for its
participation in an unlawful antitrust conspiracy among certain
railroads commencing in the 1950's and continuing through the
1970's. The lawsuits argue that USX's liability for that
payment was attributable to PCTC's alleged activities in
furtherance of the conspiracy. On October 13, 1994, the U.S.
District Court for the Eastern district of Pennsylvania enjoined
USX and B&LE from continuing their lawsuits against American
Premier, ruling that their claims are barred by the 1978
Consummation Order issued by that Court in PCTC's bankruptcy
reorganization proceedings. USX and B&LE appealed the District
Court's ruling to the U.S. Court of Appeals for the Third
Circuit. On December 13, 1995, the Court of Appeals reversed the
U.S. District Court decision. In its opinion, the Court of
Appeals only addressed American Premier's procedural argument
that the claims of USX could not proceed because they are barred
by the Consummation Order. The Third Circuit expressly
recognized in its opinion that it was not deciding any of
American Premier's defenses on the merits.
<PAGE>
In January 1996, American Premier filed a petition for
rehearing en banc, which requests all of the judges of the Third
Circuit to review the three-judge panel's decision. That
petition was denied in February 1996. In May 1996, the U.S.
Supreme Court declined to hear American Premier's petition with
respect to the bankruptcy bar issue, thereby permitting USX's
lawsuits to proceed. American Premier and its outside counsel
believe that American Premier has substantial defenses to these
lawsuits, besides the bankruptcy bar issue, and should not
suffer a material loss as a result of this litigation.
23
<PAGE>
American Premier is a party or named as a potentially
responsible party in a number of proceedings and claims by
regulatory agencies and private parties under various
environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act
("CERCLA"), seeking to impose responsibility on American
Premier for hazardous waste remediation costs at certain
railroad sites formerly owned by PCTC and at certain other
sites where hazardous waste allegedly generated by PCTC's
railroad operations is present. It is difficult to estimate
American Premier's liability for remediation costs at these
sites for a number of reasons, including the number and
financial resources of other potentially responsible parties
involved at a given site, the varying availability of evidence
by which to allocate responsibility among such parties, the
wide range of costs for possible remediation alternatives,
changing technology and the period of time over which these
matters develop. Nevertheless, American Premier believes that
its previously established loss accruals for potential pre-
reorganization environmental liabilities at such sites are
adequate to cover the probable amount of such liabilities,
based on American Premier's estimates of remediation costs and
related expenses at such sites and its estimates of the
portions of such costs that will be borne by other parties.
Such estimates are based on information currently available to
American Premier and are subject to future change as additional
information becomes available. American Premier intends to
seek reimbursement from certain insurers for portions of
whatever remediation costs it incurs.
In terms of potential liability to American Premier, the
company believes that the most significant such site is the
railyard at Paoli, Pennsylvania ("Paoli Yard") which PCTC
transferred to Consolidated Rail Corporation ("Conrail") in
1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial
action for clean-up of polychlorinated biphenyls ("PCB's") at
Paoli Yard having an estimated cost of approximately $28
million. American Premier has accrued its portion of such
estimated clean-up costs in its financial statements (in
addition to other expenses) but has not accrued the entire
amount because it believes it is probable that other parties,
including Conrail, will be responsible for substantial
percentages of the clean-up costs by virtue of their operation
of electrified railroad cars at Paoli Yard that discharged
PCB's at higher levels than discharged by cars operated by PCTC.
In management's opinion, the outcome of the foregoing
environmental claims and contingencies will not, individually
or in the aggregate, have a material adverse effect on the
financial condition of American Premier. In making this
assessment, management has taken into account previously
established loss accruals in its financial statements and
probable recoveries from third parties.
24
<PAGE>
ITEM 4
Submission of Matters to a Vote of Security Holders
AFG's predecessor held a Special Meeting of Shareholders on
December 2, 1997, to vote upon a Plan of Reorganization
pursuant to which it would become a wholly-owned subsidiary of
a newly formed holding company (the new AFG) and each share of
its common stock would be converted into one share of the new
holding company's common stock. The votes cast for the
proposal were as follows: for - 43,086,324; against - 111,175;
and abstain - 206,447.
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
AFG (and its predecessor's) Common Stock has been listed and
traded on the New York Stock Exchange under the symbol AFG. The
information presented in the table below represents the high and
low sales prices per share reported on the NYSE Composite Tape.
1997 1996
High Low High Low
First Quarter $38 3/8 $34 7/8 $34 1/2 $29 3/4
Second Quarter 42 3/4 32 3/8 32 28 1/2
Third Quarter 49 1/4 42 3/16 33 1/4 28 5/8
Fourth Quarter 46 11/16 34 9/16 38 7/8 31 1/4
There were approximately 17,100 shareholders of record of AFG
Common Stock at March 1, 1998. AFG's policy is to pay quarterly
dividends on its Common Stock in amounts determined by its Board
of Directors. In 1997 and 1996, AFG declared and paid quarterly
dividends of $.25 per share. The ability of AFG to pay dividends
will be dependent upon, among other things, the availability of
dividends and payments under intercompany tax allocation
agreements from its insurance company subsidiaries.
25
<PAGE>
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods
indicated (dollars in millions, except per share data).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Total Revenues $4,021 $4,115 $3,630 $2,104 $2,721
Earnings Before Income Taxes and
Extraordinary Items 320 353 247 44 262
Earnings Before Extraordinary Items 199 262 190 19 225
Extraordinary Items (7) (29) 1 (17) (5)
Net Earnings 192 233 191 2 220
Basic Earnings (Loss) Per Common
Share (a):
Earnings (Loss) before Extraordinary
Items and Premium on Redemption
of Preferred Stock $3.34 $4.31 $3.87 ($.24) $7.01
Net Earnings (Loss) Available to
Common Shares .65 3.84 3.88 (.83) 6.85
Diluted Earnings (Loss) Per Common
Share (a):
Earnings (Loss) before Extraordinary
Items and Premium on Redemption
of Preferred Stock $3.28 $4.26 $3.83 ($.24) $7.01
Net Earnings (Loss) Available to
Common Shares .64 3.79 3.85 (.83) 6.85
Cash Dividends Paid Per Share of
Common Stock $1.00 $1.00 $.75 (b) (b)
Ratio of Earnings to Fixed Charges (c) 3.98 4.22 2.60 1.69 2.62
Balance Sheet Data:
Total Assets $15,755 $15,051 $14,954 $10,593 $10,077
Long-term Debt:
Holding Companies 387 340 648 849 771
Subsidiaries 194 178 234 258 283
Minority Interest (d) 513 494 314 106 109
Capital Subject to Mandatory Redemption - - - 3 49
Other Capital 1,663 1,554 1,440 396 537
</TABLE>
(a) Earnings per share amounts prior to 1997 have been restated to comply
with Statement of Financial Accounting Standards No. 128 - "Earnings Per
Share." Net earnings available to common shares for 1997 is calculated
after deducting a premium over stated value on redemption of a
subsidiary's preferred stock of $153.3 million. The number of shares
used for periods prior to April 1995, is the 28.3 million shares issued
in exchange for AFC shares in the Mergers discussed in Note A.
<PAGE>
(b) Prior to the Mergers, AFC's common stock was privately held by members of
the Lindner family. In 1995, American Premier declared and paid cash
dividends per share of $.25 prior to the Mergers; it also declared cash
dividends of $.91 in 1994 and $.85 in 1993. AFG declared two quarterly
$.25 per share dividends subsequent to the Mergers in 1995.
(c) Fixed charges are computed on a "total enterprise" basis. For purposes
of calculating the ratios, "earnings" have been computed by adding to
pretax earnings the fixed charges and the minority interest in earnings
of subsidiaries having fixed charges and deducting (adding) the
undistributed equity in earnings (losses) of investees. Fixed charges
include interest (excluding interest on annuity benefits), amortization
of debt premium/discount and expense, preferred dividend and distribution
requirements of subsidiaries and a portion of rental expense deemed to be
representative of the interest factor.
(d) Includes AFC preferred stock following the Mergers and trust preferred
securities of subsidiaries issued in 1996 and 1997.
26
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial statements and
other statistical data that management believes will enhance the
understanding of AFG's financial condition and results of operations. This
discussion should be read in conjunction with the financial statements
beginning on page F-1.
As discussed in Note A to the financial statements, financial
statements for periods prior to the 1995 Mergers are those of AFC.
The operations of American Premier are included in AFG's financial
statements from the date of acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Ratios From the date of the 1995 Mergers to the end of 1997, approximately
$1.4 billion of AFC and American Premier debt and preferred stock was
retired or replaced with lower cost financing; aggregate debt and preferred
securities were reduced by approximately two-thirds. AFG's debt to total
capital ratio at the parent holding company level improved from nearly 60%
at the date of the 1995 Mergers to approximately 17% at December 31, 1997.
These reductions and replacements reduce AFG's interest expense and preferred
dividend requirements by over $110 million annually.
AFG's ratio of earnings to fixed charges on a total enterprise basis was
3.98, 4.22 and 2.60 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The National Association of Insurance Commissioners' model law for risk
based capital ("RBC") applies to both life and property and casualty
companies. 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 December 31, 1997, the capital ratios of all AFG
insurance companies substantially exceeded the RBC requirements (the lowest
capital ratio of any AFG subsidiary was 3.5 times its authorized control
level RBC; weighted average of all AFG subsidiaries was 5.2 times).
Sources of Funds AFG and its subsidiaries, AFC Holding, AFC and
American Premier, are organized as holding companies with almost all of
their operations being conducted by subsidiaries. These parent corporations,
however, have continuing cash needs for administrative expenses, the payment
of principal and interest on borrowings, and shareholder dividends. Funds
to meet these obligations come primarily from dividend and tax payments
from their subsidiaries.
Management believes these parent holding companies have sufficient
resources to meet their liquidity requirements through operations in the
short-term and long-term future. If funds generated from operations,
including dividends from subsidiaries, are insufficient to meet fixed
charges in any period, these companies would be required to generate cash
through borrowings, sales of securities or other assets, or similar
transactions.
<PAGE>
Prior to the 1995 Mergers, American Premier had substantial cash and
short-term investments at the parent company level. Subsequent to the
Mergers, AFC and two of its subsidiaries entered into separate credit
agreements with American Premier. Funds borrowed from American Premier
under these agreements were used for debt retirements, capital contributions
to subsidiaries, and other corporate purposes. In December 1997, the
parent holding companies entered into a reciprocal Master Credit Agreement
under which these companies make funds available to each other for general
corporate purposes.
27
<PAGE>
In December 1996, American Premier paid a dividend to AFG in
the form of a $675 million note receivable from AFC under its
credit agreement plus $18.7 million of related accrued
interest. AFG then contributed $450 million of the note
(without accrued interest) to the capital of AFC. At the close
of business on December 31, 1996, AFG contributed to AFC 81% of
the common stock of American Premier.
In 1996, three nationally recognized rating agencies issued
or upgraded ratings on AFC, American Premier and AAG public
debentures. All of the AFC and AAG senior debentures are now
rated investment grade; the APU and AAG subordinated debentures
are rated investment grade by two of the agencies. Generally,
the upgrades reflect the expectation that AFG's consolidated
debt to total capital will remain conservative and that
coverage ratios will benefit from higher subsidiary earnings
and a lower level of fixed charges at AFG's subsidiaries.
A new five-year, $300 million bank credit line was established by
AFC in February 1998 replacing two subsidiary holding company lines.
The new credit line provides ample liquidity and can be used to obtain
funds for operating subsidiaries or, if necessary, for the parent companies.
At December 31, 1997, there was $45 million borrowed under the two
holding company lines.
In the past, funds have been borrowed under bank facilities and used
for working capital, capital infusions into subsidiaries, and to retire
other issues of short-term or high-rate debt and preferred stock. Also,
AFG believes it may be prudent and advisable to utilize portions of the
bank debt in the normal course over the next year or two.
In 1996 and 1997, wholly-owned trust subsidiaries of AFC Holding and
AAG sold preferred securities for cash proceeds totaling $100 million and
$225 million, respectively. Proceeds were used to retire outstanding debt
and preferred stock of subsidiaries and for general corporate purposes,
including a capital contribution to a subsidiary.
In February 1997, AFG filed a shelf registration statement for the future
issuance of up to an aggregate of $500 million in common stock, debt or trust
securities, with no more than $200 million of any one security being issued.
The filing provides AFG with greater flexibility to access the capital
markets from time to time as market and other conditions permit. In
December 1997, AFG issued $100 million of 7-1/8% Senior Debentures due 2007
under this shelf registration statement. AFG used the proceeds to retire
outstanding preferred stock of AFC and minority shares of a subsidiary.
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies in the past.
However, the reliance on such dividend payments has been lessened by the
combination of (i) strong capital at AFG's insurance subsidiaries (and the
related decreased likelihood of a need for investment in those companies),
(ii) the reductions of debt at the holding companies (and the related
decrease in ongoing cash needs for interest and principal payments),
(iii) AFG's ability to obtain financing in capital markets, as well as
(iv) the sales of non-core investments.
<PAGE>
For statutory accounting purposes, equity securities are generally
carried at market value. At December 31, 1997, AFG's insurance companies
owned publicly traded equity securities with a market value of $1.5 billion,
including equity securities of AFG affiliates (including subsidiaries) of
$1.1 billion. Since significant amounts of these are concentrated
in a relatively small number of companies, decreases in the market prices
could adversely affect the insurance group's capital, potentially impacting
the amount of dividends available or necessitating a capital contribution.
Conversely, increases in the market prices could have a favorable impact on
the group's dividend-paying capability.
28
<PAGE>
Beginning with the 1997 federal tax return, American Premier
will join AFC's consolidated return. Under tax allocation
agreements with AFC, its 80%-owned U.S. subsidiaries generally
compute tax provisions as if filing separate returns based on
book taxable income computed in accordance with generally
accepted accounting principles. The resulting provision (or
credit) is currently payable to (or receivable from) AFC.
Uncertainties Two lawsuits were filed in 1994 against American
Premier by USX Corporation ("USX") and a former USX subsidiary.
The lawsuits seek contribution from American Premier for all or
a portion of a $600 million final antitrust judgment entered
against a USX subsidiary in 1994. The lawsuits argue that
USX's liability for that judgment is attributable to the
alleged activities of American Premier's predecessor in an
unlawful antitrust conspiracy among certain railroad companies.
American Premier and its outside counsel believe that American
Premier has substantial defenses and should not suffer a
material loss as a result of this litigation.
Great American's liability for unpaid losses and loss
adjustment expenses includes amounts for various liability
coverages related to environmental, hazardous product and other
mass tort claims. At December 31, 1997, Great American had
recorded $348 million (net of reinsurance recoverables of
$173 million) for such claims on policies written many years ago
where, in most cases, coverage was never intended. Due to
inconsistent court decisions on many coverage issues and the
difficulty in determining standards acceptable for cleaning up
pollution sites, significant uncertainties exist which are not
likely to be resolved in the near future.
AFG's subsidiaries are parties in a number of proceedings relating
to former operations. See Note N to the financial statements.
Most businesses utilizing computing technology are facing a
problem with the year 2000. The Year 2000 problem is caused by
the widespread use of computer programs that lack the ability
to properly interpret two-digit codes representing the year
2000 and beyond. This program flaw can cause computation
errors, faulty information processing and reporting and, in
some instances, complete shutdown of critical applications.
During the early 1990's Great American designed and developed
software to automate the Year 2000 conversion process. In 1995
Great American formed Millennium Dynamics, Inc. ("MDI") to
publicly market its software and consultative services worldwide.
In connection with the sale of MDI in the fourth quarter of 1997,
AFG retained licenses to utilize MDI's software internally.
<PAGE>
Each segment of AFG's operations is comprised of multiple
business units most of which utilize stand-alone computer
programs. These businesses are in the process of either (i)
modifying their programs utilizing the MDI software along with
other internal and external resources or (ii) replacing programs
with new software that is Year 2000 compliant. AFG's goal is to
have program modifications and new software installations
substantially completed by the end of 1998. A significant portion
of AFG's Year 2000 project will be completed using internal staff.
Incremental Year 2000 costs are not expected to have a material
effect on AFG's financial statements.
Projected Year 2000 costs and completion dates are based on
management's best estimate. However, there can be no assurance
that these estimates will be achieved. Factors such as the
availability of trained personnel could affect the successful
completion of the project. Should software modifications and new
software installation not be completed on a timely basis, the
resulting disruptions could have a material adverse impact on
operations.
AFG's operations could also be affected by the inability of
third parties such as agents and vendors to successfully become
Year 2000 compliant. In addition, AFG's property and casualty
insurance operations are reviewing policy forms and amendatory
endorsements and examining coverage issues for Year 2000
exposures. Management believes that these issues will not have
a material impact on AFG's financial statements.
29
<PAGE>
While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts, circumstances
and applicable laws, management believes that sufficient
reserves have been provided.
Investments Approximately 70% of AFG's consolidated assets
are invested in marketable securities. A diverse portfolio of
primarily publicly traded bonds and notes accounts for nearly
95% of these securities. AFG attempts to optimize investment
income while building the value of its portfolio, placing
emphasis upon long-term performance. AFG's goal is to maximize
return on an ongoing basis rather than focusing on short-term
performance.
Fixed income investment funds are generally invested in
securities with short-term and intermediate-term maturities
with an objective of optimizing total return while allowing
flexibility to react to changes in market conditions. At
December 31, 1997, the average life of AFG's bonds and
redeemable preferred stocks was just over 6 years.
Approximately 93% of the bonds and redeemable preferred
stocks held by AFG were rated "investment grade" (credit rating
of AAA to BBB) by nationally recognized rating agencies at
December 31, 1997. Investment grade securities generally bear
lower yields and lower degrees of risk than those that are
unrated and non-investment grade. Management believes that the
high quality investment portfolio should generate a stable and
predictable investment return.
Investments in mortgage-backed securities ("MBSs")
represented approximately one-fourth of AFG's bonds and
redeemable preferred stocks at December 31, 1997. AFG invests
primarily in MBSs which have a reduced risk of prepayment. In
addition, the majority of MBSs held by AFG were purchased at a
discount. Management believes that the structure and
discounted nature of the MBSs will mitigate the effect of
prepayments on earnings over the anticipated life of the MBS
portfolio. More than 90% of AFG's MBSs are rated "AAA" with
substantially all being of investment grade quality. The
market in which these securities trade is highly liquid. Aside
from interest rate risk, AFG does not believe a material risk
(relative to earnings or liquidity) is inherent in holding such
investments.
Because most income of the property and casualty insurance
subsidiaries has been sheltered from income taxes through 1997,
non-taxable municipal bonds represent only a small portion (less
than 1%) of the portfolio.
AFG's equity securities are concentrated in a relatively
limited number of major positions. This approach allows
management to more closely monitor the companies and industries
in which they operate.
<PAGE>
Prior to the 1995 Mergers, the realization of capital gains,
primarily through sales of equity securities, was an integral
part of AFG's investment program. Individual securities are sold
creating gains or losses as market opportunities exist. Pretax
capital gains recognized upon disposition of securities,
including investees, during the past five years have been:
1997 - $57 million; 1996 - $166 million; 1995 - $84 million; 1994
- - $50 million and 1993 - $165 million. At December 31, 1997, the
net unrealized gain on AFG's bonds and redeemable preferred
stocks was $389 million; the net unrealized gain on equity
securities was $293 million.
30
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1997
General As previously noted, financial statements for periods
prior to the April 1995 Mergers are those of AFC. The
operations of American Premier are included in AFG's financial
statements from the date of acquisition. AFC had accounted for
American Premier as an investee from the second quarter of 1993
through the first quarter of 1995. Accordingly, income
statement components for 1997 and 1996 are not comparable to
prior years.
Pretax earnings before extraordinary items were $320 million
in 1997, $353 million in 1996 and $247 million in 1995.
Results for 1997 include $91 million in pretax gains,
primarily on the sales of affiliates and other securities,
and reflect declines of $41 million in underwriting results
in AFG's property and casualty insurance business and
$24 million in interest expense.
Results for 1996 include $203 million in pretax gains
primarily on the sales of Citicasters and Buckeye, reduced
by a charge of $80 million resulting from a decision to
strengthen insurance reserves relating to asbestos and
other environmental matters ("A&E").
In addition to the earnings contribution resulting from the
Mergers, results for 1995 include $84 million in pretax
gains on the sale of securities.
Property and Casualty Insurance - Underwriting AFG manages and
operates its property and casualty business as three major
sectors. The nonstandard automobile insurance companies (the
"NSA Group") insure risks not typically accepted for standard
automobile coverage because of the applicant's driving record,
type of vehicle, age or other criteria. The specialty lines are
a diversified group of over twenty-five business lines that
offer a wide variety of specialty insurance products. Some of
the more significant areas are California workers' compensation,
executive liability, inland and ocean marine, U.S.-based
operations of Japanese companies, agricultural-related
coverages, non-profit liability, general aviation coverages,
fidelity and surety bonds, and umbrella and excess. The
commercial and personal lines provide coverages in workers'
compensation, commercial multi-peril, umbrella and commercial
automobile, standard private passenger automobile and homeowners
insurance.
To understand the overall profitability of particular lines,
the timing of claims payments and the related impact of
investment income must be considered. Certain "short-tail"
lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby
limiting investment income earned thereon. On the other hand,
"long-tail" lines of business (primarily liability coverages
and workers' compensation) have payouts that are either
structured over many years or take many years to settle,
thereby significantly increasing investment income earned on
related premiums received.
<PAGE>
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting losses, loss
adjustment expenses, underwriting expenses and policyholder
dividends to premiums. When the combined ratio is under 100%,
underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
For certain lines of business and products where the
credibility of the range of loss projections is less certain
(primarily the various specialty lines listed above),
management believes that it is prudent and appropriate to use
conservative assumptions until such time as the data,
experience and projections have more credibility, as evidenced
by data volume, consistency and maturity of the data. While
this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
31
<PAGE>
While AFG desires and seeks to earn an underwriting profit
on all of its business, it is not always possible to do so. As
a result, AFG attempts to expand in the most profitable areas
and control growth or even reduce its involvement in the least
profitable ones.
In 1997, underwriting results of AFG's insurance operations
outperformed the industry average for the twelfth consecutive
year. AFG's insurance operations have been able to exceed the
industry's results by focusing on growth opportunities in the
more profitable areas of the specialty lines and nonstandard
auto businesses.
Comparisons made in the following discussion of AFG's
insurance operations include American Premier's insurance
operations even though they were not consolidated in the
financial statements prior to the 1995 Mergers.
Net written premiums and combined ratios for AFG's property
and casualty insurance subsidiaries were as follows (dollars in
millions):
1997 1996 1995
Net Written Premiums (GAAP)
NSA Group $1,248 $1,135 $1,277
Specialty Operations 1,103 993 1,097
Commercial and Personal Operations 507 660 717
Other Lines - - 1
$2,858 $2,788 $3,092
Combined Ratios (GAAP)
NSA Group 97.2% 99.9% 105.2%
Specialty Operations 99.0 84.1 94.8
Commercial and Personal Operations 106.0 110.6 99.1
Aggregate (including A&E and other lines) 101.4 102.9 101.2
Operating results for 1996 were adversely impacted by two
unusual items: (i) higher than normal catastrophe losses
including approximately $30 million in losses due to Hurricane
Fran and (ii) increases in A&E reserves (exposures for which
AFG may be liable under general liability policies written
years ago). A standard insurance measure used in analyzing the
adequacy of A&E reserves is the "survival ratio" (reserves
divided by three-year average annual paid losses). Due in part
to the greater uncertainties inherent in estimating A&E claims,
management evaluates its survival ratio in relation to those
published for the industry. Based primarily on industry
survival ratios published in mid-1996, AFG increased A&E
reserves of its discontinued insurance lines by $120 million by
recording a third quarter, non-cash pretax charge of
$80 million and reallocating $40 million, or approximately 2%,
of reserves from its Specialty Operations. Reserves for unpaid
losses and loss adjustment expenses of the Specialty Lines were
approximately $2.0 billion, $2.1 billion and $2.2 billion at
December 31, 1997, 1996 and 1995, respectively. A&E reserves
at December 31, 1997, were approximately $348 million, an
amount equal to approximately 10 times the preceding three
years' average claim payments.
<PAGE>
NSA Group The NSA Group's 10% increase in net written
premiums during 1997 is due primarily to volume increases in
California resulting from enactment of legislation which
requires drivers to provide proof of insurance in order to
obtain a valid permit. During 1995 and early 1996, the NSA
Group implemented premium rate increases in various states. In
1996, the higher rate levels along with competitive pressures
in the nonstandard automobile insurance industry resulted in an
11% decline in net written premiums. These rate increases
contributed to the improvement in the combined ratio in 1997
and 1996.
Specialty Operations Net written premiums for the specialty
operations increased 11% in 1997 due primarily to premiums
recorded by a newly acquired aviation division and the return of
premiums in 1996 related to the withdrawal from a voluntary pool.
The specialty operations had profitable underwriting results for
1997 despite a significant decline in the results of AFG's
California workers' compensation business relating to (i)
deteriorating
32
<PAGE>
underwriting margins on business written in 1996 and 1997 and (ii)
reserve reductions in 1996 primarily for business written prior to
1995 in response to fundamental change in the California workers'
compensation market and actuarial evaluations. The specialty
lines combined ratio was unusually low in 1996 due primarily to
the reallocation of $40 million in reserves to A&E reserves (a
combined ratio impact of 4.1 percentage points) and the 1996
reductions in California workers' compensation reserves mentioned
above.
Net written premiums for the specialty operations declined 9%
during 1996 due primarily to a decrease in the California workers'
compensation business and withdrawal from an unprofitable pool at
the end of 1995, partially offset by increases in other specialty
niche lines. The decline in California workers' compensation
premiums reflects (i) extremely competitive pricing in the
marketplace as a result of the repeal of the California workers'
compensation minimum rate law effective January 1, 1995 and (ii)
the impact of mandatory premium rate reductions which took effect
a year earlier.
Excluding the impact of the decreases in the California
workers' compensation business and the withdrawal from the
voluntary pool, specialty net written premiums increased
$16 million (2%) in 1996. The increase is due in part to
increases in specialized coverages for fidelity and surety
bonds, executive liability, animal mortality and collateral
protection exposures.
Commercial and Personal Operations Net written premiums for
the commercial and personal operations decreased 23% in 1997 due
primarily to a reinsurance agreement, effective January 1, 1997,
under which 80% of all AFG's homeowners' business was reinsured,
and reduced writings of personal automobile coverages in certain
states. Excluding the impact of the reinsurance agreement,
premiums decreased 10%. Even though underwriting results for
1997 were impacted by several current year commercial casualty
losses as well as adverse development in certain prior year
claims, improvements in personal lines contributed to a lower
combined ratio.
Net written premiums for the commercial and personal
operations decreased 8% in 1996. The decrease is due primarily
to significant reductions in homeowners coverages in certain
states as well as competitive pricing conditions in the
commercial casualty market, partially offset by increases in
writings of workers' compensation coverages. The profitability
of the commercial and personal operations declined in 1996 due
primarily to deterioration in personal lines operations as well
as weather-related losses, including losses from Hurricane Fran.
Life, Accident and Health Premiums and Benefits Life, accident
and health premiums and benefits increased in 1997 due primarily
to an increase in pre-need life insurance sales through the
largest owner of funeral homes in the world. The increase in
life, accident and health premiums and expenses in 1996 reflects
AAG's acquisition of American Memorial and Loyal.
<PAGE>
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested assets.
1997 compared to 1996 Investment income increased
$22.5 million (3%) from 1996 due primarily to an increase in
the average amount of investments held partially offset by
lower interest rates available in the marketplace.
1996 compared to 1995 Investment income increased
$96 million (13%) from 1995; adjusting for the effects of the
1995 Mergers retroactively to January 1, 1995, investment
income increased $55 million (7%) from 1995 due primarily to an
increase in the average amount of investments held.
33
<PAGE>
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFG owns a significant portion of
the voting stock) represents AFG's proportionate share of the
investees' earnings and losses.
1997 compared to 1996 AFG recorded equity in net losses of
investee corporations of $5.6 million in 1997 and $17 million in 1996.
Chiquita's loss attributable to common shareholders was $17 million for
1997; results were adversely affected by a stronger dollar in relation
to major European currencies (mitigated in part by the company's foreign
currency hedging program) and by increased banana production costs
resulting primarily from widespread flooding in 1996. These factors
more than offset the benefit of higher local currency banana pricing in
Europe during the second half of the year. For 1996, the loss attributable
to common shareholders was $63 million and included pretax writedowns
and costs of $70 million resulting from (i) industry-wide flooding
in Costa Rica, Guatemala and Honduras, (ii) certain strategic
undertakings designed to achieve further long-term reductions in
the delivered product cost of Chiquita bananas and (iii) certain
claims relating to prior European Union quota restructuring actions.
1996 compared to 1995 AFG's equity in net earnings of investee
corporations decreased $32 million in 1996 compared to 1995.
Chiquita reported a decrease in earnings attributable to common
shareholders of $63 million in 1996 due primarily to the pretax
writedowns and costs of $70 million mentioned above. Earnings
attributable to common shareholders for 1995 were $946,000 and
included a pretax gain of $19 million primarily resulting from
divestitures of operations and other actions taken as part of the
company's ongoing program to improve shareholder value. These
divestitures and other actions included sales of older ships, the
sale of Chiquita's Costa Rican edible oils operations, the shut-
down of a portion of Chiquita's juice operations and the
reconfiguration of banana production assets.
Gains on Sales of Investees The gain on sale of investee in 1997
represents a pretax gain to AFG as a result of Chiquita's public
issuance of 4.6 million shares of its common stock. The gain on
sale of investee in 1996 represents a pretax gain, before $6.5
million of minority interest, on the sale of Citicasters common stock.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries
in 1997 include (i) a pretax gain of $49.9 million on the sale of
MDI and (ii) a charge of $17 million relating to operations
expected to be sold or otherwise disposed of in 1998. The gains
on sales of subsidiaries in 1996 include a pretax gain of
$33.9 million on the sale of Buckeye Management Company and the
settlement of litigation related to a subsidiary sold in 1993.
Other Income Other income decreased $14.9 million (11%) in 1997
compared to 1996 due primarily to the absence of revenues from a
non-insurance subsidiary which was sold in the first quarter of 1997.
<PAGE>
Annuity Benefits For GAAP financial reporting purposes,
annuity receipts are accounted for as interest-bearing deposits
("annuity benefits accumulated") rather than as revenues.
Under these contracts, policyholders' funds are credited with
interest on a tax-deferred basis until withdrawn by the
policyholder. Annuity benefits represent primarily interest
related to annuity policyholders' funds held. The rate at
which AAG credits interest on most of its annuity
policyholders' funds is subject to change based on management's
judgment of market conditions.
Fixed annuity receipts totaled approximately $490 million in
1997, $570 million in 1996 and $460 million in 1995. Annuity
receipts increased each year from 1993 through 1996 due primarily to
sales of newly introduced single premium products and, in 1995, the
development of new distribution channels. Annuity receipts in 1997
reflect the decrease of business written by a single agency from
$99 million in 1996 to $23 million in 1997. AAG is no longer writing
business through this agency.
34
<PAGE>
Annuity benefits increased $7 million (3%) in 1997 and
$17.2 million (7%) in 1996 due primarily to an increase in average
annuity benefits accumulated partially offset by decreases in
crediting rates on AAG's fixed rate annuities.
Interest on Borrowed Money Changes in interest expense result
from fluctuations in market rates as well as changes in
borrowings. AFG has generally financed its borrowings on a
long-term basis which has resulted in higher current costs.
1997 compared to 1996 Interest expense decreased $23.7 million (31%)
from 1996. The decrease reflects significant debt reductions in 1996.
1996 compared to 1995 Interest expense for 1996 was
$76.1 million and interest expense for 1995, adjusted to reflect
the effect of the 1995 Mergers retroactively to January 1, 1995,
was $116.3 million. The $40 million (35%) decrease reflects
significant debt retirements during both 1995 and 1996.
Minority Interest Expense Minority interest expense for 1996
includes $6.5 million related to the sale of Citicasters shares
held by AFEI. Dividends paid by subsidiaries on their preferred
securities have varied as the securities were issued and retired
over the past three years. Prior to the Mergers in 1995, AFC
(AFG's predecessor) preferred dividends of $6.3 million were not
recorded as minority interest.
Other Operating and General Expenses Operating and general
expenses in 1997 include third quarter charges of $5.5 million
relating to an arbitration settlement and $4.0 million relating
to relocating a subsidiary's operations to Cincinnati. These
charges were more than offset by a reduction caused by the
absence of expenses from a non-insurance subsidiary which was
sold in the first quarter of 1997.
Income Taxes See Note K to the Financial Statements for an
analysis of items affecting AFG's effective tax rate.
New Accounting Standards to be Implemented During 1997, the
Financial Accounting Standards Board issued the following
Statement of Financial Accounting Standards ("SFAS"); the
implementation of these standards will not have a significant
effect on AFG's financial position or results of operations.
SFAS # Subject of Standard Period to be Implemented
130 Comprehensive Income 1st quarter of 1998
131 Segment Information 4th quarter of 1998
SFAS No. 130 establishes standards for the reporting of a
company's change in equity during the period from non-owner
sources. For AFG, comprehensive income will principally
consist of net income and the change in net unrealized gains on
marketable securities. SFAS No. 131 establishes standards for
the way companies report information about operating segments,
products and services, geographic areas and major customers.
Implementation of these standards will not have a significant
effect on AFG's financial position, net income or reported segments.
35
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1997 and 1996 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Cash Flows:
Years ended December 31, 1997, 1996 and 1995 F-4
Notes to Consolidated Financial Statements F-5
"Selected Quarterly Financial Data" has been included in Note O
to the Consolidated Financial Statements.
PART III
The information required by the following Items will be
included in AFG's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders which will be filed with the
Securities and Exchange Commission within 120 days after the
end of Registrant's fiscal year and is incorporated herein by
reference.
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of
American Financial Group, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of earnings and
cash flows for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of American Financial Group, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 6, 1998
F-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
1997 1996
Assets:
Cash and short-term investments $ 257,117 $ 448,296
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,202,300 and $3,528,100) 3,120,106 3,491,126
Available for sale - at market
(amortized cost - $7,225,736 and $6,362,597) 7,532,836 6,494,597
Other stocks - principally at market
(cost - $153,322 and $142,364) 446,222 327,664
Investment in investee corporations 200,714 199,651
Loans receivable 513,694 568,765
Real estate and other investments 219,216 208,765
Total investments 12,032,788 11,290,568
Recoverables from reinsurers and prepaid
reinsurance premiums 998,743 942,450
Agents' balances and premiums receivable 691,005 609,403
Deferred acquisition costs 521,898 452,041
Other receivables 243,330 272,595
Deferred tax asset 41,413 137,284
Assets held in separate accounts 300,491 247,579
Prepaid expenses, deferred charges and other assets 369,156 372,321
Cost in excess of net assets acquired 299,408 278,581
$15,755,349 $15,051,118
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,225,336 $ 4,123,701
Unearned premiums 1,328,910 1,247,806
Annuity benefits accumulated 5,528,111 5,365,612
Life, accident and health reserves 709,899 575,380
Long-term debt:
Holding companies 386,661 339,504
Subsidiaries 194,084 178,415
Liabilities related to separate accounts 300,491 247,579
Accounts payable, accrued expenses and other
liabilities 906,151 924,244
Total liabilities 13,579,643 13,002,241
Minority interest 512,997 494,440
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 61,048,904 and 61,071,626 shares outstanding 61,049 61,072
Capital surplus 775,689 745,649
Retained earnings 477,071 559,716
Net unrealized gain on marketable securities,
net of deferred income taxes 348,900 188,000
Total shareholders' equity 1,662,709 1,554,437
$15,755,349 $15,051,118
See notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Income:
Property and casualty insurance premiums $2,824,381 $2,844,512 $2,648,703
Life, accident and health premiums 121,506 103,552 15,691
Investment income 868,946 846,428 750,640
Equity in net earnings (losses) of investees (5,564) (16,955) 15,237
Realized gains (losses) on sales of securities 46,006 (3,470) 84,028
Gains on sales of investees 11,428 169,138 335
Gains on sales of subsidiaries 33,602 36,837 -
Other income 120,418 135,355 114,975
4,020,723 4,115,397 3,629,609
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,075,616 2,131,421 1,977,395
Commissions and other underwriting expenses 790,324 793,800 707,340
Annuity benefits 278,829 271,821 254,650
Life, accident and health benefits 110,082 92,315 13,202
Interest charges on borrowed money 52,331 76,052 122,568
Minority interest expense 54,456 47,821 33,264
Other operating and general expenses 339,475 348,923 274,271
3,701,113 3,762,153 3,382,690
Earnings before income taxes and
extraordinary items 319,610 353,244 246,919
Provision for income taxes 120,127 91,277 56,489
Earnings before extraordinary items 199,483 261,967 190,430
Extraordinary items - gain (loss) on
prepayment of debt (7,233) (28,667) 817
Net Earnings $ 192,250 $ 233,300 $ 191,247
Preferred dividend requirement of predecessor - - (6,349)
Premium over stated value paid on redemption
of preferred stock (153,333) - -
Net earnings available to Common Shares $ 38,917 $ 233,300 $ 184,898
<PAGE>
Basic earnings (loss) per Common Share:
Before extraordinary items $3.34 $4.31 $3.87
Gain (loss) on prepayment of debt (.12) (.47) .01
Premium on redemption of preferred stock (2.57) - -
Net earnings available to Common Shares $ .65 $3.84 $3.88
Diluted earnings (loss) per Common Share:
Before extraordinary items $3.28 $4.26 $3.83
Gain (loss) on prepayment of debt (.12) (.47) .02
Premium on redemption of preferred stock (2.52) - -
Net earnings available to Common Shares $ .64 $3.79 $3.85
Average number of Common Shares:
Basic 59,660 60,801 47,606
Diluted 60,748 61,494 48,050
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 192,250 $ 233,300 $ 191,247
Adjustments:
Extraordinary items 7,233 28,667 (817)
Depreciation and amortization 76,434 79,425 47,760
Annuity benefits 278,829 271,821 254,650
Equity in net (earnings) losses of investee
corporations 5,564 16,955 (15,237)
Changes in reserves on assets 7,610 5,656 2,302
Realized gains on investing activities (103,157) (198,676) (84,995)
Decrease (increase) in reinsurance and other
receivables (171,690) 96,387 23,192
Decrease (increase) in other assets (48,871) 23,541 (11,503)
Increase in insurance claims and reserves 206,900 9,171 137,180
Decrease in other liabilities (28,003) (212,720) (247,938)
Increase in minority interest 22,654 18,206 7,877
Dividends from investees 4,799 4,799 9,568
Other, net (24,549) (3,552) (673)
426,003 372,980 312,613
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,555,060) (2,128,553) (2,378,427)
Equity securities (37,107) (10,528) (1,034)
Investees and subsidiaries (118,713) - (68,591)
Real estate, property and equipment (64,917) (38,035) (42,579)
Maturities and redemptions of fixed maturity
investments 897,786 617,272 309,581
Sales of:
Fixed maturity investments 1,407,598 881,114 2,310,837
Equity securities 104,960 53,195 17,379
Investees and subsidiaries 32,500 284,277 -
Real estate, property and equipment 23,289 7,981 27,759
Cash and short-term investments of acquired
(former) subsidiaries 2,714 (4,589) 392,100
Decrease (increase) in other investments (12,892) 315 (11,466)
(319,842) (337,551) 555,559
<PAGE>
Financing Activities:
Fixed annuity receipts 493,708 573,741 457,525
Annuity surrenders, benefits and withdrawals (607,174) (517,881) (412,854)
Additional long-term borrowings 284,150 288,775 337,076
Reductions of long-term debt (230,688) (582,288) (1,061,187)
Issuances of Common Stock 13,845 26,296 211,557
Repurchases of Common Stock (97,320) (8,563) (17)
Issuances of trust preferred securities 149,353 168,876 -
Issuances of subsidiary preferred stock - 16,800 -
Repurchases of subsidiary preferred stock (243,939) (36,912) -
Cash dividends paid (59,275) (60,385) (27,199)
(297,340) (131,541) (495,099)
Net Increase (Decrease) in Cash and Short-term
Investments (191,179) (96,112) 373,073
Cash and short-term investments at beginning of
period 448,296 544,408 171,335
Cash and short-term investments at end of period $ 257,117 $ 448,296 $ 544,408
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Mergers and Reorganization I. Minority Interest
B. Accounting Policies J. Capital Stock
C. Acquisitions and Sales of Subsidiaries K. Income Taxes
and Investees L. Extraordinary Items
D. Segments of Operations M. Earnings Per Share
E. Investments N. Commitments and Contingencies
F. Investment in Investee Corporations O. Quarterly Operating Results
G. Cost in Excess of Net Assets Acquired P. Insurance
H. Long-Term Debt Q. Additional Information
A. Mergers and Reorganization
American Financial Group, Inc. ("AFG") was formed through the
combination of American Financial Corporation ("AFC") and American
Premier Underwriters, Inc. ("American Premier" or "APU") in merger
transactions completed in April 1995 (the "1995 Mergers"). For
financial reporting purposes, because the former shareholders of
AFC owned more than 50% of AFG following the Mergers, the Mergers
were accounted for as a reverse acquisition whereby AFC was deemed
to have acquired American Premier. Financial statements for
periods prior to the Mergers are those of AFC. The operations of
American Premier are included in AFG's financial statements from
the date of the Mergers.
The valuation of American Premier's net assets was determined
based on the fair market value of the AFG shares issued to
shareholders other than AFC and was allocated to American
Premier's assets and liabilities based on their fair values at the
date of acquisition.
On December 2, 1997, AFG completed several transactions in
furtherance of a plan to reduce corporate expenses and simplify
the public company structure of certain subsidiaries (the "AFG
Reorganization").
To facilitate the AFG Reorganization, AFG became a wholly-owned
subsidiary of a newly formed holding company ("AFG Holdings") and
shareholders of AFG received AFG Holdings common stock on a one-
for-one basis. Upon consummation of the AFG Reorganization, AFG
Holdings changed its name to American Financial Group, Inc. and
AFG changed its name to AFC Holding Company. As a result,
shareholders of AFG immediately prior to the AFG Reorganization
became shareholders of a new parent company having the same name.
No material change in AFG's financial condition or in the rights
of AFG security holders occurred as a result of the AFG
Reorganization.
<PAGE>
B. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of AFG and its subsidiaries. Mergers and
changes in ownership levels of subsidiaries and investees have
resulted in certain differences in the financial statements and
have affected comparability between years. 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 in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
F-5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Changes in circumstances could cause actual results to differ
materially from those estimates.
AFG's voting ownership of subsidiaries and significant investees
with publicly traded common shares at December 31, was as follows:
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") (a) 83% 83%
Chiquita Brands International, Inc. 39% 43% 44%
Citicasters Inc. - (b) 38%
(a) Became a 100%-owned subsidiary in December 1997.
(b) Sold in September 1996.
Investments Debt securities are classified as "held to maturity"
and reported at amortized cost if AFG has the positive intent and
ability to hold them to maturity. Debt and equity securities are
classified as "available for sale" and reported at fair value
with unrealized gains and losses reported as a separate component
of shareholders' equity if the securities are not classified as
held to maturity or bought and held principally for selling in
the near term. Only in certain limited circumstances, such as
significant issuer credit deterioration or if required by
insurance or other regulators, may a company change its intent to
hold a certain security to maturity without calling into question
its intent to hold other debt securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized
over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are
stated primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in securities of
20%- to 50%-owned companies are generally carried at cost,
adjusted for AFG's proportionate share of their undistributed
earnings or losses.
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFG's equity in the underlying net
assets ("goodwill") is being amortized over 40 years.
Insurance As discussed under "Reinsurance" below, unpaid losses
and loss adjustment expenses and unearned premiums have not been
reduced for reinsurance recoverable.
<PAGE>
Reinsurance In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk
and limit maximum loss arising from large claims. To the extent
that any reinsuring companies are unable to meet obligations under
the agreements covering reinsurance ceded, AFG's insurance
subsidiaries would remain liable. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsurance policies. AFG's
insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate
for losses incurred but not reported, and (b) amounts paid to
reinsurers applicable to the unexpired terms of policies in force.
AFG's insurance subsidiaries also assume reinsurance from other
companies. Income on reinsurance assumed is recognized based on
reports received from ceding reinsurers.
F-6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Acquisition Costs Policy acquisition costs
(principally commissions, premium taxes and other underwriting
expenses) related to the production of new business are deferred
("DPAC"). For the property and casualty companies, the deferral
of acquisition costs is limited based upon their recoverability
without any consideration for anticipated investment income. DPAC
is charged against income ratably over the terms of the related
policies. For the annuity companies, DPAC is amortized, with
interest, in relation to the present value of expected gross
profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period on the direct business written; (b) estimates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. These liabilities are subject to
the impact of changes in claim amounts and frequency and other
factors. In spite of the variability inherent in such estimates,
management believes that the liabilities for unpaid losses and
loss adjustment expenses are adequate. Changes in estimates of
the liabilities for losses and loss adjustment expenses are
reflected in the Statement of Earnings in the period in which
determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to other
income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional ordinary life, accident and
health policies are computed using a net level premium method.
Computations are based on anticipated investment yield (primarily
7%), mortality, morbidity and surrenders and include provisions
for unfavorable deviations. Reserves are modified as necessary to
reflect actual experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
primarily deposits maintained by several banks under a previously
offered tax-deferred annuity program. AAG receives an annual fee
from each bank for sponsoring the program; if depositors elect to
purchase an annuity from AAG, funds are transferred to AAG.
<PAGE>
Premium Recognition Property and casualty premiums are earned
over the terms of the policies on a pro rata basis. Unearned
premiums represent that portion of premiums written which is
applicable to the unexpired terms of policies in force. On
reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from
policyholders. For interest-sensitive life and universal life
products, premiums are recorded in a policyholder account which
is reflected as a liability. Revenue is recognized as amounts
are assessed against the policyholder account for mortality
coverage and contract expenses.
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which the
related premium is earned. Changes in estimates are included in
income in the period determined. Policyholder dividends do not
become legal liabilities unless and until declared by the boards
of directors of the insurance companies.
F-7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income Taxes AFC and American Premier have each filed
consolidated federal income tax returns which include all 80%-
owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. AFG (parent) was included
in American Premier's consolidated return for 1996. At the close
of business on December 31, 1996, AFG contributed 81% of the
common stock of American Premier to AFC. Accordingly, AFC and
American Premier will file a consolidated return for 1997.
Because holders of AFC Preferred Stock hold in excess of 20% of
AFC's voting rights, AFG (parent) and AFC Holding own less than
80% of AFC, and therefore, will file separate returns.
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and
tax bases and are measured using enacted tax rates. Deferred tax
assets are recognized if it is more likely than not that a
benefit will be realized.
Stock-Based Compensation As permitted under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", AFG accounts for stock options and
other stock-based compensation plans using the intrinsic value
based method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
Benefit Plans AFG provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans. Contributions to
benefit plans are charged against earnings in the year for which
they are declared. Prior to 1997, both AFC and American Premier
had contributory employee savings plans and noncontributory
Employee Stock Ownership Retirement Plans ("ESORP"). Effective
January 1, 1997, these ESORP plans were combined into a new
retirement and savings plan. Under the retirement portion of the
plan, company contributions (approximately 6% of covered
compensation in 1997) are invested primarily in securities of AFG
and affiliates. Under the savings portion of the plan, AFG
matches a specific portion of employee contributions.
AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG also provides
postemployment benefits to former or inactive employees
(primarily those on disability) who were not deemed retired under
other company plans. The projected future cost of providing
these benefits is expensed over the period the employees earn
such benefits.
Under AFG's stock option plan, options are granted to officers,
directors and key employees at exercise prices equal to the fair
value of the shares at the dates of grant. No compensation
expense is recognized for stock option grants.
<PAGE>
Minority Interest For balance sheet purposes, minority interest
represents the interests of non-controlling shareholders in AFG
subsidiaries, including AFC preferred stock and preferred
securities issued by trust subsidiaries of AFG. For income
statement purposes, minority interest expense represents those
shareholders' interest in the earnings of AFG subsidiaries as well
as AFC preferred dividends following the 1995 Mergers and accrued
distributions on the trust preferred securities.
Earnings Per Share In 1997, AFG implemented SFAS No. 128,
"Earnings Per Share". This standard requires the presentation of
basic and diluted earnings per share. Basic earnings per share
are calculated using the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per
share are adjusted to include the dilutive effect of potentially
dilutive securities. Per share amounts for prior periods have
been restated to conform to the current presentation.
F-8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statement of Cash Flows For cash flow purposes, "investing activities"
are defined as making and collecting loans and acquiring and disposing of
debt or equity instruments and property and equipment. "Financing
activities" include obtaining resources from owners and providing them
with a return on their investments, borrowing money and repaying amounts
borrowed. Annuity receipts, benefits and withdrawals are also reflected
as financing activities. All other activities are considered "operating".
Short-term investments having original maturities of three months or less
when purchased are considered to be cash equivalents for purposes of the
financial statements.
Issuances of Stock by Subsidiaries and Investees Changes in AFG's
equity in a subsidiary or an investee caused by issuances of the
subsidiary's or investee's stock are accounted for as gains or
losses where such issuance is not a part of a broader reorganization.
Fair Value of Financial Instruments Methods and assumptions used
in estimating fair values are described in Note Q to the financial
statements. These fair values represent point-in-time estimates
of value that might not be particularly relevant in predicting
AFG's future earnings or cash flows.
C. Acquisitions and Sales of Subsidiaries and Investees
Millennium Dynamics, Inc. In December 1997, AFG completed the
sale of the assets of its software solutions and consulting
services subsidiary, Millennium Dynamics, Inc. ("MDI"), to a
subsidiary of Peritus Software Services, Inc. for $30 million in
cash and 2,175,000 shares of Peritus common stock. AFG recognized
a pretax gain of approximately $50 million on the sale.
AFEI In December 1997, AFG and AFEI engaged in a merger transaction
whereby the shares of AFEI not held by AFG were exchanged either for
shares of AFG common stock on a 1-for-1 basis or for $37.00 per share
in cash. AFG paid approximately $23 million in cash and issued
approximately 2.1 million shares of its common stock in this transaction.
Chiquita During the second half of 1997, Chiquita issued 4.6 million
shares of its common stock in acquisitions of operating businesses. AFG
recorded a pretax gain in the fourth quarter of 1997 of approximately
$11 million representing the excess of AFG's equity in Chiquita following
the issuances of its common stock over AFG's previously recorded carrying
value.
Citicasters In September 1996, AFG sold its investment in
Citicasters to Jacor Communications for approximately $220 million
in cash plus warrants to purchase Jacor common stock. AFG
realized a pretax gain of approximately $169 million, before
minority interest of $6.5 million, on the sale.
<PAGE>
Buckeye In March 1996, AFG sold Buckeye Management Company to
Buckeye's management (including an AFG director who resigned in
March 1996) and employees for $60 million in cash, net of
transaction costs. AFG recognized a $33.9 million pretax gain
on the sale. In connection with the sale, the AFG director
converted his AFG convertible preferred stock into 446,799
shares of AFG Common Stock and sold such shares in the open market.
D. Segments of Operations AFG operates its property and casualty
insurance business in three major segments: nonstandard
automobile, specialty lines, and commercial and personal lines.
AFG's annuity and life business primarily sells tax-deferred
annuities to employees of primary and secondary educational
institutions and hospitals. These insurance businesses operate
throughout the United States. In addition, AFG has owned
significant portions of the voting equity securities of certain
companies (investee corporations - see Note F).
F-9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is scheduled to become effective during the
fourth quarter of 1998. The implementation of SFAS No. 131 is not
expected to have a material effect on the segments currently
disclosed by AFG.
The following tables (in thousands) show AFG's assets, revenues
and operating profit (loss) by significant business segment.
Capital expenditures, depreciation and amortization are not
significant. Operating profit (loss) represents total revenues
less operating expenses. Goodwill and its amortization have been
allocated to the various segments to which they apply. General
corporate assets and expenses have not been identified or
allocated by segment.
Assets 1997 1996 1995
Property and casualty insurance (a) $ 7,517,856 $ 7,116,088 $ 7,443,115
Annuities and life 7,693,463 7,009,127 6,600,377
Other 343,316 726,252 603,833
15,554,635 14,851,467 14,647,325
Investment in investees 200,714 199,651 306,545
$15,755,349 $15,051,118 $14,953,870
Revenues (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 1,205,200 $ 1,183,098 $ 954,210
Specialty lines 1,055,935 976,150 995,528
Commercial and personal lines 563,217 684,776 697,512
Other lines 29 488 1,453
2,824,381 2,844,512 2,648,703
Investment and other income 448,849 500,897 465,998
3,273,230 3,345,409 3,114,701
Annuities and life (c) 638,348 585,079 444,082
Other 114,709 201,864 55,589
4,026,287 4,132,352 3,614,372
Equity in net earnings (losses)
of investees (5,564) (16,955) 15,237
$ 4,020,723 $ 4,115,397 $ 3,629,609
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Nonstandard automobile $ 33,456 $ 1,015 ($ 60,316)
Specialty lines 10,888 154,329 50,690
Commercial and personal lines (33,882) (72,513) 5,315
Other lines (d) (52,021) (163,540) (31,721)
(41,559) (80,709) (36,032)
Investment and other income 318,613 392,250 370,579
277,054 311,541 334,547
Annuities and life 93,794 77,119 79,579
Other (e) (45,674) (18,461) (182,444)
325,174 370,199 231,682
Equity in net earnings (losses) of
investees (5,564) (16,955) 15,237
$ 319,610 $ 353,244 $ 246,919
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as
other income earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and other
environmental matters ("A&E").
(e) Includes holding company expenses.
F-10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investments Bonds, redeemable preferred stocks and other stocks at
December 31, consisted of the following (in millions):
<TABLE>
<CAPTION>
1997
Held to Maturity Available for Sale
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ - $ 600.8 $ 618.6 $ 18.1 ($ .3)
States, municipalities and
political subdivisions 72.0 73.6 1.8 (.2) 86.7 89.3 2.6 -
Foreign government 8.3 8.9 .6 - 55.9 57.9 2.1 (.1)
Public utilities 459.7 466.7 8.3 (1.3) 359.3 374.7 15.7 (.3)
Mortgage-backed securities 868.9 899.4 30.6 (.1) 1,715.7 1,779.4 65.5 (1.8)
All other corporate 1,711.2 1,753.7 43.6 (1.1) 4,336.9 4,536.9 200.0 -
Redeemable preferred stocks - - - - 70.4 76.0 5.9 (.3)
$3,120.1 $3,202.3 $84.9 ($2.7) $7,225.7 $7,532.8 $309.9 ($2.8)
Other stocks $ 153.3 $ 446.2 $293.7 ($ .8)
</TABLE>
<TABLE>
<CAPTION>
1996
Held to Maturity Available for Sale
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ - $ 472.2 $ 475.7 $ 7.3 ($ 3.8)
States, municipalities and
political subdivisions 80.0 79.9 1.1 (1.2) 39.6 39.7 .5 (.4)
Foreign government 8.5 9.0 .5 - 94.5 94.3 .8 (1.0)
Public utilities 501.4 501.4 6.4 (6.4) 443.8 453.6 13.1 (3.3)
Mortgage-backed securities 935.9 949.0 18.8 (5.7) 1,626.3 1,637.9 28.1 (16.5)
All other corporate 1,965.3 1,988.8 34.8 (11.3) 3,624.4 3,733.0 122.2 (13.6)
Redeemable preferred stocks - - - - 61.8 60.4 1.5 (2.9)
$3,491.1 $3,528.1 $61.6 ($24.6) $6,362.6 $6,494.6 $173.5 ($41.5)
Other stocks $ 142.4 $ 327.7 $191.6 ($ 6.3)
</TABLE>
<PAGE>
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1997. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 6.5 years at December 31, 1997.
Held to Available
Maturity Maturity for Sale
One year or less 6% 3%
After one year through five years 32 18
After five years through ten years 30 37
After ten years 4 18
72 76
Mortgage-backed securities 28 24
100% 100%
F-11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Certain risks are inherent in connection with fixed maturity
securities, including loss upon default, price volatility in
reaction to changes in interest rates, and general market factors
and risks associated with reinvestment of proceeds due to
prepayments or redemptions in a period of declining interest rates.
Included in equity securities at December 31, 1997 and 1996, are
$313 million and $220 million, respectively, of securities of
Provident Financial Group, Inc. which exceeded 10% of Shareholders' Equity.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments
are summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1997
Realized $ 11,542 $ 34,464 ($ 16,102) $ 29,904
Change in Unrealized 220,320 107,600 (114,772) 213,148
1996
Realized (16,545) 13,075 8,199 4,729
Change in Unrealized (272,583) 70,000 70,904 (131,679)
1995
Realized 77,963 6,065 (13,915) 70,113
Change in Unrealized 810,690 43,700 (288,001) 566,389
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
1997
Held to Maturity $ 5.6 $422.3 $ 8.0 $ .5 ($ 1.0)
Available for Sale 2,549.5 475.5 1,399.6 37.7 (25.7)
Total $2,555.1 $897.8 $1,407.6 $38.2 ($26.7)
1996
Held to Maturity $ 202.8 $332.5 $ 9.3 $ 2.4 ($ 1.2)
Available for Sale 1,925.8 284.8 871.8 29.6 (47.3)
Total $2,128.6 $617.3 $ 881.1 $32.0 ($48.5)
1995
Held to Maturity $ 774.8 $176.3 $ 12.9 $ 1.9 ($ 2.3)
Available for Sale 1,603.6 133.3 2,297.9 88.0 (9.6)
Total $2,378.4 $309.6 $2,310.8 $89.9 ($11.9)
Securities classified as "held to maturity" having an amortized cost of
$8.2 million, $9.5 million and $14.7 million were sold for a loss of
$170,000, $159,000 and $1.8 million in 1997, 1996 and 1995, respectively,
due to significant deterioration in the issuers' creditworthiness.
F-12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investee Corporations All of the companies named
in the following table have been subject to the rules and
regulations of the SEC. The market value of AFG's investment in
Chiquita was $391 million and $306 million at December 31, 1997
and 1996, respectively. AFG's investment (and common stock
ownership percentage) and equity in net earnings and losses of
investees are stated below (dollars in thousands):
<TABLE>
<CAPTION>
Investment (Ownership %) Equity in Net Earnings (Losses)
12/31/97 12/31/96 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Chiquita (a) $200,714 (39%) $199,651 (43%) ($5,564) ($18,415) $ 3,628
Citicasters (b) - - - 1,460 4,702
American Premier(c) - - - - 6,907
$200,714 $199,651 ($5,564) ($16,955) $15,237
</TABLE>
(a) Equity in net earnings (losses) excludes AFG's share of amounts
included in extraordinary items.
(b) Sold in September 1996.
(c) Became a 100%-owned subsidiary on April 3, 1995.
Chiquita is a leading international marketer, producer and distributor of
bananas and other quality fresh and processed food products. Summarized
financial information for Chiquita at December 31, is shown below
(in millions).
1997 1996 1995
Current Assets $ 783 $ 844
Non-current Assets 1,618 1,623
Current Liabilities 483 464
Non-current Liabilities 1,138 1,279
Shareholders' Equity 780 724
Net Sales of Continuing Operations $2,434 $2,435 $2,566
Operating Income 100 84 176
Income (Loss) from Continuing Operations - (28) 28
Discontinued Operations - - (11)
Extraordinary Loss from Debt Refinancings - (23) (8)
Net Income (Loss) - (51) 9
Net Income (Loss) Attributable to Common Shares (17) (63) 1
G. Cost in Excess of Net Assets Acquired At December 31, 1997 and 1996,
accumulated amortization of the excess of cost over net assets of
purchased subsidiaries amounted to approximately $133 million and
$121 million, respectively. Amortization expense was $11.6 million in
1997, $10.8 million in 1996 and $9.2 million in 1995.
F-13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Holding Companies:
AFG 7-1/8% Senior Debentures due December 2007 $100,000 $ -
AFC 9-3/4% Debentures due April 2004, less discount
of $737 and $1,146 (imputed rate - 9.8%) 79,792 164,368
APU 9-3/4% Subordinated Notes due August 1999,
including premium of $1,224 and $1,912
(imputed rate - 8.8%) 92,127 93,604
APU 10-5/8% Subordinated Notes due April 2000,
including premium of $1,559 and $2,629
(imputed rate - 8.8%) 43,889 54,595
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $1,584 and $1,642
(imputed rate - 9.6%) 17,586 18,496
GAHC notes payable under bank line 45,000 -
Other 8,267 8,441
$386,661 $339,504
Subsidiaries:
AAG notes payable under bank lines $107,000 $ 44,700
AAG 11-1/8% Senior Subordinated Notes due February 2003 24,080 24,080
AAG 9-1/2% Senior Notes - 40,845
Notes payable secured by real estate 49,525 52,543
Other 13,479 16,247
$194,084 $178,415
</TABLE>
At December 31, 1997, sinking fund and other scheduled principal payments
on debt for the subsequent five years, adjusted to reflect financing
transactions through February 1998, were as follows (in thousands):
Holding
Companies Subsidiaries Total
1998 $ - $ 1,983 $ 1,983
1999 90,903 2,087 92,990
2000 42,330 8,803 51,133
2001 - 38,509 38,509
2002 50,399 61,440 111,839
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The
scheduled principal payments shown above assume that
debentures previously purchased are applied to the earliest
scheduled retirements.
<PAGE>
At December 31, 1997, the weighted average interest rate on
amounts borrowed under Great American Holding Corporation's
("GAHC") bank credit line was 6.81%. In February 1998, AFC
entered into a new unsecured credit agreement with a group of
banks and the GAHC and APU agreements were terminated. Under
the terms of the new agreement, AFC can borrow up to
$300 million through December 2002. Borrowings bear interest
at floating rates based on prime or LIBOR.
At December 31, 1997 and 1996, the weighted average interest rate on
amounts borrowed under AAG's bank credit lines was 6.80% and 6.68%,
respectively. In January 1998, AAG replaced its existing bank lines
with a new $200 million unsecured credit agreement. Loans under the
credit agreement mature from 2000 to 2003 and bear interest at
floating rates based on prime or LIBOR. In
F-14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 1998, AAG borrowed $50 million under the line and retired its
11-1/8% Notes (including $24.3 million principal amount held by AAG
entities).
Significant retirements of long-term debt since January 1, 1996,
have been as follows (in millions):
Year Principal Cost
AFC Debentures 1996 $138.2 $147.9
1997 85.0 96.7
American Premier Notes 1996 160.1 177.2
1997 11.3 12.5
AAG Notes 1996 78.0 84.2
1997 40.8 42.5
1998 (2 mos) 24.1 24.8
Cash interest payments of $50 million, $75 million and $137 million were
made on long-term debt in 1997, 1996 and 1995, respectively.
I. Minority Interest Minority interest in AFG's balance sheet is comprised
of the following (in thousands):
1997 1996
Interest of non-controlling shareholders
in subsidiaries' common stock $115,843 $156,680
Preferred securities issued by
subsidiary trusts 325,000 175,000
AFC preferred stock 72,154 162,760
$512,997 $494,440
Preferred Securities Wholly-owned subsidiary trusts of AFC Holding and AAG
have issued $325 million of preferred securities and, in turn, purchased
$325 million of newly-authorized AFC Holding and AAG subordinated debt
issues which provide interest and principal payments to fund the respective
trusts' obligations. The preferred securities are mandatorily redeemable
upon maturity or redemption of the subordinated debt.
The preferred securities are summarized as follows:
<TABLE>
<CAPTION>
Date of Optional
Issuance Issue (Maturity Date) Amount Redemption Dates
<S> <C> <C> <C>
October 1996 9-1/8% TOPrS (2026) $100,000,000 On or after 10/22/2001
November 1996 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001
March 1997 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
</TABLE>
AFG, AFC Holding and AAG effectively provide unconditional guarantees of
their respective trusts' obligations.
F-15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC Preferred Stock At December 31, 1997, AFC's Preferred
Stock was voting, cumulative, and consisted of the following:
Series J, no par value; $25.00 liquidating value per share; annual
dividends per share $2.00; redeemable at $25.75 per share beginning
December 2005 declining to $25.00 at December 2007; 2,886,161 shares
(stated value $72.2 million) outstanding at December 31, 1997.
At December 31, 1996, AFC's outstanding 11,900,725 shares of Series F
Preferred Stock had a stated value of $145.4 million; its 1,964,158 shares
of Series G Preferred Stock had a stated value of $17.4 million.
In December 1997, AFC retired all shares of its Series F and G Preferred
Stock in exchange for approximately $244 million in cash and 2,886,161
million shares of the Series J Preferred Stock. AFG recognized a charge
to retained earnings of $153.3 million representing the excess of total
consideration paid over the stated value of the preferred stock retired.
In December 1996, AFC redeemed 1.6 million shares of its Series F Preferred
Stock for $31.9 million and, in October, AFC purchased 250,000 shares of
Series F from its ESORP for $5.0 million. In December 1996, AFC issued
1.6 million shares of its Series G Preferred Stock to its ESORP for $16.8
million. During 1995, AFC retired its mandatory redeemable preferred stock
for an aggregate of $2.9 million.
Minority Interest Expense Minority interest expense is comprised of
(in thousands):
1997 1996 1995
Interest of non-controlling shareholders
in earnings of subsidiaries $16,142 $19,851 $14,238
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities 24,599 2,780 -
AFC preferred stock 13,715 25,190 19,026
$54,456 $47,821 $33,264
J. Capital Stock In connection with the 1995 Mergers discussed in Note A,
AFG issued 51.3 million shares (net of 18.7 million shares held by AFC
and its subsidiaries, which are shown herein as retired) of Common Stock
on April 3, 1995. At December 31, 1997, there were 61,048,904 shares of
AFG Common Stock outstanding, including 1,369,239 shares held by American
Premier for distribution to certain creditors and other claimants pursuant
to a plan of reorganization relating to American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting Preferred Stock
and 12.5 million shares of Nonvoting Preferred Stock, each without par
value. At December 31, 1995, AFG had 212,698 shares of convertible
preferred stock outstanding with a stated value of $469,000 (included in
Capital Surplus, net of related notes receivable). These shares were
converted into 446,799 shares of AFG Common Stock in March 1996.
F-16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A progression of AFG's Shareholders' Equity is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Common Stock
Common and Capital Retained Unrealized
Shares(*) Surplus Earnings Gain (Loss)
<S> <C> <C> <C> <C>
Balance at December 31, 1994 18,971,217 $ 904 $223,095 $ 3,500
Dividends on AFC Preferred Stock - - (191) -
Exercise of AFC stock options 762,500 8,721 - -
Restatement of AFC equity in
terms of AFG Common Stock 8,590,159 - - -
Shares issued in Mergers to
holders of APU Common Stock 24,376,667 588,492 - -
Net earnings - - 191,247 -
Change in unrealized - - - 248,000
Dividends on Common Stock - - (27,008) -
Shares issued:
Exercise of stock options 883,974 18,875 - -
Dividend reinvestment plan 200,381 5,859 - -
Employee stock purchase plan 32,972 918 - -
Public offering 4,600,000 127,180 - -
Sale to AFC ESORP 1,703,000 50,004 - -
Employee gift shares 19,050 494 - -
Shares repurchased (617) (17) - -
Change in foreign currency translation - 64 - -
Balance at December 31, 1995 60,139,303 801,494 387,143 251,500
Net earnings - - 233,300 -
Change in unrealized - - - (63,500)
Dividends on Common Stock - - (60,727) -
Shares issued:
Exercise of stock options 664,639 14,837 - -
Dividend reinvestment plan 10,491 342 - -
Employee stock purchase plan 81,041 2,551 - -
Portion of bonuses paid in stock 4,300 131 - -
Directors fees paid in stock 1,299 46 - -
Conversion of Preferred Stock 446,799 8,908 - -
Shares repurchased (276,246) (8,563) - -
Retirement of AFC Preferred Stock - (14,388) - -
Change in foreign currency translation - 1,363 - -
Balance at December 31, 1996 61,071,626 806,721 559,716 188,000
<PAGE>
Net earnings - - 192,250 -
Change in unrealized - - - 160,900
Dividends on Common Stock - - (59,589) -
Shares issued:
Exercise of stock options 413,312 11,292 - -
Dividend reinvestment plan 8,207 314 - -
Employee stock purchase plan 65,692 2,553 - -
Portion of bonuses paid in stock 40,500 1,521 - -
Directors fees paid in stock 1,662 68 - -
AFEI merger 2,122,548 51,926 - -
Shares repurchased (2,674,643) (35,347) (61,973) -
Retirement of AFC Preferred Stock - - (153,333) -
Capital transactions of subsidiaries - (1,960) - -
Change in foreign currency translation - (350) - -
Balance at December 31, 1997 61,048,904 $836,738 $477,071 $348,900
</TABLE>
(*) Prior to the 1995 Mergers, Carl H. Lindner and certain members of the
Lindner family owned all of the outstanding common stock of AFC.
Stock Options At December 31, 1997, there were 5.0 million
shares of AFG Common Stock reserved for issuance under AFG's
Stock Option Plan. Under the Stock Option Plan, the exercise
price of each option equals the market price of AFG Common
Stock at the date of grant. Options become exercisable at the
rate of 20% per year commencing one year after grant; those
granted to non-employee directors of AFG are generally fully
exercisable upon grant. All options expire ten years after
the date of grant. No compensation cost has been recognized
for stock option grants. Had compensation cost been
determined for stock option awards based on the fair values at
grant dates consistent with the method prescribed by Statement
of Financial Accounting Standards No. 123, AFG's net income
and earnings per share would not have been materially
different from amounts reported. For Statement No. 123
purposes, calculations were determined using the Black-Scholes
option pricing
F-17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
model and the following assumptions: dividend yield of 2%; expected
volatility of 21% for 1997 and 20% for 1996 and 1995; risk-free interest
rate of 5.8% for 1997 and 6.2% for 1996 and 1995; and expected life of
6.7 years for 1997 and 7.5 years for 1996 and 1995. Data for AFG's Stock
Option Plan is presented below:
1997 1996
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 3,331,947 $26.53 3,939,986 $25.72
Granted 770,500 $37.54 75,000 $32.47
Exercised (413,312) $27.32 (664,639) $22.33
Forfeited (1,500) $37.88 (18,400) $30.06
Outstanding at end of year 3,687,635 $28.73 3,331,947 $26.53
Options exercisable at year-end 1,774,280 $26.03 1,379,182 $24.60
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Average Average Average
Range of Exercise Remaining Exercise
Exercise Prices Shares Price Life Shares Price
$17.24 - $20.00 141,723 $18.52 3.0 years 141,723 $18.52
$20.00 - $25.00 1,335,548 $23.82 5.8 854,639 $23.73
$25.00 - $30.00 314,864 $27.32 6.0 213,118 $27.45
$30.00 - $35.00 1,152,500 $30.30 8.1 511,800 $30.14
$35.00 - $44.75 743,000 $37.67 9.3 53,000 $37.87
3,687,635 $28.73 7.1 1,774,280 $26.03
<PAGE>
K. Income Taxes The following is a reconciliation of income taxes at the
statutory rate of 35% and income taxes as shown in the Statement of
Earnings (in thousands):
1997 1996 1995
Earnings before income taxes
and extraordinary items $319,610 $353,244 $246,919
Extraordinary items before income taxes (11,287) (35,670) 536
Adjusted earnings before income taxes $308,323 $317,574 $247,455
Income taxes at statutory rate $107,912 $111,151 $ 86,609
Effect of:
Minority interest 10,058 15,112 11,673
Losses utilized (3,164) (43,302) (40,292)
Amortization of intangibles 3,362 3,065 3,015
Foreign income taxes 2,954 3,474 359
State income taxes (2,739) 4,140 81
Dividends received deduction (2,002) (7,450) (7,823)
Tax exempt interest (384) (597) (897)
Other 76 (1,319) 3,483
Total provision 116,073 84,274 56,208
Amounts applicable to extraordinary items 4,054 7,003 281
Provision for income taxes as shown
on the Statement of Earnings $120,127 $ 91,277 $ 56,489
Adjusted earnings before income taxes consisted of the following
(in thousands):
1997 1996 1995
Subject to tax in:
United States $317,615 $331,842 $250,423
Foreign jurisdictions (9,292) (14,268) (2,968)
$308,323 $317,574 $247,455
F-18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
1997 1996 1995
Current taxes (credits):
Federal $ 35,495 $22,450 $38,512
Foreign - (1,735) (1,213)
State (2,544) 6,369 124
Deferred taxes:
Federal 83,581 56,869 18,233
Foreign (459) 321 552
$116,073 $84,274 $56,208
For income tax purposes, certain members of the AFC consolidated tax
group had the following carryforwards available at December 31, 1997
(in millions):
Expiring Amount
{ 1998 - 2002 $35
Operating Loss { 2003 - 2007 95
{ 2008 - 2012 60
Capital Loss 1999 91
Other - Tax Credits 23
Deferred income tax assets and liabilities reflect temporary
differences between the carrying amounts of assets and
liabilities recognized for financial reporting purposes and the
amounts recognized for tax purposes. The significant components
of deferred tax assets and liabilities included in the Balance
Sheet at December 31, were as follows (in millions):
1997 1996
Deferred tax assets:
Net operating loss carryforwards $ 66.6 $ 83.7
Capital loss carryforwards 32.0 68.2
Insurance claims and reserves 287.5 289.8
Other, net 148.8 142.2
534.9 583.9
Valuation allowance for deferred
tax assets (97.9) (131.9)
437.0 452.0
Deferred tax liabilities:
Deferred acquisition costs (127.4) (124.9)
Investment securities (268.2) (189.8)
(395.6) (314.7)
Net deferred tax asset $ 41.4 $137.3
<PAGE>
The gross deferred tax asset has been reduced by a valuation
allowance based on an analysis of the likelihood of realization.
Factors considered in assessing the need for a valuation
allowance include: (i) recent tax returns, which show neither a
history of large amounts of taxable income nor cumulative losses
in recent years, (ii) opportunities to generate taxable income
from sales of appreciated assets, and (iii) the likelihood of
generating larger amounts of taxable income in the future. The
likelihood of realizing this asset will be reviewed
periodically; any adjustments required to the valuation
allowance will be made in the period in which the developments
on which they are based become known. The aggregate valuation
allowance decreased by $34 million in 1997 due primarily to the
expiration of American Premier's loss carryforwards.
Cash payments for income taxes, net of refunds, were $51.6 million,
$40.2 million and $14.8 million for 1997, 1996 and 1995, respectively.
F-19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net
of minority interest and income tax benefits (in thousands):
1997 1996 1995
Holding Companies:
AFC (parent) ($5,395) ($ 9,672) ($1,713)
APU (parent) (588) (3,254) 6,137
GAHC - - (611)
Subsidiaries:
AAG (1,250) (7,159) (201)
Other - 57 -
Investee:
Chiquita - (8,639) (2,795)
($7,233) ($28,667) $ 817
M. Earnings Per Share Weighted average shares outstanding were
adjusted for the following dilutive effects of stock options in
calculating diluted per share amounts: 1997 - 1.1 million
shares; 1996 - .7 million shares; and 1995 - .4 million shares.
N. Commitments and Contingencies Loss accruals have been recorded
for various environmental and occupational injury and disease
claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978. Any ultimate liability arising
therefrom in excess of previously established loss accruals
would normally be attributable to pre-reorganization events and
circumstances and accounted for as a reduction in capital
surplus. However, under purchase accounting in connection with
the 1995 Mergers, any such excess liability will be charged to
earnings in AFG's financial statements.
American Premier's liability for environmental claims
($39.5 million at December 31, 1997) consists of a number of
proceedings and claims seeking to impose responsibility for
hazardous waste remediation costs at certain railroad sites
formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad operation. It
is difficult to estimate remediation costs for a number of
reasons, including the number and financial resources of other
potentially responsible parties, the range of costs for
remediation alternatives, changing technology and the time
period over which these matters develop. American Premier's
liability is based on information currently available and is
subject to change as additional information becomes available.
<PAGE>
American Premier's liability for occupational injury and disease
claims of $58.1 million (included in other liabilities) at
December 31, 1997, includes pending and expected claims by
former employees of PCTC for injury or disease allegedly caused
by exposure to excessive noise, asbestos or other substances in
the railroad workplace. Anticipated recoveries of $35.2 million
on these liabilities are included in other assets. Recorded
amounts are based on the accumulation of estimates of reported
and unreported claims and related expenses and estimates of
probable recoveries from insurance carriers.
AFG has accrued approximately $14.2 million at December 31,
1997, for environmental costs and certain other matters
associated with the sales of former operations.
In management's opinion, the outcome of the items discussed
under "Uncertainties" in Management's Discussion and Analysis
and the above claims and contingencies will not, individually or
in the aggregate, have a material adverse effect on AFG's
financial condition or results of operations.
F-20
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. Quarterly Operating Results (Unaudited) The operations of certain
of AFG's business segments are seasonal in nature. While
insurance premiums are recognized on a relatively level basis,
claim losses related to adverse weather (snow, hail, hurricanes,
tornadoes, etc.) may be seasonal. Historically, Chiquita's
operations are significantly stronger in the first and second
quarters than in the third and fourth quarters. Quarterly results
necessarily rely heavily on estimates. These estimates and
certain other factors, such as the nature of investees' operations
and discretionary sales of assets, cause the quarterly results not
to be necessarily indicative of results for longer periods of
time. The following are quarterly results of consolidated
operations for the two years ended December 31, 1997 (in millions,
except per share amounts).
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1997
<S> <C> <C> <C> <C> <C>
Revenues $945.8 $987.6 $1,034.8 $1,052.5 $4,020.7
Earnings before extraordinary items 63.2 61.2 33.7 41.4 199.5
Extraordinary items (.1) - (7.0) (.1) (7.2)
Net earnings 63.1 61.2 26.7 41.3 192.3
Basic earnings per common share:
Before extraordinary items $1.03 $1.03 $.57 $ .69 $3.34
Loss on prepayment of debt - - (.12) - (.12)
Premium on redemption of
preferred stock - - - (2.58) (2.57)
Net earnings (loss) available to
Common Shares 1.03 1.03 .45 (1.89) .65
Diluted earnings per common share:
Before extraordinary items $1.02 $1.02 $.56 $ .68 $3.28
Loss on prepayment of debt - - (.12) - (.12)
Premium on redemption of
preferred stock - - - (2.54) (2.52)
Net earnings (loss) available to
Common Shares 1.02 1.02 .44 (1.86) .64
Average number of Common Shares:
Basic 61.1 59.2 58.9 59.4 59.7
Diluted 62.0 60.2 60.3 60.4 60.7
<PAGE>
1996
Revenues $1,030.9 $1,032.8 $1,163.5 $888.2 $4,115.4
Earnings before extraordinary items 81.2 58.3 121.6 .9 262.0
Extraordinary items (7.6) (9.9) (8.4) (2.8) (28.7)
Net earnings (loss) 73.6 48.4 113.2 (1.9) 233.3
Basic earnings per common share:
Before extraordinary items $1.35 $.96 $2.00 $.02 $4.31
Loss on prepayment of debt (.13) (.16) (.14) (.05) (.47)
Net earnings (loss) available to
Common Shares 1.22 .80 1.86 (.03) 3.84
Diluted earnings per common share:
Before extraordinary items $1.33 $.95 $1.98 $.02 $4.26
Loss on prepayment of debt (.13) (.16) (.14) (.05) (.47)
Net earnings (loss) available to
Common Shares 1.20 .79 1.84 (.03) 3.79
Average number of Common Shares:
Basic 60.3 60.9 61.0 61.0 60.8
Diluted 61.2 61.4 61.4 61.9 61.5
</TABLE>
Quarterly earnings per share do not add to year-to-date amounts due to
changes in shares outstanding.
F-21
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In the fourth quarter of 1997, AFG increased California workers'
compensation reserves by approximately $25 million due to
increased claims severity related to business written in 1996 and
1997. The fourth quarter of 1997 also includes income of
$13.8 million (included in "other income") from the sale of
development rights in New York City partially offset by a
$9.0 million charge related to insurance recoverables of American
Premier's prior railroad business. In the third quarter of 1996,
AFG increased A&E reserves by recording a non-cash pretax charge
of $80 million and recorded losses due to Hurricane Fran of
approximately $30 million.
During the past two years, AFG has continued a strategy of
disposing of non-core investments. Sales of significant
affiliates have included the following: MDI (December 1997);
Citicasters (September 1996); and Buckeye (March 1996). See
Note C for a more detailed description of these and other
transactions. Sales of subsidiaries in 1997 also includes a
fourth quarter pretax charge of $17 million relating to operations
expected to be sold or otherwise disposed of in 1998. Realized
gains (losses) on sales of securities and affiliates amounted to
(in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1997 $ 2.5 $4.2 $ 29.7 $54.6 $ 91.0
1996 52.6 5.7 172.5 (28.3) 202.5
P. Insurance Securities owned by insurance subsidiaries having a
carrying value of approximately $1.4 billion at December 31,
1997, were on deposit as required by regulatory authorities.
Insurance Reserves The liability for losses and loss adjustment
expenses for certain long-term scheduled payments under workers'
compensation, auto liability and other liability insurance has
been discounted at rates ranging from 4% to 8%. As a result, the
total liability for losses and loss adjustment expenses at
December 31, 1997, has been reduced by $60 million.
<PAGE>
The following table provides an analysis of changes in the
liability for losses and loss adjustment expenses, net of
reinsurance (and grossed up), over the past three years on a GAAP
basis (in millions):
1997 1996 1995
Balance at beginning of period $3,404 $3,393 $2,187
Reserves of American Premier
at date of the Mergers - - 1,090
Provision for losses and loss
adjustment expenses occurring in
the current year 2,045 2,179 2,116
Net increase (decrease) in provision for
claims occurring in prior years 31 (48) (139)
2,076 2,131 1,977
Payments for losses and loss adjustment
expenses occurring during:
Current year (840) (999) (987)
Prior years (1,151) (1,121) (874)
(1,991) (2,120) (1,861)
Balance at end of period $3,489 $3,404 $3,393
Add back reinsurance recoverables 736 720 704
Unpaid losses and loss adjustment
expenses included in Balance Sheet,
gross of reinsurance $4,225 $4,124 $4,097
F-22
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by
AFG's insurance companies.
1997 1996 1995
Insurance group investment income:
Fixed maturities $830.6 $817.8 $727.3
Equity securities 6.4 8.2 5.3
Other 10.6 13.5 7.9
847.6 839.5 740.5
Insurance group investment expenses (*) (37.3) (38.5) (33.8)
$810.3 $801.0 $706.7
(*) Included primarily in "Other operating and general expenses" in the
Statement of Earnings.
Statutory Information AFG's insurance subsidiaries are required to file
financial statements with state insurance regulatory authorities prepared
on an accounting basis prescribed or permitted by such authorities
(statutory basis). Net earnings and policyholders' surplus on a statutory
basis for the insurance subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
1997 1996 1995 1997 1996
Property and casualty companies $159 $276 $200 $1,916 $1,659
Life insurance companies 74 67 76 324 287
<PAGE>
Reinsurance In the normal course of business, AFG's insurance
subsidiaries assume and cede reinsurance with other insurance
companies. The following table shows (in millions) (i) amounts
deducted from property and casualty premiums in connection with
reinsurance ceded, (ii) amounts included in income for
reinsurance assumed and (iii) reinsurance recoveries deducted
from losses and loss adjustment expenses.
1997 1996 1995
Reinsurance ceded to:
Non-affiliates $614 $518 $476
Affiliates - - 33
Reinsurance assumed - including
involuntary pools and associations 89 58 93
Reinsurance recoveries 296 306 304
Q. Additional Information Total rental expense for various leases
of office space, data processing equipment and railroad rolling
stock was $36 million, $34 million and $35 million for 1997,
1996 and 1995, respectively. Sublease rental income related to
these leases totaled $5.4 million in 1997, $6.1 million in 1996
and $6.2 million in 1995.
Future minimum rentals, related principally to office space and
railroad rolling stock, required under operating leases having
initial or remaining noncancelable lease terms in excess of one
year at December 31, 1997, were as follows: 1998 -
$37 million; 1999 - $31 million; 2000 - $22 million; 2001 -
$18 million; 2002 - $13 million; and $30 million thereafter.
At December 31, 1997, minimum sublease rentals to be received
through the expiration of the leases aggregated $14 million.
Other operating and general expenses included charges for
possible losses on agents' balances, reinsurance recoverables
and other receivables in the following amounts: 1997 - $7.6
million; 1996 - $0; and 1995 - $0. The aggregate allowance for
such losses amounted to approximately $131 million and
$123 million at December 31, 1997 and 1996, respectively.
F-23
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summary Financial Information of AFC Holding AFG has guaranteed
the obligations of AFC Holding relating to the preferred securities
issued by a wholly-owned subsidiary trust. Summarized consolidated
financial information for AFC Holding is as follows (in millions):
1997 1996* 1995*
Cash and Investments $12,290 $11,739
Other Assets 3,482 3,312
Insurance Claims and Reserves 11,792 11,312
Debt 481 518
Minority Interest 590 494
Shareholders' Equity 1,607 1,554
Revenues $ 4,021 $ 4,115 $3,630
Income before Extraordinary Items 199 262 190
Extraordinary Item - (Loss)
Gain on Prepayment of Debt (7) (29) 1
Net Income 192 233 191
(*) AFC Holding is the predecessor of AFG; data for these periods
represents that of AFG.
Fair Value of Financial Instruments The following table presents
(in millions) the carrying value and estimated fair value of AFG's
financial instruments at December 31.
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $10,653 $10,735 $9,986 $10,023
Other stocks 446 446 328 328
Investment in investee
corporations 201 391 200 306
Liabilities:
Annuity benefits
accumulated $ 5,528 $ 5,319 $5,366 $ 5,180
Long-term debt:
Holding companies 387 401 340 362
Subsidiaries 194 195 178 183
Minority Interest:
Trust preferred securities $ 325 $ 339 $ 175 $ 179
AFC preferred stock 72 74 163 264
Shareholders' Equity $ 1,663 $ 2,461 $1,554 $ 2,305
<PAGE>
When available, fair values are based on prices quoted in the
most active market for each security. If quoted prices are not
available, fair value is estimated based on present values,
discounted cash flows, fair value of comparable securities, or
similar methods. The fair value of the liability for annuities
in the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates.
Fair value of annuities in the accumulation phase is assumed to
be the policyholders' cash surrender amount.
F-24
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial Instruments with Off-Balance-Sheet Risk On occasion,
AFG and its subsidiaries have entered into financial instrument
transactions which may present off-balance-sheet risks of both a
credit and market risk nature. These transactions include
commitments to fund loans, loan guarantees and commitments to
purchase and sell securities or loans. At December 31, 1997,
AFG and its subsidiaries had commitments to fund credit
facilities and contribute limited partnership capital totaling
$29 million.
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by AFG's subsidiaries
are subject to various state laws, federal regulations and debt
covenants which limit the amount of dividends, loans and
advances that can be paid. Under applicable restrictions, the
maximum amount of dividends available to AFG in 1998 from its
insurance subsidiaries without seeking regulatory clearance is
approximately $221 million. Total "restrictions" on
intercompany transfers from AFG's subsidiaries cannot be
quantified due to the discretionary nature of the restrictions.
Benefit Plans AFG expensed approximately $21 million in 1997,
$17 million in 1996 and $16 million in 1995 for contributions to
its retirement and employee savings plans.
Transactions With Affiliates In 1995, a subsidiary of AFC sold
a house to its Chairman for its appraised value of $1.8 million.
F-25
<PAGE>
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note O to the
Consolidated Financial Statements.
B. Schedules filed herewith for 1997, 1996 and 1995:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable,
not required, or the information required thereby is set
forth in the Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Item Reported
December 3, 1997 Holding company mergers.
December 12, 1997 Filing of exhibits relating to the
issuance of 7-1/8% Senior Debentures
due 2007.
S-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
December 31,
Assets: 1997 1996
Cash and short-term investments $ 25,890 $ 43,465
Receivables from affiliates 352,766 422,015
Investment in subsidiaries 1,473,261 1,192,239
Other assets 41,690 8,735
$1,893,607 $1,666,454
Liabilities and Shareholders' Equity:
Accounts payable, accrued expenses and other
liabilities $ 8,131 $ 7,121
Long-term debt 100,000 -
Payables to affiliates 122,767 104,896
Shareholders' equity 1,662,709 1,554,437
$1,893,607 $1,666,454
Condensed Statement of Earnings
Year Ended December 31,
Income: 1997 1996 1995
Dividends from:
Subsidiaries $ 281 $693,758 $ 37,044
Investees - - 879
281 693,758 37,923
Equity in undistributed earnings of
subsidiaries and investees 301,385 (345,484) 224,921
Investment and other income 35,470 11,723 9,131
337,136 359,997 271,975
Costs and Expenses:
Interest charges on borrowed money 9,702 1,805 13,997
Other operating and general expenses 7,824 4,948 11,059
17,526 6,753 25,056
Earnings before income taxes and
extraordinary items 319,610 353,244 246,919
Provision for income taxes 120,127 91,277 56,489
Earnings before extraordinary items 199,483 261,967 190,430
Extraordinary items - gain (loss)
on prepayment of debt (7,233) (28,667) 817
Net Earnings $192,250 $233,300 $191,247
(*) See Note A to the Consolidated Financial Statements. The Parent Only
Financial Statements include the accounts of AFG and its predecessor,
AFC Holding Company, a wholly-owned subsidiary. Financial Statements
for 1995 include earnings of AFC (parent only) for the period prior to
AFC's merger with APU in April 1995.
S-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
Year Ended December 31,
1997 1996 1995
Operating Activities:
Net earnings $192,250 $233,300 $191,247
Adjustments:
Equity in earnings of subsidiaries (180,581) (230,019) (194,023)
Equity in net earnings of investees - - (4,462)
Change in balances with affiliates 54,620 (91,453) (100,225)
Increase (decrease) in payables 881 (958) (10,861)
Dividends from subsidiaries and investees 281 - 36,649
Other 2,275 1,311 7,537
69,726 (87,819) (74,138)
Investing Activities:
Purchases of subsidiaries and other
investments (24,872) (69) (30)
Other - - 255
(24,872) (69) 225
Financing Activities:
Additional long-term borrowings 98,987 - 70
Reductions of long-term debt - - (325)
Issuance of subordinated notes to
subsidiary trust - 96,464 -
Issuances of common stock 13,845 26,296 211,557
Repurchases of common stock (97,320) (8,563) (17)
Cash dividends paid (77,941) (79,051) (36,532)
Cash of predecessor company at
date of merger - - (9,529)
(62,429) 35,146 165,224
Net Increase (Decrease) in Cash and
Short-term Investments (17,575) (52,742) 91,311
Cash and short-term investments at
beginning of period 43,465 96,207 4,896
Cash and short-term investments at end
of period $ 25,890 $ 43,465 $ 96,207
(*) See Note A to the Consolidated Financial Statements. The Parent
Only Financial Statements include the accounts of AFG and its
predecessor, AFC Holding Company, a wholly-owned subsidiary.
Financial Statements for 1995 include earnings of AFC (parent
only) for the period prior to AFC's merger with APU in April 1995.
S-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
(a)
RESERVES FOR
DEFERRED UNPAID CLAIMS (b)
AFFILIATION POLICY AND CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJSUTMENT DEDUCTED IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES (d)
1997 $260 $4,225 $60 $1,329
1996 $257 $4,124 $64 $1,248
1995
<TABLE>
<CAPTION>
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES AMORTIZATION PAID
INCURRED RELATED TO OF DEFERRED CLAIMS
NET POLICY AND CLAIM
EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
PREMIUMS INCOME YEARS YEARS COSTS EXPENSES WRITTEN
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $2,824 $316 $2,045 $ 31 $620 $1,991 $2,858
1996 $2,845 $335 $2,179 ($ 48) $628 $2,120 $2,788
1995 $2,649 $303 $2,116 ($139) $577 $1,861 $2,688
</TABLE>
(a) Grossed up for reinsurance recoverables of $736 and $720 at
December 31, 1997 and 1996, respectively.
(b) Discounted at rates ranging from 4% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $189 and $153 at
December 31, 1997 and 1996, respectively.
(d) Includes American Premier's Insurance Group after April 1, 1995.
S-4
<PAGE>
Signatures
Pursuant to the requirements of Section 13 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.
Signed: March 26, 1998 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 26, 1998
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director* March 26, 1998
Theodore H. Emmerich
s/JAMES E. EVANS Director March 26, 1998
James E. Evans
s/S. CRAIG LINDNER Director March 26, 1998
S. Craig Lindner
s/WILLIAM R. MARTIN Director* March 26, 1998
William R. Martin
s/FRED J. RUNK Senior Vice President and March 26, 1998
Fred J. Runk Treasurer (principal
financial and accounting
officer)
* Member of the Audit Committee
<PAGE>
INDEX TO EXHIBITS
AMERICAN FINANCIAL GROUP, INC.
Number Exhibit Description
3(a) Amended and Restated Articles of
Incorporation. _____
3(b) Code of Regulations. _____
4 Instruments defining the rights of Registrant has no
security holders. outstanding debt issues
exceeding 10% of the
assets of Registrant and
consolidated subsidiaries.
Management Contracts:
10(a) Stock Option Plan, filed as
Exhibit (10)(iii)(a)(i) to AFG's
Registration Statement on Form 8-B
filed on April 17, 1995. (*)
10(b) Form of stock option agreement, filed
as Exhibit 10(b) to AFG's Form 10-K
for 1995. (*)
10(c) Stock Option Loan Program, filed as
Exhibit 10(c) to AFG's Form 10-K
for 1995. (*)
10(d) 1997 Bonus Plan. _____
10(e) Retirement program for outside directors,
filed as Exhibit 10(e) to AFG's Form
10-K for 1995. (*)
10(f) Directors' Compensation Plan,
filed as Exhibit 10(f) to AFG's Form
10-K for 1995. (*)
10(g) Nonqualified Auxiliary RASP _____
12 Computation of ratios of earnings
to fixed charges. _____
21 Subsidiaries of the Registrant. _____
23 Consent of independent auditors. _____
27 Financial data schedule. (**)
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the
Securities and Exchange Commission.
E-1
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
AMERICAN FINANCIAL GROUP, INC.
FIRST. The name of the corporation is AMERICAN FINANCIAL GROUP, INC.
(the "Corporation").
SECOND. The place in the State of Ohio where the Corporation's
principal office is to be located is the City of Cincinnati in Hamilton
County, Ohio.
THIRD. The purpose for which the Corporation is organized shall be to
engage in any lawful act or activity for which corporations may be formed
under the Ohio General Corporation Law, Ohio Revised Code 1701.01 et seq..
FOURTH. The aggregate number of shares of stock which the Corporation
shall have authority to issue is Two Hundred Twenty Five Million (225,000,000)
shares, which shall be divided into two classes, consisting of:
(a) Twenty Five Million (25,000,000) shares of preferred stock
("Preferred Stock") without par value; and,
(b) Two Hundred Million (200,000,000) shares of common stock
("Common Stock") without par value.
PART ONE: PREFERRED STOCK
(a) Except as otherwise provided by this Article FOURTH or
by the amendment or amendments adopted by the Board of Directors
providing for the issue of any series of Preferred Stock, the
Preferred Stock may be issued at any time or from time to time in
any amount, not exceeding in the aggregate, including all shares
of any and all series thereof theretofore issued, the Twenty Five
Million (25,000,000) shares of Preferred Stock hereinabove
authorized, as Preferred Stock of one or more series, as
hereinafter provided, and for such lawful consideration as shall
be fixed from time to time by the Board of Directors.
Twelve Million Five Hundred Thousand (12,500,000)
shares of Preferred Stock shall have voting rights as provided in
clause (b) of this Part One of Article FOURTH (collectively,
"Voting Preferred Stock").
Twelve Million Five Hundred Thousand (12,500,000)
shares of Preferred Stock shall have no voting power whatsoever,
except as may be otherwise provided by law or except as may
arise upon a default, failure or other contingency (collectively,
"Non-Voting Preferred Stock").
All shares of any one series of Preferred Stock
shall be alike in every particular, each series thereof shall be
distinctively designated by letter or descriptive words, and all
series of
<PAGE>
-2-
Preferred Stock shall rank equally and be identical in all
respects except as provided above with respect to Voting
Preferred Stock and Non-Voting Preferred Stock or as permitted by
the provisions of Clause (b) of this Part One of Article FOURTH.
(a) Authority is hereby expressly granted to the Board of
Directors from time to time to adopt amendments to these Articles
of Incorporation providing for the issue in one or more series of
any unissued or treasury shares of Preferred Stock, and
providing, to the fullest extent now or hereafter permitted by
the laws of the State of Ohio and notwithstanding the provisions
of any other Article of these Articles of Incorporation of the
Corporation, in respect of the matters set forth in the following
subdivisions (i) to (x), inclusive, as well as any other rights
or matters pertaining to such series:
(i) The designation and number of shares of such series;
(ii) With respect to the Voting Preferred Stock only,
voting rights (to the fullest extent now or hereafter permitted
by the laws of the State of Ohio);
(iii) With respect to the Non-Voting Preferred Stock
only, voting rights upon a default, failure or other contingency;
(iv) The dividend rate or rates of such series (which
may be a variable rate or adjustable rate and which may be
cumulative);
(v) The dividend payment date or dates of such series;
(vi) The price or prices at which shares of such series
may be redeemed;
(vii) The amount of the sinking fund, if any, to be
applied to the purchase or redemption of shares of such series
and the manner of its application;
(viii) The liquidation price or prices of such series;
(ix) Whether or not the shares of such series shall be
made convertible into, or exchangeable for, shares of any other
class or classes or of any other series of the same class of
stock of the Corporation or any other property, and if made so
convertible or exchangeable, the conversion price or prices, or
the rates of exchange at which such conversion or exchange may be
made and the adjustments thereto, if any; and,
(x) Whether or not the issue of any additional shares
of such series or any future series in addition to such series
shall be subject to any restrictions and, if so, the nature of
such restrictions.
Any of the voting rights (with respect to the Voting Preferred
Stock only), voting rights upon a default, failure or other contingency
(with respect to the Non-Voting Preferred Stock only), dividend
<PAGE>
-3-
rate or rates, dividend payment date or dates, redemption
rights and price or prices, sinking fund requirements,
liquidation price or prices, conversion or exchange rights and
restrictions on issuance of shares of any such series of
Preferred Stock may, to the fullest extent now or hereafter
permitted by the laws of the State of Ohio, be made dependent
upon facts ascertainable outside these Articles of Incorporation
or outside the amendment or amendments providing for the issue of
such Preferred Stock adopted by the Board of Directors pursuant
to authority expressly vested in it by this Article FOURTH. Any
of the terms of any series may be established as senior to or
having preference over the terms of any other series, whether or
not outstanding at the time of adoption of the amendment creating
such series of Preferred Stock by the Board of Directors. If the
then-applicable laws of the State of Ohio do not permit the Board
of Directors to fix, by the amendment creating a series of Voting
Preferred Stock, the voting rights of shares of such series, each
holder of a share of such series of Voting Preferred Stock shall,
except as may be otherwise provided by law, be entitled to one
(1) vote for each share of Voting Preferred Stock of such series
held by such holder.
FIFTH. Amendment to Articles of Incorporation. The
Corporation shall have the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation
or any provision that may be added or inserted in these Articles
of Incorporation, provided that:
(a) Such amendment, alteration, change, repeal, addition or
insertion is consistent with law and is accomplished in the
manner now or hereafter prescribed by statute or these Articles
of Incorporation;
(b) Any provision of these Articles of Incorporation which
requires, or the change of which requires, the vote or consent of
all or a specific number or percentage of the holders of shares
of any class or series shall not be amended, altered, changed or
repealed by any lesser amount, number or percentage of votes or
consents of such class or series; and,
(c) No amendment to these Articles of Incorporation
pursuant to Ohio Revised Code 1701.69(B)(10) or any successor
provision may be adopted without the affirmative vote or consent
of the holders of an aggregate of two-thirds of the total voting
power of the Corporation.
Any rights at any time conferred upon the shareholders of the
Corporation are granted subject to the provisions of this
Article.
<PAGE>
-4-
SIXTH. No holder of any shares of this Corporation shall
have any preemptive rights to subscribe for or to purchase any
shares of this Corporation of any class, whether such shares or
such class be now or hereafter authorized, or to purchase or
subscribe for any security convertible into, or exchangeable for,
shares of any class or to which shall be attached or appertained
any warrants or rights entitling the holder thereof to purchase
or subscribe for shares of any class.
SEVENTH. This Corporation, through its Board of Directors,
shall have the right and power to purchase any of its outstanding
shares at such price and upon such terms as may be agreed upon
between the Corporation and any selling shareholder.
EIGHTH. Subject to the provisions of Article FIFTH hereof,
the affirmative vote of shareholders entitled to exercise a
majority of the voting power of this Corporation shall be
required to amend these Articles of Incorporation, approve
mergers and to take any other action which by law must be
approved by a specified percentage of the voting power of the
Corporation or of all outstanding shares entitled to vote.
NINTH. The provisions of Ohio Revised Code Chapter 1704 or
any successor provisions relating to transactions involving
interested shareholders shall not be applicable to the
Corporation.
TENTH. The provisions of Ohio Revised Code 1701.831 or any
successor provisions relating to control share acquisitions shall
not be applicable to the Corporation.
ELEVENTH. These Amended and Restated Articles of
Incorporation take the place of and supersede the existing
Articles of Incorporation of the Corporation as heretofore
amended and/or restated.
CODE OF REGULATIONS
OF
AMERICAN FINANCIAL GROUP, INC. (the "Corporation")
ARTICLE I
Shareholders
Section 1. Annual Meetings. The Annual Meeting of the
Shareholders of this Corporation, for the election of the Board
of Directors and the transaction of such other business as may
properly be brought before such meeting, shall be held at the
time, date and place designated by the Board of Directors or, if
it shall so determine, by the Chairman of the Board or the
President. If the Annual Meeting is not held or if Directors are
not elected thereat, a Special Meeting may be called and held for
that purpose.
Section 2. Special Meetings. Special meetings of the
Shareholders may be held on any business day when called by the
Chairman of the Board, the President, a majority of Directors, or
persons holding twenty percent of all voting power of the
Corporation and entitled to vote at such meeting.
Section 3. Place of Meetings. Any meeting of Shareholders
may be held at such place within or without the State of Ohio as
may be designated in the Notice of said meeting.
Section 4. Notice of Meeting and Waiver of Notice
4.1 Notice. Written notice of the time, place and
purposes of any meeting of Shareholders shall be given to
each Shareholder entitled thereto not less than seven
(7)days nor more than sixty (60) days before the date fixed
for the meeting and as prescribed by law. Such notice shall
be given by personal delivery, mail or facsimile
transmission to the Shareholders at their respective
addresses as they appear on the records of the Corporation.
Notice shall be deemed to have been given on the day mailed.
If any meeting is adjourned to another time or place, no
notice as to such adjourned meeting need be given other than
by announcement at the meeting at which such an adjournment
is taken. No business shall be transacted at any such
adjourned meeting except as might have been lawfully
transacted at the meeting at which such adjournment was taken.
4.2 Notice to Joint Owners. All notices with respect
to any shares to which persons are entitled by joint or
common ownership may be given to that one of such persons
who is named first upon the books of this Corporation, and
notice so given shall be sufficient notice to all the
holders of such shares.
<PAGE>
-2-
4.3 Waiver. Notice of any meeting may be waived in
writing by any Shareholder either before or after any
meeting, or by attendance at such meeting without protest to
its commencement.
Section 5. Shareholders Entitled to Notice and to Vote. If a
record date shall not be fixed, the record date for the
determination of Shareholders entitled to notice of or to vote at
any meeting of Shareholders shall be the close of business on the
twentieth day prior to the date of the meeting and only
Shareholders of record at such record date shall be entitled to
notice of and to vote at such meeting.
Section 6. Quorum. The holders of shares entitling them to
exercise a majority of the voting power of the Corporation,
present in person or by proxy, shall constitute a quorum for any
meeting. The Shareholders present in person or by proxy, whether
or not a quorum be present, may adjourn the meeting from time to
time without notice other than by announcement at the meeting.
Section 7. Voting. Except as provided by statute or in the
Articles of Incorporation (the "Articles"), every Shareholder
entitled to vote shall be entitled to cast one vote on each
proposal submitted to the meeting for each share held of record
on the record date for the determination of the Shareholders
entitled to vote at the meeting. At any meeting at which a
quorum is present, all questions and business which may come
before the meeting shall be determined by a majority of votes
cast, except when a greater proportion is required by law, the
Articles or these Regulations; provided, however, that no action
required by law, the Articles, or these Regulations to be
authorized or taken by the holders of a designated proportion of
the shares of the Corporation may be authorized or taken by a
lesser proportion.
Section 8. Organization of Meetings.
8.1 Presiding Officer. The Chairman of the Board, or
in his absence, the President, or the person designated by
the Board of Directors, shall call all meetings of the
Shareholders to order and shall act as Chairman thereof; if
all are absent, the Shareholders shall elect a Chairman.
8.2 Minutes. The Secretary of the Corporation, or in
his absence, an Assistant Secretary, or, in the absence of
both, a person appointed by the Chairman of the meeting,
shall act as Secretary of the meeting and shall keep and
make a record of the proceedings thereat.
Section 9. Proxies. A person who is entitled to attend a
Shareholders' meeting, to vote thereat, or to execute consents,
waivers and releases, may be represented at such meeting or vote
thereat, and execute consents, waivers and releases and exercise
any of his rights, by proxy or proxies appointed by a writing
signed by such person, or by his duly authorized attorney which
may be transmitted physically, by facsimile or by other
electronic medium.
<PAGE>
-3-
Section 10. List of Shareholders. At any meeting of
Shareholders a list of Shareholders, alphabetically arranged,
showing the number and classes of shares held by each on the
record date applicable to such meeting, shall be produced on the
request of any Shareholder.
ARTICLE II
Directors
Section 1. General Powers.
The authority of this Corporation shall be exercised by or
under the direction of the Board of Directors, except where the
law, the Articles or these Regulations require action to be
authorized or taken by the Shareholders.
Section 2. Election, Number and Qualification of Directors.
2.1 Election. The Directors shall be elected at the annual
meeting of the Shareholders, or if not so elected, at a special
meeting of Shareholders called for that purpose. The only
candidates who shall be eligible for election at such meeting
shall be those who have been nominated by or at the direction of
the Board of Directors (which nominations shall be either made at
such meeting or disclosed in a proxy statement, or supplement
thereto, distributed to Shareholders for such meeting at the
direction of the Board of Directors) and those who have been
nominated at such meeting by a Shareholder who has complied with
the procedures set forth in this Section 2. A Shareholder may
make a nomination for the office of Director only if such
Shareholder has first delivered or sent by certified mail, return
receipt requested, to the Secretary of the Corporation notice in
writing at least fifteen and no more than thirty days prior to
such meeting of Shareholders, which notice shall set forth or be
accompanied by (a) the name and residence of such Shareholder;
(b) a representation that such Shareholder is a holder of record
of voting stock of the Corporation and intends to appear in
person or by proxy at such meeting to nominate the person or
persons specified in the notice; (c) the name and residence of
each such nominee; and (d) the consent of such nominee to serve
as director if so elected.
2.2 Number. The number of Directors, which shall not be
less than the lesser of three or the number of Shareholders of
record, may be fixed or changed at a meeting of the Shareholders
called for the purpose of electing Directors at which a quorum is
present, by a majority of the votes cast at the meeting. In
addition, the number of Directors may be fixed or changed by
action of the Directors at any meeting at which a quorum is
present by a majority vote of the Directors present at the
meeting. The Directors then in office may fill any Director's
office that is created by an increase in the number of Directors.
The number of Directors elected shall be deemed to be the number
of Directors fixed unless otherwise fixed by resolution adopted
at the meeting at which such Directors are elected.
<PAGE>
-4-
2.3 Qualifications. Directors need not be Shareholders of
the Corporation.
Section 3. Term of Office of Directors.
3.1 Term. Each Director shall hold office until the next
annual meeting of the Shareholders and until his successor has
been elected or until his earlier resignation, removal from
office or death. Directors shall be subject to removal as
provided by statute or by other lawful procedures and nothing
herein shall be construed to prevent the removal of any or all
Directors in accordance therewith.
3.2 Resignation. A resignation from the Board of Directors
shall be deemed to take effect immediately upon its being
received by any incumbent corporate officer other than an officer
who is also the resigning Director, unless some other time is
specified therein.
3.3 Vacancy. In the event of any vacancy in the Board of
Directors for any reason, the remaining Directors, though less
than a majority of the whole Board, may fill any such vacancy for
the unexpired term.
Section 4. Meetings of Directors.
4.1 Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as may be fixed
by the Directors.
4.2 Special Meetings. Special Meetings of the Board of
Directors may be held at any time upon call of the Chairman of
the Board, the President, any Vice President, or any two
Directors.
4.3 Place of Meeting. Any meeting of Directors may be held
at such place within or without the State of Ohio as may be
designated in the notice of said meeting.
4.4 Notice of Meeting and Waiver of Notice. Notice of the
time and place of any regular or special meeting of the Board of
Directors shall be given to each Director by personal delivery,
telephone, facsimile transmission or mail at least forty-eight
hours before the meeting, which notice need not specify the
purpose of the meeting.
Section 5. Quorum and Voting.
At any meeting of Directors, not less than one-half of the
whole authorized number of Directors is necessary to constitute a
quorum for such meeting, except that a majority of the remaining
Directors in office shall constitute a quorum for filling a
vacancy in the Board. At any meeting at which a quorum is
present, all acts, questions, and business which may come before
the meeting shall be determined by a majority of votes cast by
the Directors present at such meeting, unless the vote of a
greater number is required by the Articles or these Regulations.
<PAGE>
-5-
Section 6. Committees.
6.1 Appointment. The Board of Directors may from time to
time appoint certain of its members to act as a committee or
committees in the intervals between meetings of the Board and may
delegate to such committee or committees power to be exercised
under the control and direction of the Board. Each committee
shall be composed of at least three directors unless a lesser
number is allowed by law. Each such committee and each member
thereof shall serve at the pleasure of the Board.
6.2 Executive Committee. In particular, the Board of
Directors may create from its membership and define the powers
and duties of an Executive Committee. During the intervals
between meetings of the Board of Directors, the Executive
Committee shall possess and may exercise all of the powers of the
Board of Directors in the management and control and the business
of the Corporation to the extent permitted by law.
6.3 Committee Action. Unless otherwise provided by the
Board of Directors, a majority of the members of any committee
appointed by the Board of Directors pursuant to this Section
shall constitute a quorum at any meeting thereof and the act of a
majority of the members present at a meeting at which a quorum is
present shall be the act of such committee. Any such committee
shall prescribe its own rules for calling and holding meetings
and its method of procedure, subject to any rules prescribed by
the Board of Directors, and shall keep a written record of all
action taken by it.
Section 7. Action of Directors Without a Meeting.
Any action which may be taken at a meeting of Directors or
any committee thereof may be taken without a meeting if
authorized by a writing or writings signed by all the Directors
or all of the members of the particular committee, which writing
or writings shall be filed or entered upon the records of the
Corporation.
Section 8. Compensation of Directors.
The Board of Directors may allow compensation to Directors
for performance of their duties and for attendance at meetings or
for any special services, may allow compensation to members of
any committee, and may reimburse any Director for his expenses in
connection with attending any Board or committee meeting.
Section 9. Relationship with Corporation.
Directors shall not be barred from providing professional or other
services to the Corporation. No contract, action or transaction shall be
void or voidable with respect to the Corporation for the reason that it is
between or affects the Corporation and one or more of its Directors, or
between or affects the Corporation and any other person in which one or more
of its Directors are
<PAGE>
-6-
directors, trustees or officers or have a financial or
personal interest, or for the reason that one or more interested Directors
participate in or vote at the meeting of the Directors or committee thereof
that authorizes such contract, action or transaction, if, in any such case,
any of the following apply:
9.1 the material facts as to the Director's relationship or
interest and as to the contract, action or transaction are
disclosed or are known to the Directors or the committee and the
Directors or committee, in good faith, reasonably justified by
such facts, authorize the contract, action or transaction by the
affirmative vote of a majority of the disinterested Directors,
even though the disinterested Directors constitute less than a quorum;
9.2 the material facts as to the Director's relationship or
interest and as to the contract, action or transaction are
disclosed or are known to the shareholders entitled to vote
thereon and the contract, action or transaction is specifically
approved at a meeting of the Shareholders held for such purpose
by the affirmative vote of the holders of shares entitling them
to exercise a majority of the voting power of the Corporation
held by persons not interested in the contract, action or
transaction; or
9.3 the contract, action or transaction is fair as to the
Corporation as of the time it is authorized or approved by the
Directors, a committee thereof or the Shareholders.
Section 10. Attendance at Meetings of Persons
Who Are Not Directors
Unless waived by the Chairman, any Director who desires the
presence at any regular or special meeting of the Board of
Directors of a person who is not a Director, shall so notify all
other Directors, not less than 24 hours before such meeting,
request the presence of such person and state the reason in
writing. Such person will not be permitted to attend the
Directors' meeting unless a majority of the Directors in
attendance vote to admit such person to the meeting. Such vote
shall constitute the first order of business for any such meeting
of the Board of Directors. Such right to attend, whether granted
by waiver or vote, may be revoked at any time during any such
meeting by the vote of a majority of the Directors in attendance.
<PAGE>
-7-
ARTICLE III
Officers
Section 1. General Provisions.
The Board of Directors shall elect a President, a Secretary
and a Treasurer, and may elect a Chairman of the Board, a Chief
Executive Officer, one or more Vice Presidents, and such other
officers and assistant officers as the Board may from time to
time deem necessary. The Chairman of the Board, if any, shall be
a Director, but none of the other officers need be a Director.
Any two or more offices may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required to be
executed, acknowledged or verified by two or more officers.
Section 2. Powers and Duties.
All officers, as between themselves and the Corporation,
shall respectively have such authority and perform such duties as
are customarily incident to their respective offices, and as may
be specified from time to time by the Board of Directors,
regardless of whether such authority and duties are customarily
incident to such office. The Chief Executive Officer shall also
serve either as Chairman of the Board or President and shall have
plenary power over the business and activities of the Corporation
and over its officers and employees, subject, however, to the
control of the Board of Directors and any limitations thereon
contained in these Regulations. In the absence of any officer of
the Corporation, or for any other reason the Board of Directors
may deem sufficient, the powers or duties of such officer, or any
of them may be delegated to any other officer or to any Director.
The Board of Directors may from time to time delegate to any
officer authority to appoint and remove subordinate officers and
to prescribe their authority and duties.
Section 3. Term of Office and Removal.
3.1 Term. Each officer of the Corporation shall hold
office at the pleasure of the Board of Directors.
3.2 Removal. The Board of Directors may remove any officer
at any time with or without cause by the affirmative vote of a
majority of Directors in office.
Section 4. Compensation of Officers.
The Directors shall establish the compensation of officers
and employees or may, to the extent not prohibited by law,
delegate such authority to a committee of Directors, the
President or a Chief Executive Officer, as they determine.
<PAGE>
-8-
ARTICLE IV
Indemnification
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved (including, without limitation, as a
witness) in any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the Corporation or that, being or having been such a director or
officer of the Corporation, he or she is or was serving at the request of an
executive officer of the Corporation as a director, officer, partner,
employee or agent of another corporation or of a partnership, joint venture,
trust, limited liability company or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whenever
the basis of such proceeding is alleged action in an official capacity as
such a director, officer, partner, employee, or agent, shall be indemnified
and held harmless by the Corporation to the fullest extent permitted by the
General Corporation Law of Ohio, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), or by other applicable law as then in
effect, against all expense, liability and loss (including, without
limitation, attorneys' fees, costs of investigation, judgments, fines, excise
taxes or penalties arising under the Employee Retirement Income Security Act
of 1974 ("ERISA") or other federal or state acts) actually incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators. Except as provided in Section 2 with respect
to proceedings seeking to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized or ratified by the Board of Directors of the
Corporation.
The right to indemnification conferred in this Section 1 shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"). An advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered
by such indemnitee including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such indemnitee, to repay all amounts so
advanced if it is proved by clear and convincing evidence in a court of
competent jurisdiction that his omission or failure to act involved an act
or omission undertaken with deliberate intent to cause injury to the
Corporation or undertaken with reckless disregard for the best interests of
the Corporation. An advancement of expenses shall not be made if the
Corporation's Board of Directors makes a good faith determination that such
payment would violate applicable law.
<PAGE>
-9-
Section 2. Right of Indemnitee to Bring Suit.
If a claim under Section 1 is not paid in full by the
Corporation within thirty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking,
the indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Article IV
upon submission of a written claim (and, in an action brought to
enforce a claim for an advancement of expenses, where the
required undertaking has been tendered to the Corporation), and
thereafter the Corporation shall have the burden of proof to
overcome the presumption that the indemnitee is so entitled.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its Shareholders) to have
made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances,
nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or its
Shareholders) that the indemnitee is not entitled to
indemnification shall be a defense to the suit or create a
presumption that the indemnitee is not so entitled.
Section 3. Nonexclusivity and Survival of Rights.
The rights to indemnification and to the advancement of
expenses conferred in this Article IV shall not be exclusive of
any other right which any person may have or hereafter acquire
under any statute, provisions of the Articles of Incorporation,
Code of Regulations, agreement, vote of Shareholders or
disinterested Directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article IV,
or of any of the procedures established by the Board of Directors
pursuant to Section 6, any indemnitee shall be entitled to
indemnification in accordance with the provisions hereof and
thereof with respect to any acts or omissions of such indemnitee
occurring prior to such amendment or repeal.
<PAGE>
Without limiting the generality of the foregoing paragraph,
the rights to indemnification and to the advancement of expenses
conferred in this Article IV shall, notwithstanding any amendment
to or repeal of this Article IV, inure to the benefit of any
person who otherwise may be entitled to be indemnified pursuant
to this Article IV (or the estate or personal representative of
such person) for a period of six years after the date such
person's service to or in behalf of the Corporation shall have
terminated or for such longer period as may be required in the
event of a lengthening in the applicable statute of limitations.
<PAGE>
-10-
Section 4. Insurance, Contracts, and Funding.
The Corporation may maintain insurance, at its expense, to
protect itself and any Director, officer, employee, or agent of
the Corporation or another corporation, partnership, joint
venture, trust, or other enterprise against any expense,
liability, or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or
loss under the General Corporation Law of Ohio. The Corporation
may enter into contracts with any indemnitee in furtherance of
the provisions of this Article IV and may create a trust fund,
grant a security interest or use other means (including, without
limitation, a letter of credit) to ensure the payment of such
amounts as may be necessary to effect indemnification as provided
in this Article IV.
Section 5. Indemnification of Employees and Agents
of the Corporation.
The Corporation may, by action of its Board of Directors,
authorize one or more executive officers to grant rights to
advancement of expenses to employees or agents of the Corporation
on such terms and conditions no less stringent than provided in
Section 1 hereof as such officer or officers deem appropriate
under the circumstances. The Corporation may, by action of its
Board of Directors, grant rights to indemnification and
advancement of expenses to employees or agents or groups of
employees or agents of the Corporation with the same scope and
effect as the provisions of this Article IV with respect to the
indemnification and advancement of expenses of directors and
officers of the Corporation; provided, however, that an
undertaking shall be made by an employee or agent only if
required by the Board of Directors.
Section 6. Procedures for the Submission of Claims.
The Board of Directors may establish reasonable procedures
for the submission of claims for indemnification pursuant to this
Article IV, determination of the entitlement of any person
thereto, and review of any such determination. Such procedures
shall be set forth in an appendix to these Code of Regulations
and shall be deemed for all purposes to be a part hereof.
ARTICLE V
Amendments
This Code of Regulations may be amended by the affirmative
vote or the written consent of the Shareholders entitled to
exercise a majority of the voting power on such proposal. If an
amendment is adopted by written consent the Secretary shall mail
a copy of such amendment to each Shareholder who would be
entitled to vote thereon and did not participate in the adoption
thereof. This Code of Regulations may also be amended by the
affirmative vote of a majority of the directors to the extent
permitted by Ohio law at the time of such amendment.
AMERICAN FINANCIAL GROUP, INC.
1997 ANNUAL BONUS PLAN
Adopted on March 11, 1997
AMERICAN FINANCIAL GROUP, INC.
ANNUAL BONUS PLAN
<PAGE>
1. PURPOSE
The purpose of the Annual Bonus Plan (the "Plan") is to
further the profitability of American Financial Group, Inc.
(the "Company") to the benefit of the shareholders of the
Company by providing incentive to the Plan participants.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan
shall be administered by the Compensation Committee or a
successor committee or subcommittee (the "Committee") of the
Board of Directors of the Company (the "Board") composed
solely of two or more "outside directors" as defined
pursuant to Section 162(m) of the Internal Revenue Code. No
member of the Committee while serving as such shall be
eligible to be granted a bonus under the Plan. Subject to
the provisions of the Plan (and to the approval of the Board
where specified in the Plan), the Committee shall have
exclusive power to determine the conditions (including
performance requirements) to which the payment of the
bonuses may be subject and to certify that performance goals
are attained. Subject to the provisions of the Plan, the
Committee shall have the authority to interpret the Plan and
establish, adopt or revise such rules and regulations and to
make all determinations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan.
The Committee's interpretation of the Plan and all of its
actions and decisions with respect to the Plan shall be
final, binding and conclusive on all parties.
3. PLAN TERM AND BONUS YEARS
The term of the Plan is one year, commencing January 1,
1997, which term shall be renewed from year to year unless
and until the Plan shall be terminated or suspended as
provided in Section 9. As used in the Plan the term "Bonus
Year" shall mean a calendar year.
4. PARTICIPATION
Subject to the approval of the Committee and the Board
of Directors (based on the recommendation of the Committee),
management of the Company shall suggest those persons who
are deemed to be key employees of the Company for
participation in the Plan (the "Participants").
<PAGE>
5. ESTABLISHMENT OF INDIVIDUAL BONUS TARGETS AND
PERFORMANCE CRITERIA
The Committee shall establish the individual target
amount of bonus (the "Bonus Target") that may be awarded to
each Participant and recommend that the Board adopt such
action. In no event shall the establishment of any
Participant's Bonus Target give a Participant any right to
be paid all or any part of such amount unless and until a
bonus is actually awarded pursuant to Section 6.
The Committee shall establish the performance criteria
(the "Performance Criteria") that will apply to the
determination of each Participant's bonus for that Bonus
Year and recommend that the Board adopt such action. The
individuals, their Bonus Targets and Performance Criteria
set forth on Schedules I and II have been recommended by the
Committee and approved by the Board.
6. DETERMINATION OF BONUSES AND TIME OF PAYMENT
As soon as practicable after the end of 1997, the
Committee shall certify whether or not the performance
criteria of each Participant has been attained and shall
recommend to the Board, and the Board shall determine, the
amount of the bonus, if any, to be awarded to each
Participant for 1997 according to the terms of this Plan.
Such bonus determinations shall be based on achievement of
the Performance Criteria for 1997.
Once the bonus is so determined for a Participant, it
shall be paid seventy-five percent in cash and twenty-five
percent in Company Common Stock to the Participant (less any
applicable withholding and employment taxes) as soon as
practicable. The number of shares of Company Common Stock
to be issued to a Participant shall be determined by
dividing twenty-five percent of the bonus payable (before
applicable taxes and deductions) by the average of the per
share Fair Market Value of the Common Stock for the last
twenty trading days of 1997; the resulting number shall then
be rounded to the nearest hundred.
"Fair Market Value" means the last sale price reported
on any stock exchange or over-the-counter trading system on
which Company Common Stock is trading on the last trading
day prior to a specified date or, if no last sales price is
reported, the average of the closing bid and asked prices
for a share of Common Stock on a specified date. If no sale
has been made on any date, then prices on the last preceding
day on which any such sale shall have been made be used in
determining Fair Market Value under either method prescribed
in the previous sentence.
<PAGE>
7. TERMINATION OF EMPLOYMENT
If a Participant's employment with the Company or a
subsidiary, as the case may be, is terminated for any reason
other than discharge for cause, he may be entitled to such
bonus, if any, as the Committee, in its sole discretion,
may determine.
In the event of a Participant's discharge for cause
from the employ of the Company or a Subsidiary, as the case
may be, he shall not be entitled to any amount of bonus
unless the Committee, in its sole discretion, determines
otherwise.
8. MISCELLANEOUS
A. Government and Other Regulations. The
obligation of the Company to make payment of bonuses
shall be subject to all applicable laws, rules and
regulations and to such approvals by governmental
agencies as may be required.
B. Tax Withholding. The Company or a
Subsidiary, as appropriate, shall have the right to
deduct from all bonuses paid in cash any federal, state
or local taxes required by law to be withheld with
respect to such cash payments.
C. Claim to Bonuses and Employment Rights. The
designation of persons to participate in the Plan shall
be wholly at the discretion of the Board. Neither this
Plan nor any action taken hereunder shall be construed
as giving any Participant any right to be retained in
the employ of the Company or a Subsidiary.
D. Beneficiaries. Any bonuses awarded under
this Plan to a Participant who dies prior to payment
shall be paid to the beneficiary designated by the
Participant on a form filed with the Company. If no
such beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's
legal representative. A beneficiary designation may be
changed or revoked by a Participant at any time
provided the change or revocation is filed with the
Company.
E. Nontransferability. A person's rights and
interests under the Plan may not be assigned, pledged
or transferred except, in the event of a Participant's
death, to his designated beneficiary as provided in the
Plan or, in the absence of such designation, by will or
the laws of descent and distribution.
<PAGE>
F. Indemnification. Each person who is or shall
have been a member of the Committee or of the Board
shall be indemnified and held harmless by the Company
(to the extent permitted by the Articles of
Incorporation and Code of Regulations of the Company
and applicable law) against and from any loss, cost,
liability or expense that may be imposed upon or
reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to
which he may be a party or in which they may be
involved by reason of any action taken or failure to
act under the Plan and against and from any and all
amounts paid by him in settlement thereof, with the
Company's approval, or paid by him, in satisfaction of
judgment in any such action, suit or proceeding against
him. He shall give the Company an opportunity, at its
own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf.
The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to
which such person may be entitled under the Company's
Articles of Incorporation or Code of Regulations, as a
matter of law or otherwise or of any power that the
Company may have to indemnify him or hold him harmless.
G. Reliance on Reports. Each member of the
Committee and each member of the Board shall be fully
justified in relying or acting in good faith upon any
report made by the independent certified public
accountants of the Company or of its Subsidiaries or
upon any other information furnished in connection with
the Plan by any officer or director of the Company or
any of its Subsidiaries. In no event shall any person
who is or shall have been a member of the Committee or
of the Board be liable for any determination made or
other action taken or any omission to act in reliance
upon any such report or information or for any action
taken, including the furnishing of information, or
failure to act, if in good faith.
H. Expenses. The expenses of administering the
Plan shall be borne by the Company and its Subsidiaries
in such proportions as shall be agreed upon by them
from time to time.
I. Pronouns. Masculine pronouns and other words
of masculine gender shall refer to both men and women.
J. Titles and Headings. The titles and headings
of the sections in the Plan are for convenience of
reference only, and, in the event of any conflict
between any such title or heading and the text of the
Plan, such text shall control.
<PAGE>
9. AMENDMENT AND TERMINATION
The Board may at any time terminate the Plan. The
Board may at any time, or from time to time, amend or
suspend and, if suspended, reinstate the Plan in whole or in
part. Notwithstanding the foregoing, the Plan shall
continue in effect to the extent necessary to settle all
matters relating to the payment of bonuses awarded prior to
any such termination or suspension.
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AS OF JANUARY 1, 1997
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
As of January 1, 1997
Page
ARTICLE 1. ESTABLISHMENT AND PURPOSE 1
ARTICLE 2. DEFINITIONS 1
2.1 "Account" 1
2.2 "Administrator" 1
2.3 "AFG" 1
2.4 "AFG RASP" 1
2.5 "Agreement" 1
2.6 "American Financial Group" 1
2.7 "Code" 1
2.8 "Employee" 2
2.9 "Employer" 2
2.10 "ERISA" 2
2.11 "Expiration Date" 2
2.12 "Hour of Service" 2
2.13 "One Year Period of Severance" 2
2.14 "Participant" 2
2.15 "Plan Year" 2
2.16 "RASP" 2
2.17 "Retirement Contribution" 2
2.18 "Year of Service" 2
ARTICLE 3. PARTICIPATION 2
3.1 Eligibility 2
3.2 Participation in the Plan 2
3.3 Vesting 3
ARTICLE 4. COMPENSATION ALLOCATED 4
4.1 AFG Auxiliary RASP Account 4
4.2 Amount of Allocation 4
4.3 Term of Deferral 5
4.4 Investment Performance 5
4.5 Statement of Account 5
ARTICLE 5. PAYMENT OF ACCOUNT 5
5.1 Payment After the Expiration Date, Death,
Retirement or Disability. 5
5.2 Hardship Distribution 6
5.3 Beneficiary Designation and Payment 7
ARTICLE 6. GENERAL PROVISIONS 7
6.1 Employee's Rights Unsecured 7
6.2 Non-Assignability 7
6.3 Administration 7
6.4 Amendment and Termination 8
6.5 Construction 8
6.6 Limitations 8
6.7 Subsidiaries. 8
APPENDIX I
APPENDIX II
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
As of January 1, 1997
ARTICLE 1. ESTABLISHMENT AND PURPOSE
The American Financial Group, Inc. Auxiliary RASP
Plan ("Plan") is established as of January 1,
1997. The purpose of the Plan is to enable
eligible Employees of American Financial Group,
Inc. ("AFG"), and certain of its subsidiaries and
affiliates (collectively "Employers" and
singularly "Employer"), who are eligible to
participate in the Retirement Contribution portion
of the American Financial Group Retirement and
Savings Plan (the "RASP") or any other defined
contribution plan sponsored by an AFG subsidiary
to have an alternative to the RASP or such other plan.
The Plan is being established by AFG and the other
Employers for the benefit of their respective
eligible Employees who are not eligible for
another nonqualified Plan of AFG or any other
Employer. With respect to Employees not directly
employed by AFG, such Employers shall annually
forward the amount necessary to fund the
contributions for the Account of each eligible
Employee as determined pursuant to Section 4.2 and
thereafter the Account (the investment performance
as determined pursuant to Section 4.4) of each
Employee is the obligation of AFG.
ARTICLE 2. DEFINITIONS
2.1 "Account" means the account established by the
Administrator pursuant to Section 3.1.
2.2 "Administrator" means the person or committee
appointed by the President of AFG responsible for
the administration of the Plan.
2.3 "AFG" means American Financial Group.
2.4 "AFG RASP" means the American Financial Group
Retirement and Savings Plan.
2.5 "Agreement" means the written election of a
Participant to participate in the Plan in the form
attached hereto as Appendix I.
2.6 "American Financial Group" means American
Financial Group, Inc., its successors and assigns.
2.7 "Code"means the Internal Revenue Code of 1986, as
amended.
<PAGE>
2.8 "Employee" means all common law employees of an
Employer as further described in the AFG RASP.
2.9 "Employer" means AFG and certain of its
subsidiaries and affiliates who have adopted the
Plan.
2.10 "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
2.11 "Expiration Date" means the date in which a
Participant incurs five consecutive One Year
Periods of Severance.
2.12 "Hour of Service" means each hour an Employee is
entitled to payment by an Employer as further
described in the AFG RASP.
2.13 "One Year Period of Severance" means any 12-month
period during which a Participant does not
complete a month of service pursuant to the terms
of the RASP.
2.14 "Participant" means an Employee who becomes
eligible pursuant to Article 3.
2.15 "Plan Year" means the twelve month period
beginning each January 1 and ending December 31 on
which the records of the Plan are kept.
2.16 "RASP" means the AFG RASP.
2.17 "Retirement Contribution" means the employer
retirement contribution made by an Employer
pursuant to the terms of the AFG RASP.
2.18 "Year of Service" means each 12-month period
beginning on the Employee's employment
commencement date during which a Participant
completes at least one Hour of Service, as
determined pursuant to the RASP.
<PAGE>
ARTICLE 3. PARTICIPATION
3.1 Eligibility. The Employees who are eligible to
become a Participant in the Plan are those
officers and other key employees of an Employer
who are authorized by the Board of Directors of
AFG to participate in the Plan or have been
specifically authorized to participate in the Plan
by an employment agreement between an Employer and
a person employed by an Employer.
3.2 Participation in the Plan. A Participant elects,
subject to the provisions of the Plan, to
participate in the Plan by delivering before March
15, or such earlier time as may be directed by the
Plan Administrator, of the first Plan Year the
Participant is eligible to participate, a properly
executed Agreement to the Administrator. The
Agreement shall conform to the terms and
conditions of the Plan and shall include an
election not to participate in the Retirement
Contribution of the AFG RASP or any other defined
contribution plan sponsored by an AFG subsidiary.
An Employee's election to participate in the Plan
may not be revoked during the Plan Year. An
employee may only revoke this election by
notifying the Plan Administrator in writing by
December 1 of the Plan Year for the termination to
be effective in the next following Plan Year. All
Employees who were participants of the AFC
Auxiliary ESORP shall automatically be
participants in this Plan subject to the elections
made under such plan without executing a new Agreement.
3.3 Vesting.
(a) A Participant's interest in his Account shall
become vested and nonforfeitable to the
extent of the following percentages based
upon full Years of Service with an Employer:
Percentage Percentage
Year of Service Vested Forfeited
Fewer than five years 0% 100%
At least five years 100% 0%
An Employee forfeits all non-vested rights to an Account
after the Plan Year after five consecutive One Year
Periods of Severance have occurred.
(b) For purposes of vesting, a Year of Service shall
be credited for each 12-month period beginning on the
Employee's employment commencement date during which
an Employee completes a month of service. In
addition, each Employee participating in the Plan
shall be credited, for Service purposes, for his
employment with any subsidiary or affiliate of AFG.
<PAGE>
(c) In computing full Years of Service hereunder, any
Employee who has a One Year Period of Severance shall
not receive credit for Years of Service prior to such
break until one full Year of Service has been
completed after return to service. In addition,
Years of Service by any Employee after any five
consecutive One Year Periods of Severance shall not
be taken into account for purposes of determining the
nonforfeitable percentage of an Employee's interest
derived from compensation deferred by the Employee
which accrued before such five consecutive One Year
Periods of Severance.
Further, when computing full Years of Service
hereunder, the Employer shall establish and
maintain a separate Account for each Employee
who has incurred a One Year Period of
Severance and has subsequently returned to
the employment of an Employer. The purpose of
maintaining such separate Accounts will be to
insure that allocations to any Employee are
properly made to determine the nonforfeitable
percentage of accrued interest in accordance
with the above.
(d) Participation in the Plan will continue until
an Employee terminates his employment as
provided for in Section or for as long as he
has an interest in the Plan that has not been
distributed to him or for his benefit.
ARTICLE 4. COMPENSATION ALLOCATED
4.1 AFG Auxiliary RASP Account. An Account will be
established for each Employee who elects to
participate in the Plan. The Account will be
maintained by the Administrator. All allocations
on behalf of an Employee shall be deferred and all
increases or decreases in the Account due to
investment performance of the Retirement
Contributions in the AFG RASP (see Section ), all
distributions to the Employee or beneficiary or
estate, and any other interest earned on the
balance thereof, shall be reflected in the Account.
<PAGE>
4.2 Amount of Allocation.
(a) The amount allocated to an Employee's Account
shall be deferred and shall be the same
percentage of an Employee's gross income (as
defined in Section 61(a) of the Code) paid by
any Employer as would have been allocated to
an Employee's Retirement Contributions
account in the AFG RASP (or any other defined
contribution plan sponsored by an AFG
subsidiary) up to a maximum of $30,000, which
amount shall be increased (but not decreased)
with respect to adjustments allowed by
Section 415 of the Code.
Provided, however, that the initial amount
of compensation allocated and deferred shall
include an amount equivalent to the amount
that would have been allocated in an
Employee's Retirement Contributions account
or predecessor defined contribution plan
account for the Plan Year prior to
participation in this Plan but for
limitations and rules existing in the Code as
of the date hereof.
(b) Allocations under this Plan for any Plan Year
shall be credited to an Employee's Account as
of December 31 of such Plan Year.
(c) A Participant's Accounts shall also include
amounts previously credited under the AFC
Auxiliary ESORP, if any.
4.3 Term of Deferral. The Agreement shall provide
that all amounts posted to the Account shall be
paid upon the earlier of (1) retirement or
termination of employment at age 60 or over, (2)
death, (3) Total Disability or (4) the Expiration
Date. Commencing in the first quarter of the year
following an Expiration Date, payments from the
Account shall be made in accordance with the
provisions specified in Section hereof.
4.4 Investment Performance. The Participant's Account
shall be credited (or charged) with interest at a
rate determined by the Treasurer of AFG to be the
same rate as earned on the Retirement
Contributions accounts under the RASP (investment
income plus or minus "investment performance"
under the Retirement Contributions account of the
RASP) as of each December 31 prior to the
Expiration Date. Such determination shall be
final, binding and conclusive on all parties.
4.5 Statement of Account. A statement of Account for the
preceding calendar year will be sent to each Participant
annually no later than February 28 until the complete
distribution of the Participant's Account.
<PAGE>
ARTICLE 5. PAYMENT OF ACCOUNT
5.1 Payment After the Expiration Date, Death,
Retirement or Disability.
(a) Within 90 days following the end of the year
in which Expiration Date occurs, termination
of employment after age 60, death or
disability, the Participant, or in the event
of death, the Beneficiary, shall choose
payment or distribution of the Account under
one of the following payment options:
(1) The Account may be applied to the
purchase of an immediate or deferred
life annuity contract, on the sole life
of the Participant, or jointly on the
lives of the Participant and a
beneficiary named by the Participant.
The annuity contract shall be purchased
from an insurance company to be
determined at the sole discretion of AFG
provided that such insurance company
shall have a current rating of A
(Excellent) or better from Bests'
Insurance Reports.
(2) The Account may be paid out as if the
Participant purchased an immediate or
deferred life annuity contract, on the
sole life of the Participant, or jointly
on the lives of the Participant and the
beneficiary named by the Participant.
Such payment of the Account shall be as
if AFG purchased an annuity contract
from an insurance company to be
determined at the sole discretion of AFG
provided that such insurance company
shall have a rating of A (Excellent) or
better from Bests' Insurance Reports and
using as the interest rate assumption,
the same interest rate as such insurance
company would provide.
(3) The Account may be paid in a lump sum in
cash.
The Employer may take into consideration, but
is not bound by, the Employee's preference as
to the payment options.
The annuity contract provided for in
paragraph 5.l(a)(l) shall provide for, and
payments provided for in paragraph 5.l(a)(2)
shall be made, in equal installments over the
expected life span of Participant which shall
be determined by standard actuarial tables
then in existence.
<PAGE>
(b) Within 30 days of AFG's choice of payment
option, AFG will purchase such annuity, begin
to make payments or make the lump sum
payment.
(c) Notwithstanding the payment option chosen by
AFG, after the commencement of payments from
the Account, the Administrator, at his sole
discretion, may accelerate payment of any
amount remaining in the Account to the extent
that the amounts being paid are not
sufficiently large to warrant the
administrative expense then being incurred to
administer such payments.
(d) Any applicable federal, state and local taxes
will be withheld from the gross amounts paid.
Neither the Participant nor any designated
beneficiary shall have any right, directly or
indirectly, to alienate, assign, pledge or in
any way encumber any amount that is payable
from the Account.
5.2 Hardship Distribution. Distribution of payments
from a Participant's Account prior to the
Expiration Date shall be made only if the
Administrator, after consideration of an
application by the Participant, determines that
the Participant has sustained financial hardship
caused by events beyond the Participant's control.
In such event, the Administrator may, at his sole
discretion, direct that all or a portion of the
Account be paid to the Participant in such manner,
and at such times as determined by the Administrator.
5.3 Beneficiary Designation and Payment.
(a) The Participant shall have the right to
designate a beneficiary hereunder and to
change any beneficiary previously designated.
Such designation shall be made by the
Participant delivering to the Administrator a
writing setting forth the name and address of
the person or persons so designated with a
statement by the Participant of the intention
that the person or persons so designated be
the beneficiary or beneficiaries hereunder.
The last-dated and filed beneficiary
designation shall cancel all earlier filed
designations. (Appendix II provides the
acceptable form of beneficiary designation.)
(b) In the event of the Participant's death
before or after the commencement of payments
from the Account, then the amount otherwise
payable to the Participant shall be paid to
the designated beneficiary or, if none, to
the estate, which beneficiary or estate shall
have all the rights conferred by Section above.
<PAGE>
ARTICLE 6. GENERAL PROVISIONS
6.1 Employee's Rights Unsecured. The right of any
Employee to receive payments under the provisions
of the Plan shall be an unsecured claim against
the general assets of the Employers. It is not
required or intended that the amounts credited to
the Employee's Account be segregated on the books
of AFG or be held by the Employers in trust for
the Employee. All credits to the Account are for
bookkeeping purposes only.
6.2 Non-Assignability. The right to receive payments
hereunder shall not be transferable or assignable
by an Employee, except by will or by the laws of
descent and distribution. Any other attempted
assignment or alienation of payments hereunder
shall be void and of no force or effect.
6.3 Administration. The Administrator shall have the
authority to adopt rules, regulations and
interpret, construe and implement the provisions
of the Plan according to the laws of the State of
Ohio, to the extent not preempted by ERISA.
6.4 Amendment and Termination. The Plan may at any
time or from time to time be amended or terminated
by AFG. No amendment, modification or termination
shall adversely affect the Employee's accrued
rights under the Plan. Any such amendment,
modification or termination shall be in a writing
signed by an officer of AFG and approved by the
Board of Directors of AFG.
6.5 Construction. The masculine gender, where
appearing in this Plan, shall be deemed to also
include the feminine and neuter genders. The
singular shall also include the plural, and the
plural, the singular, where appropriate.
6.6 Limitations. The Plan does not constitute a
contract of employment, and participation in the
Plan will not give any Employee the right to be
retained in the employ of an Employer or any right
or claim to any benefit under the terms of the
Plan, unless such right or claim has specifically
accrued pursuant to the provisions of his
Agreement with the Employer. This Plan does not
confer the right for an Employee to receive a
bonus.
6.7 Subsidiaries. Each subsidiary of AFG who employs
an Employee shall be obligated to make payments to
AFG to fund each eligible Employee's Account. The
amount paid to AFG shall be in the proportion that
such subsidiary's compensation paid to an Employee
bears to an Employee's gross income determined
under Section .
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
BY:
Its:
<PAGE>
APPENDIX I
PARTICIPATION AGREEMENT
American Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Secretary
Gentlemen:
I am in receipt of the American Financial Group, Inc.
Auxiliary RASP Plan (the "Plan"), as adopted by the Board of
Directors of American Financial Group, Inc.. I have read and
reviewed the Plan, and I hereby elect to participate in the Plan
and agree to be bound by and fully comply with the terms and
conditions of the Plan. I acknowledge that my election to
participate in the Plan means that I am not going to participate,
beginning _________________ and forward, in the [American
Financial Group Retirement and Savings Plan] or [subsidiary
defined contribution plan].
I acknowledge that it is my obligation to notify the Administrator
of the Plan in writing by December 1 of any year in the event I wish to
terminate participation in the Plan for the following Plan Year and
re-activate participation in the American Financial Group Retirement
and Savings Plan or [subsidiary defined contribution plan].
I hereby acknowledge that I am not relying on any tax advice
given to me by American Financial Group, Inc. or by any
affiliate, employee, contractee, agent, director or officer
thereof regarding federal or state income or estate tax
consequences arising to me or my estate, heirs or devisees as a
result of my participation in the Plan. I further hereby
acknowledge that I have been advised to consult with my own tax
advisors regarding any such tax consequences to me.
Very truly yours, Employee
_______________________________
Signature
_______________________________
Name typed or printed
S.S. No.________________________
Date:__________________________
<PAGE>
APPENDIX II
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP
DESIGNATION OF BENEFICIARY
___________________________
TO: The Board of Directors
American Financial Group, Inc.
I hereby direct that upon my death all or any payments to be
made or remaining to be paid in accordance with rights granted to
me under the Auxiliary RASP Plan shall be paid as follows:
(A) Primary Beneficiary
Name or Names of Persons or
Trust:
Address:
Date of Birth or of Trust:
Name of Trustee if applicable:
Telephone Number:
Social Security Number or
T.I.N.:
(B) Alternative Beneficiary (in the event of the death or
non-existence of the Primary Beneficiary listed above):
Name:
Address:
Date of Birth or of Trust:
Name of Trustee if applicable:
Telephone Number:
Social Security Number or
T.I.N.:
The undersigned hereby reserves the right to change the
beneficiary or beneficiaries designated herein at any time by
filing in writing a new Designation of Beneficiary form with the
Plan Administrator.
WITNESS:
EMPLOYEE:
Date:
ACKNOWLEDGMENT
AMERICAN FINANCIAL GROUP, INC.
Date: By:
S1-8
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Pretax income $308,323 $317,574 $247,455 $ 26,376 $257,426
Minority interest in subsidiaries
having fixed charges (*) 54,163 46,689 33,190 8,565 34,800
Less undistributed equity in (earnings)
losses of investees 10,363 31,353 (1,559) 49,010 (25,067)
Fixed charges:
Interest expense 53,578 78,048 124,633 114,803 153,836
Debt discount (premium) and expense (701) (1,174) (1,023) 1,240 5,273
One-third of rentals 10,152 9,279 9,471 5,119 5,801
EARNINGS $435,878 $481,769 $412,167 $205,113 $432,069
Fixed charges:
Interest expense $ 53,578 $ 78,048 $124,633 $114,803 $153,836
Debt discount (premium) and expense (701) (1,174) (1,023) 1,240 5,273
One-third of rentals 10,152 9,279 9,471 5,119 5,801
Pretax preferred dividend requirements
of subsidiaries 46,578 27,970 25,376 - -
FIXED CHARGES $109,607 $114,123 $158,457 $121,162 $164,910
Ratio of Earnings to Fixed Charges 3.98 4.22 2.60 1.69 2.62
Earnings in Excess of Fixed Charges $326,271 $367,646 $253,710 $ 83,951 $267,159
</TABLE>
(*) Amounts include subsidiary preferred dividends and accrued
distributions on trust preferred securities.
E-2
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFG at December 31, 1997.
All corporations are subsidiaries of AFG and, if indented, subsidiaries
of the company under which they are listed.
<TABLE>
<CAPTION>
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
<S> <C> <C>
AFC Holding Company Ohio 100
American Financial Capital Trust I Delaware 100
American Financial Corporation Ohio 100
American Premier Underwriters, Inc. Pennsylvania 100
Pennsylvania Company Delaware 100
Atlanta Casualty Company Illinois 100
Infinity Insurance Company Indiana 100
Leader National Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Holding Corporation Ohio 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 81
AAG Holding Company, Inc. Ohio 100
Great American Life Insurance Company Ohio 100
Loyal American Life Insurance Company Alabama 100
Prairie National Life Insurance Company South Dakota 100
American Memorial Life Insurance Company South Dakota 100
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
American Empire Surplus Lines Insurance Company Delaware 100
American National Fire Insurance Company New York 100
Brothers Property Corporation Ohio 80
Mid-Continent Casualty Company Oklahoma 100
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
</TABLE>
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AFG owns a significant portion and accounts for
under the equity method.
E-3
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following
Registration Statements: (i) No. 33-58825 on Form S-8 pertaining
to the Stock Option Plan, (ii) No. 33-58827 on Form S-8 pertaining
to the Employee Stock Purchase Plan, (iii) No. 33-62459 on Form S-3
pertaining to the Dividend Reinvestment Plan, (iv) No. 333-10853
on Form S-8 pertaining to the Non-Employee Directors' Compensation
Plan, (v) No. 333-14935 on Form S-8 pertaining to the Retirement
and Savings Plan and (vi) No. 333-21995 on Form S-3 pertaining to
the Registration of $500,000,000 of Debt Securities, Common Stock
and Trust Securities of our report dated March 6, 1998, with
respect to the consolidated financial statements and schedules of
American Financial Group, Inc. included in the Annual Report on
Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 26, 1998
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the American
Financial Group, Inc. Form 10-K for December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $257,117
<SECURITIES> 11,299,878<F1>
<RECEIVABLES> 691,005
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,755,349
<CURRENT-LIABILITIES> 0
<BONDS> 580,745
0
0
<COMMON> 61,049
<OTHER-SE> 1,601,660
<TOTAL-LIABILITY-AND-EQUITY> 15,755,349
<SALES> 0
<TOTAL-REVENUES> 4,020,723
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 339,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,331
<INCOME-PRETAX> 319,610
<INCOME-TAX> 120,127
<INCOME-CONTINUING> 199,483
<DISCONTINUED> 0
<EXTRAORDINARY> (7,233)
<CHANGES> 0
<NET-INCOME> $192,250
<EPS-PRIMARY> .65<F2>
<EPS-DILUTED> .64<F2>
<FN>
<F1>Includes an investment in investees of $201 million.
<F2>Calculated after deducting a premium over stated value on retirement of a
subsidiary's preferred stock of $153.3 million.
</FN>
</TABLE>
