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, 1998 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
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, 1999, there were 60,978,493 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 nonaffiliates at that
date, was approximately $1.3 billion (based upon nonaffiliate holdings of
35,034,730 shares and a market price of $36.9375 per share.)
_____________
Documents Incorporated by Reference:
Proxy Statement for the 1999 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 22
Item 3 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of Security Holders (a)
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk (b)
Item 8 - Financial Statements and Supplementary Data 36
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
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) The response to this Item is "none".
(b) The response to this Item is included in Item 7.
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, chiefly in Items 1, 3, 5, 7
and 8, contains certain forward-looking statements that are based on
assumptions which management believes are reasonable, but by their
nature, inherently uncertain. Future results could differ materially
from those projected. Factors that could cause such differences
include, but are not limited to: changes in economic conditions
especially with regard to availability of and returns on capital,
regulatory actions, changes in legal environment, levels of
catastrophe and other major losses, availability of reinsurance, the
Year 2000 issue, and competitive pressures. AFG undertakes no
obligation to update any forward-looking statements.
<PAGE>
PART I
ITEM 1
Business
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
Introduction
American Financial Group, Inc. ("AFG") is a holding company which,
through its subsidiaries, is engaged primarily in private passenger
automobile and specialty property and casualty insurance businesses
and in the sale of tax-deferred annuities and certain life and
supplemental health insurance products. AFG's property and casualty
operations originated in the 1800's and is one of the twenty five
largest property and casualty groups in the United States based on
statutory net premiums written. 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.
In December 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"). No
material change in AFG's financial condition or in the rights of AFG
securityholders occurred as a result.
AFG's predecessor had been formed in 1994 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 "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, 1998, 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 E 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,
1998 1997 1996 1995 1994
American Financial Corporation 79% 79% 76% 79% n/a
American Premier Underwriters 100% 100% 100% 100% 42%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 82% 81% 81% 81% 80%
American Financial Enterprises 100% 100% 83% 83% 83%
Chiquita Brands International 37% 39% 43% 44% 46%
Citicasters - - (a) 38% 37%
(a) Sold in September 1996.
The following summarizes the more significant changes in ownership
percentages shown in the above table.
American Financial Corporation In April 1995, AFC became a
subsidiary of AFG as a result of the Mergers. For financial reporting
purposes, AFC is the predecessor to AFG. In the Mergers, holders of
AFC preferred stock were granted voting rights equal to approximately
21% of the voting power of all AFC shareholders.
American Premier Underwriters In April 1995, APU became a
subsidiary of AFG as a result of the Mergers.
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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 and
the first half of 1998, Chiquita issued an aggregate of 4.6 million
shares and 4.0 million shares of its common stock, respectively, in
connection with the purchase of new businesses.
Citicasters In 1996, the investment in Citicasters was sold to an
unaffiliated company.
Property and Casualty Insurance Operations
Prior to agreeing in September 1998 to sell substantially all of
its Commercial lines division to the Ohio Casualty Corporation, AFG
managed and operated its property and casualty business in three major
business segments: Nonstandard Automobile Insurance, Specialty lines
and Commercial and Personal lines. Following the sale of its
Commercial lines division, AFG's property and casualty group is
engaged primarily in private passenger automobile and specialty
insurance businesses. Accordingly, AFG has realigned its property and
casualty group into two major business groups: Personal and Specialty.
Each group reports to an individual senior executive and 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 7,600 persons.
In December 1998, AFG completed the sale of the Commercial lines
division for approximately $300 million plus warrants to purchase
3 million shares of Ohio Casualty common stock. AFG may receive up to
an additional $40 million in the year 2000 based upon the retention
and growth of the insurance businesses acquired by Ohio Casualty. The
commercial lines sold generated net written premiums of approximately
$250 million in 1998 prior to the sale, $315 million in 1997 and
$314 million in 1996.
In January 1999, AFG agreed to acquire Worldwide Insurance Company
(formerly, Providian Auto and Home Insurance Company), from AEGON
Insurance Group for approximately $160 million. Worldwide is a
provider of direct response private passenger automobile insurance and
is licensed in 45 states. The acquisition will provide AFG with a
significant new distribution channel for its private passenger auto
insurance business and a variety of other insurance products. In
1998, Worldwide generated net written premiums of approximately
$121 million. Completion of the transaction is expected to occur in
the first half of 1999.
<PAGE>
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.
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.
2
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Management's focus on underwriting performance has resulted in a
statutory combined ratio averaging 103.5% for the period 1994 to 1998,
as compared to 105.5% for the property and casualty industry over the
same period (Source: "Best's Review/Preview - Property/Casualty" -
January 1999 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 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 for all periods (i) the insurance
operations of AFC and American Premier and (ii) the commercial lines
businesses sold up to the sale date.
The following table shows (in millions) certain information of
AFG's property and casualty insurance operations.
1998 1997 1996
Statutory Basis
Premiums Earned $ 2,657 $2,802 $2,821
Admitted Assets 6,463 6,983 6,603
Unearned Premiums 914 1,133 1,104
Loss and LAE Reserves 3,702 3,475 3,397
Capital and Surplus 1,840 1,916 1,659
GAAP Basis
Premiums Earned $ 2,699 $2,824 $2,845
Total Assets 10,053 9,212 8,623
Unearned Premiums 1,233 1,329 1,248
Loss and LAE Reserves 4,773 4,225 4,124
Shareholder's Equity 3,174 3,019 2,695
<PAGE>
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 and private passenger auto
businesses which represented the bulk of 1998 net written premiums.
Net Written Premiums
Company (A.M. Best Rating) Personal Specialty
Great American (A) $ 167 $ 995(*)
Republic Indemnity (A) - 162
Mid-Continent (A) - 108
National Interstate (A-) - 30
American Empire Surplus Lines (A+) - 17
Atlanta Casualty (A) 348 -
Infinity (A) 314 -
Windsor (A) 313 -
Leader (A-) 137 -
$1,279 $1,312
(*) Includes $250 million in premiums written by Great American's
Commercial lines division which was sold in 1998.
3
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The following table shows the performance of AFG's property and
casualty insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $2,609(a) $2,858 $2,788
Net earned premiums $2,699 $2,824 $2,845
Loss and LAE 2,001 2,076 2,052
Special A&E charge 214 - 80
Underwriting expenses 764 783 780
Policyholder dividends 9 7 14
Underwriting loss ($ 289) ($ 42) ($ 81)
GAAP ratios:
Loss and LAE ratio 82.1% 73.5% 75.0%
Underwriting expense ratio 28.3 27.7 27.4
Policyholder dividend ratio .3 .2 .5
Combined ratio (b) 110.7% 101.4% 102.9%
Statutory ratios:
Loss and LAE ratio 82.7% 73.4% 74.8%
Underwriting expense ratio 27.9 27.3 27.2
Policyholder dividend ratio .5 .7 .4
Combined ratio (b) 111.1% 101.4% 102.4%
Industry statutory combined ratio (c) 105.0% 101.6% 105.8%
(a) Before a reduction of $138 million for unearned premium
transfer related to the sale of the Commercial lines division.
(b) The 1998 combined ratios include effects of the strengthening
of insurance reserves relating to asbestos and other
environmental matters ("A&E") of 7.9 percentage points (GAAP)
and 8.0 percentage points (statutory); the 1996 combined ratios
include A&E increases of 2.8 percentage points.
(c) Ratios are derived from "Best's Review/Preview - Property/Casualty"
(January 1999 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
midwestern hailstorms and tornadoes and Hurricanes Bonnie and Georges
in 1998 and Hurricane Fran in 1996. Total net losses to AFG's
insurance operations from catastrophes were $60 million in 1998;
$20 million in 1997; and $85 million in 1996. These amounts are
included in the tables herein.
4
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Personal
General The Personal group consists of the nonstandard auto group
along with the preferred/standard private passenger auto and other
personal insurance business.
The nonstandard automobile insurance companies underwrite 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 1998 have been
estimated by A.M. Best to be approximately $120 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.
Other personal insurance business consists primarily of preferred/standard
private passenger automobile and homeowners' insurance. 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 have
significant catastrophic potential (such as windstorms, earthquakes and
hurricanes). During 1998, AFG had a reinsurance agreement under which
90% of its homeowners' business was reinsured.
The Personal group writes business in 48 states and holds licenses
to write policies in all states and the District of Columbia. The
U.S. geographic distribution of the Personal group's statutory direct
written premiums in 1998 compared to 1994, was as follows:
1998 1994 1998 1994
California 14.8% 2.5% Tennessee * % 4.8%
Georgia 10.1 9.3 Indiana * 3.3
Connecticut 10.0 7.6 Alabama * 3.3
Florida 9.4 9.7 Ohio * 2.8
New York 6.2 * Mississippi * 2.8
Pennsylvania 5.5 4.8 Oklahoma * 2.7
Texas 5.0 11.5 Washington * 2.5
New Jersey 3.3 2.2 Kentucky * 2.0
North Carolina 2.8 3.0 Virginia * 2.0
Arizona 2.6 4.9 Utah * 2.0
Missouri 2.0 2.4 Other 28.3 13.9
_______________ 100.0% 100.0%
(*) less than 2%
<PAGE>
Management believes that the Personal 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 Personal group 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 Personal group has implemented cost control measures both in the
underwriting and claims handling areas.
5
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The following table shows the performance of AFG's Personal group
insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $1,279 $1,345 $1,384
Net earned premiums $1,290 $1,357 $1,448
Loss and LAE 958 1,019 1,146
Underwriting expenses 298 318 358
Policyholder dividends - (1) -
Underwriting profit (loss) $ 34 $ 21 ($ 56)
GAAP ratios:
Loss and LAE ratio 74.2% 75.1% 79.1%
Underwriting expense ratio 23.1 23.5 24.8
Policyholder dividend ratio - (.1) -
Combined ratio 97.3% 98.5% 103.9%
Statutory ratios:
Loss and LAE ratio 74.3% 75.2% 79.1%
Underwriting expense ratio 22.4 22.9 24.5
Combined ratio 96.7% 98.1% 103.6%
Industry statutory combined ratio (a) 103.5% 100.1% 103.6%
(a) Represents the personal lines industry statutory combined ratio
derived from "Best's Review/Preview - Property/Casualty"
(January 1999 Edition).
Marketing Each of the principal units in the Personal group is
responsible for its own marketing, sales, underwriting and claims
processing. These units each write policies primarily through several
thousand independent agents. The 1999 acquisition of Worldwide will
also enable AFG to sell its products through direct marketing channels.
The Personal group had approximately 1.1 million policies in force
at December 31, 1998, just under 80% of which had policy limits of
$50,000 or less per occurrence. Most Personal group policies are
written for policy periods of six months or less.
Competition A large number of national, regional and local
insurers write private passenger automobile and homeowners' 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 presence and ease of
enrollment and, to a lesser extent, reputation for claims handling,
financial stability and customer service. Management believes that
sophisticated data analysis for refinement of risk profiles has helped
the Personal group to compete successfully. The Personal 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.
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Specialty
General The Specialty group 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 businesses:
Executive Liability Markets liability coverage for attorneys
and for directors and officers of
businesses and nonprofit organizations.
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
(allied lines) weather and disease perils as well as
coverage for full-time operating
farms/ranches and agribusiness operations
on a nationwide basis.
Workers' Compensation Writes coverage for prescribed benefits
payable to employees (principally in
California) who are injured on the job.
Nonprofit Liability Provides property, general/professional
liability, automobile, trustee liability,
umbrella and crime coverage for a wide
range of nonprofit organizations.
General Aviation Provides coverage for corporate and
private aircraft and airports.
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. Also,
provides export credit coverage and
insurance and risk management programs for
lending and leasing institutions.
Umbrella and Excess Provides large capacity coverage in excess
of primary layers.
<PAGE>
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 service. These specialty businesses 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 commercial business sold included certain coverages in workers'
compensation, commercial multi-peril, umbrella (including primary and
excess layers) and commercial auto.
7
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The U.S. geographic distribution of the Specialty group statutory
direct written premiums in 1998 (adjusted for the sale of the
Commercial lines division) compared to 1994 is shown below.
1998 1994 1998 1994
California 27.4% 35.1% Ohio 2.3% 2.2%
Texas 8.4 4.1 New Jersey 2.1 3.8
New York 6.0 8.2 Pennsylvania 2.1 2.7
Massachusetts 4.6 3.4 Michigan * 3.1
Florida 4.6 2.8 North Carolina * 3.0
Illinois 4.0 3.2 Connecticut * 2.4
Oklahoma 3.7 2.9 Other 34.8 23.1
_______________ 100.0% 100.0%
(*) less than 2%
The following table sets forth a distribution of statutory net written
premiums for AFG's Specialty group by NAIC annual statement line for 1998
(adjusted for the sale of the Commercial lines division) compared to 1994.
1998 1994
Other liability 22.2% 15.8%
Workers' compensation 17.6 38.5
Inland marine 12.4 5.3
Auto liability 8.7 7.4
Commercial multi-peril 6.4 12.1
Allied lines 5.8 4.5
Fidelity and surety 5.7 2.0
General aviation 5.0 -
Auto physical damage 4.7 5.2
Ocean marine 4.0 3.1
Other 7.5 6.1
100.0% 100.0%
The following table shows the performance of AFG's Specialty group
insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $1,312(a) $1,468 $1,367
Net earned premiums $1,372 $1,429 $1,356
Loss and LAE 979 967 781
Underwriting expenses 451 454 406
Policyholder dividends 9 8 14
Underwriting profit (loss) ($ 67) $ - $ 155
GAAP ratios:
Loss and LAE ratio 71.4% 67.6% 57.5%
Underwriting expense ratio 32.9 31.8 29.9
Policyholder dividend ratio .7 .6 1.0
Combined ratio (b) 105.0% 100.0% 88.4%
<PAGE>
Statutory ratios:
Loss and LAE ratio 72.1% 67.6% 57.8%
Underwriting expense ratio 34.1 31.5 30.2
Policyholder dividend ratio 1.0 1.4 .9
Combined ratio (b) 107.2% 100.5% 88.9%
Industry statutory combined ratio (c) 107.2% 103.7% 108.9%
(a) Before a reduction of $138 million for unearned premium
transfer related to the sale of the Commercial lines division.
(b) The 1996 combined ratios reflect a reduction of 3.0 percentage
points attributable to a reallocation of loss reserves in
connection with the strengthening of A&E reserves.
(c) Represents the commercial industry statutory combined ratio
derived from "Best's Review/Preview - Property/Casualty"
(January 1999 Edition).
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Marketing The Specialty group operations direct their sales
efforts primarily through independent property and casualty insurance
agents and brokers, although portions are written through employee
agents. These businesses write insurance through several thousand
agents and brokers and have approximately 350,000 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 group compete successfully.
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 (b) $150.0(c)
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(d)
Property - Catastrophe 10.0 90.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) Less than $30,000.
(c) In 1998, AFG ceded 30% of its California workers' compensation
business through a reinsurance agreement.
(d) In 1998 and 1997, AFG ceded 90% and 80% of its homeowners
insurance coverage through a reinsurance agreement, respectively.
<PAGE>
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 nonstandard auto group is not materially
involved in reinsuring risks with third party insurance companies.
Included in the balance sheet caption "recoverables from reinsurers
and prepaid reinsurance premiums" were approximately $150 million on
paid losses and LAE and $1.5 billion on unpaid losses and LAE at
December 31, 1998. The collectibility of a reinsurance balance is
based upon the financial condition of a reinsurer as well as
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individual claim considerations. Market conditions over the past few years
have forced many reinsurers into financial difficulties or liquidation
proceedings. At December 31, 1998, AFG's insurance subsidiaries had
allowances of approximately $92 million for doubtful collection of
reinsurance recoverables, most of which 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 Reliance Insurance Company, Mitsui Marine and Fire
Insurance Company, American Re-Insurance Company, Employers Reinsurance
Corporation, NAC Reinsurance Corporation, Transatlantic Reinsurance Company,
Vesta Fire Insurance Corporation and Zurich Reinsurance North America, Inc.
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):
1998 1997 1996
Reinsurance ceded $788(*) $614 $518
Reinsurance assumed - including
involuntary pools and associations 37 89 58
(*) Includes approximately $170 million of premiums written by the
Commercial lines division that were ceded to Ohio Casualty.
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 businesses, 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.
<PAGE>
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 N 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.
10
<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, 1998. 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>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,209 $2,246 $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489 $3,305
As re-estimated at
December 31, 1998 2,717 2,771 2,583 2,489 2,412 2,317 2,393 3,526 3,604 3,644 N/A
Liability re-estimated (*):
One year later 99.8% 100.4% 98.6% 99.3% 99.9% 98.1% 95.9% 98.7% 100.9% 104.5%
Two years later 100.0% 99.3% 97.7% 98.7% 98.2% 94.1% 99.3% 98.5% 105.9%
Three years later 99.7% 98.4% 97.4% 98.0% 95.2% 97.4% 99.9% 103.9%
Four years later 98.7% 98.2% 99.2% 97.3% 100.3% 98.9% 109.4%
Five years later 99.1% 101.1% 100.0% 103.0% 102.6% 109.7%
Six years later 103.0% 102.7% 106.3% 105.6% 113.6%
Seven years later 104.7% 109.2% 109.4% 116.9%
Eight years later 111.4% 112.2% 120.9%
Nine years later 114.5% 123.4%
Ten years later 123.0%
Cumulative deficiency
(redundancy) 23.0% 23.4% 20.9% 16.9% 13.6% 9.7% 9.4% 3.9% 5.9% 4.5% N/A
Cumulative paid as of:
One year later 29.4% 32.3% 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8% 41.7%
Two years later 48.6% 48.2% 43.2% 43.0% 43.7% 40.6% 42.5% 51.6% 58.0%
Three years later 59.8% 59.2% 55.3% 55.4% 54.2% 50.9% 54.4% 67.2%
Four years later 67.9% 67.6% 64.8% 63.3% 60.8% 59.1% 66.3%
Five years later 74.0% 74.3% 71.1% 67.8% 67.0% 68.0%
Six years later 79.5% 78.8% 74.5% 72.7% 74.0%
Seven years later 83.2% 81.2% 78.6% 78.6%
Eight years later 85.2% 84.8% 83.9%
Nine years later 88.5% 89.0%
Ten years later 89.9%
</TABLE>
(*) Reflects significant A&E charges and reallocations in 1994, 1996 and
1998 for prior years losses. Excluding these items, the re-estimated
liability shown above would decrease ranging from approximately
17 percentage points in 1988 to 6 percentage points in 1997.
<PAGE>
The following is a reconciliation of the net liability to the gross
liability for unpaid losses and LAE.
1993 1994 1995 1996 1997 1998
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489 $3,305
Add reinsurance recoverables 611 730 704 720 736 1,468
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225 $4,773
As re-estimated at
December 31, 1998:
Net liability shown above $2,317 $2,393 $3,526 $3,604 $3,644
Add reinsurance recoverables 928 919 993 996 1,065
Gross liability $3,245 $3,312 $4,519 $4,600 $4,709 N/A
Gross cumulative deficiency
(redundancy) 19.0% 13.6% 10.3% 11.5% 11.5% N/A
11
<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.
1989 1990 1991 1992 1993 1994
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, 1998 3,083 3,121 3,092 3,062 3,103 3,378
Cumulative deficiency
(redundancy) 17.9% 14.0% 10.7% 6.1% 2.4% 3.4%
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, 1998:
Net liability shown above $3,103 $3,378
Add reinsurance recoverables 970 953
Gross liability $4,073 $4,331
Gross cumulative deficiency
(redundancy) 11.7% 8.0%
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
$214 million special charge for A&E claims related to losses recorded in
1998, but incurred before 1988, 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.
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.
<PAGE>
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, 1998, are as follows (in millions):
Liability reported on a SAP basis, net of $511 million
of retroactive reinsurance $3,191
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (7)
Reserves of foreign operations 45
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables, net of allowance 1,468
Reclassification of allowance for uncollectible
reinsurance 77
Liability reported on a GAAP basis $4,773
12
<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. During this time, the industry's
survival ratio (reserves divided by annual paid losses) was used as a
benchmark for reserving such claims. The following table compares AFG's
three-year survival ratio for A&E claims with that of the industry.
December 31,
Survival Ratio: 1998 1997 1996 1995 1994
AFG 19.5 10.0 10.5 6.5 7.0
Industry (a) N/A 8.9 9.0 9.4 7.8
(a) Source: "BestWeek - Property and Casualty Supplement"
(September 21, 1998 Edition); 1998 is not available; the impact
of an extraordinary case payment made in 1996 is excluded from
industry ratios.
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 in 1996 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 recorded a
noncash, pretax charge of $80 million and reallocated $40 million in
reserves from its Specialty group.
As part of the continuing process of monitoring appropriate reserve needs
and prompted by the retention of certain A&E exposures under the agreement
covering the sale of its Commercial lines division, AFG began a thorough
study of its A&E exposures in 1998. Based on this study and observations
of industry trends in this regard, AFG decided that the survival ratio may
not be the best basis for measuring ultimate A&E exposures. AFG's study was
reviewed by independent actuaries who used state of the art actuarial
techniques that have wide acceptance in the industry. AFG recorded a
fourth quarter charge of $214 million in 1998 to increase A&E reserves to
its best estimate of the ultimate liability.
13
<PAGE>
The following table (in millions) is a progression of A&E reserves. During
the review of A&E exposures in 1998, $13.8 million in reserves recorded prior
to 1998 and not identified as A&E were determined to be A&E reserves. In
addition, the allowance for uncollectible reinsurance applicable to ceded
A&E reserves was not reflected in the following table prior to 1998.
1998 1997 1996
Reserves at beginning of year $347.9 $343.4 $225.7
Incurred losses and LAE (a) 247.5 43.2 149.0
Paid losses and LAE (26.1) (38.7) (31.3)
Reserves transferred with sale of
Commercial lines (11.4) - -
Reserves not classified as A&E prior
to 1998:
Reserves 13.8 - -
Allowance for uncollectable reinsurance
applicable to ceded A&E reserves 53.7 - -
Reserves at end of year, net of
reinsurance recoverable 625.4 347.9 343.4
Reinsurance recoverable, net of
allowance in 1998 240.7 173.2 162.7
Gross reserves at end of year $866.1 $521.1 $506.1
(a) Includes (i) special charges of $214 million in 1998 and
$80 million in 1996 and (ii) a reallocation in 1996 of
$40 million in reserves from its Specialty group.
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, $20 million in losses and LAE have been paid
and reserves for unpaid losses and LAE aggregated $30 million at
December 31, 1998 (not included in the above table).
14
<PAGE>
Annuity and Life Operations
General
AFG's annuity and life operations are conducted through American
Annuity Group, Inc. ("AAG"), a holding company which markets primarily
retirement annuity products as well as life and supplemental health
insurance through the following subsidiaries (in millions). AAG and
its subsidiaries employ approximately 1,700 persons.
1998
Statutory
Subsidiary - year acquired Principal Products Premiums
Great American Life Insurance Traditional fixed annuities $301
Company ("GALIC") - 1992(*) Equity-indexed annuities 58
Annuity Investors Life Insurance Variable annuities 89
Company ("AILIC") - 1994 Traditional fixed annuities 73
Loyal American Life Insurance Supplemental health 20
Company ("Loyal") - 1995 Supplemental life 17
Great American Life Assurance Company Life 37
of Puerto Rico, Inc. ("GAPR")-1997 Supplemental health 11
GALIC's Life Division (formed in 1997) Term and universal life 19
(*) Acquired from Great American.
Acquisitions in recent years have supplemented AAG's internal growth as
the assets of the holding company and its operating subsidiaries have
increased from $4.5 billion at the end of 1992 to over $7.1 billion at the end
of 1998. Premiums over the last three years were as follows (in millions):
Insurance Product 1998 1997 1996
Retirement annuities $521 $489 $540
Life and health 104 42 43
$625 $531 $583
________________
Table does not include premiums of subsidiaries or divisions
until their first full year following acquisition or formation.
All periods exclude premiums of subsidiaries sold.
In September 1998, AAG sold its Funeral Services division. This division
had assets of approximately $1 billion as of September 30, 1998 and 1997
premiums of $111 million.
Retirement Products
AAG's principal retirement products are Flexible Premium Deferred Annuities
("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). Annuities 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. 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.
15
<PAGE>
The following table (in millions) presents combined financial information
concerning AAG's principal retirement annuity subsidiaries, GALIC and AILIC.
1998 1997 1996
GAAP Basis
Total Assets $6,549 $6,289 $5,942
Fixed Annuity Reserves 5,396 5,355 5,211
Variable Annuity Reserves
(separate accounts) 120 37 3
Stockholder's Equity 862 770 658
Statutory Basis
Total Assets $6,159 $5,977 $5,760
Fixed Annuity Reserves 5,538 5,469 5,302
Variable Annuity Reserves
(separate accounts) 120 37 3
Capital and Surplus 350 317 285
Asset Valuation Reserve (a) 63 65 91
Interest Maintenance Reserve (a) 21 24 25
Annuity Receipts:
Flexible Premium:
First Year $ 45 $ 38 $ 36
Renewal 149 160 182
194 198 218
Single Premium 327 291 322
Total Annuity Receipts $ 521 $ 489 $ 540
________________
(a) Allocation of surplus.
Sales of 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, 1998, AAG had approximately 265,000 annuity
policies in force.
Annuity contracts are generally classified as either fixed rate
(including equity-indexed) 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. The following table
presents premiums by classification:
Premiums 1998 1997 1996
Traditional fixed 72% 83% 98%
Equity-indexed 11 8 2
Variable 17 9 *
100% 100% 100%
________________
* less than 1%
<PAGE>
AAG seeks to maintain a desired spread between the yield on its
investment portfolio and the rate it credits to its fixed rate annuities.
AAG 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. AAG 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, annuity surrenders have averaged less than 10% of statutory
reserves over the past five years.
16
<PAGE>
All of AAG's fixed rate annuities offer a minimum interest rate
guarantee of 3% or 4%; the majority permit AAG to change the crediting
rate at any time (subject to the minimum guaranteed interest rates).
In determining the frequency and extent of changes in the crediting
rate, AAG 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, AAG began offering equity-indexed annuities
and variable annuities. An equity-indexed fixed annuity 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 liabilities
associated with equity-indexed annuities.
Industry sales of variable annuities have increased substantially
over the last ten years as investors have sought to obtain the returns
available in the equity markets while enjoying the tax-deferred status
of annuities. 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. Premiums directed to
the variable options in policies issued by AAG are invested in funds
managed by various independent investment managers. AAG earns a fee
on amounts deposited into variable accounts. Policyholders may also
choose to direct all or a portion of their premiums to various fixed
rate options, in which case AAG earns a spread on amounts deposited.
The following table reflects the geographical distribution of AAG's
annuity premiums in 1998 compared to 1994.
1998 1994 1998 1994
California 28.8% 20.5% Michigan 3.4% 9.1%
Ohio 7.5 6.2 New Jersey 3.4 4.5
Texas 4.9 2.6 Indiana 2.8 *
Washington 4.8 3.7 Connecticut 2.4 4.4
Florida 4.7 8.5 Pennsylvania 2.4 *
Massachusetts 4.6 8.0 Illinois 2.2 3.1
North Carolina 4.1 3.0 Iowa 2.1 2.0
Minnesota 3.6 4.6 Rhode Island * 2.0
Other 18.3 17.8
_______________ 100.0% 100.0%
(*) less than 2%
AAG's FPDAs are sold primarily to employees of qualified not-for-profit
organizations. Employees of these 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 from other qualified investments.
Federal income taxes are not payable on contributions or earnings until
amounts are withdrawn.
<PAGE>
Historically, AAG's principal marketing focus had been on sales to
employees of educational institutions in the kindergarten through high
school segment. However, sales of non-qualified annuities have begun
to represent an increasing percentage of premiums (33% in 1998
compared to 15% in 1994) as AAG has developed products and
distribution channels targeted to the non-qualified markets.
AAG distributes its annuity products through approximately 90 managing
general agents ("MGAs") who, in turn, direct approximately 1,000 actively
producing independent agents. AAG has developed its business on the basis
of its relationships with MGAs and independent agents primarily through a
consistent marketing approach and responsive service. To extend the
distribution of its annuities to a broader customer base, AAG developed a
personal producing general agent ("PPGA") distribution system. More than
100 PPGAs are contracted to sell annuities in those territories not served
by an MGA.
17
<PAGE>
Life, Accident and Health Products
AAG offers a variety of life, accident and health products through
Loyal, GAPR and GALIC's life division. This group produced
approximately $100 million of premiums in 1998. At year end 1998, it
had assets of over $550 million. It also had more than 500,000
policies and $7.1 billion of life insurance in force.
Loyal offers a variety of life and supplemental health insurance
products through payroll deduction plans and credit unions. The
principal products sold by Loyal include cancer, universal life,
traditional whole life, hospital indemnity, and short-term disability
insurance. Loyal's products are marketed with the endorsement or
consent of the employer or the credit union management.
GAPR sells in-home service life and supplemental health products
through a network of company-employed agents. Ordinary life, cancer,
credit and group life products are sold through independent agents.
In December 1997, GALIC's life division began offering term,
universal and whole life insurance products through national marketing
organizations.
Sale of Funeral Services Division
In September 1998, AAG sold its Funeral Services division for
approximately $165 million in cash. The Funeral Services division
provided life insurance and annuities to fund pre-arranged funerals,
as well as administrative services for pre-arranged funeral trusts.
This division included American Memorial Life Insurance Company
(acquired in 1995) and Arkansas National Life Insurance Company
(acquired in 1998).
Independent Ratings
AAG's principal insurance subsidiaries are rated by Standard &
Poor's, 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.
Standard
& Poor's A.M. Best Duff & Phelps
GALIC A+ (Strong) A (Excellent) AA- (Very high)
AILIC A+ (Strong) A (Excellent) AA- (Very high)
Loyal A (Strong) A (Excellent) AA- (Very high)
GAPR Not rated A (Excellent) Not rated
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 and agents; (v) product design (including
interest rates credited and premium rates charged); and (vi) commissions.
Since policies are marketed and distributed primarily through independent
agents (except at GAPR), 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.
Foreign Operations
In 1998, AAG opened an office in Bangalore, India. Employees located at
this office perform computer programming and certain back office functions
for AAG's insurance operations. Management believes there are sufficient
resources available at domestic locations should there be any interruption
in the operations at this office and as a result no materially adverse
impact would result from any such interruption.
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), New Orleans (Le Pavillon
Hotel), Cape Cod (Chatham Bars Inn), Austin (Driskill Hotel) and apartments
in Austin, Houston, Lafayette-Louisiana, Louisville, Milwaukee, Pittsburgh,
St. Paul and Tampa Bay. These operations employ approximately 700
full-time employees.
<PAGE>
Investment Portfolio
General
A summary of AFG's December 31, 1998, investment portfolio by
business segment follows (excluding investment in equity securities of
investee corporations) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and short-term investments $ 142 $ 133 $22 $ 297 $ 297
Fixed maturities 4,271 6,023 30 10,324 10,324
Other stocks, options and
warrants 342 83 5 430 430
Policy loans - 220 - 220 220(a)
Real estate and other investments 126 119 27 272 272(a)
$4,881 $6,578 $84 $11,543 $11,543
(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.
1998 1997 1996 1995 1994
Cash and Short-term Investments 2.6% 2.1% 3.9% 4.9% 2.2%
Fixed Maturities:
U.S. Government and Agencies 4.4 5.0 4.1 3.7 4.0
State and Municipal 1.2 1.3 1.0 .7 .8
Public Utilities 6.0 6.8 8.2 9.7 9.1
Mortgage-Backed Securities 20.8 21.4 22.2 20.7 21.8
Corporate and Other 53.0 52.3 51.5 49.5 53.4
Redeemable Preferred Stocks .5 .6 .5 1.0 1.4
85.9 87.4 87.5 85.3 90.5
Net Unrealized Gains (Losses) on
fixed maturities held
Available for Sale 3.5 2.5 1.1 2.7 (1.0)
89.4 89.9 88.6 88.0 89.5
Other Stocks, Options and Warrants 3.7 3.7 2.8 2.3 2.7
Policy Loans 1.9 2.0 2.1 2.1 2.5
Real Estate and Other Investments 2.4 2.3 2.6 2.7 3.1
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.8% 7.8% 7.9% 7.9% 8.1%
Including realized gains and losses 8.0% 7.9% 7.7% 8.8% 8.1%
Yield on Stocks:
Excluding realized gains and losses 5.4% 5.6% 5.8% 3.9% 5.1%
Including realized gains and losses (5.3%) 30.2% 15.1% 8.4% 35.4%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.8% 7.8% 7.9% 8.1%
Including realized gains and losses 7.8% 8.2% 7.8% 8.8% 8.8%
(*) 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, 1998 (dollars in millions).
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $6,681 $ 7,000 68%
2 BBB 2,401 2,484 24
Total investment grade 9,082 9,484 92
3 BB 426 435 4
4 B 320 315 3
5 CCC, CC, C 92 81 1
6 D 1 9 *
Total noninvestment grade 839 840 8
Total $9,921 $10,324 100%
_______________
(*) Less than 1%
20
<PAGE>
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.
AFG's primary investment objective for fixed maturities 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, 1998, AFG owned 24 million shares of
Chiquita common stock representing 37% of its outstanding shares. The
carrying value and market value of AFG's investment in Chiquita were
approximately $192 million and $229 million, respectively, at December
31, 1998. Chiquita is a leading international marketer, producer and
distributor of quality fresh fruits and vegetables and processed
foods. In addition to bananas, these products include a wide variety
of other fresh fruits and vegetables; fruit and vegetable juices and
beverages; processed bananas and other processed fruits and
vegetables; private-label and branded canned vegetables; fresh cut and
ready-to-eat salads; and edible oil-based consumer products.
Citicasters In 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.
Other Stocks AFG's $243 million investment in Provident Financial
Group, Inc., a Cincinnati-based commercial banking and financial
services company, comprised approximately three-fifths of the equity
investments included in "Other stocks" in AFG's Balance Sheet at
December 31, 1998.
<PAGE>
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 1999 from its insurance subsidiaries without
seeking regulatory clearance is approximately $281 million.
21
<PAGE>
Changes in state insurance laws and regulations have the potential
to materially affect the revenues and expenses of the insurance
operations. For example, between July 1993 and January 1995, the
California Commissioner ordered reductions in workers' compensation
insurance premium rates totaling more than 30% and subsequently
replaced the workers' compensation insurance minimum rate law with an
"open rating" policy. The Company is unable to predict whether or
when other state insurance laws or regulations may be adopted or
enacted or what the impact of such developments would be on the future
operations and revenues of its insurance businesses.
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 1998.
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, 1998, 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, 1998, the capital
ratios of all AFG insurance companies substantially exceeded the risk-based
capital requirements.
<PAGE>
ITEM 2
Properties
Subsidiaries of AFG own several buildings in downtown Cincinnati.
AFG and its affiliates occupy about 70% of the aggregate 660,000
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 Great American's and AAG's home offices in Cincinnati. An
AAG subsidiary owns an office building in Mobile, Alabama which 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
1.5 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.
22
<PAGE>
ITEM 3
Legal Proceedings
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
AFG and its subsidiaries are involved in various litigation, most of which
arose in the ordinary course of business, including litigation alleging bad
faith in dealing with policyholders and challenging certain business
practices of insurance subsidiaries. Except for the following, management
believes that none of the litigation meets the threshold for disclosure
under this Item.
In February 1994, the USX Corporation ("USX") paid nearly $600 million
in satisfaction of antitrust judgments entered against its subsidiary,
The Bessemer & Lake Erie Railroad ("B&LE"). In May 1994, USX/B&LE filed two
lawsuits, one in state and the other in federal court, against American
Premier as the reorganized successor of The Penn Central Corporation seeking
to recover this amount under theories of indemnity and contribution law. In
disclosing the existence of these lawsuits, American Premier stated that it
had sufficient defenses and did not expect to suffer any material loss
from the litigation.
In May 1998, the largest and last of these lawsuits was dismissed
in state court; a companion federal lawsuit had been dismissed earlier
in 1998. Both of the lawsuits were dismissed on American Premier's
Motion for Summary Judgment filed in state and federal court.
The state court action is now on appeal to the Eighth Appellate
District of Ohio in Cleveland, Ohio. The federal court action is now
on appeal to the US Court of Appeals for the Sixth Circuit in
Cincinnati, Ohio. American Premier and its outside counsel continue
to believe that American Premier will not suffer any material loss
from either of these cases.
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 Penn Central Transportation
Company ("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.
<PAGE>
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.
23
<PAGE>
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.
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
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.
1998 1997
High Low High Low
First Quarter $44 3/16 $37 5/8 $38 3/8 $34 7/8
Second Quarter 45 3/4 42 3/8 42 3/4 32 3/8
Third Quarter 44 7/8 32 3/8 49 1/4 42 3/16
Fourth Quarter 43 7/8 30 1/2 46 11/16 34 9/16
There were approximately 16,300 shareholders of record of AFG
Common Stock at March 1, 1999. AFG's policy is to pay quarterly
dividends on its Common Stock in amounts determined by its Board of
Directors. In 1998 and 1997, 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.
24
<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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Total Revenues $4,050 $4,021 $4,115 $3,630 $2,104
Earnings Before Income Taxes and
Extraordinary Items 205 320 353 247 44
Earnings Before Extraordinary Items 125 199 262 190 19
Extraordinary Items (1) (7) (29) 1 (17)
Net Earnings 124 192 233 191 2
Basic Earnings (Loss) Per Common
Share (a):
Earnings (Loss) before Extraordinary
Items and Premium on Redemption
of Preferred Stock $2.04 $3.34 $4.31 $3.87 ($.24)
Net Earnings (Loss) Available to
Common Shares 2.03 .65 3.84 3.88 (.83)
Diluted Earnings (Loss) Per Common
Share (a):
Earnings (Loss) before Extraordinary
Items and Premium on Redemption
of Preferred Stock $2.01 $3.28 $4.26 $3.83 ($.24)
Net Earnings (Loss) Available to
Common Shares 2.00 .64 3.79 3.85 (.83)
Cash Dividends Paid Per Share of
Common Stock $1.00 $1.00 $1.00 $.75 (b)
Ratio of Earnings to Fixed Charges (c) 3.22 3.98 4.22 2.60 1.69
<PAGE>
Balance Sheet Data:
Total Assets $15,845 $15,755 $15,051 $14,954 $10,593
Long-term Debt:
Holding Companies 415 387 340 648 849
Subsidiaries 177 194 178 234 258
Minority Interest (d) 522 513 494 314 106
Capital Subject to Mandatory Redemption - - - - 3
Other Capital 1,716 1,663 1,554 1,440 396
</TABLE>
(a) 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.
(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. 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.
25
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
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.
AFG was formed through the combination of AFC and American Premier
in merger transactions completed in April 1995 (the "Mergers").
LIQUIDITY AND CAPITAL RESOURCES
Ratios Following the Mergers, AFC and American Premier retired or
replaced with lower cost financing over $1 billion in debt and
preferred stock reducing AFG's interest expense and preferred dividend
requirements by over $110 million annually. AFG's debt to total
capital ratio at the parent holding company level improved from nearly
60% at the date of the Mergers to approximately 18% at December 31, 1998.
AFG's ratio of earnings to fixed charges on a total enterprise
basis was 3.22 for the year ended December 31, 1998 compared to 2.07
in 1994 (pro forma for the Mergers and related transactions).
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,
1998, the capital ratios of all AFG insurance companies substantially
exceeded the RBC requirements (the lowest capital ratio of any AFG
subsidiary was 2.1 times its authorized control level RBC; weighted
average of all AFG subsidiaries was 5.0 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,
shareholder dividends, and taxes. 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 and tax payments from subsidiaries,
are insufficient to meet fixed charges in any period, these companies
would be required to generate cash through borrowings, sales of
securities or other assets, or similar transactions.
<PAGE>
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.
The senior debentures of AFG, AFC and AAG are rated investment
grade by three nationally recognized rating agencies; the subordinated
debentures of APU and AAG are rated investment grade by two of the
agencies.
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, 1998, there was $80 million borrowed under the line.
26
<PAGE>
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 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. 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 noncore investments.
For statutory accounting purposes, equity securities are generally
carried at market value. At December 31, 1998, AFG's insurance
companies owned publicly traded equity securities with a market value
of $1.4 billion, including equity securities of AFG affiliates
(including subsidiaries) of $1.0 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.
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. In May 1998, the
largest and last of the lawsuits was dismissed in state court. All of
USX's claims against American Premier have now been dismissed with
prejudice, and, although USX has appeals pending, American Premier and its
outside legal counsel continue to believe that American Premier will not
suffer a material loss from this litigation.
<PAGE>
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, 1998, Great American had recorded $866 million (before
reinsurance recoverables of $241 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. 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. See Note L to the financial statements.
27
<PAGE>
Year 2000 Status AFG's Year 2000 Project is a corporate-wide program
designed to ensure that its computer systems and other equipment using
date-sensitive computer chips will function properly in the year 2000. The
Project also encompasses communicating with agents, vendors, financial
institutions and others with which the companies conduct business to
determine their Year 2000 readiness and resulting effects on AFG. AFG's
Year 2000 Project Office monitors and coordinates the work being performed
by the various business units and reports monthly to the Audit Committee of
the Board of Directors and more frequently to senior management.
To address the Year 2000 issue, AFG's operations have been divided into
separate systems groups. During 1998, these groups were in the process of
either (i) modifying their software programs or (ii) replacing programs with
new software that is Year 2000 compliant. A majority of the groups have met
AFG's goal of having program modifications and new software installations
substantially completed by the end of 1998, with testing continuing in and
through 1999. About 40% of the groups is being "closely watched" because
there is some degree of risk that critical dates in the project schedule
may be missed with a potential for some disruption of normal business
operations. AFG's goal is to have program modifications and new
installations for these groups completed during mid-1999. One group, which
has significantly missed internal project deadlines, now has been reorganized
and staffing levels were increased. This group is expected to be completed
during the third quarter of 1999.
Contingency plans have been developed for certain systems deemed most
critical to operations. These plans provide a documented order of actions
necessary to keep the business functions operating for these systems. Such
plans typically include procedures and workflow processes for developing and
operating contingent databases. Contingency planning for other systems
deemed critical to operations and reasonably likely not to be modified on
schedule began in the fourth quarter of 1998 and will be completed by
mid-1999.
Many of the systems being replaced were planned replacements which
were accelerated due to the Year 2000 considerations. In addition, a
significant portion of AFG's Year 2000 Project is being completed
using internal staff. Therefore, cost estimates for the Year 2000
Project do not represent solely incremental costs.
From the inception of the Year 2000 Project in the early 1990's
through December 31, 1998, AFG estimates that it has incurred
approximately $46 million in costs related to the Project, including
capitalized costs of $10 million for new systems. During 1998,
$27 million in such costs have been expensed. AFG estimates that it
will incur an additional $26 million of such costs in completing the
Project, about two-thirds of which is projected to be expensed.
Projected Year 2000 costs and completion dates are based on management's
best estimates. However, there can be no assurances that these estimates
will be achieved. Should software modifications and new software
installations not be completed on a timely basis, the resulting disruptions
could have a material adverse effect on operations.
<PAGE>
AFG's operations could also be affected by the inability of third
parties such as agents and vendors to become Year 2000 compliant.
While assessments of independent agents and evaluations of third party
vendors are progressing slowly, efforts are being intensified to
complete these assessments in the second quarter of 1999. In
addition, AFG's property and casualty insurance subsidiaries are
reviewing the potential impact of the Year 2000 issue on insureds as
part of their underwriting process. They are also reviewing policy
forms, issuing clarifying endorsements where appropriate and examining
coverage issues for Year 2000 exposures. While it is possible that
Year 2000 claims may emerge in future periods, it is not possible to
estimate any such amounts.
Exposure to Market Risk Market risk represents the potential economic
loss arising from adverse changes in the fair value of financial instruments.
AFG's exposures to market risk relate primarily to its investment portfolio
and annuity contracts which are exposed to interest rate risk and, to a
lesser extent, equity price risk. AFG's long-term debt is also exposed to
interest rate risk. AFG's investments in derivatives were not significant
at December 31, 1998.
28
<PAGE>
Fixed Maturity Portfolio The fair value of AFG's fixed maturity portfolio
($10.3 billion at December 31, 1998) is directly impacted by changes in
market interest rates. AFG's fixed maturity portfolio is comprised of
substantially all fixed rate investments with primarily short-term and
intermediate-term maturities. This practice allows flexibility in reacting
to fluctuations of interest rates. The portfolios of AFG's property and
casualty insurance and life and annuity operations are managed with an
attempt to achieve an adequate risk-adjusted return while maintaining
sufficient liquidity to meet policyholder obligations. AFG's life and
annuity operations use various actuarial models in an attempt to align the
duration of their invested assets to the projected cash flows of
policyholder liabilities.
The following table provides information about AFG's fixed maturity
investments at December 31, 1998, that are sensitive to interest rate
risk. The table shows principal cash flows (in millions) and related
weighted-average interest rates by expected maturity dates. Callable
bonds and notes are included based on call date or maturity date
depending upon which date produces the most conservative yield.
Mortgage-backed securities ("MBSs") and sinking fund issues are
included based on maturity year adjusted for expected payment
patterns. Actual cash flows may differ from those expected.
Weighted
Average
Principal Interest
Cash Flows Rate
1999 $ 849.8 7.87%
2000 942.7 8.01
2001 954.2 8.08
2002 1,086.3 7.76
2003 1,415.3 7.33
Thereafter 4,784.1 7.59
Total $10,032.4 7.68%
Equity Price Risk Equity price risk is the potential economic loss
from adverse changes in equity security prices. Although AFG's
investment in "Other stocks" is less than 4% of total investments, it
is concentrated in a relatively limited number of major positions.
While this approach allows management to more closely monitor the
companies and industries in which they operate, it does increase risk
exposure to adverse price declines in a major position.
Annuity Contracts Substantially all of AAG's fixed rate annuity
contracts permit AAG to change crediting rates (subject to minimum
interest rate guarantees of 3% to 4% per annum) enabling management to
react to changes in market interest rates and maintain an adequate
spread. Sales of variable rate annuities have not been significant.
Projected payments (in millions) of AAG's fixed annuity liabilities at
December 31, 1998, were as follows.
1999 2000 2001 2002 2003 Remaining Total
$660 $620 $560 $500 $450 $2,610 $5,400
<PAGE>
About half of AAG's fixed annuity liabilities at December 31, 1998,
were two-tier in nature in that policyholders can receive a higher
amount if they annuitize rather than surrender their policy, even if
the surrender period has expired. Current stated crediting rates on
AAG's principal fixed annuity products range from 3% on equity-indexed
annuities (before any equity participation) to over 7% on certain new
policies (including first year bonus amounts). AAG estimates that its
effective weighted-average crediting rate over the next five years
will range from 5% to 5.2%. This range reflects actuarial assumptions
as to (i) deaths, (ii) the number of policyholders who annuitize and
receive higher credited amounts and (iii) the number of policyholders
who surrender. Actual experience and changes in actuarial assumptions
may result in different effective crediting rates than those above.
29
<PAGE>
Debt and Preferred Securities The following table shows scheduled
principal payments (in millions) on fixed-rate and variable-rate long-term
debt of AFG and its subsidiaries and related weighted average interest
rates. At December 31, 1998, there were $325 million of subsidiary trust
preferred securities outstanding, none of which are scheduled for redemption
during the next five years; weighted average interest rate on these
securities is 8.66%.
Fixed-Rate Debt Variable-Rate Debt
Weighted Weighted
Scheduled Average Scheduled Average
Principal Interest Principal Interest
Payments Rate Payments Rate
1999 $ 90.7 9.69% $ .3 5.86%
2000 49.1 9.85 .2 5.80
2001 1.2 7.13 .1 5.58
2002 1.1 6.81 85.7 5.95
2003 1.1 6.68 27.2 6.09
Thereafter 333.3 7.92 .2 5.58
Total $476.5 8.45% $113.7 5.98%
At December 31, 1998, the fair value of fixed-rate debt and variable-rate
debt was approximately $490.6 million and $113.7 million, respectively.
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, 1998, the average life of AFG's
fixed maturities was just under 6 years.
Approximately 92% of the fixed maturities held by AFG were rated
"investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at December 31, 1998. Investment grade
securities generally bear lower yields and lower degrees of risk than
those that are unrated or noninvestment grade. Management believes
that the high quality investment portfolio should generate a stable
and predictable investment return.
Investments in MBSs represented approximately one-fourth of AFG's
fixed maturities at December 31, 1998. 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. Approximately 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.
<PAGE>
Because most income of the property and casualty insurance subsidiaries
has been sheltered from income taxes through 1997, nontaxable municipal
bonds represent only a small portion (less than 1%) of the portfolio.
Prior to the 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:
1998 - $16 million; 1997 - $57 million; 1996 - $166 million;
1995 - $84 million and 1994 - $50 million. At December 31, 1998, the net
unrealized gain (before income taxes) on AFG's fixed maturities and equity
securities was $403 million and $223 million, respectively.
30
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1998
General Pretax earnings before extraordinary items were $205 million
in 1998, $320 million in 1997 and $353 million in 1996.
Results for 1998 include a pretax charge in the fourth quarter of
$214 million attributable to an increase in loss reserves relating
to asbestos and environmental coverages ("A&E"), $180 million in
pretax gains, primarily from the sale of substantially all of
AFG's Commercial lines division and the Funeral Services division,
and a $34 million decline in the underwriting results in AFG's
property and casualty insurance business (excluding the special
A&E charge) due primarily to increased catastrophe losses.
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 A&E reserves.
Property and Casualty Insurance - Underwriting Following the sale of its
Commercial lines division in late 1998, AFG's property and casualty group
is engaged primarily in private passenger automobile and specialty
insurance businesses. Accordingly, AFG has realigned its property and
casualty group into two major business groups: Personal and Specialty.
The Personal group consists of the nonstandard auto group along
with the preferred/standard private passenger auto and other personal
insurance business, formerly included in the Commercial and Personal
lines. The nonstandard automobile insurance companies insure risks
not typically accepted for standard automobile coverage because of the
applicant's driving record, type of vehicle, age or other criteria.
The Specialty group includes a highly diversified group of business lines
(formerly, Specialty lines) plus the commercial business previously included
in the Commercial and Personal lines. Some of the more significant areas
are executive liability, inland and ocean marine, U.S.-based operations of
Japanese companies, agricultural-related coverages, California workers'
compensation, nonprofit liability, general aviation coverages, fidelity and
surety bonds, and umbrella and excess coverages. Commercial lines
businesses sold included certain coverages in workers' compensation,
commercial multi-peril, commercial automobile, and umbrella.
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 businesses listed above), management believes that it is
prudent and appropriate to use conservative assumptions until such
time as the data, experience and projections have more credibility, as
evidenced by data volume, consistency and maturity of the data. While
this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
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.
Excluding the special $214 million A&E charge in the fourth quarter
of 1998, underwriting results of AFG's insurance operations
outperformed the industry average for the thirteenth 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 and nonstandard auto businesses.
Net written premiums and combined ratios for AFG's property and
casualty insurance subsidiaries were as follows (dollars in millions):
1998 1997 1996
Net Written Premiums (GAAP)
Personal $1,279 $1,345 $1,384
Specialty 1,312(*) 1,468 1,367
Other Lines 18 45 37
$2,609 $2,858 $2,788
Combined Ratios (GAAP)
Personal 97.3% 98.5% 103.9%
Specialty 105.0 100.0 88.4
Aggregate (including A&E and other lines) 110.7% 101.4% 102.9%
(*) Before a reduction of $138 million for the unearned premium
transfer related to the sale of the Commercial lines division.
Special A&E Charge Operating results for 1998 and 1996 were adversely
impacted by increases in A&E reserves (exposures for which AFG may be liable
under general liability policies written years ago) and higher catastrophe
losses. A standard insurance measure used in testing the reasonableness of
A&E reserves has been the "survival ratio" (reserves divided by average
annual paid losses for the preceding three years). Due in part to the
greater uncertainties inherent in estimating A&E claims, management has
evaluated 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 in 1996 by recording a third quarter, noncash pretax
charge of $80 million and reallocating $40 million, or approximately 2%,
of its Specialty group reserves (approximately $2.1 billion at
December 31, 1996).
Under the agreement covering the sale of its Commercial lines division
in 1998, AFG retained liabilities for certain A&E exposures. Prompted by
this retention and as part of the continuing process of monitoring reserves,
AFG began a thorough study of its A&E exposures. Based on this study and
observations of industry trends in this regard, AFG decided that the survival
ratio may not be the best basis for measuring ultimate A&E exposures. AFG's
study was reviewed by independent actuaries who used state of the art
actuarial techniques that have wide acceptance in the industry. The methods
used involved sampling and statistical modeling incorporating external data
bases that supplement the internal information. AFG recorded a fourth
quarter charge of $214 million increasing A&E reserves at December 31, 1998,
to approximately $866 million (before deducting reinsurance recoverables
of $241 million), an amount which, in the opinion of management, makes a
reasonable provision for AFG's ultimate liability for A&E claims.
<PAGE>
Personal The Personal group's net written premiums decreased
$65.9 million (5%) during 1998 due primarily to stronger price competition
in the personal automobile market. The combined ratio improved in 1998 due
to both lower loss experience and a 6% reduction in underwriting expenses.
The Personal group's net written premiums decreased $39.6 million (3%)
during 1997 due primarily to a reinsurance agreement, effective
January 1, 1997, under which 80% of all AFG's homeowners' business was
reinsured. Excluding the impact of
32
<PAGE>
the reinsurance agreement, premiums increased 4%. Volume increases in
the California nonstandard auto business resulting from enactment of
legislation which requires drivers to provide proof of insurance in order
to obtain a valid permit contributed to a growth in personal automobile
business. Rate increases during 1995 and early 1996, primarily in the
nonstandard auto group, contributed to the improvement in the combined
ratio in 1997.
Specialty The Specialty group's net written premiums decreased
$156 million (11%) during 1998 due primarily to the impact of a
reinsurance agreement whereby approximately 30% of AFG's California
workers' compensation premiums were ceded and the sale of the
Commercial lines division. Excluding these operations, the net
written premiums of the other specialty businesses were essentially
the same as a year ago. Underwriting results worsened from the
comparable period in 1997 due to losses from the midwestern storms in
the second quarter of 1998 compared to milder weather conditions
during 1997 and unusually good results in 1997 in certain other lines.
Net written premiums increased $101.8 million (7%) 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 group had a combined ratio of 100% in 1997
despite a significant decline in the results of AFG's California workers'
compensation business relating to (i) deteriorating underwriting margins
on business written in 1996 and 1997, (ii) reserve reductions in 1996
primarily for business written prior to 1995 in response to a fundamental
change in the California workers' compensation market and actuarial
evaluations and (iii) several current year commercial casualty losses as
well as adverse development in certain prior year claims. The Specialty
group's 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 3.0 percentage points) and the 1996 reductions in California
workers' compensation reserves mentioned above.
Life, Accident and Health Premiums and Benefits The increase in life,
accident and health premiums and benefits in 1998 reflects primarily AAG's
acquisition of Great American Life Assurance Company of Puerto Rico, Inc.
in December 1997. Life, accident and health premiums and benefits increased
in 1997 due primarily to an increase in pre-need life insurance sales by
AAG's Funeral Services division which was sold in 1998.
Investment Income Changes in investment income reflect fluctuations
in market rates and changes in average invested assets.
1998 compared to 1997 Investment income increased $14.8 million (2%)
from 1997 due primarily to an increase in the average amount of investments
held partially offset by decreasing market interest rates.
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 decreasing market interest rates.
Investee Corporation Equity in net losses of investee corporation
represents AFG's proportionate share of the results of Chiquita Brands
International. Equity in net losses excludes AFG's share of amounts
included in extraordinary items; the amount for 1996 includes
$1.5 million in earnings from Citicasters which was sold in 1996.
<PAGE>
AFG recorded equity in net losses of Chiquita of $13.2 million,
$5.6 million and $18.4 million in 1998, 1997 and 1996, respectively.
Chiquita's loss attributable to common shareholders (before extraordinary
items) was $35.5 million, $16.6 million and $39.7 million during these
same periods.
Chiquita's results for 1998 include pretax writedowns and costs of
$74 million resulting from widespread flooding in Honduras and
Guatemala caused by Hurricane Mitch. Excluding these unusual items,
Chiquita's operating income improved $52 million in 1998 compared to
1997 due primarily to lower delivered product costs for bananas on
higher worldwide volume, which more than offset the adverse effect of
lower banana pricing.
33
<PAGE>
Chiquita's results for 1997 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.
Chiquita's results for 1996 include 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.
Gains on Sales of Investees The gains on sales of investees in 1998
and 1997 represent pretax gains to AFG as a result of Chiquita's
public issuance of 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 1998
include (i) a pretax gain of $152.6 million on the sale of the Commercial
lines division, (ii) a pretax gain of $21.6 million on AAG's sale of its
Funeral Services division and (iii) a charge of $15.5 million relating to
operations expected to be sold or otherwise disposed of. 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. 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
1998 compared to 1997 Other income increased $10.3 million (9%) in 1998
due primarily to income from the sale of operating real estate assets and
lease residuals which more than offset the absence of revenues from a
noninsurance subsidiary which was sold in the fourth quarter of 1997.
1997 compared to 1996 Other income decreased $14.9 million (11%)
in 1997 compared to 1996 due primarily to the absence of revenues from
a noninsurance subsidiary which was sold in the first quarter of 1997.
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 reflect amounts accrued on annuity
policyholders' funds accumulated. 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. As a result, management has
been able to react to changes in market interest rates and maintain a desired
interest rate spread. While AAG believes the recent interest rate and stock
market environment over the last several years has contributed to an
increase in annuitizations and surrenders, the company's persistency rate
remains approximately 88%. However, a continuation of the current interest
rate environment could adversely affect this rate.
<PAGE>
Fixed annuity receipts totaled approximately $480 million in 1998,
$490 million in 1997 and $570 million in 1996. 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. AAG believes that the success of the stock market and the
recent interest rate environment have also resulted in decreased sales
and persistency of traditional fixed annuities. Sales of annuity products
linked to the performance of the stock market (equity-indexed and variable
annuities) helped offset this decrease.
34
<PAGE>
Annuity benefits decreased $17.2 million (6%) from 1997 due primarily to
decreases in crediting rates and changes in actuarial assumptions. Annuity
benefits increased $7 million (3%) in 1997 due primarily to an increase in
average annuity benefits accumulated partially offset by decreases in
crediting rates.
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.
1998 compared to 1997 Interest expense increased $5.4 million (10%)
from 1997 due primarily to an increase in outstanding indebtedness.
1997 compared to 1996 Interest expense decreased $23.7 million (31%)
from 1996. The decrease reflects significant debt reductions in 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.
Other Operating and General Expenses
1998 compared to 1997 Other operating and general expenses increased
$10.8 million (3%) in 1998 due primarily to inclusion of the operations of
Great American Life Assurance Company of Puerto Rico following its
acquisition in late 1997 which more than offset the absence of expenses from
a noninsurance subsidiary which was sold in the fourth quarter of 1997.
1997 compared to 1996 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 noninsurance subsidiary which was sold in
the first quarter of 1997.
Income Taxes See Note J to the Financial Statements for an analysis
of items affecting AFG's effective tax rate.
Recent Accounting Standards The following accounting standards have been
implemented by AFG in 1997 or 1998 or will be implemented in 1999 or 2000.
The implementation of these standards is discussed under various subheadings
of Note A to the Financial Statements (segment information is discussed in
Note C); effects of each are shown in the relevant Notes. Implementation
of Statement of Position ("SOP") 98-5 in the first quarter of 1999 and
Statement of Financial Account Standard ("SFAS") No. 133 in the first
quarter of 2000 is not expected to have a significant effect on AFG.
Accounting
Standard Subject of Standard (Year Implemented) Reference
SFAS #128 Earnings Per Share (1997) "Earnings Per Share"
SFAS #130 Comprehensive Income (1998) "Comprehensive Income"
SFAS #131 Segment Information (1998) "Segment Information"
SFAS #133 Derivatives (2000) "Derivatives"
SOP 98-5 Start-up Costs (1999) "Start-up Costs"
Other standards issued in recent years did not apply to AFG or had
only negligible effects on AFG.
<PAGE>
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
35
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1998 and 1997 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note M to the
Consolidated Financial Statements.
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
PART III
The information required by the following Items will be included in
AFG's definitive Proxy Statement for the 1999 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, 1998 and 1997, and the related consolidated statements of
earnings, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, 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 19, 1999
F-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
1998 1997
Assets:
Cash and short-term investments $ 296,721 $ 257,117
Investments:
Fixed maturities:
Available for sale - at market
(amortized cost - $9,921,344 and $7,225,736) 10,324,344 7,532,836
Held to maturity - at amortized cost
(market - $3,419,000) - 3,328,082
Other stocks - principally at market
(cost - $207,345 and $153,322) 430,345 446,222
Investment in investee corporation 192,138 200,714
Policy loans 220,496 240,955
Real estate and other investments 271,915 283,979
Total investments 11,439,238 12,032,788
Recoverables from reinsurers and prepaid
reinsurance premiums 1,973,895 998,743
Agents' balances and premiums receivable 618,198 691,005
Deferred acquisition costs 464,047 521,898
Other receivables 306,821 243,330
Assets held in separate accounts 120,049 300,491
Prepaid expenses, deferred charges and other assets 344,465 410,569
Cost in excess of net assets acquired 281,769 299,408
$15,845,203 $15,755,349
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,773,377 $ 4,225,336
Unearned premiums 1,232,848 1,328,910
Annuity benefits accumulated 5,449,633 5,528,111
Life, accident and health reserves 341,595 709,899
Long-term debt:
Holding companies 415,536 386,661
Subsidiaries 176,896 194,084
Liabilities related to separate accounts 120,049 300,491
Accounts payable, accrued expenses and other
liabilities 1,097,316 906,151
Total liabilities 13,607,250 13,579,643
Minority interest 521,776 512,997
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 60,928,322 and 61,048,904 shares outstanding 60,928 61,049
Capital surplus 770,721 775,689
Retained earnings 527,028 477,071
Net unrealized gain on marketable securities,
net of deferred income taxes 357,500 348,900
Total shareholders' equity 1,716,177 1,662,709
$15,845,203 $15,755,349
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,
1998 1997 1996
<S> <C> <C> <C>
Income:
Property and casualty insurance premiums $2,698,738 $2,824,381 $2,844,512
Life, accident and health premiums 170,365 121,506 103,552
Investment income 883,700 868,946 846,428
Equity in net losses of investees (13,198) (5,564) (16,955)
Realized gains (losses) on sales of:
Securities 6,275 46,006 (3,470)
Investees 9,420 11,428 169,138
Subsidiaries 158,673 33,602 36,837
Other investments 5,293 - -
Other income 130,768 120,418 135,355
4,050,034 4,020,723 4,115,397
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,001,783 2,075,616 2,051,421
Special asbestos and environmental charge 213,500 - 80,000
Commissions and other underwriting expenses 772,917 790,324 793,800
Annuity benefits 261,666 278,829 271,821
Life, accident and health benefits 131,652 110,082 92,315
Interest charges on borrowed money 57,682 52,331 76,052
Minority interest expense 55,798 54,456 47,821
Other operating and general expenses 350,282 339,475 348,923
3,845,280 3,701,113 3,762,153
Earnings before income taxes and
extraordinary items 204,754 319,610 353,244
Provision for income taxes 79,584 120,127 91,277
Earnings before extraordinary items 125,170 199,483 261,967
Extraordinary items - loss on prepayment of debt (770) (7,233) (28,667)
Net Earnings $ 124,400 $ 192,250 $ 233,300
Premium over stated value paid on redemption
of preferred stock - (153,333) -
Net earnings available to Common Shares $ 124,400 $ 38,917 $ 233,300
<PAGE>
Basic earnings (loss) per Common Share:
Before extraordinary items $2.04 $3.34 $4.31
Loss on prepayment of debt (.01) (.12) (.47)
Premium on redemption of preferred stock - (2.57) -
Net earnings available to Common Shares $2.03 $ .65 $3.84
Diluted earnings (loss) per Common Share:
Before extraordinary items $2.01 $3.28 $4.26
Loss on prepayment of debt (.01) (.12) (.47)
Premium on redemption of preferred stock - (2.52) -
Net earnings available to Common Shares $2.00 $ .64 $3.79
Average number of Common Shares:
Basic 61,222 59,660 60,801
Diluted 62,185 60,748 61,494
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars In Thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized
Common and Capital Retained Gain on Comprehensive
Shares Surplus Earnings Securities Income
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 60,139,303 $801,494 $387,143 $251,500
Net earnings - - 233,300 - $233,300
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 unrealized - - - (63,500) (63,500)
Other - 1,363 - - -
Balance at December 31, 1996 61,071,626 806,721 559,716 188,000 $169,800
Net earnings - - 192,250 - $192,250
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 unrealized - - - 160,900 160,900
Other - (350) - - -
Balance at December 31, 1997 61,048,904 836,738 477,071 348,900 $353,150
Net earnings - - 124,400 - $124,400
Dividends on Common Stock - - (61,222) - -
Shares issued:
Exercise of stock options 296,416 8,288 - - -
Dividend reinvestment plan 11,021 432 - - -
Employee stock purchase plan 68,177 2,689 - - -
401-K plan company match 44,035 1,783 - - -
Portion of bonuses paid in stock 20,300 816 - - -
Directors fees paid in stock 2,280 90 - - -
Shares repurchased (562,811) (7,768) (13,221) - -
Capital transactions of subsidiaries - (11,703) - - -
Change in unrealized - - - 8,600 8,600
Other - 284 - - -
Balance at December 31, 1998 60,928,322 $831,649 $527,028 $357,500 $133,000
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 124,400 $ 192,250 $ 233,300
Adjustments:
Extraordinary items 770 7,233 28,667
Special asbestos and environmental charge 213,500 - 80,000
Depreciation and amortization 106,041 76,434 79,425
Annuity benefits 261,666 278,829 271,821
Equity in net losses of investee corporations 13,198 5,564 16,955
Changes in reserves on assets 14,020 7,610 5,656
Realized gains on investing activities (205,659) (103,157) (198,676)
Deferred annuity and life policy acquisition costs (117,202) (72,634) (68,511)
Decrease (increase) in reinsurance and other
receivables (349,183) (171,690) 96,387
Decrease (increase) in other assets (5,575) 23,763 92,052
Increase (decrease) in insurance claims
and reserves 176,552 206,900 (70,829)
Increase (decrease) in other liabilities 153,903 (28,003) (212,720)
Increase in minority interest 5,731 22,654 18,206
Dividends from investees 4,799 4,799 4,799
Other, net (11,516) (24,549) (3,552)
385,445 426,003 372,980
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,155,192) (2,555,060) (2,128,553)
Equity securities (78,604) (37,107) (10,528)
Subsidiaries (30,325) (118,713) -
Real estate, property and equipment (66,819) (64,917) (38,035)
Maturities and redemptions of fixed maturity
investments 1,248,775 897,786 617,272
Sales of:
Fixed maturity investments 795,520 1,407,598 881,114
Equity securities 28,850 104,960 53,195
Investees and subsidiaries 164,589 32,500 284,277
Real estate, property and equipment 53,962 23,289 7,981
Cash and short-term investments of acquired
(former) subsidiaries (21,141) 2,714 (4,589)
Decrease (increase) in other investments (15,135) (12,892) 315
(75,520) (319,842) (337,551)
<PAGE>
Financing Activities:
Fixed annuity receipts 480,572 493,708 573,741
Annuity surrenders, benefits and withdrawals (690,388) (607,174) (517,881)
Additional long-term borrowings 262,537 284,150 288,775
Reductions of long-term debt (251,837) (230,688) (582,288)
Issuances of Common Stock 10,236 13,845 26,296
Repurchases of Common Stock (20,651) (97,320) (8,563)
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 (60,790) (59,275) (60,385)
(270,321) (297,340) (131,541)
Net Increase (Decrease) in Cash and Short-term
Investments 39,604 (191,179) (96,112)
Cash and short-term investments at beginning of
period 257,117 448,296 544,408
Cash and short-term investments at end of period $ 296,721 $ 257,117 $ 448,296
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies H. Minority Interest
B. Acquisitions and Sales of Subsidiaries I. Shareholders' Equity
and Investees J. Income Taxes
C. Segments of Operations K. Extraordinary Items
D. Investments L. Commitments and Contingencies
E. Investment in Investee Corporations M. Quarterly Operating Results
F. Cost in Excess of Net Assets Acquired N. Insurance
G. Long-Term Debt O. Additional Information
P. Subsequent Event
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
A. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of American Financial Group, Inc. ("AFG") and
its subsidiaries. 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. Changes in
circumstances could cause actual results to differ materially from
those estimates.
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. At December 31, 1998, AFG reclassified "held to maturity"
securities with an amortized cost of $2.6 billion to "available
for sale" to give management greater flexibility to react to
changing market conditions. This reclassification resulted in an
increase of $98.8 million in the carrying value of fixed maturity
investments and (after effects of income taxes, minority interest,
and adjustments related to deferred policy acquisition costs) an
increase of $49.6 million in shareholders'equity. The transfer
had no effect on net earnings.
Short-term investments are carried at cost; loans receivable are
carried primarily at the aggregate unpaid balance. Premiums and
discounts on mortgage-backed securities are amortized over their
expected average lives using the interest method.
<PAGE>
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Investment in Investee Corporation Investments in securities of
20%- to 50%-owned companies are generally carried at cost,
adjusted for AFG's proportionate share of their undistributed
earnings or losses.
F-6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFG's equity in the underlying net
assets ("goodwill") is being amortized over 40 years.
Insurance As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
Reinsurance In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFG's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policies.
AFG's insurance subsidiaries report as assets (a) the estimated reinsurance
recoverable on unpaid losses, including an estimate for losses incurred but
not reported, and (b) amounts paid to reinsurers applicable to the
unexpired terms of policies in force. AFG's insurance subsidiaries also
assume reinsurance from other companies. Income on reinsurance assumed is
recognized based on reports received from ceding reinsurers.
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.
F-7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional life, accident and health
policies are computed using the net level premium method.
Computations are based on anticipated investment yield, mortality,
morbidity and surrenders and include provisions for unfavorable
deviations. Reserves are modified as necessary to reflect actual
experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent variable
annuity deposits and, in 1997, include deposits maintained by
several banks under a tax-deferred annuity program previously
offered by American Annuity Group, Inc.'s ("AAG's") Funeral
Services division, which was sold in 1998 (see Note B).
Premium Recognition Property and casualty premiums are earned
over the terms of the policies on a pro rata basis. Unearned
premiums represent that portion of premiums written which is
applicable to the unexpired terms of policies in force. On
reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from policyholders.
For interest-sensitive life and universal life products, premiums
are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against
the policyholder account for mortality coverage and contract expenses.
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which the
related premium is earned. Changes in estimates are included in
income in the period determined. Policyholder dividends do not
become legal liabilities unless and until declared by the boards
of directors of the insurance companies.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFG
subsidiaries, including American Financial Corporation ("AFC")
preferred stock and preferred securities issued by trust
subsidiaries of AFG. For income statement purposes, minority
interest expense represents those shareholders' interest in the
earnings of AFG subsidiaries as well as AFC preferred dividends
and accrued distributions on the trust preferred securities.
Issuances of Stock by Subsidiaries and Investees Changes in AFG's
equity in a subsidiary or an investee caused by issuances of the
subsidiary's or investee's stock are accounted for as gains or
losses where such issuance is not a part of a broader reorganization.
<PAGE>
Income Taxes AFC files consolidated federal income tax returns
which include all 80%-owned U.S. subsidiaries, except for certain
life insurance subsidiaries and their subsidiaries. Because
holders of AFC Preferred Stock hold in excess of 20% of AFC's
voting rights, AFG (parent) and its direct subsidiary, AFC Holding
Company ("AFC Holding" or "AFCH") own less than 80% of AFC, and
therefore, file separate returns.
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and
tax bases and are measured using enacted tax rates. Deferred tax
assets are recognized if it is more likely than not that a benefit
will be realized.
F-8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock-Based Compensation As permitted under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," AFG accounts for stock options and
other stock-based compensation plans using the intrinsic value
based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
Benefit Plans AFG provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans contained in AFG's
Retirement and Savings Plan. Under the retirement portion of the
plan, company contributions (approximately 6% of covered
compensation in 1998) are invested primarily in securities of AFG
and affiliates. Under the savings portion of the plan, AFG
matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in the
year for which they are declared.
AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG also provides
postemployment benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other
company plans. The projected future cost of providing these
benefits is expensed over the period the employees earn such benefits.
Under AFG's stock option plan, options are granted to officers,
directors and key employees at exercise prices equal to the fair
value of the shares at the dates of grant. No compensation
expense is recognized for stock option grants.
Start-up Costs Certain costs associated with introducing new
products and distribution channels are deferred by AAG and are
amortized on a straight-line basis over 5 years. Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," was issued during the second quarter of 1998 and is
effective for fiscal years beginning after December 15, 1998. The
SOP requires that (i) costs of start-up activities be expensed as
incurred and (ii) unamortized balances of previously deferred
costs be expensed no later than the first quarter of 1999 and
reported as the cumulative effect of a change in accounting
principle. AAG had approximately $7 million in capitalized start-up
costs at December 31, 1998.
<PAGE>
Derivatives The Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," during the second quarter of 1998. SFAS No. 133 is
effective for fiscal periods (both years and quarters) beginning
after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including
derivative instruments that are embedded in other contracts, and
for hedging activities. SFAS No. 133 requires the recognition of
all derivatives (both assets and liabilities) in the statement of
financial position at fair value. Changes in fair value of
derivative instruments are included in current income or as a
component of comprehensive income (outside current income)
depending on the type of derivative. Implementation of SFAS No. 133
is not expected to have a material effect on AFG's financial
position or results of operations.
Earnings Per Share 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 is
calculated using the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share
include the effect of the assumed exercise of dilutive common
stock options. Per share amounts for prior periods were restated.
F-9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Comprehensive Income Effective January 1, 1998, AFG implemented
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 uses
the term "comprehensive income" to describe the total of net
earnings plus other comprehensive income. For AFG, other
comprehensive income represents the change in net unrealized gain
on marketable securities net of deferred taxes. Implementation of
this statement had no impact on net earnings or shareholders'
equity. Appropriate data for prior periods has been added to
conform to the current presentation.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and property
and equipment. "Financing activities" include obtaining resources
from owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating".
Short-term investments having original maturities of three months
or less when purchased are considered to be cash equivalents for
purposes of the financial statements.
Fair Value of Financial Instruments Methods and assumptions used
in estimating fair values are described in Note O 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.
B. Acquisitions and Sales of Subsidiaries and Investees
Commercial lines division In December 1998, AFG completed the
sale of substantially all of its Commercial lines division to Ohio
Casualty Corporation for $300 million plus warrants to purchase
3 million shares of Ohio Casualty common stock. AFG retained
$300 million in securities it would otherwise have transferred to
Ohio Casualty in connection with the reinsurance of business
assumed by Ohio Casualty. For accounting purposes, the insurance
liabilities ceded to Ohio Casualty and the sale of the other net
assets are required to be accounted for separately. AFG deferred
a gain of $103 million on the insurance ceded to Ohio Casualty and
recognized a pretax gain of $153 million on the sale of the other
net assets. The deferred gain is being recognized over the
estimated remaining settlement period (weighted average of 4.25 years)
of the claims ceded. AFG may receive up to an additional $40 million
in the year 2000 based upon the retention and growth of the insurance
businesses acquired by Ohio Casualty. The commercial lines sold
generated net written premiums of approximately $250 million in 1998
(11 months), $315 million in 1997 and $314 million in 1996.
<PAGE>
Funeral Services division In September 1998, AAG sold its Funeral
Services division for approximately $165 million in cash. The
division held assets of approximately $1 billion at the sale
date. AFG realized a third quarter pretax gain of $21.6 million,
before $2.7 million of minority interest, on this sale.
Chiquita During 1997 and 1998, Chiquita issued shares of its
common stock in acquisitions of operating businesses. AFG
recorded pretax gains of $11.4 million in the fourth quarter of
1997, $7.7 million in the first quarter of 1998 and $1.7 million
in the second quarter of 1998 representing the excess of AFG's
equity in Chiquita following the issuances of its common stock
over AFG's previously recorded carrying value.
F-10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Peritus experienced difficulties in 1998, wrote off substantial
amounts of its assets, and reported significant losses throughout
the year. As a result, AFG recognized a pretax realized loss of
$26.9 million and reduced its carrying value of Peritus shares to
a nominal value at December 31, 1998.
American Financial Enterprises, Inc. ("AFEI") In December 1997, AFG and
AFEI engaged in a merger transaction whereby the shares of AFEI not held
by AFG were acquired by AFG for approximately $23 million in cash and
approximately 2.1 million shares of its common stock.
Citicasters In 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.
Buckeye In 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.
C. Segments of Operations Following the sale of substantially all of
its Commercial lines division, AFG's property and casualty group
is engaged primarily in private passenger automobile and specialty
insurance businesses. The Personal group consists of the
nonstandard auto group along with the preferred/standard private
passenger auto and other personal insurance business, formerly
included in the Commercial and Personal lines. The Specialty
group now includes a highly diversified group of specialty
business units (formerly, Specialty lines) plus the commercial
business previously included in the Commercial and Personal lines.
AFG's annuity and life business markets primarily retirement
products as well as life and supplemental health insurance. AFG's
businesses operate throughout the United States. In addition, AFG
has owned significant portions of the voting equity securities of
certain companies (investee corporation - see Note E).
Effective January 1, 1998, AFG implemented SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires segment information to be reported based on how
management internally evaluates the operating performance of its
business units. Implementation of this standard had no impact on
AFG's financial position or results of operations.
F-11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables (in thousands) show AFG's assets, revenues and
operating profit (loss) by significant business segment. Operating
profit (loss) represents total revenues less operating expenses.
1998 1997 1996
Assets
Property and casualty insurance (a) $ 8,278,898 $ 7,517,856 $ 7,116,088
Annuities and life 7,174,544 7,693,463 7,009,127
Other 199,623 343,316 726,252
15,653,065 15,554,635 14,851,467
Investment in investees 192,138 200,714 199,651
$15,845,203 $15,755,349 $15,051,118
Revenues (b)
Property and casualty insurance:
Premiums earned:
Personal $ 1,289,689 $ 1,356,642 $ 1,447,751
Specialty 1,371,509 1,429,143 1,355,906
Other lines 37,540 38,596 40,855
2,698,738 2,824,381 2,844,512
Investment and other income 643,106 448,849 500,897
3,341,844 3,273,230 3,345,409
Annuities and life (c) 729,854 638,348 585,079
Other (8,466) 114,709 201,864
4,063,232 4,026,287 4,132,352
Equity in net losses of investees (13,198) (5,564) (16,955)
$ 4,050,034 $ 4,020,723 $ 4,115,397
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal $ 34,029 $ 21,235 ($ 55,989)
Specialty (67,131) (324) 155,405
Other lines (d) (256,360) (62,470) (180,125)
(289,462) (41,559) (80,709)
Investment and other income 514,736 318,613 392,250
225,274 277,054 311,541
Annuities and life 128,074 93,794 77,119
Other (e) (135,396) (45,674) (18,461)
217,952 325,174 370,199
Equity in net losses of investees (13,198) (5,564) (16,955)
$ 204,754 $ 319,610 $ 353,244
(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-12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investments Fixed maturities and other stocks at December 31,
consisted of the following (in millions):
<TABLE>
<CAPTION>
1998
Available for Sale Held to Maturity
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>
Fixed maturities:
United States Government
and government agencies
and authorities $ 507.5 $ 537.6 $ 30.2 ($ .1) $ - $ - $ - $ -
States, municipalities and
political subdivisions 137.0 144.8 7.8 - - - - -
Foreign government 67.3 71.0 3.8 (.1) - - - -
Public utilities 688.0 717.8 29.9 (.1) - - - -
Mortgage-backed securities 2,399.9 2,493.2 102.0 (8.7) - - - -
All other corporate 6,062.3 6,297.9 265.9 (30.3) - - - -
Redeemable preferred stocks 59.3 62.0 3.5 (.8) - - - -
$9,921.3 $10,324.3 $443.1 ($40.1) $ - $ - $ - $ -
Other stocks $ 207.3 $ 430.3 $230.7 ($ 7.7)
</TABLE>
<TABLE>
<CAPTION>
1997
Available for Sale Held to Maturity
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>
Fixed maturities:
United States Government
and government agencies
and authorities $ 600.8 $ 618.6 $ 18.1 ($ .3) $ - $ - $ - $ -
States, municipalities and
political subdivisions 86.7 89.3 2.6 - 72.0 73.6 1.8 (.2)
Foreign government 55.9 57.9 2.1 (.1) 8.3 8.9 .6 -
Public utilities 359.3 374.7 15.7 (.3) 459.7 466.7 8.3 (1.3)
Mortgage-backed securities 1,715.7 1,779.4 65.5 (1.8) 868.9 899.4 30.6 (.1)
All other corporate 4,336.9 4,536.9 200.0 - 1,919.2 1,970.4 52.7 (1.5)
Redeemable preferred stocks 70.4 76.0 5.9 (.3) - - - -
$7,225.7 $ 7,532.8 $309.9 ($ 2.8) $3,328.1 $ 3,419.0 $ 94.0 ($ 3.1)
Other stocks $ 153.3 $ 446.2 $293.7 ($ .8)
</TABLE>
<PAGE>
The table below sets forth the scheduled maturities of fixed
maturities based on market value as of December 31, 1998. Data
based on amortized cost is generally the same. Mortgage-backed
securities had an average life of approximately 4.6 years at
December 31, 1998.
Maturity
One year or less 6%
After one year through five years 25
After five years through ten years 30
After ten years 15
76
Mortgage-backed securities 24
100%
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.
F-13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Included in "Other stocks" at December 31, 1998 and 1997, are $243 million
and $313 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
1998
Realized (*) $ 25,841 ($ 19,566) ($ 2,196) $ 4,079
Change in Unrealized 4,982 (69,900) 22,721 (42,197)
1997
Realized 11,542 34,464 (16,102) 29,904
Change in Unrealized 222,188 107,600 (115,426) 214,362
1996
Realized (16,545) 13,075 8,199 4,729
Change in Unrealized (271,803) 70,000 70,631 (131,172)
(*) Includes $6.8 million in realized gains on fixed maturities
transferred to Ohio Casualty in connection with sale of the
Commercial lines division (see Note B).
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
1998
Held to Maturity (*) $ .8 $ 585.0 $ 45.3 $12.1 ($ .5)
Available for Sale 2,154.4 663.8 750.2 24.9 ( 17.5)
Total $2,155.2 $1,248.8 $ 795.5 $37.0 ($18.0)
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)
(*) Prior to reclassification to available for sale at December 31, 1998.
Securities classified as "held to maturity" having amortized cost of $41.8
million, $8.2 million and $9.5 million were sold for gains (losses) of
$603,000, ($170,000) and ($159,000) in 1998, 1997 and 1996, respectively,
due to significant deterioration in the issuers' creditworthiness.
F-14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Investee Corporation Investment in investee
corporation reflects AFG's ownership of 24 million shares (37%) of
Chiquita common stock. The market value of this investment was
$229 million and $391 million at December 31, 1998 and 1997,
respectively. Chiquita is a leading international marketer,
producer and distributor of quality fresh fruits and vegetables
and processed foods. Equity in net losses excludes AFG's share of
amounts included in extraordinary items; the amount for 1996 includes
$1.5 million in earnings from Citicasters which was sold in 1996.
Summarized financial information for Chiquita at December 31, is
shown below (in millions).
1998 1997 1996
Current Assets $ 840 $ 783
Noncurrent Assets 1,669 1,618
Current Liabilities 531 483
Noncurrent Liabilities 1,184 1,138
Shareholders' Equity 794 780
Net Sales $2,720 $2,434 $2,435
Operating Income 79 100 84
Loss Before Extraordinary Items (18) - (28)
Extraordinary Loss from Debt Refinancings - - (23)
Net Loss (18) - (51)
Net Loss Attributable to Common Shares (36) (17) (63)
Operating income for 1998 includes $74 million of fourth quarter
write-downs and costs resulting from widespread flooding in
Honduras and Guatemala caused by Hurricane Mitch.
F. Cost in Excess of Net Assets Acquired At December 31, 1998 and 1997,
accumulated amortization of the excess of cost over net assets of
purchased subsidiaries amounted to approximately $143 million and
$133 million, respectively. Amortization expense was $11.9 million
in 1998, $11.6 million in 1997 and $10.8 million in 1996.
F-15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1998 1997
Holding Companies:
AFG 7-1/8% Senior Debentures due December 2007 $100,000 $100,000
AFC notes payable under bank line 80,000 45,000
AFC 9-3/4% Debentures due April 2004, less discount
of $618 and $737 (imputed rate - 9.8%) 78,560 79,792
American Premier Underwriters, Inc. ("APU")
9-3/4% Subordinated Notes due August 1999,
including premium of $487 and $1,224
(imputed rate - 8.8%) 89,467 92,127
APU 10-5/8% Subordinated Notes due April 2000,
including premium of $883 and $1,559
(imputed rate - 8.8%) 41,518 43,889
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $1,471 and $1,584
(imputed rate - 9.6%) 17,473 17,586
Other 8,518 8,267
$415,536 $386,661
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $ -
AAG notes payable under bank line 27,000 107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 37,602 49,525
Other 12,294 13,479
$176,896 $194,084
At December 31, 1998, sinking fund and other scheduled principal payments
on debt for the subsequent five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
1999 $88,980 $ 1,986 $90,966
2000 40,635 8,685 49,320
2001 - 1,382 1,382
2002 85,608 1,268 86,876
2003 - 28,294 28,294
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>
In February 1998, AFC entered into an unsecured credit agreement
with a group of banks under which AFC can borrow up to
$300 million through December 2002. Borrowings bear interest at
floating rates based on prime or Eurodollar rates. At December
31, 1998 and 1997, the weighted average interest rate on amounts
borrowed under this bank credit line and a previous one was 5.68%
and 6.81%, respectively.
In January 1998, AAG replaced its existing bank lines with a
$200 million unsecured credit agreement. Loans under the credit
agreement mature from 2000 to 2003 and bear interest at floating
rates based on prime or Eurodollar rates. At December 31, 1998 and
1997, the weighted average interest rate on amounts borrowed under
AAG's bank credit line was 6.09% and 6.80%, respectively. In
F-16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 1998, AAG borrowed under the credit line and retired its
11-1/8% Notes. In June 1998, AAG issued $100 million principal
amount of 6-7/8% Senior Notes due 2008 and used the net proceeds
to reduce outstanding indebtedness under the credit line.
Significant retirements of long-term debt since January 1, 1997,
have been as follows (in millions):
Year Principal Cost
AFC Debentures 1997 $85.0 $96.7
1998 1.4 1.4
APU Notes 1997 11.3 12.5
1998 3.6 3.8
AAG Notes 1997 40.8 42.5
1998 24.1 24.8
Cash interest payments of $49 million, $50 million and $75 million
were made on long-term debt in 1998, 1997 and 1996, respectively.
H. Minority Interest Minority interest in AFG's balance sheet is
comprised of the following (in thousands):
1998 1997
Interest of noncontrolling shareholders
in subsidiaries' common stock $124,622 $115,843
Preferred securities issued by
subsidiary trusts 325,000 325,000
AFC preferred stock 72,154 72,154
$521,776 $512,997
Preferred Securities Wholly-owned subsidiary trusts of AFCH and AAG have
issued $325 million of preferred securities and, in turn, purchased
$325 million of newly-authorized AFCH 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 AFCH 9-1/8% TOPrS (2026) $100,000,000 On or after 10/22/2001
November 1996 AAG 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027 75,000,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
</TABLE>
AFCH and AAG effectively provide unconditional guarantees of their
respective trusts' obligations and AFG guarantees AFCH's obligation.
F-17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC Preferred Stock AFC's Preferred Stock is voting, cumulative,
and consists of the following:
Series J, no par value; $25.00 liquidating value per share;
annual dividends per share $2.00; redeemable at $25.75 per
share beginning December 2005 declining to $25.00 at December
2007; 2,886,161 shares (stated value $72.2 million) outstanding
at December 31, 1998 and 1997.
In December 1997, AFC retired all shares of its Series F and G
Preferred Stock in exchange for approximately $244 million in cash
and the above shares of Series J Preferred Stock. AFG recorded 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 1996, AFC redeemed 1.6 million shares of its Series F Preferred
Stock for $31.9 million and purchased 250,000 shares of Series F
from its retirement plan for $5.0 million. In 1996, AFC issued
1.6 million shares of its Series G Preferred Stock to its
retirement plan for $16.8 million.
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
1998 1997 1996
Interest of noncontrolling shareholders
in earnings of subsidiaries $21,845 $16,142 $19,851
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities 28,181 24,599 2,780
AFC preferred stock 5,772 13,715 25,190
$55,798 $54,456 $47,821
I. Shareholders' Equity At December 31, 1998, there were 60,928,322
shares of AFG Common Stock outstanding, including 1,367,472 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. In 1996, 212,698 shares of convertible
preferred stock were converted into 446,799 shares of AFG Common
Stock. Prior to conversion, the preferred stock had a carrying
value of $9.4 million and was included in Capital Surplus at
$469,000 (net of $8.9 million in related notes receivable).
F-18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock Options At December 31, 1998, there were 4.7 million shares
of AFG Common Stock reserved for issuance under AFG's Stock Option
Plan. Options are granted with an exercise price equal to the
market price of AFG Common Stock at the date of grant. Options
generally become exercisable at the rate of 20% per year
commencing one year after grant; those granted to nonemployee
directors of AFG are fully exercisable upon grant. All options
expire ten years after the date of grant. Data for AFG's Stock
Option Plan is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,687,635 $28.73 3,331,947 $26.53 3,939,986 $25.72
Granted 466,250 $41.13 770,500 $37.54 75,000 $32.47
Exercised (296,416) $27.96 (413,312) $27.32 (664,639) $22.33
Forfeited (49,100) $33.79 (1,500) $37.88 (18,400) $30.06
Outstanding at end of year 3,808,369 $30.25 3,687,635 $28.73 3,331,947 $26.53
Options exercisable at year-end 2,085,873 $27.06 1,774,280 $26.03 1,379,182 $24.60
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
Average Average Average
Range of Exercise Remaining Exercise
Exercise Prices Shares Price Life Shares Price
$17.24 - $20.00 99,405 $18.22 2.0 years 99,405 $18.22
$20.00 - $25.00 1,271,850 $23.95 5.0 952,577 $23.94
$25.00 - $30.00 291,864 $27.16 5.0 257,791 $27.26
$30.00 - $35.00 1,013,250 $30.34 7.1 597,900 $30.22
$35.00 - $45.19 1,132,000 $39.09 8.6 178,200 $37.81
3,808,369 $30.25 6.6 2,085,873 $27.06
No compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the
fair values at grant dates consistent with the method prescribed by
Statement of Financial Accounting Standards No. 123, AFG's net income and
earnings per share would not have been materially different from amounts
reported. For SFAS No. 123 purposes, calculations were determined using
the Black-Scholes option pricing model and the following assumptions:
dividend yield of 2%; expected volatility of 21% for 1998 and 1997
and 20% for 1996; risk-free interest rate of 4.8% for 1998, 5.8% for 1997
and 6.2% for 1996; and expected life of 7.3 years for 1998, 6.7 years
for 1997 and 7.5 years for 1996.
F-19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unrealized Gain on Marketable Securities The change in net
unrealized gain on marketable securities included the following
(in millions):
<TABLE>
<CAPTION>
Tax Minority
Pretax Effects Interest Net
1998
<S> <C> <C> <C> <C>
Unrealized holding gains (losses) on
securities arising during the period ($ 50.5) $ 19.0 $ .6 ($ 30.9)
Unrealized gain on securities transferred
from held to maturity 87.0 (30.4) (7.0) 49.6
Less reclassification adjustment for
realized gains included in net income
and unrealized gains of subsidiaries sold (20.4) 7.1 3.2 (10.1)
Change in net unrealized gain on
marketable securities $ 16.1 ($ 4.3) ($ 3.2) $ 8.6
1997
Unrealized holding gains (losses) on
securities arising during the period $320.2 ($112.2) ($15.1) $192.9
Less reclassification adjustment for
realized gains included in net income (51.5) 18.0 1.5 (32.0)
Change in net unrealized gain on
marketable securities $268.7 ($ 94.2) ($13.6) $160.9
1996
Unrealized holding gains (losses) on
securities arising during the period ($ 94.3) $ 21.5 $ 6.3 ($ 66.5)
Less reclassification adjustment for
realized gains included in net income 4.7 (1.7) - 3.0
Change in net unrealized gain on
marketable securities ($ 89.6) $ 19.8 $ 6.3 ($ 63.5)
</TABLE>
<PAGE>
J. 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):
1998 1997 1996
Earnings before income taxes
and extraordinary items $204,754 $319,610 $353,244
Extraordinary items before income taxes (1,265) (11,287) (35,670)
Adjusted earnings before income taxes $203,489 $308,323 $317,574
Income taxes at statutory rate $ 71,221 $107,912 $111,151
Effect of:
Minority interest 9,438 10,058 15,112
Losses utilized (6,572) (3,164) (43,302)
Amortization of intangibles 4,482 3,362 3,065
Dividends received deduction (2,189) (2,002) (7,450)
Other 2,709 (93) 5,698
Total provision 79,089 116,073 84,274
Amounts applicable to extraordinary items 495 4,054 7,003
Provision for income taxes as shown
on the Statement of Earnings $ 79,584 $120,127 $ 91,277
Adjusted earnings before income taxes consisted of the following
(in thousands):
1998 1997 1996
Subject to tax in:
United States $196,020 $317,615 $331,842
Foreign jurisdictions 7,469 (9,292) (14,268)
$203,489 $308,323 $317,574
F-20
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
1998 1997 1996
Current taxes (credits):
Federal $63,368 $ 35,495 $22,450
Foreign 94 - (1,735)
State 652 (2,544) 6,369
Deferred taxes:
Federal 14,553 83,581 56,869
Foreign 422 (459) 321
$79,089 $116,073 $84,274
For income tax purposes, certain members of the AFC consolidated
tax group had the following carryforwards available at December 31, 1998
(in millions):
Expiring Amount
{ 1999 - 2003 $70
Operating Loss { 2004 - 2008 56
Capital Loss 1999 68
Other - Tax Credits 15
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):
1998 1997
Deferred tax assets:
Net operating loss carryforwards $ 44.3 $ 66.6
Capital loss carryforwards 23.7 32.0
Insurance claims and reserves 291.2 287.5
Other, net 110.0 148.8
469.2 534.9
Valuation allowance for deferred
tax assets (88.6) (97.9)
380.6 437.0
Deferred tax liabilities:
Deferred acquisition costs (121.3) (127.4)
Investment securities (267.9) (268.2)
(389.2) (395.6)
Net deferred tax asset (liability) ($ 8.6) $ 41.4
<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
$9.3 million in 1998 due primarily to the utilization of net
operating loss carryforwards previously reserved.
Cash payments for income taxes, net of refunds, were $45.9 million,
$51.6 million and $40.2 million for 1998, 1997 and 1996, respectively.
F-21
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
1998 1997 1996
Holding Companies:
AFC (parent) ($ 77) ($5,395) ($ 9,672)
APU (parent) (44) (588) (3,254)
Subsidiaries:
AAG (649) (1,250) (7,159)
Other - - 57
Investee:
Chiquita - - (8,639)
($770) ($7,233) ($28,667)
L. Commitments and Contingencies Loss accruals (included in other
liabilities) 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. Under
purchase accounting in connection with the Mergers, any such
excess liability will be charged to earnings in AFG's financial
statements.
American Premier's liability for environmental claims of
$32.4 million at December 31, 1998, 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 related
operations. 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.
American Premier's liability for occupational injury and disease
claims of $48.1 million at December 31, 1998, 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 workplace. Anticipated recoveries of
$29.5 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.
<PAGE>
AFG has accrued approximately $10.6 million at December 31, 1998,
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-22
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. 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, 1998 (in millions,
except per share amounts).
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1998
<S> <C> <C> <C> <C> <C>
Revenues $1,016.8 $1,037.8 $1,031.8 $ 963.6 $4,050.0
Earnings (loss) before extraordinary
items 66.9 40.6 56.4 (38.7) 125.2
Extraordinary items (.7) (.1) - - (.8)
Net earnings (loss) 66.2 40.5 56.4 (38.7) 124.4
Basic earnings per common share:
Before extraordinary items $1.09 $.66 $.92 ($.63) $2.04
Loss on prepayment of debt (.01) - - - (.01)
Net earnings (loss) available to
Common Shares 1.08 .66 .92 (.63) 2.03
Diluted earnings per common share:
Before extraordinary items $1.08 $.65 $.91 ($.63) $2.01
Loss on prepayment of debt (.01) - - - (.01)
Net earnings (loss) available to
Common Shares 1.07 .65 .91 (.63) 2.00
Average number of Common Shares:
Basic 61.1 61.4 61.4 61.1 61.2
Diluted 62.1 62.6 62.2 61.8 62.2
<PAGE>
1997
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
</TABLE>
Quarterly earnings per share do not add to year-to-date amounts
due to changes in shares outstanding.
F-23
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In the second quarter of 1998, AFG recorded approximately $41 million
of losses due to severe storms in the midwestern part of the country.
In the fourth quarter of 1998, AFG increased A&E reserves by recording
a noncash, pretax charge of $214 million. 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.
AFG has realized substantial gains on sales of subsidiaries and
investees in recent years. See Note B for a more detailed
description of these and other transactions. Sales of
subsidiaries also includes pretax charges of $10.5 million and
$5.0 million in the third and fourth quarters of 1998,
respectively, and $17.0 million in the fourth quarter of 1997
relating to operations expected to be disposed of. Realized gains
on sales of securities, affiliates and other investments amounted
to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1998 $22.0 $8.9 $25.4 $123.4 $179.7
1997 2.5 4.2 29.7 54.6 91.0
N. Insurance Securities owned by insurance subsidiaries having a
carrying value of approximately $900 million at December 31, 1998,
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 3.5% to 8%. As a result,
the total liability for losses and loss adjustment expenses at
December 31, 1998, has been reduced by $41 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):
1998 1997 1996
Balance at beginning of period $3,489 $3,404 $3,393
Provision for losses and LAE
occurring in the current year 2,059 2,045 2,179
Net increase (decrease) in provision for
claims of prior years 156 31 (48)
2,215 2,076 2,131
Payments for losses and LAE of:
Current year (885) (840) (999)
Prior years (1,110) (1,151) (1,121)
(1,995) (1,991) (2,120)
Reserves transferred to Ohio Casualty (481) - -
Reclassification of allowance for
uncollectible reinsurance 77 - -
Balance at end of period $3,305 $3,489 $3,404
Add back reinsurance recoverables, net
of allowance in 1998 1,468 736 720
Gross unpaid losses and LAE
included in the Balance Sheet $4,773 $4,225 $4,124
F-24
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Reinsurance Recoverable Balance sheet amounts for reinsurance
recoverable and prepaid reinsurance premiums at December 31, 1998,
include amounts recoverable related to (i) the transfer of the
Commercial lines business to Ohio Casualty under a reinsurance
contract ($644 million), (ii) additional A&E reserves recorded
($121 million) and (iii) the ceding of 30% of California workers'
compensation business ($38 million).
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by AFG's
insurance companies.
1998 1997 1996
Insurance group investment income:
Fixed maturities $849.6 $830.6 $817.8
Equity securities 9.1 6.4 8.2
Other 12.1 10.6 13.5
870.8 847.6 839.5
Insurance group investment expenses (*) (42.6) (37.3) (38.5)
$828.2 $810.3 $801.0
(*) 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
1998 1997 1996 1998 1997
Property and casualty companies $261 $159 $276 $1,840 $1,916
Life insurance companies 41 74 67 365 324
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.
1998 1997 1996
Reinsurance ceded $788 $614 $518
Reinsurance assumed - including
involuntary pools and associations 37 89 58
Reinsurance recoveries 651 296 306
<PAGE>
O. Additional Information Total rental expense for various leases of office
space, data processing equipment and railroad rolling stock was
$41 million, $36 million and $34 million for 1998, 1997 and 1996,
respectively. Sublease rental income related to these leases totaled
$5.4 million in 1998, $5.4 million in 1997 and $6.1 million in 1996.
F-25
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1998,
were as follows: 1999 - $40 million; 2000 - $35 million;
2001 - $31 million; 2002 - $25 million; 2003 - $19 million; and
$19 million thereafter. At December 31, 1998, minimum sublease rentals
to be received through the expiration of the leases aggregated $9 million.
Other operating and general expenses included charges for possible losses
on agents' balances, reinsurance recoverables, other receivables and other
assets in the following amounts: 1998 - $14.0 million; 1997 - $7.6 million;
and 1996 - $0. The aggregate allowance for such losses amounted to
approximately $149 million and $131 million at December 31, 1998 and 1997,
respectively.
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):
1998 1997 1996*
Cash and Investments $11,748 $12,290
Other Assets 4,116 3,482
Insurance Claims and Reserves 11,797 11,792
Debt 492 481
Minority Interest 600 590
Shareholders' Equity 1,754 1,607
Revenues $ 4,056 $ 4,021 $4,115
Income before Extraordinary Items 133 199 262
Extraordinary Item - Loss on
Prepayment of Debt (1) (7) (29)
Net Income 132 192 233
(*) AFC Holding is the predecessor of AFG; data for 1996
represents that of AFG.
<PAGE>
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.
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $10,324 $10,324 $10,861 $10,952
Other stocks 430 430 446 446
Investment in investee
corporation 192 229 201 391
Liabilities:
Annuity benefits
accumulated $ 5,450 $ 5,307 $ 5,528 $ 5,319
Long-term debt:
Holding companies 415 428 387 401
Subsidiaries 177 176 194 195
Minority Interest:
Trust preferred securities $ 325 $ 336 $ 325 $ 339
AFC preferred stock 72 80 72 74
Shareholders' Equity $ 1,716 $ 2,673 $ 1,663 $ 2,461
F-26
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. Fair value of
shareholders' equity is based on the quoted market price of AFG's
Common Stock.
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, 1998, AFG
and its subsidiaries had commitments to fund credit facilities and
contribute limited partnership capital totaling up to $80 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 1999 from its insurance
subsidiaries without seeking regulatory clearance is approximately
$281 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 $22 million in 1998,
$21 million in 1997 and $17 million in 1996 for contributions to
its retirement and employee savings plans.
Transactions With Affiliates AFG owns a $3.7 million minority interest
in a residential homebuilding company. A brother of AFG's Chairman also
owns a minority interest. AAG has extended a line of credit to this
company under which the homebuilder may borrow up to $8 million at 13%
with interest deferred and added to principal. At December 31, 1998,
$6.1 million was due under the credit line.
In a 1997 transaction, AAG purchased for $4.9 million a minority
ownership position in a company engaged in the production of
ethanol. AFG's Chairman purchased the remaining ownership.
During 1998, this company borrowed $4.0 million from AAG under a
subordinated note bearing interest at 14% and paid a $6.3 million
capital distribution, including $3.1 million to AAG. AAG's equity
investment in this company at December 31, 1998 was $1.8 million.
In addition, AAG and Great American have each extended a
$5 million line of credit to this company; no amounts have been
borrowed under the credit lines.
<PAGE>
P. Subsequent Event (Unaudited) In January 1999, AFG agreed to
acquire Worldwide Insurance Company (formerly Providian Auto and
Home Insurance Company) from AEGON Insurance Group for
approximately $160 million. Worldwide is a provider of direct
response private passenger automobile insurance and generated net
written premiums in 1998 of approximately $121 million.
Completion of the transaction is expected to occur in the first
half of 1999.
F-27
<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 M
to the Consolidated Financial Statements.
B. Schedules filed herewith for 1998, 1997 and 1996:
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: None
S-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
December 31,
1998 1997
Assets:
Cash and short-term investments $ 6,777 $ 25,890
Receivables from affiliates 270,500 352,766
Investment in subsidiaries 1,612,674 1,473,261
Other assets 44,502 41,690
$1,934,453 $1,893,607
Liabilities and Shareholders' Equity:
Accounts payable, accrued expenses and other
liabilities $ 1,659 $ 8,131
Long-term debt 100,000 100,000
Payables to affiliates 116,617 122,767
Shareholders' equity 1,716,177 1,662,709
$1,934,453 $1,893,607
Condensed Statement of Earnings
Year Ended December 31,
1998 1997 1996
Income:
Dividends from subsidiaries $ 282 $ 281 $693,758
Equity in undistributed earnings of
subsidiaries 209,453 301,385 (345,484)
Investment and other income 22,367 35,470 11,723
232,102 337,136 359,997
Costs and Expenses:
Interest charges on borrowed money 18,748 9,702 1,805
Other operating and general expenses 8,600 7,824 4,948
27,348 17,526 6,753
Earnings before income taxes and
extraordinary items 204,754 319,610 353,244
Provision for income taxes 79,584 120,127 91,277
Earnings before extraordinary items 125,170 199,483 261,967
Extraordinary items - loss on
prepayment of debt (770) (7,233) (28,667)
Net Earnings $124,400 $192,250 $233,300
(*) The Parent Only Financial Statements include the accounts of AFG
and its predecessor, AFC Holding Company, a wholly-owned subsidiary.
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,
1998 1997 1996
Operating Activities:
Net earnings $124,400 $192,250 $233,300
Adjustments:
Equity in earnings of subsidiaries (127,547) (180,581) (230,019)
Change in balances with affiliates 76,116 54,620 (91,453)
Increase (decrease) in payables (2,612) 881 (958)
Dividends from subsidiaries 282 281 -
Other (2,882) 2,275 1,311
67,757 69,726 (87,819)
Investing Activities:
Purchases of subsidiaries and other
investments - (24,872) (69)
Financing Activities:
Additional long-term borrowings - 98,987 -
Issuance of subordinated notes to
subsidiary trust - - 96,464
Issuances of common stock 13,238 13,845 26,296
Repurchases of common stock (20,651) (97,320) (8,563)
Cash dividends paid (79,457) (77,941) (79,051)
(86,870) (62,429) 35,146
Net Decrease in Cash and Short-term
Investments (19,113) (17,575) (52,742)
Cash and short-term investments at
beginning of period 25,890 43,465 96,207
Cash and short-term investments at
end of period $ 6,777 $ 25,890 $ 43,465
(*) The Parent Only Financial Statements include the accounts of AFG
and its predecessor, AFC Holding Company, a wholly-owned
subsidiary.
S-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1998
(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 ADJUSTMENT DEDUCTED IN COLUMN C UNEARNED
REGISTRANT COSTS EXPENSES PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1998 $217 $4,773 $41 $1,233
1997 $260 $4,225 $60 $1,329
1996
<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>
1998 $2,699 $324 $2,059 $156 $589 $1,995 $2,609(d)
1997 $2,824 $316 $2,045 $ 31 $620 $1,991 $2,858
1996 $2,845 $335 $2,179 ($ 48) $628 $2,120 $2,788
</TABLE>
(a) Grossed up for reinsurance recoverables of $1,468 and $736 at
December 31, 1998 and 1997, respectively.
(b) Discounted at rates ranging from 3.5% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $314 and $189 at
December 31, 1998 and 1997, respectively.
(d) Before a reduction of $138 million for unearned premium transfer
related to the sale of the Commercial lines division.
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 29, 1999 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 29, 1999
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director* March 29, 1999
Theodore H. Emmerich
s/JAMES E. EVANS Director March 29, 1999
James E. Evans
s/S. CRAIG LINDNER Director March 29, 1999
S. Craig Lindner
s/WILLIAM R. MARTIN Director* March 29, 1999
William R. Martin
s/FRED J. RUNK Senior Vice President and March 29, 1999
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, filed as Exhibit 3(a)
to AFG's Form 10-K for 1997. (*)
3(b) Code of Regulations, filed as
Exhibit 3(b) to AFG's Form 10-K
for 1997. (*)
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, as amended. _____
10(b) Form of stock option agreements. _____
10(c) 1998 Bonus Plan. _____
10(d) Nonqualified Auxiliary RASP, as amended. _____
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. (*)
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>
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,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Pretax income $203,489 $308,323 $317,574 $247,455 $ 26,376
Minority interest in subsidiaries
having fixed charges (*) 55,646 54,163 46,689 33,190 8,565
Less undistributed equity in (earnings)
losses of investees 17,997 10,363 31,353 (1,559) 49,010
Fixed charges:
Interest expense 58,925 53,578 78,048 124,633 114,803
Debt discount (premium) and expense (504) (701) (1,174) (1,023) 1,240
One-third of rentals 11,883 10,152 9,279 9,471 5,119
EARNINGS $347,436 $435,878 $481,769 $412,167 $205,113
Fixed charges:
Interest expense $ 58,925 $ 53,578 $ 78,048 $124,633 $114,803
Debt discount (premium) and expense (504) (701) (1,174) (1,023) 1,240
One-third of rentals 11,883 10,152 9,279 9,471 5,119
Pretax preferred dividend requirements
of subsidiaries 37,628 46,578 27,970 25,376 -
FIXED CHARGES $107,932 $109,607 $114,123 $158,457 $121,162
Ratio of Earnings to Fixed Charges 3.22 3.98 4.22 2.60 1.69
Earnings in Excess of Fixed Charges $239,504 $326,271 $367,646 $253,710 $ 83,951
</TABLE>
(*) Amounts include subsidiary preferred dividends and accrued
distributions on trust preferred securities.
E-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFG at December 31, 1998.
All corporations are subsidiaries of AFG and, if indented, subsidiaries
of the company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
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 Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 82
AAG Holding Company, Inc. Ohio 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
Great American Life Insurance Company Ohio 100
Loyal American Life Insurance Company Ohio 100
Prairie National Life Insurance Company South Dakota 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
National Interstate Corporation Ohio 52
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
E-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following
Registration Statements and related prospectuses of American Financial
Group, Inc. of our report dated March 19, 1999, 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, 1998.
Registration
Form Number Description
S-8 33-58825 Stock Option Plan
S-8 33-58827 Employee Stock Purchase Plan
S-3 33-62459 Dividend Reinvestment Plan
S-8 333-10853 Nonemployee Directors' Compensation Plan
S-8 333-14935 Retirement and Savings Plan
S-3 333-21995 $500 million of Debt Securities,
Common Stock and Trust Securities
ERNST & YOUNG LLP
Cincinnati, Ohio
March 24, 1999
E-4
AMERICAN FINANCIAL GROUP, INC.
STOCK OPTION PLAN
_______________
As amended and restated
effective May 28, 1998
<PAGE>
AMERICAN FINANCIAL GROUP, INC. STOCK OPTION PLAN
1. PURPOSES
The American Financial Group, Inc. Stock Option Plan (the
"Plan") is divided into two programs: a key employee stock option
program (the "Key Employee Program") and an outside director
stock option program (the "Outside Director Program").
The purposes of the Key Employee Program are to aid American
Financial Group, Inc. (the "Company") and its Subsidiaries in
attracting and retaining employees of outstanding competence and
to enable selected key employees of the Company and any Subsidiary
to acquire or increase ownership interests in the Company on
a basis that will encourage them to perform at increasing levels
of effectiveness and use their best efforts to promote the growth
and profitability of the Company or any Subsidiary. Consistent
with these objectives, the Plan authorizes the granting to
selected key employees of options to acquire shares of Company
stock ("Options") pursuant to the terms and conditions hereinafter
set forth. As used herein, the term "Subsidiary" means any
domestic or foreign corporation, at least 50% of the outstanding
voting stock or voting power of which is beneficially owned,
directly or indirectly, by the Company.
The purposes of the Outside Director Program are to provide
to each of the Outside Directors added incentive to continue in
the service of the Company and a more direct interest in the
future success of the operations of the Company. Consistent with
these objectives, the Plan authorizes the automatic granting to
Outside Directors of Options pursuant to the terms and conditions
hereinafter set forth. As used herein, the term "Outside
Director" means a member of the Board of Directors of the Company
who is not an employee of the Company or a Subsidiary.
2. EFFECTIVE DATE
The Plan became effective on September 9, 1980 (the "Effective
Date"). The Plan was assumed by the Company from its
Subsidiary, AFC Holding Company, which assumed the Plan from its
Subsidiary, American Premier Underwriters, Inc. and amended and
restated the Plan effective December 17, 1997.
3. ADMINISTRATION
(a) The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Board of Directors"),
consisting of at least two directors designated by the Board of
Directors (the "Committee"), each of whom shall be a
"disinterested person" as defined in Rule 16b-3(c)(2) under the
Securities Exchange Act of 1934, as from time to time amended.
All Committee members shall serve, and may be removed, at the
pleasure of the Board of Directors.
<PAGE>
(b) For purposes of administration of the Plan, a majority
of the members of the Committee (but not less than two) eligible
to serve as such shall constitute a quorum, and any action taken
by a majority of such members of the Committee present at any
meeting at which a quorum is present, or acts approved in writing
by a majority of such members of the Committee, shall be the acts
of the Committee.
<PAGE>
(c) Subject to the express provisions of the Key Employee
Program, the Committee shall have full and final authority to
decide when Options will be granted under the Key Employee
Program, to select the key employees to whom the Options will be
granted, and to determine the number of Shares (as defined in
Paragraph 4 hereof) to be covered by each Option, the price at
which such Shares may be purchased and other terms and conditions
of such purchase. In making these determinations, the Committee
may take into account the key employee's present and potential
contributions to the Company's or a Subsidiary's success and any
other factors which the Committee may deem relevant.
(d) The Committee shall have no authority or discretion or
power to select the participants who will receive Options under
the Outside Director Program, to set the number of Shares to be
covered by each Option under the Outside Director Program, or to
set the Option price or the period within which the Options granted
under the Outside Director Program may be exercised or to alter any
other terms or conditions specified in the Outside Director Program.
(e) Subject to the express provisions of the Plan, and, in
particular, the limitations set forth in Paragraph 3(d) hereof,
the Committee shall have full authority to interpret the Plan and
any stock option agreements evidencing Options granted hereunder,
to issue rules for administering the Plan, to change, alter,
amend or rescind such rules, and to make all other determinations
necessary or appropriate for the administration of the Plan. All
determinations, interpretations and constructions made by the
Committee pursuant to this Paragraph 3 shall be final and conclusive.
No member of the Board of Directors or the Committee shall
be liable for any action, determination or omission taken or made
in good faith with respect to the Plan or any Option granted hereunder.
4. OPTION SHARES
(a) The stock subject to the Options granted under the Plan
shall be shares of Common Stock, without par value, of the
Company ("Shares") and except as otherwise required by
Subparagraph (b) of this Paragraph 4, the aggregate number of
Shares with respect to which Options may be granted under the
Plan shall not exceed 13,237,163 Shares, consisting of 9,237,613
Shares with respect to which Options had been exercised or were
outstanding as of April 3, 1995 plus 4,000,000 Shares with
respect to which Options may be granted after April 3, 1995,
provided, however, that Options to acquire no more than 250,000
Shares may be granted pursuant to the Outside Director Program.
Options to acquire no more than 500,000 Shares may be granted to
any participant in the Plan in any twelve-month period, except as
otherwise required by Subparagraph (b) of this Paragraph 4. If
an Option expires, terminates, or is otherwise surrendered, in
whole or in part, the Shares allocable to the unexercised portion
of such Option shall again become available for grants of Options
under the Plan. As determined from time to time by the Board of
Directors, the Shares available under the Plan for grants of
Options may consist either in whole or in part of authorized but
unissued Shares or Shares which have been reacquired by the
Company or a Subsidiary following original issuance.
<PAGE>
(b) The aggregate number of Shares purchasable under Options
pursuant to the provisions of the Plan and the number of Shares
and the Option price for Shares covered by each outstanding
Option shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from any stock
dividend, stock split or similar event, any other capital adjust
ment (including a reclassification of Shares or recapitalization
or reorganization of the Company), or the distribution to holders
of Shares of rights, warrants, assets or evidences of indebtedness
(other than regular cash dividends) in such manner as the
Committee in its sole judgment determines to be equitable.
2
<PAGE>
5. KEY EMPLOYEE PROGRAM
The provisions of this Paragraph 5 are applicable only to
Options granted pursuant to the Key Employee Program and Options
to key employees shall be granted only in accordance with the
provisions of this Paragraph 5.
(a) Effective Date. The Key Employee Program became
effective on September 9, 1980.
(b) Eligibility. Grants of Options under the Key Employee
Program shall be confined to key employees of the Company or a
Subsidiary (including officers and directors who are also employees
of the Company or a Subsidiary) who can make a meaningful
contribution to the Company's or Subsidiary's success; provided,
however, that no Option under the Key Employee Program shall be
granted to any member of the Committee.
(c) Incentive and Non-Incentive Options.
(i) Subject to the provisions of Paragraphs 5(c)(ii)
and 5(e), Options granted under the Key Employee Program
shall be designated either (A) "Incentive Options" (which
term, as used herein, shall mean stock options intended to
be "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the
"Code")) or (B) "Non-Incentive Options" (which term, as used
herein, shall mean stock options not intended to be "incentive
stock options" within the meaning of said Section 422).
In the case of Options granted prior to January 1, 1987, the
aggregate fair market value of the Shares (determined as of
the date the Option is granted) for which an Optionee may,
in any calendar year, be granted "incentive stock options"
under this Key Employee Program and all other option plans
of the Company and its subsidiaries (and any other
corporation that may become a "parent corporation" of the
Company within the meaning of Section 424(e) of the Code)
shall not exceed $100,000 plus any applicable unused limit
carryover to such calendar year. In the case of Options
granted after December 31, 1986, the preceding sentence
shall not apply. The limitations of the preceding sentences
shall not apply to the grant of Options designated Non-Incentive
Options under the Plan.
<PAGE>
For purposes of the Key Employee Program: (1) the "fair
market value" of a Share shall be the mean between the high
and the low prices of the Shares on such date on the New
York Stock Exchange Composite Tape (or the principal market
in which the Shares are traded, if the Shares are not listed
on that Exchange on such date) or, if the Shares were not
traded on such date, the mean between the high and the low
prices of the Shares on the next preceding trading day
during which the Shares were traded, (2) the "fair market
value" of any other stock shall be such amount as determined
by the Committee in accordance with the provisions of the
Code and the Income Tax Regulations thereunder then in
effect with respect to "incentive stock options" and (3) the
"unused limit carryover" from a calendar year shall be 1/2
of the amount (determined as of the time the option is
granted) by which $100,000 exceeds the aggregate fair market
value of the stock for which an Optionee (as defined in
Paragraph 5(d) below) was granted "incentive stock options"
(within the meaning of said Section 422) in such calendar
year under all plans of the Company and its Subsidiaries
(and any corporation that may become a "parent corporation"
of the Company within the meaning of Section 424(e) of the
Code), provided that there will be no unused limit carryover
from any calendar year prior to 1981.
3
<PAGE>
No Incentive Option may be granted to any individual
who, at the time of grant, owns stock possessing more than
10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary (or any corporation
that is a "parent corporation" of the Company (within the
meaning of Section 424(e) of the Code)).
To the extent that any provisions of the Key Employee
Program relate to Incentive Options, such provisions shall
be interpreted in a manner consistent with the requirements
of Section 422 of the Code, so that Incentive Options will
qualify as "incentive stock options" under said Section 422.
(ii) Each Option granted under the Key Employee Program
prior to January 1, 1982 shall (A), if the aggregate fair
market value of the Shares covered thereby shall be $100,000
or less, be designated an Incentive Option or (B), if the
aggregate fair market value of the Shares covered thereby
shall exceed $100,000, be split into (1) an Incentive Option
for Shares having an aggregate fair market value as close as
practicable to, but not exceeding, $100,000 and (2) a Non-Incentive
Option for the remaining Shares which are not covered by the
Incentive Option; provided that the Optionee shall, prior to
August 13, 1982, have entered into an amended stock option
agreement (or, if the Optionee's Option shall have been split
as aforesaid, separate amended stock option agreements) with
the Company providing for Incentive and Non-Incentive Options
as aforesaid. In the event that the Optionee shall not have
entered into an amended stock option agreement (or agreements)
prior to August 13, 1982, any Option granted to such Optionee
prior to January 1, 1982 shall be a Non-Incentive Option.
(d) Terms and Conditions of Options Granted to Key Employees.
Each Option granted pursuant to the Key Employee Program
shall be evidenced by a written stock option agreement between
the Company and the key employee to whom the Option is granted
(the "Optionee") in such form or forms as the Committee, from
time to time, shall prescribe, which agreements need not be
identical to each other but shall comply, inter alia, with and be
subject to the terms and conditions of this Paragraph 5(d). In
addition, the Committee may, in its absolute discretion, include
in any such stock option agreement other terms, conditions and
provisions that are not inconsistent with the express provisions
of the Key Employee Program. Separate forms of stock option
agreements shall be used to evidence Incentive Options and Non-
Incentive Options.
<PAGE>
(i) Option Price. The price at which each Share may be
purchased pursuant to an Option granted under the Key
Employee Program shall be not less than 100% of the higher of
the "fair market value" for each such Share (A) on the date
the Committee approves the granting of such Option (the
"Date of Grant") or (B) on a future date if such is fixed on
the Date of Grant by the Committee, and in no event shall
such price be less than the par value of such Shares. The
"fair market value" of the Shares on any date shall be the
mean between the high and the low prices of the Shares on
such date on the New York Stock Exchange Composite Tape (or
the principal market in which the Shares are traded, if the
Shares are not listed on that Exchange on such date), or if
the Shares were not traded on such date, the mean between
the high and the low prices of the Shares on the next
preceding trading day during which the Shares were traded.
Anything contained in this Subparagraph (i) of Paragraph
5(d) to the contrary notwithstanding, in the event that the
number of Shares subject to any Option is adjusted pursuant
to Paragraph 4(b)
4
<PAGE>
hereof, a corresponding adjustment shall be made in the
price at which the Shares subject to such Option may there
after be purchased.
(ii) Duration of Options. Each Option granted under
the Key Employee Program shall expire and all rights to
purchase Shares pursuant thereto shall cease on the date
(the "Expiration Date") which shall be the tenth anniversary
of the Date of Grant of the Option; provided, however, that
the Expiration Date of any Non-Incentive Option granted on
or after May 17, 1984 shall be the third day after the tenth
anniversary of the Date of Grant of such Non-Incentive
Option; provided, further, that the Committee may specify
for any Option on the Date of Grant of the Option any
shorter period than the foregoing.
(iii) Vesting of Options. Each Option granted hereunder
may only be exercised to the extent that the Optionee is
vested in such Option. An Optionee shall vest separately in
each Option granted hereunder in accordance with a schedule
determined by the Committee in its sole discretion, which
will be appended to the stock option agreement. In the
absence of any special circumstances, the Committee will
cause the Options to vest in accordance with the following
schedule:
Number of years the Optionee
has remained in the employ Extent to which
of the Company or a Subsidiary the Option is
following the grant of the Option vested
Under one 0%
At least one but less than two 20%
At least two but less than three 40%
At least three but less than four 60%
At least four but less than five 80%
Five or more 100%
<PAGE>
In the event that an Incentive Option and a Non-
Incentive Option have been granted simultaneously to an
Optionee, they shall be considered a single Option for
(but only for) purposes of the foregoing schedule and
the portion thereof attributable to the Incentive
Option shall vest in accordance with such schedule
before any of the portion attributable to the Non-
Incentive Option shall vest. Anything contained in
this Subparagraph (iii) of Paragraph 5(d) to the
contrary notwithstanding, an Optionee shall become
fully (100%) vested in each of his or her Options upon
his or her termination of employment with the Company
or a Subsidiary for reasons of death or Disability,
upon his or her termination of employment by the
Company or a Subsidiary for a reason other than
discharge for cause within one year of the merger of
the Company into, consolidation of the Company with, or
sale or transfer of all or substantially all the
Company's assets to, another corporation or the
acquisition of effective voting control of the Company
by any individual or company or by any individuals or
companies acting in concert (a good faith determination
by the Board of Directors that such control has been
acquired shall be final and conclusive); if in the sole
discretion of the Committee, the Committee determines
that acceleration of the Option vesting schedule would
be desirable for the Company; or if such Options vest
pursuant to Paragraph 7 of the Plan.
5
<PAGE>
(iv) Exercise of Options. A person entitled to
exercise an Option may exercise it in whole at any time, or
in part from time to time, by delivering to the Secretary of
the Company written notice specifying the number of Shares
with respect to which the Option is being exercised,
together with payment in full of the purchase price of such
Shares plus any applicable federal, state or local taxes for
which the Company (or a Subsidiary) has a withholding
obligation in connection with such exercise. Such payment shall
be made in whole or in part (A) in cash or by certified
check or bank draft to the order of the Company, or (B) in
the case of either an Incentive Option granted after
March 23, 1983 which so provides at the time of grant or any
Non-Incentive Option, by personal check or money market check to
the order of the Company or the exchange of Common Stock of
the Company acquired by the person entitled to exercise the
Option more than 6 months prior to the date of exercise and
having a "fair market value" on the date of exercise at
least equal to the price for which the Shares may be
purchased pursuant to the Option plus any applicable federal,
state or local taxes for which the Company (or a Subsidiary)
has a withholding obligation as noted above (including any
such taxes with respect to income recognized by the Optionee
upon the disposition of the Common Stock of the Company used
to effect such exchange). Notwithstanding the foregoing,
the Committee may, in its sole discretion, authorize such
payment, in whole or in part, in any other form. Each
Incentive Option granted under the Plan before January 1,
1987 shall by its terms provide that it may not be exercised
while there is outstanding any "incentive stock option"
(within the meaning of Section 422 of the Code) which was
granted to the Optionee at any earlier time to purchase
stock in the Company or in a corporation which, at the time
of the granting of such Incentive Option, is a Subsidiary
(or a corporation that is a "parent corporation" of the
Company within the meaning of Section 424(e) of the Code) or
in a predecessor corporation of any such corporation. For
purposes of the preceding sentence, any "incentive stock
option" (within the meaning of Section 422 of the Code)
which has not been exercised in full (including an
"incentive stock option" which has been "modified," within
the meaning of Section 424(h)(3) of the Code, prior to being
exercised in full) shall be considered outstanding until the
expiration of the period during which under its initial
terms it could have been exercised.
(v) Termination of Employment. Unless otherwise
determined by the Committee, the following rules shall apply
in the event of an Optionee's termination of employment with
the Company or a Subsidiary:
(A) Except as provided in Subparagraph (v)(D)
hereof, in the event of an Optionee's termination of
employment with the Company or a Subsidiary either (1)
for cause or (2) voluntarily on the part of the
Optionee and without the written consent of the
Company, his or her Option shall terminate on the 30th
day after the date of such termination.
<PAGE>
(B) In the event of an Optionee's termination of
employment with the Company or a Subsidiary under
circumstances other than those specified in
Subparagraph (v)(A) hereof and for reasons other than
death, Disability or Retirement (as defined in
Subparagraph (v)(D) hereof), such Option shall
terminate on the date which is 90 days from the date of
such termination of employment or on its Expiration
Date, whichever shall first occur, provided, however,
that if (x) the Optionee is a former officer of the
Company subject to the provisions of Section 16(a) of
the Securities Exchange Act of
6
<PAGE>
1934 and (y) such Option is an Incentive Option granted
on or after March 28, 1985 or a Non-Incentive Option,
such Option shall terminate on (1) the date which is
the later of (a) 90 days from the date of such
termination of employment or (b) six months and ten
days after such officer's last purchase or sale of
Shares prior to his or her ceasing to be such an
officer or (2) its Expiration Date, which ever shall
first occur, and provided further that the Committee
may, in its sole discretion if determined by the
Committee that it would be desirable for the Company,
fix a date for termination of such Option which is not
later than the third anniversary of such termination of
employment or on its Expiration Date, whichever shall
first occur.
(C) In the event of the death of an Optionee and
either while he or she is employed by the Company or a
Subsidiary or, if Subparagraph (v)(B) or (v)(D) hereof
is applicable, during a period of time following his or
her termination of employment, such Option shall terminate
on the first anniversary of the Optionee's death
or on its Expiration Date, whichever shall first occur.
(D) In the event of the Optionee's termination of
employment with the Company or a Subsidiary for reasons
of the inability, due to mental or physical infirmity,
of the Optionee to discharge the regular
responsibilities and duties of his or her employment
with the Company or a Subsidiary, as the case may be
("Disability"), or at or after age 55, other than a
discharge for cause ("Retirement"), such Option shall
terminate (i) on the date which is one year after the
date of such termination of employment or on its
Expiration Date, whichever shall first occur, in the
case of an optionee who has been employed by the
Company or any of its Subsidiaries for less than ten
full years, or (ii) on the date which is two years
after the date of termination of employment or on its
Expiration Date, whichever shall first occur, in the
case of an Optionee who has been employed by the
Company or any of its Subsidiaries for twenty full
years or more.
(E) An Optionee's transfer of employment between
the Company and a Subsidiary or between Subsidiaries
shall not constitute a termination of employment and
the Committee shall determine in each case whether an
authorized leave of absence for military service or
otherwise shall constitute a termination of employment.
(F) For purposes of this Subparagraph (v) of Paragraph
5(d), employment with any corporation that is a "parent
corporation" of the Company (within the meaning of Section
424(e) of the Code) shall be treated in the same manner as
employment with a Subsidiary and, with respect to any
Incentive Option, the term "employment" shall be defined
in accordance with Section 1.421-7(h) of the Income Tax
Regulations (or any successor regulations).
<PAGE>
(vi) Surrender of Options. The Committee may permit the
voluntary surrender of all or a portion of any Option to be
conditioned upon the granting to the Optionee under this Key
Employee Program of a new Option for the same or a different
number of Shares as the Option surrendered, or may require such
voluntary surrender as a condition precedent to a grant of a new
Option to such Optionee. Such new Option shall be exercisable
at the price, during the period, and in accordance with any other
terms or conditions specified by the Committee at the time the
new Option is granted, all determined in accordance with the
provisions of this Key Employee
7
<PAGE>
Program without regard to the price, period of exercise, or any
other terms or conditions of the Option surrendered except as
provided in the final proviso in Paragraph 5(d)(iv) above.
6. OUTSIDE DIRECTOR PROGRAM
The provisions of this Paragraph 6 are applicable only to
Options granted pursuant to the Outside Director Program and
Options to Outside Directors shall be granted only in accordance
with the provisions of this Paragraph 6.
(a) Effective Date. The Outside Director Program became
effective on October 27, 1988.
(b) Terms and Conditions of Options Granted to Outside Directors.
Each Option granted pursuant to the Outside Director Program
shall be evidenced by a written stock option agreement between
the Company and the Outside Director to whom the Option is
granted (the "Optionee") in such form or forms as the Committee,
from time to time, shall prescribe, which agreements need not be
identical to each other but shall comply, inter alia, with and be
subject to the terms and conditions of this Paragraph 6(b). In
addition, the Committee may, in its absolute discretion, but
subject to the provisions of Paragraph 3(d), include in any such
stock option agreement other terms, conditions and provisions
that are not inconsistent with the express provisions of the
Outside Director Program.
(i) Initial Automatic Grant. Each Outside Director
shall be granted an Option designated a Non-Incentive Option
for 5,000 Shares on the later of (A) October 27, 1988 or (B)
the effective date of such Outside Director's initial election
as a member of the Board of Directors. Such grant
shall occur automatically without any further action by the
Board of Directors.
(ii) Subsequent Automatic Annual Grant. On each June 1
occurring prior to the termination of the Plan, beginning
June 1, 1989, each Outside Director who is in office on such
June 1 shall be granted an Option designated a Non-Incentive
Option for 1,000 Shares automatically without any further
action by the Board of Directors.
<PAGE>
(iii) Option Price. The price at which each Share may
be purchased pursuant to an Option granted under the Outside
Director Program shall be equal to the "fair market value"
for each such Share as of the date on which the Option is
granted (the "Date of Grant"), but in no event shall such
price be less than the par value of such Shares. The "fair
market value" of the Shares on any date shall be the mean
between the high and the low prices of the Shares on such
date on the New York Stock Exchange Composite Tape (or the
principal market in which the Shares are traded, if the
Shares are not listed on that Exchange on such date), or if
the Shares were not traded on such date, the mean between
the high and the low prices of the Shares on the next
preceding trading day during which the Shares were traded.
Anything contained in this Subparagraph (iii) of Paragraph
6(b) to the contrary notwithstanding, in the event that the
number of Shares subject to any Option is adjusted pursuant
to Paragraph 4(b) hereof, a corresponding adjustment shall
be made in the price at which the Shares subject to such
Option may thereafter be purchased.
8
<PAGE>
(iv) Duration of Options. Each Option granted under
the Outside Director Program shall expire and all rights to
purchase Shares pursuant thereto shall cease on the date
(the "Expiration Date") which shall be the third day after
the tenth anniversary of the Date of Grant of such Option.
(v) Vesting of Options. Each Option granted under the
Outside Director Program shall be fully exercisable and
vested as of the Date of Grant.
(vi) Exercise of Options. A person entitled to
exercise an Option may exercise it in whole at any time, or
in part from time to time, by delivering to the Secretary of
the Company written notice specifying the number of Shares
with respect to which the Option is being exercised,
together with payment in full of the purchase price of such
Shares plus any applicable federal, state or local taxes for
which the Company (or a Subsidiary) has a withholding
obligation in connection with such exercise. Such payment
shall be made in whole or in part (A) in cash or by personal
check, money market check, certified check or bank draft to
the order of the Company, or (B) by the exchange of Common
Stock of the Company acquired by the person entitled to
exercise the Option more than 6 months prior to the date of
exercise and having a "fair market value" on the date of
exercise at least equal to the price for which the Shares
may be purchased pursuant to the Option plus any applicable
federal, state or local taxes for which the Company (or a
Subsidiary) has a withholding obligation as noted above
(including any such taxes with respect to income recognized
by the Optionee upon the disposition of the Common Stock of
the Company used to effect such exchange). Notwithstanding
the foregoing, the Committee may, in its sole discretion,
authorize such payment, in whole or in part, in any other form.
(vii) Termination of Service. In the event of an
Outside Director's termination of service as a member of the
Board of Directors for any reason, his or her Option(s)
granted pursuant to the Outside Director Program shall
terminate on (A) the date which is the later of (1) 90 days
from the date of such termination of service or (2) six
months and ten days after such Outside Director's last
purchase or sale of Shares prior to his or her ceasing to be
a member of the Board of Directors or (B) its Expiration
Date, whichever shall first occur.
(viii) Terms Control. Except as expressly provided in
this Paragraph 6, grants of Options made pursuant to this
Paragraph 6 shall be subject to the terms and conditions of
the Plan; however, if there is a conflict between the terms
and conditions of the Plan and this Paragraph 6, then the
terms and conditions of this Paragraph 6 shall control.
<PAGE>
7. MERGER, CONSOLIDATION, ETC.
In the event that the Company shall, pursuant to action by
its Board of Directors, at any time propose to merge into,
consolidate with, or sell or otherwise transfer all or
substantially all of its assets to another corporation and
provision is not made pursuant to the terms of such transaction
for the assumption by the surviving, resulting or acquiring
corporation of outstanding Options under the Plan, or for the
substitution of new options therefor, the Committee shall cause
written notice of the proposed transaction to be given to each
Optionee not less than 40 days prior to the anticipated effective
date of the proposed transaction, and his or her Option shall
become fully (100%) vested and, prior to a date specified in such
notice, which shall be not more than 10 days prior to the
anticipated effective date of
9
<PAGE>
the proposed transaction, each Optionee shall have the right to exercise
his or her Option to purchase any or all Shares then subject to such
Option, including those, if any, which by reason of other provisions
of the Plan have not then become available for purchase. Each Optionee,
by so notifying the Company in writing, may, in exercising his or her
Option, condition such exercise upon, and provide that such exercise
shall become effective at the time of, but immediately prior to, the
consummation of the transaction, in which event such Optioneeneed not
make payment for the Shares to be purchased upon exercise of such Option
until 5 days after written notice by the Company to such Optionee that
the transaction has been consummated. If the transaction is consummated,
each Option, to the extent not previously exercised prior to the date
specified in the foregoing notice, shall terminate on the effective date
of such consummation. If the transaction is abandoned, (a) any Shares not
purchased upon exercise of such Option shall continue to be available for
purchase in accordance with the other provisions of the Plan and (b) to
the extent that any Option not exercised prior to such abandonment shall
have vested solely by operation of this Paragraph 7, such vesting shall be
deemed annulled, and the vesting schedule set forth in Subparagraph (iii)
of Paragraph 5(d) shall be reinstituted, as of the date of such abandonment.
8. NONTRANSFERABILITY
During the lifetime of an Optionee, an Option is not
transferable voluntarily or by operation of law and may be
exercised only by such individual. Upon the death of an
Optionee, an Option may be transferred to the beneficiaries or
heirs of the Optionee will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order
as defined by the Code or Title I of ERISA. Notwithstanding the
above, the Committee may, with respect to particular Options,
establish or modify the terms of the Option to allow the Option
to be transferred at the request of an Optionee to trusts
established by an Optionee or as to which an Optionee is a
grantor or to lineal descendents of an Optionee or otherwise for
personal and tax planning purposes of an Optionee. If the
Committee allows such transfer, such Options shall not be
exercisable for a period of six months following the action of
the Committee.
9. NO RIGHTS AS STOCKHOLDER OR TO CONTINUED EMPLOYMENT
No Optionee shall have any rights as a stockholder of the
Company with respect to any Shares prior to the date of issuance
to him or her of the certificate or certificates for such Shares
and neither the Plan nor any Option granted under the Plan shall
confer upon an Optionee any right to continuance of employment by
the Company or any Subsidiary or interfere in any way with the
right of the Company or Subsidiary to terminate the employment of
such Optionee.
<PAGE>
10. ISSUANCE OF SHARES; RESTRICTIONS
(a) Subject to the conditions and restrictions provided in
this Paragraph 10, the Company shall, within twenty business days
after an Option has been duly exercised in whole or in part,
deliver to the person who exercised the Option a certificate,
registered in the name of such person, for the number of Shares
with respect to which the Option has been exercised. The Company
may legend any stock certificate issued hereunder to reflect any
restrictions provided for in this Paragraph 10.
(b) Unless the Shares subject to Options granted under the
Plan have been registered under the Securities Act of 1933, as
amended (the "Act"), (and, in the case of any Optionee who may be
deemed an "affiliate" of the Company as defined in Rule 405 under
the Act, such Shares have been registered under
10
<PAGE>
the Act for resale by such Optionee), or the Company has
determined that an exemption from registration is available, the
Company may require prior to and as a condition of the issuance
of any Shares that the person exercising an Option hereunder
furnish the Company with a written representation in a form
prescribed by the Committee to the effect that such person is
acquiring said Shares solely with a view to investment for his or
her own account and not with a view to the resale or distribution
of all or any part thereof and that such person will not dispose
of any of such Shares otherwise than in accordance with the
provisions of Rule 144 under the Act unless and until either the
Shares are registered under the Act or the Company is satisfied
that an exemption for such registration is available.
(c) Anything contained herein to the contrary notwithstanding,
the Company shall not be obligated to sell or issue any
Shares under the Plan unless and until the Company is satisfied
that such sale or issuance complies with (i) all applicable
requirements of the New York Stock Exchange (or the governing
body of the principal market in which such Shares are traded, if
such Shares are not then listed on that Exchange), (ii) all
applicable provisions of the Act and (iii) all other laws or
regulations by which the Company is bound or to which the Company
is subject.
(d) Separate Share certificates shall be issued upon the
simultaneous exercise of Incentive Options and Non-Incentive
Options.
(e) Each Incentive Option shall require the Optionee to
agree that if he shall make a disposition (within the meaning of
Section 424(c) of the Code and the rules and regulations thereunder)
of any Shares covered by such Incentive Option within one
year after the date of transfer to him of such Shares or within
two years from the date of grant of such Incentive Option, then
in either such event the Optionee shall promptly notify the
Company, by delivery of written notice to the Secretary of the
Company, of (i) the date of such disposition, (ii) the number of
Shares covered by such Incentive Option which were disposed of
and (iii) the price at which such Shares were disposed of or the
amount of any other consideration received on such disposition.
Each Incentive Option granted under the Plan shall authorize the
Company (or a Subsidiary) to make such provision as it may deem
appropriate for the withholding of any applicable federal, state
or local taxes that it determines it may be obligated to withhold
or pay in connection with the exercise of such Incentive Option
or the disposition of Shares acquired upon exercise of such
Incentive Option.
<PAGE>
11. SUBSTITUTE OPTIONS
Anything contained herein to the contrary notwithstanding, Options
may, at the discretion of the Committee, be granted under the Plan in
substitution for options to purchase shares of capital stock of another
corporation which is merged into, consolidated with, or all or a
substantial portion of the property or stock of which is acquired by,
the Company or a Subsidiary. The terms, provisions and benefits to
Optionees of such substitute Options shall in all respects be identical
to the terms, provisions and benefits to optionees of the options of the
other corporation on the date of substitution, except that such
substitute Options shall provide for the purchase of Shares of the
Company instead of shares of such other corporation.
12. TERM OF THE PLAN
Unless the Plan has been sooner terminated pursuant to
Paragraph 13 hereof, the Plan shall terminate on, and no Options
shall be granted after, September 9, 2000. The provisions of the Plan,
11
<PAGE>
however, shall continue thereafter to govern all Options
theretofore granted, until the exercise, expiration or
cancellation of such Options.
13. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors at any time may terminate the Plan or
amend it from time to time in such respects as it deems
desirable; provided that, without the further approval of the
shareholders of the Company by the affirmative vote of
shareholders entitled to cast at least the majority of the total
number of votes represented (a quorum being present) at a meeting
of shareholders of the Company, no amendment shall (i) increase
the maximum aggregate number of Shares with respect to which
Options may be granted under the Plan, (ii) change the Option
price provided for in Paragraphs 5(d)(i) and 6(b)(iii) hereof, or
(iii) change the eligibility provisions of Paragraphs 5(b) and 6
hereof; provided further that the provisions of the Plan
applicable to the Outside Director Program may not be amended
more than once every six months, other than to comport with
changes in the Code, ERISA, or the rules thereunder; and provided
moreover that, subject to the provisions of Paragraph 10 hereof,
no termination of or amendment to the Plan shall adversely affect
the rights of an Optionee or other person holding an Option
theretofore granted hereunder without the consent of such
Optionee or other person, as the case may be.
ISO
AMERICAN FINANCIAL GROUP, INC. ("AFG")
STOCK OPTION AGREEMENT
Subject and pursuant to the provisions of the AFG Stock Option
Plan (the "Plan"), _____________(the "Optionee") is hereby granted
the option (the "Option') to purchase _______________ (___) fully
paid and non-assessable shares of AFG Common Stock, upon and subject
to the following terms and conditions:
1. Effective Date of Grant: ________________
2. Option Price: $_______________
3. Duration of Option: Expires on _______________ or sooner.
Please see the enclosed Plan for further explanation.
4. Option Type: ISO (which term as used herein shall mean an
option intended to be an "incentive stock option" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
5. Vesting: 20% per year as follows:
____ on __________________
____ on __________________
____ on __________________
____ on __________________
____ on __________________
See Section 5(d)(iii) of the Plan for further vesting information.
6. Exercise of Option. Optionee must send to AFG's Corporate
Secretary (a) written notice specifying the number of shares for
which the option is exercised and (b) payment of the option price
plus applicable withholding taxes, if necessary. Among other payment
methods, you may pay for option shares with certain shares of AFG
common stock which you already own. See Section 5(d)(iv) of the Plan
for further explanation.
<PAGE>
7. Termination of Employment. See Section 5(d)(v) of the Plan
for further explanation.
Please read the enclosed Plan for a full explanation of the
conditions and terms of this stock option grant.
Optionee acknowledges receipt of a copy of the Plan dated
5/28/98. Optionee hereby agrees to accept this ISO agreement as a
brief description of terms and conditions of the Plan and also agrees
to accept as final and conclusive all determinations, interpretations
and constructions made by the Committee pursuant to the Plan and the
Option.
AMERICAN FINANCIAL GROUP, INC.
By:_________________________________________
James C. Kennedy, Vice President, Deputy
General Counsel & Secretary
_________________________________________
Optionee
<PAGE>
NON-ISO
AMERICAN FINANCIAL GROUP, INC. ("AFG")
STOCK OPTION AGREEMENT
Subject and pursuant to the provisions of the AFG Stock Option
Plan (the "Plan"), ____________________(the "Optionee") is hereby
granted the option (the "Option') to purchase _______________
(_______) fully paid and non-assessable shares of AFG Common Stock,
upon and subject to the following terms and conditions:
1. Effective Date of Grant: ___________________
2. Option Price: $__________________
3. Duration of Option: Expires on ______________ or sooner.
Please see the enclosed Plan for further explanation.
4. Option Type: NON-ISO (which term as used herein shall mean
an option not intended to be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
5. Vesting: 20% per year as follows:
____ on __________________
____ on __________________
____ on __________________
____ on __________________
____ on __________________
See Section 5(d)(iii) of the Plan for further vesting information.
6. Exercise of Option. Optionee must send to AFG's Corporate
Secretary (a) written notice specifying the number of shares for
which the option is exercised and (b) payment of the option price
plus applicable withholding taxes. Among other payment methods, you
may pay for option shares with certain shares of AFG common stock
which you already own. See Section 5(d)(iv) of the Plan for further
explanation.
7. Transferability. Non-transferable except as explained in
Section 8 of the Plan.
<PAGE>
8. Termination of Employment. See Section 5(d)(v) of the Plan
for further explanation.
Please read the enclosed Plan for a full explanation of the
conditions and terms of this stock option grant.
Optionee acknowledges receipt of a copy of the Plan dated
5/28/98. Optionee hereby agrees to accept this NON-ISO agreement as
a brief description of terms and conditions of the Plan and also
agrees to accept as final and conclusive all determinations,
interpretations and constructions made by the Committee pursuant to
the Plan and the Option.
AMERICAN FINANCIAL GROUP, INC.
By:_________________________________________
James C. Kennedy, Vice President, Deputy
General Counsel & Secretary
_________________________________________
Optionee
<PAGE>
OUTSIDE DIRECTOR
NON-ISO
AMERICAN FINANCIAL GROUP, INC. ("AFG")
STOCK OPTION AGREEMENT
Subject and pursuant to the provisions of the AFG Stock Option
Plan (the "Plan"), _____________________ (the "Optionee") is hereby
granted the option (the "Option') to purchase __________________
(_______) fully paid and non-assessable shares of AFG Common Stock,
upon and subject to the following terms and conditions:
1. Effective Date of Grant: _____________
2. Option Price: $____________
3. Duration of Option: Expires on _______________ or sooner.
Please see the enclosed Plan for further explanation.
4. Option Type: NON-ISO (which term as used herein shall mean
an option not intended to be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
5. Vesting: 100% vested on date of grant.
6. Exercise of Option. Optionee must send to AFG's Corporate
Secretary (a) written notice specifying the number of shares for
which the option is exercised and (b) payment of the option price
plus applicable withholding taxes. Among other payment methods, you
may pay for option shares with certain shares of AFG common stock
which you already own. See Section 6(b)(vi) of the Plan for further
explanation.
7. Transferability. Non-transferable except as explained in
Section 8 of the Plan.
<PAGE>
8. Termination of Employment. See Section 6(b)(vii) of the
Plan for further explanation.
Please read the enclosed Plan for a full explanation of the
conditions and terms of this stock option grant.
Optionee acknowledges receipt of a copy of the Plan dated
5/28/98. Optionee hereby agrees to accept this NON-ISO agreement as
a brief description of terms and conditions of the Plan and also
agrees to accept as final and conclusive all determinations,
interpretations and constructions made by the Committee pursuant to
the Plan and the Option.
AMERICAN FINANCIAL GROUP, INC.
By:_________________________________________
James C. Kennedy, Vice President, Deputy
General Counsel & Secretary
_________________________________________
Optionee
AMERICAN FINANCIAL GROUP, INC.
1998 ANNUAL BONUS PLAN
Adopted on April 9, 1998
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
1998 ANNUAL BONUS PLAN
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,
1998, 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").
2
<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,
both subjective and objective, (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 1998, 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 1998 according to the terms of this Plan.
Such bonus determinations shall be based on achievement of
the Performance Criteria for 1998.
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 1998; the resulting number shall then
be rounded to the nearest hundred. Any shares of Company
Common Stock issued pursuant to this Plan will be
"restricted."
"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 shall be
used in determining Fair Market Value under either method
prescribed in the previous sentence.
3
<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.
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
4
<PAGE>
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.
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
5
<PAGE>
in effect to the extent necessary to settle all matters
relating to the payment of bonuses awarded prior to any such
termination or suspension.
<PAGE>
Schedule I
Annual Bonus Plan
for 1998
Participants and
Bonus Targets
Total Company
Bonus EPS Performance
Name Position Target Component Component
Carl H. Lindner Chairman of the Board
& Chief Executive Officer
Carl H. Lindner III Co-President
Keith E. Lindner Co-President
S. Craig Lindner Co-President
James E. Evans Sr. Vice President
& General Counsel
Thomas E. Mischell Sr. Vice President - Taxes
Fred J. Runk Sr. Vice President
& Treasurer
<PAGE>
Schedule II
Annual Bonus Plan
1998 Performance Criteria for Participants
The overall bonus for 1998 for each Participant will be the
sum of such Participant's bonuses for the following two
Performance Criteria components:
Weighting of Dollar Amount of Bonus Target
(Assuming Schedule I indicates $925,000 Bonus Target)
Earnings Per Share ("EPS")- 50% $462,500
Company Performance - 50% $462,500
A. EPS Component.
Each participant's bonus will range from 0% to 150% of
the dollar amount of the Bonus Target allocated to the
EPS Component, based on the following levels of
reported earnings per common share achieved by the
Company and its consolidated subsidiaries for 1998:
Percentage of Bonus Target to be paid
Operating EPS for EPS Component
$2.19 or less 0
2.92 100%
more than 2.92 more than 100% up to 175%
Where the Operating EPS is above $2.19 and below $2.92,
the Committee, in its discretion, shall determine the
percentage of bonus below 100% and the percentage of
bonus above 100% of EPS is above $2.92.
The Operating EPS to be considered is diluted EPS from
the Company's insurance operations and not including
investee results, realized gains and losses in the
investment portfolio and unusual or non-recurring
items. Additionally, the Committee shall have the
power and authority, in its discretion, to adjust
reported EPS upward or downward for purposes of the
Plan to the extent the Committee deems equitable in the
event of occurrences which might unfairly affect the
computation of EPS for purposes of the Plan.
<PAGE>
B. Company Performance Component
Each participant's bonus could range up to 175% of the
dollar amount of the Bonus Target allocated to the
Company Performance Component and will be determined by
the Board, upon the Compensation Committee's
recommendation, based on the Compensation Committee's
subjective rating of the Company's relative overall
performance for 1998. Such rating shall include a
consideration of all factors deemed relevant, including
financial (and non-financial) and strategic factors.
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
AS OF JANUARY 1, 1998
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
As of January 1, 1998
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" 2
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 "Retirement Contributions Account" 2
2.19 "Year of Service" 2
ARTICLE 3. PARTICIPATION 2
3.1 Eligibility 2
3.2 Participation in the Plan 3
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 Return 5
4.5 Statement of Account 5
ARTICLE 5. PAYMENT OF ACCOUNT 6
5.1 Payment After the Expiration Date, Death,
Retirement or Disability. 6
5.2 Hardship Distribution 7
5.3 Beneficiary Designation and Payment 7
ARTICLE 6. GENERAL PROVISIONS 8
6.1 Employee's Rights Unsecured 8
6.2 Non-Assignability 8
<PAGE>
6.3 Administration 8
6.4 Amendment and Termination 8
6.5 Construction 8
6.6 Limitations 8
6.7 Subsidiaries 8
APPENDIX I
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
As of January 1, 1998
ARTICLE 1. ESTABLISHMENT AND PURPOSE
The American Financial Group, Inc. Auxiliary RASP
Plan ("Plan") was established as of January 1,
1997. It is amended and restated as of January 1,
1998. 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 additional benefit 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 return 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.
<PAGE>
-2-
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.
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 "Retirement Contributions Account" means the
Retirement Contributions Account as defined in the
RASP.
2.19 "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 per month,
as determined pursuant to the RASP.
<PAGE>
-3-
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. Effective January 1, 1998,
a Participant shall automatically become
a Participant in the Plan upon the authorization
described in Section 3.1.
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 means
each consecutive 12-month period beginning on the
Employee's employment commencement date and
anniversaries thereof. A month of service means
a calendar month during any part of which an
Employee completes an Hour of Service. Vesting
shall be calculated in the same manner as
calculated in the RASP. In addition, each Employee
participating in the Plan shall be credited, for
Service purposes, for his employment with any
subsidiary or affiliate of AFG.
(c) A former Participant shall become a
Participant immediately upon the former
Participant's return to the employ of an
Employer if such former Participant had a
nonforfeitable right to such Participant's
Account. A former Participant who did not have
a nonforfeitable right to his Account at the
time of termination shall be considered a new
Employee, for vesting purposes, if the number
of consecutive One Year Periods of Severance
equal or exceed the greater of (1) five
<PAGE>
-4-
or (2) the aggregate number of Years of
Service before such Period of Severance. If
such former Participant's Years of Service
prior to termination exceeds the number of
consecutive One Year Periods of Severance
after such termination, or if the number of
consecutive One Year Periods of Severance is
less than five, such Participant shall have
all Years of Service counted.
(d) Participation in the Plan will continue until
an Employee terminates his employment as
provided for in Section 4.3 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 return of the Retirement Contribution
in the AFG RASP (see Section 4.4), all distributions
to the Employee or beneficiary or estate, and any
other interest earned on the balance thereof, shall
be reflected in the Account.
4.2 Amount of Allocation.
(a) Prior to January 1, 1998, 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.
<PAGE>
-5-
(b) After December 31, 1997, 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) that would have
been paid by an Employer under the allocation
formula in the AFG RASP in excess of the
amount of the contribution actually allocated
to the Employee's Retirement Contributions
Account in the AFG RASP (or any other defined
contribution plan sponsored by an AFG
subsidiary) provided there was no
Compensation Limit, as defined in the RASP,
imposed by the Code. The maximum amount of
this contribution when added to the
contribution allocated to the Employee's
Retirement Contributions Account shall be
$30,000, which amount shall be increased (but
not decreased) with respect to adjustments
allowed by Section 415 of the Code.
(c) Allocations under this Plan for any Plan Year
shall be deemed to be credited to an
Employee's Account as of December 31 of such
Plan Year.
(d) 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 may 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 5.1(a) hereof.
4.4 Investment Return. The Participant's Account shall
be credited (or charged) with interest at 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 or more
frequently as determined by the Administrator. Such
determination shall be final, binding and conclusive
on all parties.
4.5 Statement of Account. A statement of Account
will be sent to each Participant annually or more
frequently as determined by the Administrator.
<PAGE>
-6-
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
the Expiration Date occurs, termination of employment
after age 60, death or disability, the Participant,
or in the event of death, the Beneficiary, may 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.
(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.
<PAGE>
-7-
(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.
(e) Notwithstanding the above, the Participant, or in
the event of death, the Beneficiary, may choose to
defer payment or distribution of the Account to a
time not later than the first calendar quarter of
the year following the year in which the Participant
attains age 65, or in the event of death, would have
attained age 65.
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 I 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
<PAGE>
-8-
beneficiary or, if none, to the estate, which
beneficiary or estate shall have all the rights
conferred by Section 5.1 above.
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
<PAGE>
-9-
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 4.2(a).
AMERICAN FINANCIAL GROUP, INC.
BY: __________________________________
Its: __________________________________
<PAGE>
APPENDIX I
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: _________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from American
Financial Group, Inc. 10-K for December 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $296,721
<SECURITIES> 10,946,827<F1>
<RECEIVABLES> 618,198
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,845,203
<CURRENT-LIABILITIES> 0
<BONDS> 592,432
0
0
<COMMON> 60,928
<OTHER-SE> 1,655,249
<TOTAL-LIABILITY-AND-EQUITY> 15,845,203
<SALES> 0
<TOTAL-REVENUES> 4,050,034
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 350,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,682
<INCOME-PRETAX> 204,754
<INCOME-TAX> 79,584
<INCOME-CONTINUING> 125,170
<DISCONTINUED> 0
<EXTRAORDINARY> (770)
<CHANGES> 0
<NET-INCOME> $124,400
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.00
<FN>
<F1>Includes an investment in investee corporation of $192 million.
</FN>
</TABLE>
