<PAGE> 1
This prospectus supplement relates to an effective registration
statement under the Securities Act of 1933, but is not complete and may
be changed. This prospectus is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
Filed Pursuant to Rule 424(b)(2)
File No. 333-81903
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 2000
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 15, 1999
6,250,000 Shares
[AMERICAN FINANCIAL LOGO]
Common Stock
------------------
Our common stock is listed on The New York Stock Exchange under the symbol
"AFG." The last reported sale price on November 28, 2000 was $19.75 per share.
Carl H. Lindner, Chairman of the Board, Chief Executive Officer and a
principal shareholder of the company, and our Retirement and Savings Plan,
intend to invest approximately $15 million and $10 million, respectively, in the
purchase of common stock in the offering. In the offering, Mr. Lindner and the
Retirement and Savings Plan will pay the per share public offering price set
forth below, net of any underwriting discounts and commissions.
The underwriters have an option to purchase a maximum of 937,500 additional
shares to cover over-allotments of shares.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND AMERICAN FINANCIAL
PUBLIC COMMISSIONS GROUP, INC.
-------- ------------- ------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ (1) $ (2) $
</TABLE>
(1) Includes shares sold to Carl H. Lindner and the Retirement and
Savings Plan at $ per share.
(2) No underwriting discounts and commissions are to be paid in connection with
the shares sold to Carl H. Lindner and the Retirement and Savings
Plan.
Delivery of the shares of common stock will be made on or about
December , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
The date of this prospectus supplement is December , 2000.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
----
<S> <C>
SUMMARY............................... S-1
USE OF PROCEEDS....................... S-6
PRICE RANGE OF COMMON STOCK........... S-6
DIVIDEND POLICY....................... S-6
CAPITALIZATION........................ S-7
BUSINESS.............................. S-8
UNDERWRITING.......................... S-18
NOTICES TO CANADIAN RESIDENTS......... S-20
LEGAL MATTERS......................... S-21
EXPERTS............................... S-21
SELECTED FINANCIAL INFORMATION........ F-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS
PAGE
----
<S> <C>
ABOUT THE PROSPECTUS.................. i
WHERE YOU CAN FIND MORE INFORMATION... i
AMERICAN FINANCIAL GROUP, INC......... 1
USE OF PROCEEDS....................... 3
RATIO OF EARNINGS TO FIXED CHARGES.... 3
DESCRIPTION OF THE SECURITIES WE MAY
OFFER............................... 3
DESCRIPTION OF COMMON STOCK........... 16
PLAN OF DISTRIBUTION.................. 17
LEGAL MATTERS......................... 18
EXPERTS............................... 18
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the information
incorporated by reference in them contain or incorporate by reference certain
forward-looking statements that are subject to numerous assumptions, risks or
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"believes", "expects", "may", "will", "should", "seeks", "approximately",
"intends", "plans", "estimates", "anticipates" or the negative version of those
words or other comparable terminology. Actual results could differ materially
from those contained in or implied by such forward-looking statements for a
variety of factors including:
- changes in economic conditions, including interest rates, performance of
securities markets, and the availability of capital;
- regulatory actions;
- changes in legal environment;
- tax law changes;
- levels of catastrophes and other major losses;
- adequacy of loss reserves;
- availability of reinsurance; and
- competitive pressures, including the ability to obtain rate increases.
Forward-looking statements speak only as of the date made. We undertake no
obligations to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made. For a discussion of
factors that could cause actual results to differ, see the information contained
in our publicly available filings with the SEC. These filings are described
under the caption "Where You Can Find More Information" in the accompanying
prospectus.
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
i
<PAGE> 3
SUMMARY
This summary highlights information about American Financial Group, Inc.
and the offering. Because this is a summary, it may not contain all the
information you should consider before investing in our common stock. You should
carefully read this entire prospectus supplement and the prospectus to which it
relates.
AMERICAN FINANCIAL GROUP, INC.
INTRODUCTION
We are engaged primarily in private passenger automobile and specialty
property and casualty insurance businesses and in the sale of retirement
annuities and life, supplemental health and long-term care insurance products.
Our property and casualty operations originated in the 1800s and make up one of
the 30 largest property and casualty groups in the United States based on 1999
statutory net premiums written. We are an Ohio corporation with headquarters
located at One East Fourth Street, Cincinnati, Ohio 45202. Our telephone number
is (513) 579-2121.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Our property and casualty segment is organized into two major groups:
Personal and Specialty. Each group reports to an individual senior executive and
is comprised of multiple business units which operate autonomously but with
certain strong central 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 and
administrative support functions.
The Personal group writes primarily private passenger automobile liability
and physical damage insurance and, to a lesser extent, homeowners' insurance.
Historically the group has concentrated on sales in the nonstandard market
covering drivers 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. We believe that we are the second
largest writer of nonstandard auto insurance through independent agents and the
third largest overall.
In addition to our nonstandard auto business, we have launched an expanded
approach making personal automobile coverage available across a full spectrum of
drivers with emphasis on the preferred and standard categories. Our approach is
to develop tailored rates for our personal automobile customers based on a
variety of factors, including the driving record of the insureds and the number
of and type of vehicles covered.
The Specialty group emphasizes the writing of insurance coverage where we
are experts in particular lines of business or customer groups. The following
are examples of such specialty businesses: Inland and Ocean Marine; Workers'
Compensation; Agricultural-related; Executive and Professional Liability;
Fidelity and Surety Bonds; and Umbrella and Excess coverage.
Specialization is the key element of 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. We continually evaluate expansion in existing
markets and opportunities in new specialty markets.
ANNUITIES, LIFE AND HEALTH OPERATIONS
Through our 83%-owned subsidiary, Great American Financial Resources
(formerly known as American Annuity Group, Inc.), we market primarily retirement
annuity products as well as life, supplemental health and long-term care
insurance. Traditional fixed annuity products have been sold primarily to
employees of educational and other not-for-profit organizations. However, since
1996 Great American Financial Resources
S-1
<PAGE> 4
has offered variable and equity-indexed annuities. Premiums received on these
products have increased from $83 million in 1997 to over $300 million in the
first nine months of 2000. In addition to annuity products, Great American
Financial Resources has broadened its focus to sell life and supplemental health
products.
STRATEGY
Our strategy is to allocate capital to niche insurance operations which we
believe will bring a competitive advantage or in which we see unique
opportunities. In implementing this strategy we adhere to the following
operating philosophies:
- Specialization. We seek niche opportunities where we believe our
specialized skills, unique product or distribution provide a competitive
advantage. By concentrating on these areas, we can take advantage of
specialized skills and quickly respond to changing market dynamics.
- Underwriting Profits. We believe that the key to achieving financial
success in the property and casualty insurance business is to produce
underwriting profits. This means that we are committed to price our
products appropriately and to refrain from writing business that is not
expected to produce an underwriting profit, even if it is necessary to
forego premium growth to do so.
- Conservative reserving practices. Actuarial analyses typically produce a
range of acceptable reserve levels. Our property and casualty reserves
have been toward the conservative end of those ranges for several years.
We review our reserves quarterly and if changes in claims experience
indicate that reserves may be in danger of developing to a deficient
position, we act decisively to bring reserves to what we consider to be
an appropriate level.
- Cost management. We have begun sharing many back office functions across
business lines to take advantage of economies of scale, while maintaining
our specialty focus in dealing with our customers.
Within each business segment, our operating philosophies translate into
specific initiatives to improve performance and bring value to shareholders.
Personal Group
- Obtain appropriate pricing in our nonstandard automobile insurance
operations. We are participating in the improving market for nonstandard
auto by increasing rates 13% during the first nine months of 2000, and we
expect to increase rates by 15% by the end of this year. These increases
reflect a combination of changes in filed and approved rates and changes
in other underwriting criteria on a weighted basis over the existing book
of business. These rate actions, while moderating premium growth, are
expected to improve profitability. We cannot be sure that these rate and
underwriting changes will be fully realized.
- Broaden automobile offerings to include more standard and preferred
risks. We plan to leverage our pricing, underwriting and loss control
expertise in nonstandard automobile insurance by expanding our marketing
to standard and preferred risk drivers. Our goal is to price
appropriately for the risk assumed, whether it is a preferred, standard
or nonstandard risk.
- Diversify distribution system. Our goal is to provide products to our
customers at any time and in any manner that they desire, whether through
independent agents or direct marketing channels including the Internet.
The purchase of Worldwide Insurance Company in 1999 greatly enhanced our
ability to sell products directly to consumers, including over the
Internet. By the end of 2000, we expect to have the ability to sell over
the Internet in as many as twelve states which together represent a
majority of the U.S. auto insurance market.
Specialty Group
- Focus on specialized areas where our personnel are experts. Rather than
compete in standard commercial lines, we focus on areas in which we
believe our specialized knowledge, unique products or distribution
provides a significant advantage.
S-2
<PAGE> 5
- React opportunistically to changing market conditions. We constantly
reevaluate market conditions in the specialized lines that we write, and
shift capital and give increased attention to those areas where market
conditions allow for attractive returns. In our California workers'
compensation business, we have achieved rate increases of 22% through the
first nine months of this year, and we expect rate increases to exceed
40% on renewals in the fourth quarter and to implement further rate
increases in 2001. Renewal rate increases in the remainder of our
specialty businesses averaged in excess of 10% in the first nine months
of this year. These rate actions, while moderating growth, are expected
to improve profitability. We cannot be sure that these rate and
underwriting changes will be fully realized.
- Strategic realignment of non-performing lines. While most of our
specialty lines have earned an underwriting profit and shown good growth,
a few of our non-workers' compensation specialty operations have not
shown underwriting profits and are the subject of strategic realignment.
In each of these lines we are either taking significant rate increases to
improve profitability or we are discontinuing the line. For example, we
have recently discontinued our Massachusetts Municipality business and
commercial aviation line because the returns achieved were not acceptable
to us and we did not believe the specific market would allow for
sufficient rate increases.
Annuities, Life, Accident and Health Operations
- Capitalize on long-time strength in education and not-for-profit
sectors. We sell most of our traditional annuity products to employees
of educational and other not-for-profit organizations. We believe that
this base provides excellent persistency and attractive profitability.
- Offer diverse products to respond to various investment market
environments. From our origins as a provider of qualified fixed
annuities to the education market, we have expanded our product offerings
to provide equity based products, which we believe are more popular in
rising equity markets, as well as supplemental health and long-term care
products which we believe meet the lifestyle needs of our customers.
- Grow life insurance operations. Three years ago, we re-established life
insurance operations. We have been able to hire an experienced team of
professionals with solid industry experience and strong relationships
with distribution channels. Although these operations currently require
significant investment to support their rapid growth, we believe that the
investment will enable us to capitalize on market opportunities. Also,
many of the independent agents of Great American Financial Resources
offer life and supplemental health products of other insurance companies,
and we believe Great American Financial Resources can leverage its
relationships with these agents with similar product offerings.
PRINCIPAL SHAREHOLDERS
At September 30, 2000, Carl H. Lindner, members of his immediate family and
trusts for their benefit, and our Retirement and Savings Plan, beneficially
owned approximately 49.2% and 12.8% of our outstanding voting common stock,
respectively. Following the offering (assuming Mr. Lindner purchases
approximately 750,000 shares and the Retirement and Savings Plan purchases
approximately 500,000 shares in the offering), the ownership of outstanding
voting common stock by the Lindner family and the Retirement and Savings Plan
will decrease to approximately 45.6% and 12.3%, respectively.
S-3
<PAGE> 6
THE OFFERING
Common stock offered................ 6,250,000 shares
Common stock to be outstanding after
this offering....................... 65,004,411 shares
Use of proceeds..................... To provide working capital for our
property and casualty insurance
subsidiaries
New York Stock Exchange symbol...... "AFG"
Unless otherwise noted, we assume in this prospectus supplement that the
underwriters will not exercise their over-allotment option.
The number of shares of common stock shown above to be outstanding after
this offering is based on the number of shares outstanding on September 30,
2000, and excludes unissued shares reserved under various employee compensation
plans -- namely, 5,487,025 shares issuable upon exercise of stock options under
our stock option plan, at a weighted average exercise price of $29.40 per share;
1,329,888 shares reserved for issuance pursuant to stock options not yet granted
under our stock option plan; 2,331,408 shares reserved for issuance under an
employee stock purchase plan; and 500,000 shares reserved for issuance under a
deferred compensation plan. It also excludes 18,666,614 shares held by certain
of our subsidiaries but includes 1,364,478 shares held by a subsidiary for
issuance to claimants and creditors of such subsidiary. In November 2000,
approximately 280,000 shares were issued under our dividend reinvestment plan.
S-4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary financial information shown below (in millions, except per
share amounts) is derived from, and should be read in conjunction with, the
financial statements and other financial information which are incorporated by
reference into this prospectus supplement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Total Revenues............................. $ 2,833.3 $ 2,496.6 $ 3,334.5 $ 4,063.2 $ 4,026.3
Operating Earnings Before Income
Taxes(a)................................. 98.7 242.4 302.1 273.8 379.6
Earnings Before Extraordinary Items and
Accounting Change........................ 38.9(b) 132.8 147.0 125.2 199.5
Extraordinary Items........................ -- (2.3) (1.7) (.8) (7.2)
Cumulative Effect of Accounting Change..... -- (3.8) (3.9) -- --
Net Earnings............................... 38.9(b) 126.7 141.4 124.4 192.3
Basic Earnings per Common Share(c):
Earnings before Extraordinary Items and
Accounting Change..................... $ .66 $ 2.21 $ 2.46 $ 2.04 $ .77
Net Earnings Available to Common
Shares................................ .66 2.11 2.37 2.03 .65
Diluted Earnings per Common Share(c):
Earnings before Extraordinary Items and
Accounting Change..................... $ .66 $ 2.18 $ 2.44 $ 2.01 $ .76
Net Earnings Available to Common
Shares................................ .66 2.08 2.35 2.00 .64
Cash Dividends Paid per Share of Common
Stock.................................... $ .75 $ .75 $ 1.00 $ 1.00 $ 1.00
BALANCE SHEET DATA:
Total Assets............................... $16,233.6 $16,018.6 $16,054.1 $15,845.2 $15,755.3
Long-term Debt:
Holding Companies........................ 546.8 498.5 492.9 415.5 386.7
Subsidiaries............................. 191.0 239.2 239.7 176.9 194.1
Minority Interest.......................... 492.9 494.8 489.3 521.8 513.0
Shareholders' Equity....................... 1,346.7 1,431.9 1,340.0 1,716.2 1,662.7
Book Value per Share....................... $ 22.92 $ 24.52 $ 22.94 $ 28.17 $ 27.24
</TABLE>
---------------
(a) Excludes minority interest expense, equity in investee earnings (losses),
extraordinary items and the cumulative effect of an accounting change.
(b) Includes special litigation charges of $23.3 million (after tax) or $.40 per
share in the second quarter and a charge of $22.8 million (after tax) or
$.39 per share to increase our California workers' compensation reserves
during the third quarter.
(c) Per share results for 1997 are calculated after deducting a premium of
$153.3 million over stated value on redemption of a subsidiary's preferred
stock.
------------------------
Quarterly net earnings for the first nine months of 2000 were lower than
those for the comparable quarters of 1999. We cannot determine at this time
whether net earnings for the fourth quarter of 2000 will be higher or lower than
those reported for the fourth quarter of 1999.
S-5
<PAGE> 8
USE OF PROCEEDS
We estimate that we will receive approximately $ million in net
proceeds from this offering after deducting approximately $ million in
underwriting discounts and commissions and our estimated expenses for this
offering.
We intend to use the net proceeds from this offering to provide working
capital for our property and casualty insurance subsidiaries. Until we use the
net proceeds of this offering, we intend to invest the net proceeds in U.S.
Treasury and government agency obligations and high grade corporate debt
securities and commercial paper.
This use of proceeds does not reflect the underwriters' exercise of their
over-allotment option. Additional net proceeds of approximately $ , if the
underwriters exercise their over-allotment option in full, will be used for
general corporate purposes, which may include providing additional working
capital for our property and casualty insurance subsidiaries or providing
working capital for the parent companies.
PRICE RANGE OF COMMON STOCK
Our common stock trades on The New York Stock Exchange under the symbol
"AFG." The high and low closing prices, as reported by The New York Stock
Exchange, are shown below.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
First Quarter............................................ $ 44.19 $ 37.63
Second Quarter........................................... 45.75 42.38
Third Quarter............................................ 44.88 32.38
Fourth Quarter........................................... 43.88 30.50
1999
First Quarter............................................ 43.63 34.06
Second Quarter........................................... 37.38 33.00
Third Quarter............................................ 35.44 29.56
Fourth Quarter........................................... 30.25 24.50
2000
First Quarter............................................ 29.00 18.88
Second Quarter........................................... 29.00 24.38
Third Quarter............................................ 26.43 23.13
Fourth Quarter(through November 28)...................... 23.19 19.00
</TABLE>
The closing price of our common stock on The New York Stock Exchange on
November 28, 2000 was $19.75 per share.
DIVIDEND POLICY
For more than five years, we have paid quarterly dividends on our common
stock of $0.25 per share in January, April, July and October. Our ability to pay
dividends is dependent upon, among other things, the availability of dividends
and tax sharing payments from our insurance company subsidiaries.
S-6
<PAGE> 9
CAPITALIZATION
The following table shows our capitalization at September 30, 2000, and as
adjusted to give effect to the sale of the common stock offered by this
prospectus supplement based upon an assumed public offering price of $19.75 per
share (the last reported sale price of our common stock on The New York Stock
Exchange on November 28, 2000) and assuming underwriting discounts and
commissions and offering expenses of approximately $5,200,000.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Direct obligations of AFG................................. $ 380,490 $ 380,490
Obligations of subsidiaries:
American Financial Corporation and American Premier
Underwriters, Inc. (parent only)...................... 166,302 166,302
Great American Financial Resources, Inc................ 152,123 152,123
Other subsidiaries..................................... 38,853 38,853
---------- ----------
Total long-term debt.............................. 737,768 737,768
Minority interest (a)....................................... 492,916 492,916
Shareholders' equity:
Common Stock and capital surplus.......................... 805,626 922,626
Retained earnings......................................... 552,132 552,132
Net unrealized gain on marketable securities, net of
deferred income tax.................................... (11,100) (11,100)
---------- ----------
Total shareholders' equity........................ 1,346,658 1,463,658
---------- ----------
Total capitalization........................................ $2,577,342 $2,694,342
========== ==========
Ratios:
Long-term debt to total capitalization.................... 29% 27%
Long-term debt and subsidiary trust preferred securities
to total capitalization................................ 41% 39%
Book value per share........................................ $ 22.92 $ 22.52
</TABLE>
---------------
(a) Minority interest represents the interests of noncontrolling shareholders in
subsidiaries, including American Financial Corporation preferred stock and
preferred securities issued by trust subsidiaries.
S-7
<PAGE> 10
BUSINESS
GENERAL
We are a holding company and, through subsidiaries, are engaged primarily
in property and casualty insurance businesses and in the sale of retirement
annuities, life, supplemental health and long-term care insurance products. Our
property and casualty operations originated in the 1800s and make up one of the
30 largest property and casualty groups in the United States based on 1999
statutory net premiums written. (Source: "Best's
Viewpoint -- Property/Casualty," July 24, 2000).
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Our property and casualty group is engaged primarily in private passenger
automobile and specialty insurance businesses which we manage as two major
business groups: Personal and Specialty. At September 30, 2000, our property and
casualty insurance operations employed approximately 7,900 persons.
Two significant actions in the last two years have served to refocus our
property and casualty insurance operations. First, we sold substantially all of
our Commercial lines division to Ohio Casualty Corporation in December 1998 for
approximately $300 million plus warrants to purchase 6,000,000 shares of Ohio
Casualty common stock. We received an additional $25 million in 2000 under a
provision in the sale agreement related to the retention and growth of the
insurance businesses acquired by Ohio Casualty. The commercial lines business
sold generated net written premiums of approximately $230 million in 1998 before
the sale and approximately $315 million in 1997.
Second, we have focused much attention on expanding our distribution
channels in order to make it more convenient for customers to obtain our
insurance products. New distribution channels were enhanced by the April 1999
purchase of Worldwide Insurance Company. This acquisition accelerated our entry
into the direct sale market, including over the Internet, and provided us with a
significant base for selling not only private passenger auto insurance, but also
a variety of other insurance products directly to consumers.
We operate in a highly competitive industry affected by many factors which
can cause significant fluctuations in our results of operations. The 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 has been in an extended downcycle for over a decade,
although we believe there are early indications of price firming and increases
in certain specialty markets and in the private passenger automobile market.
The primary objective of our property and casualty insurance operations is
to achieve underwriting profitability. This focus on underwriting performance
has resulted in a statutory combined ratio averaging 104.0% for the period 1995
to 1999, as compared to 105.4% for the property and casualty industry over the
same period (Source: "Best's Review/Preview -- Property/Casualty" -- January
2000 Edition). We believe that product line diversification and underwriting
discipline have contributed to our ability to consistently outperform the
industry's underwriting results. Our 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.
Unless indicated otherwise, the financial information for the property and
casualty insurance operations appearing in this prospectus supplement is
presented based on GAAP and includes the Commercial lines division which we sold
in 1998 for all periods prior to the sale date.
S-8
<PAGE> 11
The following table shows (in millions) certain balance sheet information
of our property and casualty insurance operations:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 1999 1998 1997
------------------ ------ ------- ------
<S> <C> <C> <C> <C>
GAAP BASIS
Total Assets........................... $9,403 $9,487 $10,053 $9,212
Unearned Premiums...................... 1,418 1,325 1,233 1,329
Loss and LAE Reserves.................. 4,621 4,795 4,773 4,225
Shareholder's Equity................... 3,162 3,158 3,174 3,019
STATUTORY BASIS
Admitted Assets........................ $6,277 $6,332 $ 6,463 $6,983
Unearned Premiums...................... 1,124 1,005 914 1,133
Loss and LAE Reserves.................. 3,516 3,525 3,702 3,475
Capital and Surplus.................... 1,579 1,664 1,840 1,916
</TABLE>
The following table shows the performance of our property and casualty
insurance operations (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net written premiums.................. $1,972 $1,689 $2,263 $2,609(a) $2,858(a)
====== ====== ====== ====== ======
Net earned premiums................... $1,857 $1,681 $2,211 $2,699 $2,824
Loss and LAE.......................... 1,464 1,188 1,589 2,001 2,076
Special A&E charge.................... -- -- -- 214 --
Underwriting expenses................. 553 503 661 764 783
Policyholder dividends................ 3 4 4 9 7
------ ------ ------ ------ ------
Underwriting loss..................... $ (163) $ (14) $ (43) $(289) $ (42)
====== ====== ====== ====== ======
GAAP ratios:
Loss and LAE ratio.................. 78.8% 70.7% 71.9% 82.1% 73.5%
Underwriting expense ratio.......... 29.8 29.9 29.9 28.3 27.7
Policyholder dividend ratio......... .2 .2 .2 .3 .2
------ ------ ------ ------ ------
Combined ratio...................... 108.8%(b) 100.8% 102.0% 110.7%(c) 101.4%
====== ====== ====== ====== ======
Statutory ratios:
Loss and LAE ratio.................. 79.7% 72.2% 73.4% 82.7% 73.4%
Underwriting expense ratio.......... 29.0 30.5 30.0 27.9 27.3
Policyholder dividend ratio......... .2 .2 .3 .5 .7
------ ------ ------ ------ ------
Combined ratio...................... 108.9%(b) 102.9% 103.7% 111.1%(c) 101.4%
====== ====== ====== ====== ======
Industry statutory combined
ratio(d)............................ n/a 106.3% 107.7% 105.6% 101.6%
</TABLE>
---------------
(a) Includes $232 million in 1998 and $315 million in 1997 generated by the
Commercial lines that were sold in December 1998.
(b) Includes an increase of 1.9 percentage points for third quarter
strengthening of California workers' compensation reserves.
(c) 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).
(d) Ratios are derived from "Best's Viewpoint -- Property/Casualty" (April 10,
2000 Edition) and "BestWeek -- Property/Casualty" (December 13, 1999
Edition). An industry ratio for the nine months ended September 30, 2000 is
not expected to be available until the second week of December 2000.
S-9
<PAGE> 12
As with other property and casualty insurers, our 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. We generally seek to reduce our exposure
to such events through individual risk selection and the purchase of
reinsurance.
For further discussion of property and casualty results of operations,
please see "Management's Discussion and Analysis of Selected Financial
Information -- Results of Operations" beginning on page F-19.
Personal
Our Personal group writes primarily private passenger automobile liability
and physical damage insurance, and to a lesser extent, homeowners' insurance.
The Personal group writes business in all states except Hawaii. Historically, we
have derived the majority of our auto premiums from sales in the nonstandard
market covering drivers 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. Though our Personal group
will continue to write coverage in this market, we have launched an expanded
approach making personal automobile coverage available to drivers across a full
spectrum from preferred to nonstandard risks with emphasis on the preferred and
standard categories. Our approach to the personal auto business is to develop
tailored rates for customers based on a variety of factors, including the
driving record of the insureds, the number of and type of vehicles covered and
other factors.
In the homeowners' business, we attempt to limit exposure in locations
which have significant catastrophic potential (such as windstorms, earthquakes
and hurricanes). Since the beginning of 1998, we have ceded 90% of our
homeowners' business through reinsurance agreements.
The following table shows the performance of our Personal group operations
(dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------
2000 1999 1999 1998 1997
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net written premiums...................... $ 997 $ 839 $1,154 $1,279 $1,345
====== ====== ====== ====== ======
Net earned premiums....................... 940 875 $1,163 $1,290 $1,357
Loss and LAE.............................. 774 661 881 958 1,019
Underwriting expenses..................... 238 215 290 298 318
Policyholder dividends.................... -- -- -- -- (1)
------ ------ ------ ------ ------
Underwriting profit (loss)................ $ (72) $ (1) $ (8) $ 34 $ 21
====== ====== ====== ====== ======
GAAP ratios:
Loss and LAE ratio...................... 82.3% 75.6% 75.7% 74.2% 75.1%
Underwriting expense ratio.............. 25.3 24.6 25.0 23.1 23.5
Policyholder dividend ratio............. -- -- -- -- (.1)
------ ------ ------ ------ ------
Combined ratio.......................... 107.6% 100.2% 100.7% 97.3% 98.5%
====== ====== ====== ====== ======
Statutory ratios:
Loss and LAE ratio...................... 82.5% 75.6% 75.6% 74.3% 75.2%
Underwriting expense ratio.............. 25.2 25.2 25.4 22.4 22.9
------ ------ ------ ------ ------
Combined ratio.......................... 107.7% 100.8% 101.0% 96.7% 98.1%
====== ====== ====== ====== ======
Industry statutory combined ratio(a)...... n/a 104.8% 105.4% 104.3% 100.1%
====== ====== ====== ======
</TABLE>
---------------
(a) Ratios are derived from "Best's Viewpoint -- Property/Casualty" (April 10,
2000 Edition) and "BestWeek -- Property/Casualty" (December 13, 1999
Edition). An industry ratio for the nine months ended September 30, 2000 is
not expected to be available until the second week of December 2000.
S-10
<PAGE> 13
For further discussion of property and casualty results of operations,
please see "Management's Discussion and Analysis of Selected Financial
Information -- Results of Operations" beginning on page F-19.
Specialty
Our Specialty group emphasizes the writing of specialized insurance
coverage where our personnel are experts in particular lines of business or
customer groups. The following are examples of such specialty businesses:
- 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 motor truck cargo.
- Workers' Compensation: Writes coverage for prescribed benefits payable
to employees (principally in California) who are injured on the job.
- Agricultural-related: Provides federally reinsured multi-peril crop
(allied lines) insurance covering most perils as well as crop hail,
equine mortality and other coverages for full-time operating
farms/ranches and agribusiness operations on a nationwide basis.
- Executive and Professional Liability: Markets liability coverage for
attorneys and for directors and officers of businesses and not-for-profit
organizations.
- 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.
- Lender Services: Provides coverage for insurance risk management
programs for lending and leasing institutions.
- Umbrella and Excess: Provides large liability coverage in excess of
primary layers.
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant operating
autonomy to oversee the important operational functions of its business such as
underwriting, pricing, marketing, policy processing and claims service. These
specialty businesses are opportunistic and their premium volume will vary based
on prevailing market conditions. We continually evaluate expansion in existing
markets and opportunities in new specialty markets, but only in areas that meet
our profitability objectives.
S-11
<PAGE> 14
The following table shows the performance of our Specialty group operations
(dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net written premiums.................... $ 975 $ 850 $1,111 $1,132(a) $1,468(a)
====== ====== ====== ====== ======
Net earned premiums..................... $ 917 $ 805 $1,048 $1,372 $1,429
Loss and LAE............................ 681 522 702 979 967
Underwriting expenses................... 315 287 370 451 454
Policyholder dividends.................. 3 4 4 9 8
------ ------ ------ ------ ------
Underwriting profit (loss).............. $ (82) $ (8) $ (28) $ (67) $ --
====== ====== ====== ====== ======
GAAP ratios:
Loss and LAE ratio.................... 74.3% 64.9% 67.0% 71.4% 67.6%
Underwriting expense ratio............ 34.3 35.6 35.3 32.9 31.8
Policyholder dividend ratio........... .3 .5 .4 .7 .6
------ ------ ------ ------ ------
Combined ratio........................ 108.9%(b) 101.0% 102.7% 105.0% 100.0%
====== ====== ====== ====== ======
Statutory ratios:
Loss and LAE ratio.................... 76.1% 67.9% 70.2% 72.1% 67.6%
Underwriting expense ratio............ 32.9 35.7 34.8 34.1 31.5
Policyholder dividend ratio........... .4 .4 .5 1.0 1.4
------ ------ ------ ------ ------
Combined ratio.......................... 109.4%(b) 104.0% 105.5% 107.2% 100.5%
====== ====== ====== ====== ======
Industry statutory combined ratio(c).... n/a 107.8% 109.6% 107.3% 103.7%
====== ====== ====== ======
</TABLE>
---------------
(a) Includes $232 million in 1998 and $315 million in 1997 generated by the
Commercial lines that were sold in December 1998.
(b) Includes an increase of 3.8 percentage points for third-quarter
strengthening of California workers' compensation reserves.
(c) Ratios are derived from "Best's Viewpoint -- Property/Casualty" (April 10,
2000 Edition) and "BestWeek -- Property/Casualty" (December 13, 1999
Edition). An industry ratio for the nine months ended September 30, 2000 is
not expected to be available until the second week of December 2000.
For further discussion of property and casualty results of operations,
please see "Management's Discussion and Analysis of Selected Financial
Information -- Results of Operations" beginning on page F-19.
Reinsurance
Consistent with standard practice of most insurance companies, we reinsure
a portion of our business with other insurance companies and assume 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. We are subject to credit
risk with respect to our reinsurers, as the ceding of risk to reinsurers
generally does not relieve us of liability to our insureds until claims are
fully settled.
We regularly monitor the financial strength of our reinsurers. This process
periodically results in the transfer of risks to more financially secure
reinsurers. Substantially all reinsurance is ceded to reinsurers
S-12
<PAGE> 15
having more than $100 million in capital and A.M. Best ratings of "A-" or
better. Premiums written for reinsurance ceded and assumed are presented in the
following table (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000 1999 1998 1997
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Reinsurance ceded................................... $656 $898 $788 $614
Reinsurance assumed -- including involuntary pools
and associations.................................. 35 48 38 89
</TABLE>
Loss and Loss Adjustment Expense Reserves
Our consolidated financial statements include the estimated liability for
unpaid losses and LAE of our insurance subsidiaries, including business
reinsured (amounts recoverable from reinsurers are shown as an asset in the
balance sheet). The 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, we
monitor items such as the effect of inflation on medical, hospitalization,
material, repair and replacement costs, general economic trends and the legal
environment. Although we believe that the reserves currently established reflect
a reasonable provision for the ultimate cost of all losses and claims, actual
development may vary materially.
We recognize 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, we hold reasonable
"incurred but not reported" reserves and do not recognize underwriting profit
until the experience matures.
Asbestos and Environmental Reserves
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. We believe these issues are not likely to be resolved
in the near future.
As part of our continuing process of monitoring appropriate reserve needs
and prompted by the retention of certain A&E exposures under the agreement
covering the sale of our Commercial lines division, we conducted a thorough
study of our A&E exposures in 1998. Our study was reviewed by independent
actuaries who used state-of-the-art actuarial techniques that have wide
acceptance in the industry. We recorded a charge of $214 million in 1998 to
increase A&E reserves to our best estimate of the ultimate liability. At
December 31, 1999, our three year survival ratio was approximately 15 times
average paid losses. A.M. Best has reported that it believes that the average
three year survival ratio for property and casualty insurance companies at that
date was approximately 7.8 times paid losses. (Source: "Best's
Viewpoint -- Property/ Casualty" October 26, 2000). The survival ratio is
derived by dividing reserves for A&E exposures by annual paid losses for A&E
exposures and is used in the industry as a measure of A&E claim reserves.
S-13
<PAGE> 16
ANNUITY AND LIFE OPERATIONS
Our annuity and life operations are conducted through Great American
Financial Resources, Inc. (formerly known as American Annuity Group, Inc.), a
holding company which markets primarily retirement annuity products as well as
life and supplemental health insurance. Great American Financial Resources sells
most of its traditional annuity products to employees of educational and other
not-for-profit organizations. Its common stock is traded on The New York Stock
Exchange under the symbol "GFR." Great American Financial Resources and its
subsidiaries employ approximately 1,900 persons.
Retirement Products
Great American Financial Resources' principal retirement products are
Flexible Premium Deferred Annuities and Single Premium Deferred Annuities.
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.
The following table (in millions) presents combined financial information
concerning Great American Financial Resources' principal annuity subsidiaries.
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C> <C>
GAAP BASIS
Total Assets................................... $6,903 $6,657 $6,549 $6,289
Fixed Annuity Reserves......................... 5,299 5,349 5,396 5,355
Variable Annuity Reserves...................... 576 354 120 37
Stockholders' Equity........................... 838 801 862 770
STATUTORY BASIS
Total Assets................................... $6,635 $6,493 $6,159 $5,977
Fixed Annuity Reserves......................... 5,411 5,564 5,538 5,469
Variable Annuity Reserves...................... 576 354 120 37
Capital Accounts:
Capital and Surplus.......................... 393 404 350 317
Asset Valuation Reserve...................... 70 67 63 65
Interest Maintenance Reserve................. 3 10 21 24
------ ------ ------ ------
Total Capital Accounts.................... 466 481 434 406
Annuity Receipts:
Flexible Premium:
First Year................................ $ 45 $ 55 $ 45 $ 38
Renewal................................... 111 145 149 160
------ ------ ------ ------
156 200 194 198
Single Premium:.............................. 389 388 327 291
------ ------ ------ ------
Total Annuity Receipts....................... $ 545 $ 588 $ 521 $ 489
====== ====== ====== ======
</TABLE>
At December 31, 1999, Great American Financial Resources had approximately
280,000 annuity policies in force. Great American Financial Resources seeks to
maintain a desired spread between the yield on its investment portfolio and the
rate it credits to its fixed rate annuities. Great American Financial Resources
designs its products with certain provisions to encourage policyholders to
maintain their funds with Great
S-14
<PAGE> 17
American Financial Resources for at least five to ten years. Partly due to these
features, annuity surrenders have averaged less than 10% of statutory reserves
over the past five years.
Annuity contracts are generally classified as either fixed rate (including
equity-indexed) or variable. The following table presents premiums by
classification:
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C> <C>
PREMIUMS
Traditional fixed......................................... 45% 55% 72% 83%
Variable.................................................. 47 35 17 9
Equity-indexed............................................ 8 10 11 8
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
With a traditional 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.
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
Great American Financial Resources are invested in funds managed by various
independent investment managers. Great American Financial Resources 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 Great American Financial Resources earns a spread on amounts
deposited.
An equity-indexed fixed annuity provides policyholders with a crediting
rate tied, in part, to the performance of an existing market index while
protecting them against the related downside risk through a guarantee of
principal. Great American Financial Resources 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.
Life, Accident and Health Products
Great American Financial Resources offers a variety of life, accident and
health products, including cancer, universal life, traditional whole life,
long-term care, hospital indemnity and short-term disability insurance. Many
products are marketed through payroll deduction plans and credit unions. The
life, accident and health group produced $187 million of statutory premiums in
the first nine months of 2000, $126 million in 1999, $104 million in 1998 and
$42 million in 1997. It also had more than 740,000 policies and $11.9 billion of
life insurance in force at December 31, 1999.
INVESTMENT PORTFOLIO
Our goal with respect to our investment portfolio is to maximize return on
an ongoing basis rather than focusing on short-term performance. A summary of
our investment portfolio at September 30, 2000 follows (in millions).
S-15
<PAGE> 18
<TABLE>
<CAPTION>
CARRYING
VALUE %
-------- -----
<S> <C> <C>
Fixed Maturities:
U.S. Government and Agencies.............................. $ 537 4.8%
State and Municipal....................................... 379 3.4
Foreign Government........................................ 79 0.7
Public Utilities.......................................... 593 5.3
Mortgage-Backed Securities................................ 2,583 23.1
Corporate and Other....................................... 5,716 51.1
Redeemable Preferred Stocks............................... 80 0.7
------- -----
9,967 89.1
Cash and Short-term Investments............................. 268 2.4
Other Stocks................................................ 317 2.8
Investment in Chiquita...................................... 153 1.4
Policy Loans................................................ 215 1.9
Real Estate and Other Investments........................... 271 2.4
------- -----
$11,191 100.0%
======= =====
</TABLE>
FIXED MATURITY INVESTMENTS
Our fixed maturities portfolio is invested primarily in taxable bonds. The
National Association of Insurance Commissioners assigns quality ratings which
range from Class 1 (highest quality) to Class 6 (lowest quality). The following
table shows our bonds and redeemable preferred stocks, by National Association
of Insurance Commissioners designation (and comparable Standard & Poor's
Corporation rating) as of September 30, 2000 (dollars in millions).
<TABLE>
<CAPTION>
NAIC RATING COMPARABLE S&P RATING CARRYING VALUE %
----------- ------------------------- -------------- -----
<S> <C> <C> <C>
1 AAA, AA, A $7,016 70.4%
2 BBB 2,030 20.4
------ -----
Total Investment Grade 9,046 90.8
------ -----
3 BB 403 4.0
4 B 414 4.1
5 CCC, CC, C 91 1.0
6 D 13 0.1
------ -----
Total Noninvestment Grade 921 9.2
------ -----
Total $9,967 100.0%
====== =====
</TABLE>
Our primary investment objective for fixed maturities is to earn interest
and dividend income rather than to realize capital gains. We invest in bonds and
redeemable preferred stocks that have primarily short-term and intermediate-term
maturities. The average life of our fixed maturity investments is about six
years. This practice allows flexibility in reacting to fluctuations of interest
rates.
Equity Investments
Our 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 our concentration
in a relatively small number of companies may permit us to identify investments
with above average potential to increase in value.
S-16
<PAGE> 19
At September 30, 2000, we owned 24 million shares (36%) of Chiquita Brands
International, Inc. common stock. 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.
The carrying value of our investment in Chiquita was $153 million at
September 30, 2000. Market value at that date was $75 million, and at November
1, 2000 it was $47 million. In 1993, the European Union ("EU") implemented a
regulatory system governing the importation of bananas in the EU. This quota
system, which has been ruled illegal by the World Trade Organization, has
significantly adversely impacted Chiquita's sales and market share in Europe as
well as banana prices in other worldwide markets. To date, the United States
government has been unable to obtain relief from the EU. These factors and
others have led to a significant decline in Chiquita's operating results and in
the quoted market value of our Chiquita investment. Should we conclude that the
decline in the quoted market price of our Chiquita investment is other than
temporary, we would recognize a writedown of the investment.
S-17
<PAGE> 20
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated December , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Bear Stearns & Co.
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, the following respective numbers of shares of common stock.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc.....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
----------
Total............................................. 6,250,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares if any are purchased, other than those covered by the
over-allotment option described below. The underwriting agreement also provides
that if an underwriter defaults, the purchase commitment of non-defaulting
underwriters may be increased or the offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 937,500 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the common stock initially at the public
offering price on the cover page of this prospectus supplement and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering the
representatives may change the public offering price and concession and discount
to broker/dealers.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us(1)......... $ $ $ $
Expenses payable by us.............. $ $ $ $
</TABLE>
---------------
(1) We will not pay any underwriting discounts and commissions on the common
stock sold to Carl H. Lindner and our Retirement and Savings Plan.
We have agreed that we will not offer, sell, contract to sell, announce our
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to,
any shares of common stock or any securities convertible into, or exchangeable
or exercisable for, any shares of common stock, in each case for a period of 90
days after the closing of the offering contemplated by this prospectus
supplement, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation, provided, however, that (1) we may issue and
sell common stock pursuant to any employee stock option plan, directors' stock
option plan, deferred compensation plan, employee stock purchase plan, stock
ownership plan
S-18
<PAGE> 21
or dividend reinvestment plan in effect on the date of this prospectus
supplement and (2) we may issue common stock upon the conversion of securities
or the exercise of warrants outstanding on the date of this prospectus
supplement.
Our executive officers and directors have agreed that they will not offer,
sell, contract to sell, announce their intention to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of common stock or securities
convertible into or exchangeable or exercisable for any shares of common stock,
enter into a transaction which would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of common stock, whether any such
aforementioned transaction is to be settled by delivery of common stock or such
other securities, in cash or otherwise, or publicly disclose the intention to
make any such offer, sale, pledge or disposition, or to enter any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the closing of the offering contemplated by this prospectus
supplement.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments that they may be required to make in
that respect.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option (a naked short position), the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
A prospectus supplement in electronic format may be made available on the
web sites maintained by one or more of the underwriters participating in this
offering. The representatives may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders. Internet
distributions will be
S-19
<PAGE> 22
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate, DLJ Direct, Inc., an on-line
broker/dealer, as a selling group member.
The underwriters have engaged in transactions with and performed various
investment banking and other services for us in the past and may do so from time
to time in the future.
Carl H. Lindner, Chairman of the Board, Chief Executive Officer and a
principal shareholder of the company, and our Retirement and Savings Plan intend
to invest approximately $15 million and $10 million, respectively, in the
purchase of common stock in the offering. In the offering, Mr. Lindner and the
Retirement and Savings Plan will pay the per share public offering price, net of
any underwriting discounts and commissions.
NOTICES TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws;
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the
S-20
<PAGE> 23
sale of any common stock acquired by the purchaser in this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed for common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio, will provide us with
an opinion as to legal matters in connection with the common stock offered by
this prospectus. Dewey Ballantine LLP, New York, New York, will pass upon
certain legal matters for the underwriters. Dewey Ballantine LLP will rely upon
the opinion of Keating, Muething & Klekamp, P.L.L. as to matters governed by the
laws of the State of Ohio. Paul V. Muething, a partner of Keating, Muething &
Klekamp, P.L.L., serves as trustee of a trust which holds 3,878,630 shares of
our common stock for the benefit of members of the Lindner family. Mr. Muething
has sole voting and dispositive power over the shares as trustee, but has no
financial interest in them.
EXPERTS
Our consolidated financial statements appearing in our Annual Report (Form
10-K) for the year ended December 31, 1999, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
S-21
<PAGE> 24
SELECTED FINANCIAL INFORMATION
The following financial information has generally been extracted from AFG's
Quarterly Report on Form 10-Q for September 30, 2000, and Annual Report on Form
10-K for the three years ended December 31, 1999.
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS:
Cash and short-term investments........................... $ 268,447 $ 390,630
Investments:
Fixed maturities -- at market (amortized
cost -- $10,143,117 and $10,101,105).................. 9,966,717 9,862,205
Other stocks -- at market (cost -- $180,030 and
$229,201)............................................. 317,530 409,701
Investment in investee corporation..................... 153,262 159,984
Policy loans........................................... 214,631 217,171
Real estate and other investments...................... 270,521 269,032
----------- -----------
Total investments................................. 10,922,661 10,918,093
Recoverables from reinsurers and prepaid reinsurance
premiums............................................... 1,849,782 2,105,818
Agents' balances and premiums receivable.................. 822,113 656,924
Deferred acquisition costs................................ 747,437 660,672
Other receivables......................................... 239,896 223,753
Variable annuity assets (separate accounts)............... 576,464 354,371
Prepaid expenses, deferred charges and other assets....... 491,938 411,742
Cost in excess of net assets acquired..................... 314,887 332,072
----------- -----------
$16,233,625 $16,054,075
=========== ===========
LIABILITIES AND CAPITAL:
Unpaid losses and loss adjustment expenses................ $ 4,621,129 $ 4,795,449
Unearned premiums......................................... 1,417,810 1,325,766
Annuity benefits accumulated.............................. 5,473,096 5,519,528
Life, accident and health reserves........................ 587,668 520,644
Long-term debt:
Holding companies...................................... 546,792 492,923
Subsidiaries........................................... 190,976 239,733
Variable annuity liabilities (separate accounts).......... 576,464 354,371
Accounts payable, accrued expenses and other
liabilities............................................ 980,116 976,413
----------- -----------
Total liabilities................................. 14,394,051 14,224,827
Minority interest........................................... 492,916 489,270
Shareholders' Equity:
Common Stock, no par value
-- 200,000,000 shares authorized
-- 58,754,411 and 58,419,952 shares outstanding........ 58,754 58,420
Capital surplus........................................... 746,872 742,220
Retained earnings......................................... 552,132 557,538
Unrealized loss on marketable securities, net............. (11,100) (18,200)
----------- -----------
Total shareholders' equity........................ 1,346,658 1,339,978
----------- -----------
$16,233,625 $16,054,075
=========== ===========
</TABLE>
F-1
<PAGE> 25
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
INCOME:
Property and casualty insurance premiums.................. $1,856,935 $1,680,561
Life, accident and health premiums........................ 166,146 77,418
Investment income......................................... 639,134 632,302
Realized gains (losses) on sales of:
Securities............................................. (20,563) 5,997
Subsidiaries........................................... 19,038 --
Other investments...................................... 27,230 --
Other income.............................................. 145,381 100,343
---------- ----------
2,833,301 2,496,621
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses.................... 1,463,456 1,188,050
Commissions and other underwriting expenses............ 556,272 506,646
Annuity benefits.......................................... 203,783 194,977
Life, accident and health benefits........................ 124,308 52,238
Interest charges on borrowed money........................ 51,007 48,122
Other operating and general expenses...................... 335,766 264,210
---------- ----------
2,734,592 2,254,243
---------- ----------
Operating earnings before income taxes...................... 98,709 242,378
Provision for income taxes.................................. 28,767 80,563
---------- ----------
Net operating earnings...................................... 69,942 161,815
Minority interest expense, net of tax....................... (26,699) (30,735)
Equity in net earnings (loss) of investee, net of tax....... (4,368) 1,715
---------- ----------
Earnings before extraordinary items and accounting change... 38,875 132,795
Extraordinary items -- gain (loss) on prepayment of debt.... -- (2,261)
Cumulative effect of accounting change...................... -- (3,854)
---------- ----------
NET EARNINGS................................................ $ 38,875 $ 126,680
========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary items and accounting change.......... $ .66 $ 2.21
Gain (loss) on prepayment of debt......................... -- (.04)
Cumulative effect of accounting change.................... -- (.06)
---------- ----------
Net earnings (loss) available to Common Shares............ $ .66 $ 2.11
========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary items and accounting change.......... $ .66 $ 2.18
Gain (loss) on prepayment of debt......................... -- (.04)
Cumulative effect of accounting change.................... -- (.06)
---------- ----------
Net earnings (loss) available to Common Shares............ $ .66 $ 2.08
========== ==========
Average number of Common Shares:
Basic..................................................... 58,525 60,177
Diluted................................................... 58,731 60,764
Cash dividends per Common Share............................. $ .75 $ .75
</TABLE>
F-2
<PAGE> 26
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Property and casualty insurance premiums............. $2,210,819 $2,698,738 $2,824,381
Life, accident and health premiums................... 123,928 170,365 121,506
Investment income.................................... 842,065 883,700 868,946
Realized gains on sales of:
Securities........................................ 20,152 6,275 46,006
Investee.......................................... -- 9,420 11,428
Subsidiaries...................................... -- 158,673 33,602
Other investments................................. -- 5,293 --
Other income......................................... 137,518 130,768 120,418
---------- ---------- ----------
3,334,482 4,063,232 4,026,287
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses............... 1,588,651 2,215,283 2,075,616
Commissions and other underwriting expenses....... 665,109 772,917 790,324
Annuity benefits..................................... 262,632 261,666 278,829
Life, accident and health benefits................... 86,439 131,652 110,082
Interest charges on borrowed money................... 63,672 57,682 52,331
Other operating and general expenses................. 365,918 350,282 339,475
---------- ---------- ----------
3,032,421 3,789,482 3,646,657
---------- ---------- ----------
Operating earnings before income taxes................. 302,061 273,750 379,630
Provision for income taxes............................. 98,198 94,067 130,684
---------- ---------- ----------
Net operating earnings................................. 203,863 179,683 248,946
Minority interest expense, net of tax.................. (39,085) (45,935) (45,846)
Equity in net losses of investee, net of tax........... (17,783) (8,578) (3,617)
---------- ---------- ----------
Earnings before extraordinary items and accounting
change............................................... 146,995 125,170 199,483
Extraordinary items -- loss on prepayment of debt...... (1,701) (770) (7,233)
Cumulative effect of accounting change................. (3,854) -- --
---------- ---------- ----------
NET EARNINGS........................................... $ 141,440 $ 124,400 $ 192,250
========== ========== ==========
Premium over stated value paid on redemption of
preferred stock...................................... -- -- (153,333)
Net earnings available to Common Shares................ $ 141,440 $ 124,400 $ 38,917
========== ========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary items and accounting change..... $ 2.46 $ 2.04 $ .77
Loss on prepayment of debt........................... (.03) (.01) (.12)
Cumulative effect of accounting change............... (.06) -- --
---------- ---------- ----------
Net earnings available to Common Shares.............. $ 2.37 $ 2.03 $ .65
========== ========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary items and accounting change..... $ 2.44 $ 2.01 $ .76
Loss on prepayment of debt........................... (.03) (.01) (.12)
Cumulative effect of accounting change............... (.06) -- --
---------- ---------- ----------
Net earnings available to Common Shares.............. $ 2.35 $ 2.00 $ .64
========== ========== ==========
Average number of Common Shares:
Basic................................................ 59,732 61,222 59,660
Diluted.............................................. 60,210 62,185 60,748
Cash dividends per Common Share........................ $ 1.00 $ 1.00 $ 1.00
</TABLE>
F-3
<PAGE> 27
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 (LOSS)
SHARES SURPLUS EARNINGS ON SECURITIES TOTAL
---------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 2000... 58,419,952 $800,640 $557,538 $(18,200) $1,339,978
Net earnings................. -- -- 38,875 -- 38,875
Change in unrealized......... -- -- -- 7,100 7,100
----------
Comprehensive income....... 45,975
Dividends on Common Stock.... -- -- (43,880) -- (43,880)
Shares issued:
Exercise of stock
options................. 39,319 831 -- -- 831
Dividend reinvestment
plan.................... 3,910 92 -- -- 92
Employee stock purchase
plan.................... 54,738 1,356 -- -- 1,356
Retirement plan
contributions........... 274,716 6,242 -- -- 6,242
Directors fees paid in
stock................... 2,820 72 -- -- 72
Shares repurchased........... (41,044) (562) (579) -- (1,141)
Tax effect of intercompany
dividends.................. -- (4,800) -- -- (4,800)
Repurchase of trust preferred
securities................. -- -- 178 -- 178
Other........................ -- 1,755 -- -- 1,755
---------- -------- -------- -------- ----------
BALANCE AT SEPTEMBER 30,
2000....................... 58,754,411 $805,626 $552,132 $(11,100) $1,346,658
========== ======== ======== ======== ==========
</TABLE>
F-4
<PAGE> 28
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 (LOSS)
SHARES SURPLUS EARNINGS ON SECURITIES TOTAL
---------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.... 61,071,626 $806,721 $ 559,716 $ 188,000 $1,554,437
Net earnings.................... -- -- 192,250 -- 192,250
Change in unrealized............ -- -- -- 160,900 160,900
----------
Comprehensive income............ 353,150
Dividends on Common Stock....... -- -- (59,589) -- (59,589)
Shares issued:
Exercise of stock options..... 413,312 11,292 -- -- 11,292
Dividend reinvestment plan.... 8,207 314 -- -- 314
Employee stock purchase
plan........................ 65,692 2,553 -- -- 2,553
Portion of bonuses paid in
stock....................... 40,500 1,521 -- -- 1,521
Directors fees paid in
stock....................... 1,662 68 -- -- 68
AFEI merger................... 2,122,548 51,926 -- -- 51,926
Shares repurchased.............. (2,674,643) (35,347) (61,973) -- (97,320)
Retirement of AFC Preferred
Stock......................... -- -- (153,333) -- (153,333)
Tax effect of intercompany
dividends..................... -- (1,960) -- -- (1,960)
Other........................... -- (350) -- -- (350)
---------- -------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1997.... 61,048,904 $836,738 $ 477,071 $ 348,900 $1,662,709
========== ======== ========= ========= ==========
Net earnings.................... -- -- 124,400 -- $ 124,400
Change in unrealized............ -- -- -- 8,600 8,600
----------
Comprehensive income............ 133,000
Dividends on Common Stock....... -- -- (61,222) -- (61,222)
Shares issued:
Exercise of stock options..... 296,416 8,288 -- -- 8,288
Dividend reinvestment plan.... 11,021 432 -- -- 432
Employee stock purchase
plan........................ 68,177 2,689 -- -- 2,689
401-K plan company match...... 44,035 1,783 -- -- 1,783
Portion of bonuses paid in
stock....................... 20,300 816 -- -- 816
Directors fees paid in
stock....................... 2,280 90 -- -- 90
Shares repurchased.............. (562,811) (7,768) (13,221) -- (20,989)
Tax effect of intercompany
dividends..................... -- (11,703) -- -- (11,703)
Other........................... -- 284 -- -- 284
---------- -------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1998.... 60,928,322 $831,649 $ 527,028 $ 357,500 $1,716,177
========== ======== ========= ========= ==========
Net earnings.................... -- -- 141,440 -- $ 141,440
Change in unrealized............ -- -- -- (375,700) (375,700)
----------
Comprehensive income (loss)..... (234,260)
Dividends on Common Stock....... -- -- (59,754) -- (59,754)
Shares issued:
Exercise of stock options..... 79,762 2,200 -- -- 2,200
Dividend reinvestment plan.... 6,099 222 -- -- 222
Employee stock purchase
plan........................ 63,794 2,136 -- -- 2,136
401-K plan company match...... 57,888 2,171 -- -- 2,171
Portion of bonuses paid in
stock....................... 38,640 1,439 -- -- 1,439
Directors fees paid in
stock....................... 2,683 90 -- -- 90
Shares repurchased.............. (2,757,236) (37,726) (51,176) -- (88,902)
Tax effect of intercompany
dividends..................... -- (6,400) -- -- (6,400)
Other........................... -- 4,859 -- -- 4,859
---------- -------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1999.... 58,419,952 $800,640 $ 557,538 $ (18,200) $1,339,978
========== ======== ========= ========= ==========
</TABLE>
F-5
<PAGE> 29
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings.............................................. $ 38,875 $ 126,680
Adjustments:
Extraordinary items..................................... -- 2,261
Cumulative effect of accounting change.................. -- 3,854
Equity in net (earnings) loss of investee............... 4,368 (1,715)
Depreciation and amortization........................... 94,379 68,659
Annuity benefits........................................ 203,783 194,977
Realized gains on investing activities.................. (40,246) (20,749)
Deferred annuity and life policy acquisition costs...... (106,844) (87,009)
Increase in reinsurance and other receivables........... (57,172) (135,237)
Increase in other assets................................ (63,973) (65,621)
Increase in insurance claims and reserves............... 286,781 116,590
Increase in other liabilities........................... 9,446 95,660
Increase in minority interest........................... 2,879 8,016
Dividends from investee................................. -- 3,600
Other, net.............................................. 13,330 (1,196)
----------- -----------
385,606 308,770
----------- -----------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments.............................. (1,237,409) (1,562,054)
Equity securities....................................... (22,547) (56,041)
Subsidiaries............................................ -- (204,942)
Real estate, property and equipment..................... (57,238) (63,496)
Maturities and redemptions of fixed maturity
investments............................................. 465,637 801,833
Sales of:
Fixed maturity investments.............................. 651,578 886,790
Equity securities....................................... 67,473 45,887
Subsidiaries............................................ 35,000 --
Real estate, property and equipment..................... 8,156 24,394
Cash and short-term investments of acquired (former)
subsidiaries, net....................................... (131,880) 19,454
Decrease in other investments............................. 8,695 12,734
----------- -----------
(212,535) (95,441)
----------- -----------
FINANCING ACTIVITIES:
Fixed annuity receipts.................................... 359,884 330,744
Annuity surrenders, benefits and withdrawals.............. (564,454) (518,713)
Net transfers from fixed to variable annuity assets....... (44,305) (13,589)
Additional long-term borrowings........................... 131,341 557,170
Reductions of long-term debt.............................. (133,343) (417,015)
Issuances of Common Stock................................. 1,890 2,968
Repurchases of Common Stock............................... -- (88,597)
Repurchases of trust preferred securities................. (2,479) (5,509)
Cash dividends paid....................................... (43,788) (44,930)
----------- -----------
(295,254) (197,471)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... (122,183) 15,858
Cash and short-term investments at beginning of period...... 390,630 296,721
----------- -----------
Cash and short-term investments at end of period............ $ 268,447 $ 312,579
=========== ===========
</TABLE>
F-6
<PAGE> 30
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings....................................... $ 141,440 $ 124,400 $ 192,250
Adjustments:
Extraordinary items............................. 1,701 770 7,233
Cumulative effect of accounting change.......... 3,854 -- --
Equity in net losses of investee................ 17,783 8,578 3,617
Depreciation and amortization................... 94,984 106,041 76,434
Annuity benefits................................ 262,632 261,666 278,829
Changes in reserves on assets................... (8,285) 14,020 7,610
Realized gains on investing activities.......... (37,988) (205,659) (103,157)
Deferred annuity and life policy acquisition
costs......................................... (119,382) (117,202) (72,634)
Increase in reinsurance and other receivables... (112,558) (439,183) (171,690)
Decrease (increase) in other assets............. 58,404 (5,575) 23,763
Increase in insurance claims and reserves....... 112,721 480,052 206,900
Increase (decrease) in other liabilities........ (50,590) 158,523 (26,056)
Increase in minority interest................... 11,112 5,731 22,654
Dividends from investee......................... 4,799 4,799 4,799
Other, net...................................... (2,396) (11,516) (24,549)
----------- ----------- -----------
378,231 385,445 426,003
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments...................... (2,049,536) (2,155,192) (2,555,060)
Equity securities............................... (80,624) (78,604) (37,107)
Subsidiaries.................................... (285,971) (30,325) (118,713)
Real estate, property and equipment............. (74,063) (66,819) (64,917)
Maturities and redemptions of fixed maturity
investments..................................... 1,047,169 1,248,775 897,786
Sales of:
Fixed maturity investments...................... 1,226,111 795,520 1,407,598
Equity securities............................... 100,076 28,850 104,960
Investees and subsidiaries...................... -- 164,589 32,500
Real estate, property and equipment............. 31,354 53,962 23,289
Cash and short-term investments of acquired
(former) subsidiaries, net...................... 54,331 (21,141) 2,714
Decrease (increase) in other investments........... 21,439 (15,135) (12,892)
----------- ----------- -----------
(9,714) (75,520) (319,842)
----------- ----------- -----------
FINANCING ACTIVITIES:
Fixed annuity receipts............................. 446,430 480,572 493,708
Annuity surrenders, benefits and withdrawals....... (706,840) (690,388) (607,174)
Additional long-term borrowings.................... 614,638 262,537 284,150
Reductions of long-term debt....................... (478,657) (251,837) (230,688)
Issuances of Common Stock.......................... 3,459 10,236 13,845
Repurchases of Common Stock........................ (88,597) (20,651) (97,320)
Issuances of trust preferred securities............ -- -- 149,353
Repurchase of trust preferred securities........... (5,509) -- --
Repurchases of subsidiary preferred stock.......... -- -- (243,939)
Cash dividends paid................................ (59,532) (60,790) (59,275)
----------- ----------- -----------
(274,608) (270,321) (297,340)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS........................................ 93,909 39,604 (191,179)
Cash and short-term investments at beginning of
period............................................. 296,721 257,117 448,296
----------- ----------- -----------
Cash and short-term investments at end of period..... $ 390,630 $ 296,721 $ 257,117
=========== =========== ===========
</TABLE>
F-7
<PAGE> 31
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for American Financial Group, Inc. ("AFG") and subsidiaries as of and for the
nine months ended September 30, 2000, are unaudited; however, management
believes that all adjustments (consisting only of normal recurring accruals
unless otherwise disclosed herein) necessary for fair presentation have been
made. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Changes in circumstances could cause actual
results to differ materially from those estimates.
INVESTMENTS All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity. 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.
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.
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 periods of 20 to 40 years.
INSURANCE As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for reinsurance
recoverable. To the extent that unrealized gains (losses) from securities
classified as "available for sale" would result in adjustments to deferred
acquisition costs and policyholder liabilities had those gains (losses) actually
been realized, such balance sheet amounts are adjusted, net of deferred taxes.
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
F-8
<PAGE> 32
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and casualty companies, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against income
ratably over the terms of the related policies. For the annuity companies, DPAC
is amortized, with interest, in relation to the present value of expected gross
profits on the policies.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities stated for
unpaid claims and for expenses of investigation and adjustment of unpaid claims
are based upon (a) the accumulation of case estimates for losses reported prior
to the close of the accounting period on the direct business written; (b)
estimates received from ceding reinsurers and insurance pools and associations;
(c) estimates of unreported losses based on past experience; (d) estimates based
on experience of expenses for investigating and adjusting claims and (e) the
current state of the law and coverage litigation. These liabilities are subject
to the impact of changes in claim amounts and frequency and other factors. In
spite of the variability inherent in such estimates, management believes that
the liabilities for unpaid losses and loss adjustment expenses are adequate.
Changes in estimates of the liabilities for losses and loss adjustment expenses
are reflected in the Statement of Earnings in the period in which determined.
ANNUITY BENEFITS ACCUMULATED Annuity receipts and benefit payments are
recorded as increases or decreases in "annuity benefits accumulated" rather than
as revenue and expense. Increases in this liability for interest credited are
charged to expense and decreases for surrender charges are credited to other
income.
LIFE, ACCIDENT AND HEALTH RESERVES Liabilities for future policy benefits
under traditional 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 established for accident and health claims are modified as
necessary to reflect actual experience and developing trends.
VARIABLE ANNUITY ASSETS AND LIABILITIES Separate accounts related to
variable annuities represent deposits invested in underlying investment funds on
which Great American Financial Resources, Inc. ("GAFRI", formerly American
Annuity Group, Inc.), an 83%-owned subsidiary, earns a fee. The investment funds
are selected and may be changed only by the policyholder.
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.
F-9
<PAGE> 33
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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 Prior to 1999, GAFRI deferred certain costs associated with
introducing new products and distribution channels and amortized them on a
straight-line basis over 5 years. In 1999, GAFRI implemented Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." The SOP
requires that (i) costs of start-up activities be expensed as incurred and (ii)
unamortized balances of previously deferred costs be expensed and reported as
the cumulative effect of a change in accounting principle. Accordingly, AFG
expensed previously capitalized start-up costs of $3.8 million (net of minority
interest and taxes) or $.06 per diluted share, effective January 1, 1999.
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 establishes accounting and reporting
standards for derivative instruments, including derivative instruments that are
embedded in other contracts, and for hedging activities and must be implemented
no later than January 1, 2001. SFAS No. 133 requires the recognition of all
derivatives (both assets and liabilities) in the balance sheet 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 Basic earnings per share is calculated using the
weighted average number of shares of common stock outstanding during the period.
The calculation of diluted earnings per share includes
F-10
<PAGE> 34
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the following dilutive effect of common stock options: third quarter of 2000 and
1999 -- 236,000 shares and 379,000 shares; nine months of 2000 and
1999 -- 206,000 shares and 587,000 shares, respectively.
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.
B. ACQUISITIONS AND SALES OF SUBSIDIARIES
STONEWALL INSURANCE COMPANY In September 2000, AFG sold Stonewall
Insurance Company for $35.6 million (including a $25.6 million dividend to AFG
immediately prior to the sale) realizing a pretax loss of $6 million. Stonewall
was a non-operating property and casualty subsidiary with approximately $320
million in assets, primarily engaged in the run-off of approximately $170
million in asbestos and environmental liabilities associated with policies
written through 1991.
START-UP MANUFACTURING BUSINESSES Since 1998, AFG subsidiaries have made
loans to two start-up manufacturing businesses which were previously owned by
unrelated third-parties. During 2000, the former owners chose to forfeit their
equity interests to AFG rather than invest additional capital. Total loans
extended to these businesses prior to forfeiture amounted to $49.7 million and
the accumulated losses of the two businesses were approximately $29.7 million.
WORLDWIDE INSURANCE COMPANY In April 1999, AFG acquired Worldwide
Insurance Company for $157 million in cash. Worldwide is a provider of direct
response private passenger automobile insurance.
UNITED TEACHER ASSOCIATES In October 1999, GAFRI acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA"), a company which provides
supplemental health products and retirement annuities, and purchases blocks of
insurance policies from other insurers.
GREAT AMERICAN LIFE INSURANCE COMPANY OF NEW YORK AND CONSOLIDATED
FINANCIAL In February 1999, GAFRI acquired Great American Life Insurance
Company of New York, formerly Old Republic Life Insurance Company of New York,
for $27 million in cash. In July 1999, GAFRI acquired Consolidated Financial
Corporation, an insurance agency, for $21 million in cash.
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 6 million (post split) shares of Ohio
Casualty common stock. 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. In August 2000, AFG received an additional payment of $25 million
from Ohio Casualty based on retention and growth through May 2000 of the
businesses sold. This earn-out was recognized as additional "gain on sale of
subsidiary". The commercial lines sold generated net written premiums of
approximately $230 million in 1998 (11 months) and $315 million in 1997.
FUNERAL SERVICES DIVISION In September 1998, GAFRI 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 pretax gain
of $21.6 million, before $2.7 million of minority interest, on this sale.
MILLENNIUM DYNAMICS, INC. In 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
F-11
<PAGE> 35
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
C. SEGMENTS OF OPERATIONS
AFG's property and casualty group is engaged primarily in private passenger
automobile and specialty insurance businesses. The Personal group writes
nonstandard and preferred/standard private passenger auto and other personal
insurance coverage. The Specialty group includes a highly diversified group of
specialty business units. Some of the more significant areas are inland and
ocean marine, California workers' compensation, agricultural-related coverages,
executive and professional liability, U.S.-based operations of Japanese
companies, fidelity and surety bonds, collateral protection, and umbrella and
excess coverages. AFG's annuity and life business markets primarily retirement
products as well as life and supplemental health insurance. In addition, AFG
owns a significant portion of the voting equity securities of Chiquita Brands
International, Inc. (an investee corporation -- see Note D).
F-12
<PAGE> 36
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables (in thousands) shows AFG's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES(a)
Property and casualty
insurance:
Premiums earned:
Personal............ $ 940,237 $ 875,036 $1,163,223 $1,289,689 $1,356,642
Specialty........... 917,057 804,957 1,047,858 1,371,509 1,429,143
Other lines......... (359) 568 (262) 37,540 38,596
---------- ---------- ---------- ---------- ----------
1,856,935 1,680,561 2,210,819 2,698,738 2,824,381
Investment and other
income.............. 349,181 329,885 450,829 643,106 448,849
---------- ---------- ---------- ---------- ----------
2,206,116 2,010,446 2,661,648 3,341,844 3,273,230
Annuities and life(b).... 596,574 465,348 640,036 729,854 638,348
Other.................... 30,611 20,827 32,798 (8,466) 114,709
---------- ---------- ---------- ---------- ----------
$2,833,301 $2,496,621 $3,334,482 $4,063,232 $4,026,287
========== ========== ========== ========== ==========
OPERATING PROFIT (LOSS)
Property and casualty
insurance:
Underwriting:
Personal............ $ (72,029) $ (1,121) $ (7,685) $ 34,029 $ 21,235
Specialty........... (81,758) (7,925) (28,015) (67,131) (324)
Other lines(c)...... (9,006) (5,089) (7,241) (256,360) (62,470)
---------- ---------- ---------- ---------- ----------
(162,793) (14,135) (42,941) (289,462) (41,559)
Investment and other
income.............. 235,457 204,095 299,057 518,234 320,710
---------- ---------- ---------- ---------- ----------
72,664 189,960 256,116 228,772 279,151
Annuities and life....... 75,806 95,050 112,498 165,238 122,401
Other(d)................. (49,761) (42,632) (66,553) (120,260) (21,922)
---------- ---------- ---------- ---------- ----------
$ 98,709 $ 242,378 $ 302,061 $ 273,750 $ 379,630
========== ========== ========== ========== ==========
</TABLE>
---------------
(a) Revenues include sales of products and services as well as other income
earned by the respective segments.
(b) Represents primarily investment income.
(c) Represents primarily losses related to asbestos and other environmental
matters ("A&E").
(d) Includes holding company expenses.
F-13
<PAGE> 37
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. INVESTMENT IN INVESTEE CORPORATION
Investment in investee corporation reflects AFG's ownership of 24 million
shares (36%) of Chiquita common stock. The market value of this investment was
$75 million and $114 million at September 30, 2000 and December 31, 1999,
respectively and $47 million at November 1, 2000. Chiquita is a leading
international marketer, producer and distributor of quality fresh fruits and
vegetables and processed foods. Summarized financial information for Chiquita
follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ --------------------------
2000 1999 1999 1998 1997
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Current Assets................................ $ 861 $ 903
Noncurrent Assets............................. 1,611 1,693
Current Liabilities........................... 585 488
Noncurrent Liabilities........................ 1,203 1,403
Shareholders' Equity.......................... 684 705
Net Sales..................................... $1,725 $1,937 $2,556 $2,720 $2,434
Operating Income.............................. 88 93 42 79 100
Net Income (Loss)............................. (6) 19 (58) (18) --
Net Income (Loss) Attributed to Common
Shares...................................... (19) 7 (75) (36) (17)
</TABLE>
E. LONG-TERM DEBT
The carrying value of long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
HOLDING COMPANIES:
AFG 7 1/8% Senior Debentures due April 2009............. $300,890 $300,766
AFG 7 1/8% Senior Debentures due December 2007.......... 79,600 79,600
AFC notes payable under bank line....................... 140,000 68,000
American Premier Underwriters, Inc. ("APU") 10 5/8%
Subordinated Notes................................... -- 23,786
APU 10 7/8% Subordinated Notes due May 2011............. 11,623 11,661
Other................................................... 14,679 9,110
-------- --------
$546,792 $492,923
======== ========
SUBSIDIARIES:
GAFRI 6 7/8% Senior Notes due June 2008................. $100,000 $100,000
GAFRI notes payable under bank line..................... 48,500 97,000
Notes payable secured by real estate.................... 31,331 31,704
Other................................................... 11,145 11,029
-------- --------
$190,976 $239,733
======== ========
</TABLE>
In April 2000, AFG redeemed the APU 10 5/8% Notes at maturity using funds
borrowed under the AFC bank line.
F-14
<PAGE> 38
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 2000, sinking fund and other scheduled principal payments
on debt for the balance of 2000 and the subsequent five years were as follows
(in millions):
<TABLE>
<CAPTION>
HOLDING
COMPANIES SUBSIDIARIES TOTAL
--------- ------------ ------
<S> <C> <C> <C>
2000................................................ $ -- $ .4 $ .4
2001................................................ 1.7 1.7 3.4
2002................................................ 150.0 1.6 151.6
2003................................................ -- 50.1 50.1
2004................................................ -- 14.2 14.2
2005................................................ -- 9.7 9.7
</TABLE>
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.
AFC and GAFRI each have an unsecured credit agreement with a group of banks
under which they can borrow up to $300 million and $190 million, respectively.
Borrowings bear interest at floating rates based on prime or Eurodollar
rates. Loans mature December 2002 under the AFC credit agreement and from 2000
to 2003 under the GAFRI credit agreement.
F. MINORITY INTEREST
Minority interest in AFG's balance sheet is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Interest of noncontrolling shareholders in subsidiaries'
common stock............................................ $104,099 $ 97,516
Preferred securities issued by subsidiary trusts.......... 316,663 319,600
AFC preferred stock....................................... 72,154 72,154
-------- --------
$492,916 $489,270
======== ========
</TABLE>
PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFCH and GAFRI have
issued $325 million of preferred securities and, in turn, purchased a like
amount of AFCH and GAFRI subordinated debt which provides interest and principal
payments to fund the respective trusts' obligations. The preferred securities
must be redeemed upon maturity or redemption of the subordinated debt. AFCH and
GAFRI effectively provide unconditional guarantees of their respective trusts'
obligations and AFG guarantees AFCH's obligations.
The preferred securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DATE OF SEPTEMBER 30, DECEMBER 31, OPTIONAL
ISSUANCE ISSUE (MATURITY DATE) 2000 1999 REDEMPTION DATES
-------- ---------------------- ------------- ------------ ----------------------
<S> <C> <C> <C> <C>
October 1996......... AFCH 9 1/8% TOPrS $98,750 $100,000 On or after 10/22/2001
(2026)
November 1996........ GAFRI 9 1/4% TOPrS 72,913 74,600 On or after 11/7/2001
(2026)
March 1997........... GAFRI 8 7/8% Pfd 70,000 70,000 On or after 3/1/2007
(2027)
May 1997............. GAFRI 7 1/4% ROPES 75,000 75,000 Prior to 9/28/2000 and
(2041) after 9/28/2001
</TABLE>
In the first six months of 2000, AFCH and GAFRI repurchased $1.3 million
and $1.7 million of their preferred securities for $1.1 million and $1.4 million
in cash, respectively.
F-15
<PAGE> 39
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED 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 AFC's option at $25.75 per share
beginning December 2005 declining to $25.00 at December 2007 and
thereafter; 2,886,161 shares (stated value $72.2 million) outstanding at
September 30, 2000 and December 31, 1999.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest of noncontrolling
shareholders in earnings of
subsidiaries................... $ 9,011 $12,899 $15,308 $21,845 $16,142
Accrued distributions by
subsidiaries on preferred
securities:
Trust issued securities, net of
tax......................... 13,359 13,507 18,005 18,318 15,989
AFC preferred stock............ 4,329 4,329 5,772 5,772 13,715
------- ------- ------- ------- -------
$26,699 $30,735 $39,085 $45,935 $45,846
======= ======= ======= ======= =======
</TABLE>
G. SHAREHOLDERS' EQUITY
At September 30, 2000, there were 58,754,411 shares of AFG Common Stock
outstanding, including 1,364,478 shares held by APU for possible distribution to
certain creditors and other claimants upon proper claim presentation and
settlement pursuant to the 1978 plan of reorganization of APU's predecessor, The
Penn Central Corporation. Shares being held for distribution are not eligible to
vote but otherwise are accounted for as issued and outstanding. AFG is
authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5
million shares of Nonvoting Preferred Stock, each without par value.
At September 30, 2000, there were 6.8 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date, AFG had
options for 5.5 million shares outstanding. Options generally become exercisable
at the rate of 20% per year commencing one year after grant; those granted to
non-employee directors of AFG are fully exercisable upon grant. All options
expire ten years after the date of grant.
H. 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 taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ---------------------------
SEPTEMBER 30, 1999 1999 1998 1997
------------------ ------- ----- -------
<S> <C> <C> <C> <C>
Holding Companies:
AFG (parent)......................... $ 1,735 $ 2,295 $ -- $ --
AFC (parent)......................... (2,993) (2,993) (77) (5,395)
APU (parent)......................... (1,003) (1,003) (44) (588)
Subsidiary:
GAFRI................................ -- -- (649) (1,250)
------- ------- ----- -------
$(2,261) $(1,701) $(770) $(7,233)
======= ======= ===== =======
</TABLE>
F-16
<PAGE> 40
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. 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 APU's
predecessor, Penn Central Transportation Company ("PCTC"), prior to its
bankruptcy reorganization in 1978. Under purchase accounting, any such excess
liability will be charged to earnings in AFG's financial statements.
APU's liability of $32.3 million for environmental claims at December 31,
1999, 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. APU's liability is based on information currently
available and is subject to change as additional information becomes available.
APU's liability of $39.9 million for occupational injury and disease claims
at December 31, 1999, 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 $26
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.
In management's opinion, the outcome of the items discussed in this note
will not individually or in the aggregate, have a material adverse effect on
AFG's financial condition or results of operations.
F-17
<PAGE> 41
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SELECTED FINANCIAL INFORMATION
GENERAL
AFG and its subsidiaries, AFC Holding, AFC and APU, are organized as
holding companies with almost all of their operations being conducted by
subsidiaries. These parent corporations, however, have continuing cash needs for
administrative expenses, the payment of principal and interest on borrowings,
shareholder dividends, and taxes. Therefore, certain analyses are best done on a
parent only basis while others are best done on a total enterprise basis. In
addition, since most of its businesses are financial in nature, AFG does not
prepare its consolidated financial statements using a current-noncurrent format.
Consequently, certain traditional ratios and financial analysis tests are not
meaningful.
IT INITIATIVE In the third quarter of 1999, AFG initiated an
enterprise-wide study of its information technology ("IT") resources, needs and
opportunities. The initiative entails extensive effort and costs and has led to
substantial changes in the area, which AFG believes will result in significant
cost savings, efficiencies and effectiveness in the future. While the costs
(most of which will be expensed) precede the expected savings, management
expects benefits to greatly exceed the costs incurred, all of which have been
and will be funded through available working capital.
FORWARD-LOOKING STATEMENTS This prospectus supplement, the accompanying
prospectus and the information incorporated by reference in them contain or
incorporate by reference certain forward-looking statements that are subject to
numerous assumptions, risks or uncertainties. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. Some
of the forward-looking statements can be identified by the use of
forward-looking words such as "believes", "expects", "may", "will", "should",
"seeks", "approximately", "intends", "plans", "estimates", "anticipates" or the
negative version of those words or other comparable terminology. Actual results
could differ materially from those contained in or implied by such
forward-looking statements for a variety of factors including:
- changes in economic conditions, including interest rates, performance of
securities markets, and the availability of capital;
- regulatory actions;
- changes in legal environment;
- tax law changes;
- levels of catastrophes and other major losses;
- adequacy of loss reserves;
- availability of reinsurance; and
- competitive pressures, including the ability to obtain rate increases.
Forward-looking statements speak only as of the date made. We undertake no
obligations to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made. For a discussion of
factors that could cause actual results to differ, see the information contained
in our publicly available filings with the SEC. These filings are described
under the caption "Where You Can Find More Information" in the accompanying
prospectus.
LIQUIDITY AND CAPITAL RESOURCES
RATIOS AFG's debt to total capital ratio (at the parent holding company
level) was approximately 26% at September 30, 2000 and 25% at December 31, 1999.
AFG's ratio of earnings to fixed charges (on a total enterprise basis) was 1.82
for the first nine months of 2000 and 3.36 for the entire year of 1999.
SOURCES OF FUNDS Management believes the parent holding companies have
sufficient resources to meet their liquidity requirements through operations. 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.
F-18
<PAGE> 42
AFC has a revolving credit agreement with several banks under which it can
borrow up to $300 million. AFG believes that this credit line provides ample
liquidity and can be used to obtain funds for operating subsidiaries or, if
necessary, for the parent companies. At September 30, 2000, there was $140
million borrowed under the line. At October 31, 2000, borrowings under the line
had increased to $173 million.
In April 1999, AFG issued $350 million principal amount of 7 1/8% senior
debentures due 2009, using the proceeds to retire outstanding holding company
public debt and borrowings under AFC's credit line.
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies during certain
periods in the past. However, the reliance on such dividend payments has been
lessened in recent years by the combination of (i) reductions in the amounts and
cost of debt at the holding companies from historical levels (and the related
decrease in ongoing cash needs for interest and principal payments), (ii) AFG's
ability to obtain financing in capital markets, as well as (iii) the sales of
certain noncore investments.
INVESTMENTS Approximately 91% of the fixed maturities held by AFG were
rated "investment grade" (credit rating of AAA to BBB) by nationally recognized
rating agencies at September 30, 2000. Investment grade securities generally
bear lower yields and lower degrees of risk than those that are unrated and
noninvestment grade. Management believes that the high quality investment
portfolio should generate a stable and predictable investment return.
AFG's equity securities are concentrated in a relatively limited number of
major positions. This approach allows management to more closely monitor the
companies and the industries in which they operate.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL Pretax operating earnings for the nine months ended September 30,
2000, were $98.7 million compared to $242.4 million in the comparable 1999
period. A decline in property and casualty underwriting results (including a $35
million third quarter charge for reserve strengthening in the California
workers' compensation business) and second quarter special litigation charges
were partially offset by higher realized gains and income from the sale of
certain lease rights in the third quarter.
Many investors and analysts focus on "core earnings" of companies, setting
aside certain items included in net earnings. Such "core earnings" for AFG,
consisting of net earnings (loss) adjusted to exclude: (i) realized gains
(losses), (ii) equity in investee earnings (losses), (iii) extraordinary items,
and (iv) a 1999 accounting change, were $28 million ($.48 per share) in the nine
months of 2000 compared to $126.6 million ($2.08 per share) in the nine months
of 1999.
PROPERTY AND CASUALTY INSURANCE -- UNDERWRITING AFG's property and
casualty group consists of two major business groups: Personal and Specialty.
The Personal group sells nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risk 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.
Some of the more significant areas are inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, fidelity and surety bonds, lender services collateral
protection, and umbrella and excess coverages.
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
F-19
<PAGE> 43
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.
Net written premiums and combined ratios for AFG's property and casualty
insurance subsidiaries were as follows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net Written Premiums (GAAP)
Personal.................................................. $ 997.3 $ 839.2
Specialty................................................. 974.9 850.4
Other lines............................................... (.3) (.8)
-------- --------
$1,971.9 $1,688.8
======== ========
Combined Ratios (GAAP)
Personal.................................................. 107.6% 100.2%
Specialty................................................. 108.9 101.0
Aggregate (including discontinued lines).................. 108.8 100.8
</TABLE>
PERSONAL The Personal group's increase in net written premiums reflects
firming market prices in the nonstandard auto market, expanded writings in
certain private passenger automobile markets and premiums generated by Worldwide
(AFG's direct marketing channel) since its acquisition in April 1999. The
combined ratio for the nine months of 2000 increased due to (i) increased auto
claim frequency and severity (particularly in medical and health related costs),
(ii) the impact of a very competitive pricing environment on policies written
during 1999 and early 2000 and (iii) increased underwriting expenses associated
with the direct and Internet marketing initiatives (adding approximately 1.5
points to the Personal group's combined ratio). In an effort to alleviate
increasing losses, AFG has implemented rate increases of approximately 10%
through the first nine months of the year and expects that rate increases will
be 12% by the end of 2000. These rate actions are expected to continue to
moderate premium growth in the private passenger auto insurance business for the
remainder of 2000, with the full impact on earnings not likely to take effect
until early 2001.
SPECIALTY The Specialty group's increase in net written premiums reflects
the effect of (i) the January 2000 termination of reinsurance agreements
relating to the California workers' compensation business which were in effect
throughout 1999, (ii) rate increases in certain casualty markets (particularly
California workers' compensation) and (iii) the realization of growth
opportunities in certain commercial markets. Excluding the impact of the
terminated reinsurance agreements, net written premiums were up approximately
10% for the nine months.
In response to continuing losses in the California workers' compensation
business, rate increases for this business have been about 22% so far this year
and are expected to be in excess of 40% on renewals in the fourth quarter. Rate
increases implemented in the other specialty operations have been 10% through
the first nine months of 2000 and are targeted to be 12% by year-end.
In response to adverse development in prior year losses, AFG recorded a $35
million pretax charge in the third quarter of 2000 to strengthen loss reserves
in its California workers' compensation business. The combined ratio for the
nine months of 2000 reflects this reserve strengthening (a combined ratio effect
of 3.8 points for the nine months) and the effect of a highly competitive
pricing environment on policies written during 1999.
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS The increase in life,
accident and health premiums and benefits is due primarily to the acquisition of
UTA in October 1999.
F-20
<PAGE> 44
START-UP MANUFACTURING BUSINESSES AFG's pretax operating earnings for the
first nine months of 2000 include losses of $6.7 million from two start-up
manufacturing businesses acquired in 2000 from their former owners. The
businesses are expected to reach "break-even" by the latter part of 2001.
OTHER INCOME Other income increased $45 million (45%) in the first nine
months of 2000 compared to 1999 primarily due to increased fee income generated
by certain insurance operations and income from the lease rights sale and lease
residuals.
REALIZED GAINS Realized capital gains have been an important part of the
return on investments in marketable securities. Individual securities are sold
creating gains and losses as market opportunities exist.
GAIN ON SALE OF OTHER INVESTMENTS In September 2000, GAFRI realized a
$27.2 million pretax gain on the sale of its minority ownership in a company
engaged in the production of ethanol. GAFRI's investment was repurchased by the
ethanol company which, following the purchase, became wholly-owned by AFG's
Chairman.
GAIN ON SALE OF SUBSIDIARIES In 2000, AFG recognized a $25 million second
quarter pretax gain representing an earn-out related to the 1998 sale of its
Commercial lines division and a $6 million third quarter pretax loss on the sale
of Stonewall Insurance Company.
ANNUITY BENEFITS Annuity benefits reflect amounts accrued on annuity
policyholders' funds accumulated. The majority of GAFRI's fixed rate annuity
products permit GAFRI to change the crediting rate at any time (subject to
minimum interest rate guarantees of 3% or 4% per annum). As a result, management
has been able to react to changes in market interest rates and maintain a
desired interest rate spread.
INTEREST ON BORROWED MONEY Interest expense for the nine months of 2000
increased compared to 1999 due primarily to higher average indebtedness.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
for the nine months of 2000 include second quarter charges of $32.5 million
related to an agreement to settle a lawsuit against a GAFRI subsidiary and $8.8
million for an adverse California Supreme Court ruling against an AFG property
and casualty subsidiary. Excluding these litigation charges, other operating and
general expenses increased $30.3 million (11%) for the nine months of 2000
compared to 1999 primarily due to the inclusion of the operations of UTA
following its acquisition in October 1999 and increased expenses from certain
start-up operations.
INVESTEE CORPORATION Equity in net earnings of investee represents AFG's
proportionate share of Chiquita's earnings.
In 1993, the European Union ("EU") implemented a regulatory system
governing the importation of bananas into the EU. This quota system, which has
been ruled illegal by the World Trade Organization, has significantly adversely
impacted Chiquita's sales and market share in Europe as well as banana prices in
other world-wide markets. To date, the United States government has been unable
to obtain relief from the EU. These factors have led to a significant decline in
Chiquita's operating results and in the quoted market value of AFG's Chiquita
investment. Should AFG's management conclude that the decline in the quoted
market price of its Chiquita investment is other than temporary, a writedown of
the investment would be recognized.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE In the first quarter of 1999, GAFRI
implemented Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires that costs of start-up activities be expensed as
incurred and that unamortized balances of previously deferred costs be expensed
and reported as the cumulative effect of a change in accounting principle.
Accordingly, AFG expensed previously capitalized start-up costs of $3.8 million
(net of minority interest and taxes) in the first quarter of 1999.
RESULTS OF OPERATIONS -- THREE YEARS ENDED DECEMBER 31, 1999
GENERAL Operating earnings before income taxes were $302 million in 1999,
$274 million in 1998 and $380 million in 1997. Results for 1998 include a pretax
charge of $214 million for reserve strengthening
F-21
<PAGE> 45
relating to asbestos and other environmental matters ("A&E") and $159 million of
pretax gains on sales of subsidiaries.
Pretax operating earnings for 1999 were 8% lower than those of 1998
(excluding the above mentioned A&E charge and sales gains) due primarily to
decreased investment income and a fourth quarter charge of $10 million for
estimated expenses related to realignment within the operating units of the
life, health and annuity business. These were partially offset by improved
underwriting results in the property and casualty insurance operations.
Pretax operating earnings for 1998 (excluding the above mentioned A&E
charge and sales gains) were 13% lower than those of 1997 due primarily to lower
gains on sales of securities and affiliates and a decline in the underwriting
results of the property and casualty insurance operations which were impacted by
higher catastrophe losses in 1998. These declines were partially offset by
higher income on investments.
PROPERTY AND CASUALTY INSURANCE -- UNDERWRITING Net written premiums and
combined ratios for AFG's property and casualty insurance subsidiaries were as
follows (dollars in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET WRITTEN PREMIUMS (GAAP)
Personal................................................. $1,154 $1,279 $1,345
Specialty................................................ 1,111 1,312(*) 1,468
Other Lines.............................................. (2) 18 45
------ ------ ------
$2,263 $2,609 $2,858
====== ====== ======
COMBINED RATIOS (GAAP)
Personal................................................. 100.7% 97.3% 98.5%
Specialty................................................ 102.7 105.0 100.0
Aggregate (including A&E and other lines)................ 102.0% 110.7% 101.4%
</TABLE>
---------------
(*) Includes $232 million for the 1998 year generated by the Commercial lines
sold.
SPECIAL A&E CHARGE 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. 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 databases 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.
Personal The Personal group's net written premiums for 1999 include $71
million in net premiums written by Worldwide since its acquisition in April. The
10% decrease in written premiums reflects continuing strong price competition in
the private passenger automobile market. The combined ratio for 1999 increased
as loss and underwriting expenses declined at a slower rate than premiums.
In 1998, the Personal group's net written premiums decreased 5% 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.
Specialty The Specialty group's net written premiums for 1999 increased
slightly compared to the 1998 period, excluding premiums of the Commercial lines
division sold in December 1998. The combined ratio improved as the beneficial
effects of the Commercial lines sale more than offset less favorable
underwriting results in other specialty businesses, in particular the
multi-peril crop insurance program. The Specialty group's underwriting results
for 1999 include $28 million representing amortization of a portion of the
deferred gain related to the Commercial lines business ceded to Ohio Casualty in
1998. In addition,
F-22
<PAGE> 46
underwriting margins improved in the California workers' compensation business
as favorable reinsurance agreements executed during 1998 more than offset an
increase in reserves during the fourth quarter of 1999. In January 2000, AFG
completed an agreement with Reliance Insurance Company which commuted these
reinsurance agreements.
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 in 1997. 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.
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS Life, accident and health
premiums and benefits increased in 1999 (excluding Funeral Services division
sold in 1998) due primarily to the acquisition of United Teacher Associates in
October 1999 and increased sales by GALIC's Life division. The increase in
1998's premiums and benefits reflects primarily GAFRI's acquisition of Great
American Life Assurance Company of Puerto Rico, Inc. in December 1997.
INVESTMENT INCOME Changes in investment income reflect fluctuations in
market rates and changes in average invested assets.
1999 COMPARED TO 1998 Investment income decreased 5% from 1998 due
primarily to the transfer of investment assets in connection with the sales
of the Commercial lines division and Funeral Services division in 1998,
partially offset by the effect of the purchases of Worldwide and United
Teacher Associates in 1999.
1998 COMPARED TO 1997 Investment income increased 2% from 1997 due
primarily to an increase in the average amount of investments held
partially offset by decreasing market interest rates.
GAINS ON SALES OF INVESTEE The gains on sales of investee in 1998 and 1997
represent pretax gains to AFG as a result of Chiquita's public issuance of
shares of its 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 GAFRI'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 a pretax gain of $49.9 million on the sale of MDI and a charge
of $17 million relating to operations expected to be sold or otherwise disposed
of.
OTHER INCOME
1999 COMPARED TO 1998 Other income increased $6.8 million (5%) in
1999 as increased fee income generated by certain insurance operations more
than offset a decrease in income from the sale of operating real estate and
lease residuals.
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.
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. Interest expense increased in both 1999 and 1998 due to higher
average indebtedness partially offset by lower average interest rates on AFG's
borrowings.
OTHER OPERATING AND GENERAL EXPENSES From inception of AFG's Year 2000
Project in the early 1990's through 1997, AFG expensed approximately $9 million
in remediation costs. During 1999 and 1998,
F-23
<PAGE> 47
respectively, $23 million and $27 million in such costs were expensed. Because a
significant portion of the Year 2000 Project was completed using internal staff,
these costs do not represent solely incremental costs.
1999 COMPARED TO 1998 Other operating and general expenses increased
$15.6 million (4%) as GAFRI's $10 million realignment charge and increased
expenses from start-up insurance services subsidiaries more than offset a
decrease in franchise taxes and a decrease in amortization of annuity and
life acquisition costs related to the Funeral Services division sold.
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.
MINORITY INTEREST EXPENSE Dividends paid by subsidiaries on their
preferred securities have varied as the securities were issued and retired over
the past three years.
INVESTEE CORPORATION Chiquita's operating income declined in 1999 from
1998 primarily due to weak banana pricing, particularly in Europe as a result of
the overallocation of EU banana import licenses early in the year and weakness
in demand from Eastern Europe and Russia.
Chiquita's results for 1998 include pretax writedowns and costs of $74
million as a result of significant damage in Honduras and Guatemala caused by
Hurricane Mitch. Excluding these unusual items, operating income improved 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.
Chiquita's results for 1997 were adversely affected by a stronger dollar in
relation to major European currencies and by increased banana production costs
resulting from widespread flooding in 1996.
F-24
<PAGE> 48
PROSPECTUS
$500,000,000
AMERICAN FINANCIAL GROUP, INC.
Debt Securities and Common Stock
and
AMERICAN FINANCIAL CAPITAL TRUST II
Preferred Securities
Fully and unconditionally guaranteed, as described in this prospectus, by
American Financial Group, Inc.
We will provide the specific terms of these securities in supplements to
this prospectus. You should read carefully this prospectus and any supplement
before you invest.
This Prospectus may not be used to consummate sales of securities unless
accompanied by a prospectus supplement.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is July 15, 1999.
<PAGE> 49
ABOUT THE PROSPECTUS
This prospectus is part of a registration statement filed with the
Securities and Exchange Commission utilizing a shelf registration process. Under
this shelf process, American Financial Group, Inc. and American Financial
Capital Trust II may sell the securities described in this prospectus in one or
more offerings up to a total dollar amount of $500,000,000. This prospectus
provides you with a general description of the securities which may be offered.
Each time securities are offered for sale, a prospectus supplement will be
provided that contains specific information about the terms of that offering.
The prospectus supplement may also add, update or change information contained
in this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described below under the
following heading.
WHERE YOU CAN FIND MORE INFORMATION
American Financial Group files annual, quarterly and special reports, proxy
statement and other information with the SEC. These filings are available to the
public over the Internet at the SEC's web site at http://www.sec.gov. You may
also read and copy any document American Financial Group files at the SEC's
public reference rooms in Washington, D.C., New York City and Chicago. Please
call the SEC at 1-800-732-0330 for further information on the public reference
rooms. American Financial Group's common stock, previously issued debt
securities and the securities of a related trust are also listed on the New York
Stock Exchange, and you may inspect any document at its offices located at 20
Broad Street, New York, NY 10005.
The SEC allows American Financial Group to "incorporate by reference" the
information it files with the SEC. This means that American Financial Group can
disclose important information to you by referring you to documents American
Financial Group files with the SEC. The information incorporated by reference is
an important part of this prospectus. Information that American Financial Group
files later with the SEC will automatically update and supersede information
which American Financial Group has previously incorporated by reference until
American Financial Group sells all of the securities described in this
prospectus. The following documents of American Financial Group are incorporated
by reference in this prospectus:
<TABLE>
<CAPTION>
FILING DATE
----------------------------- ----------------------------
<S> <C>
Annual Report on Form 10-K Year Ended December 31, 1998
Quarterly Report on Form 10-Q Quarter Ended March 31, 1999
Report on Form 8-K April 13, 1999
</TABLE>
All documents filed by American Financial Group under Section 13(a), 13(e),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus will be deemed incorporated by reference into this prospectus and to
be a part of this prospectus from the date of filing of the documents.
No separate financial statements of the Trust have been included and none
are incorporated by reference in this prospectus. American Financial Group does
not believe that financial statements of the Trust would be useful since the
Trust will not have any independent function other than to issue securities
representing undivided interests in its assets and investing the proceeds in
American Financial Group debt securities. In addition, all obligations of the
Trust are fully and unconditionally guaranteed by American Financial Group.
We will provide you with a copy of any of these documents we are
incorporating by reference at no cost, by writing or telephoning us at the
following address or telephone number:
James C. Kennedy
Vice President, Deputy General Counsel and Secretary
American Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
(513) 579-2538
i
<PAGE> 50
You should rely only on the information incorporated by reference or
provided in this prospectus. No one else is authorized to provide you with any
other information or any different information. Neither American Financial Group
nor the Trust is making an offer of its securities in any state where an offer
is not permitted. You should not assume that the information in this prospectus
is accurate as of any date other than the date on the front of those documents.
ii
<PAGE> 51
AMERICAN FINANCIAL GROUP, INC.
American Financial Group, Inc. 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. At March 31, 1999, AFG had total assets of $15.7 billion and
shareholders' equity of $1.6 billion.
AFG's property and casualty operation originated in the 1800's and is one
of the 25 largest property and casualty groups in the United States based on
statutory net premiums written. We have achieved outstanding results that
consistently outperform insurance industry averages by focusing on highly
specialized niche products and markets, supplemented with personal automobile
products.
Our annuity, life and health operations are headed by American Annuity
Group, Inc., an 83%-owned subsidiary with over $7 billion in assets. AAG
specializes in the sale of retirement products, including traditional fixed,
equity-indexed and variable annuities. In 1998, AAG's retirement annuity
premiums were in excess of $500 million; its life and health premiums exceeded
$100 million.
The address of our principal executive offices is One East Fourth Street,
Cincinnati, Ohio, 45202, and our telephone number is (513) 579-2121. All
references to "we," "us," "the Company," "AFG" or "American Financial Group" in
this prospectus mean, unless the context otherwise indicates, American Financial
Group, Inc. and its consolidated subsidiaries.
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust executed by the Company, as sponsor, and the
trustees (described below) for the Trust and (ii) the filing of a certificate of
trust with the Delaware Secretary of State. The Trust's declaration will be
amended and restated as of the date the securities of the Trust are initially
issued. The amended declaration will be qualified as an indenture under the
Trust Indenture Act of 1939.
The Trust exists solely for the purposes of:
- issuing preferred securities and common securities representing undivided
beneficial interests in the assets of that Trust;
- investing the proceeds of those securities issuances in junior
subordinated debt securities of the Company; and
- engaging only in other incidental activities.
The rights of the holders of the trust securities, including economic
rights, rights to information and voting rights, are set forth in the amended
declaration of the Trust, the Delaware Business Trust Act and the Trust
Indenture Act.
The Company will own, directly or indirectly, all of the common securities
of the Trust, which will have an aggregate liquidation amount equal to 3% of the
total capital of the Trust. The common securities will generally rank equally in
right of payment with the preferred securities, and payments on both will be
made pro rata. However, upon an event of default under the Trust's amended
declaration, the rights of the holders of the common securities to payment of
distributions and payments upon liquidation, redemption and otherwise will be
subordinated to the rights of the holders of the preferred securities. The
Company will pay all fees and expenses related to the Trust and the offering of
trust securities.
The Company, as holder of all of the common securities, will be entitled to
appoint, remove or replace any of, or increase or reduce the number of, the
trustees of the Trust. The business and affairs of the Trust will be conducted
by such trustees, and the duties and obligations of the trustees will be
governed by the amended declaration of the Trust.
At least two of the trustees of the Trust will be persons who are employees
or officers of, or otherwise affiliated with, the Company. These persons are
sometimes referred to herein as "regular" trustees. One
1
<PAGE> 52
trustee of the Trust will be a financial institution which will be unaffiliated
with the Company and which will act as property trustee and as indenture trustee
for purposes of the Trust Indenture Act pursuant to the terms of the amended
declaration and as may be further described in a prospectus supplement. The
property trustee will hold title to the junior subordinated debt securities for
the benefit of the holders of the trust securities. In addition, unless the
property trustee maintains a principal place of business in the State of
Delaware and otherwise meets the requirements of applicable laws, one trustee of
the Trust will be a legal entity having a principal place of business in, or an
individual resident of, the State of Delaware.
Unless otherwise indicated in a prospectus supplement, The Bank of New York
will be the property trustee and The Bank of New York (Delaware) will be the
Delaware trustee. The address of the principal corporate trust office of The
Bank of New York is 101 Barclay Street, 21st Floor, New York, New York, 10286
and for The Bank of New York (Delaware) is White Clay Center, Route 273, Newark,
Delaware, 19711. The principal place of business of the Trust will be c/o
American Financial Group, Inc., One East Fourth Street, Cincinnati, Ohio, 45202,
telephone number (513) 579-2121.
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USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, the
net proceeds received by AFG from the sale of any securities offered hereby are
expected to be used for general corporate purposes, which may include investment
in insurance businesses and the repayment of outstanding debt of AFG and its
subsidiaries. Until the net proceeds are used for these purposes, AFG may
deposit them in interest-bearing accounts or invest them in short-term
marketable securities. The specific allocations, if any, of the proceeds of any
of the securities will be described in the prospectus supplement. The proceeds
from any sale of preferred securities by the Trust will be invested in debt
securities of AFG.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
AFG and its subsidiaries. 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. The ratio for years 1995 and 1994 do not give pro forma
effect to the April 1995 merger transactions through which AFG was created.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges....... 3.88 4.87 3.22 3.98 4.22 2.60 1.69
</TABLE>
DESCRIPTION OF THE SECURITIES WE MAY OFFER
GENERAL
The Company may issue, in one or more offerings, any combination of senior
or subordinated debt securities and common stock. The Trust may issue in one or
more offerings, trust preferred securities that will be unconditionally
guaranteed by the Company.
This prospectus contains a summary of the general terms of the various
securities that the Company or the Trust may offer. The prospectus supplement
relating to any particular securities offered will describe the specific terms
of the securities, which may be in addition to or different from the general
terms summarized in this prospectus. The summary in this prospectus and in any
prospectus supplement does not describe every aspect of the securities and is
subject to and qualified in its entirety by reference to all applicable
provisions of the documents relating to the securities offered. These documents
are or will be filed as exhibits to or incorporated by reference in the
registration statement.
In addition, the prospectus supplement will set forth the terms of the
offering, the initial public offering price and net proceeds to the Company.
Where applicable, the prospectus supplement will also describe any material
United States federal income tax considerations relating to the securities
offered and indicate whether the securities offered are or will be listed on any
securities exchange.
BOOK-ENTRY SYSTEM
The Company or the Trust may issue securities in the form of one or more
fully registered global securities. These will be deposited with, or on behalf
of, the Depository Trust Company ("DTC") and registered in the name of its
nominee. Except as described below, the global securities may be transferred, in
whole and not in part, only to DTC or to another nominee of DTC.
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DTC has advised the Company that it is:
- A limited-purpose trust company organized under the laws of the state of
New York;
- A member of the Federal Reserve System;
- A "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- A "clearing agency" registered pursuant to the provisions of Section 17A
of the Securities Exchange Act of 1934.
DTC was created to hold securities for institutions that have accounts with
DTC ("Participants") and to facilitate the clearance and settlement of
securities transactions among its Participants through electronic book-entry
changes in Participants' accounts. Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. DTC administers its book-entry system in accordance with its rules
and bylaws and legal requirements.
Upon issuance of a global security representing offered securities, DTC
will credit (on its book-entry registration and transfer system) the principal
amount to Participants' accounts. Ownership of beneficial interests in the
global security will be limited to Participants or to persons that hold
interests through Participants. Ownership of interests in the global security
will be shown on, and the transfer of those ownership interests will be effected
only through, records maintained by DTC (with respect to Participants'
interests) and the Participants (with respect to the owners of beneficial
interests in the global security). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of those securities
in definitive form. These limits and laws may impair the ability to transfer
beneficial interests in a global security.
So long as DTC (or its nominee), is the registered holder and owner of a
global security, DTC (or its nominee) will be considered, for all purposes under
the applicable indenture, the sole owner and holder of the related offered
securities. Except as described below, owners of beneficial interests in a
global security will not:
- be entitled to have the offered securities registered in their names; or
- receive or be entitled to receive physical delivery of certificated
offered securities in definitive form.
Each person owning a beneficial interest in a global security must rely on
DTC's procedures (and, if that person holds through a Participant, on the
Participant's procedures) to exercise any rights of a holder of offered
securities under the global security or any applicable indenture, or otherwise.
The indentures provide that DTC may grant proxies and otherwise authorize
Participants to take any action which it (as the holder of a global security) is
entitled to take under the indentures or the global security. We understand that
under existing industry practice, if the Company or the Trust requests any
action of holders or an owner of a beneficial interest in a global security
desires to take any action that DTC (as the holder of the global security) is
entitled to take, DTC would authorize the Participants to take that action and
the Participants would authorize their beneficial owners to take the action or
would otherwise act upon the instructions of their beneficial owners.
The Company or the Trust will make payments with respect to securities
represented by a global security to DTC. We expect that DTC, upon receipt of any
payments, will immediately credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests. We also expect
that payments by Participants to owners of beneficial interests in a global
security held through them will be governed by standing instructions and
customary practices (as is the case with securities held for customers' accounts
in "street name") and will be the responsibility of the Participants. None of
the Company, the Trust or any trustee will have any responsibility or liability
for:
- any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in a global security for any securities;
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<PAGE> 55
- maintaining, supervising, or reviewing any records relating to any
beneficial ownership interests;
- any other aspect of the relationship between DTC and its Participants; or
- the relationship between the Participants and the owners of beneficial
interests in a global security.
Unless and until they are exchanged in whole or in part for certificated
securities in definitive form, the global securities may not be transferred
except as a whole by DTC to its nominee or by its nominee to DTC or another
nominee.
The securities of any series represented by a global security may be
exchanged for certificated securities in definitive form if:
- DTC notifies us that it is unwilling or unable to continue as depositary
for the global security or if at any time it ceases to be a clearing
agency registered under the Securities Exchange Act of 1934;
- the Company decides at any time not to have the securities of that series
represented by a global security and so notifies DTC; or
- in the case of debt securities, an event of default has occurred and is
continuing with respect to the debt securities.
If there is such an exchange, we will issue certificated securities in
authorized denominations and registered in such names as DTC directs. Subject to
the foregoing, the global securities are not exchangeable, except for a global
security(ies) of the same aggregate denomination to be registered in DTC's or
its nominee's name.
DESCRIPTION OF DEBT SECURITIES
GENERAL
As required by Federal law for all bonds and notes of companies that are
publicly offered, the debt securities are governed by documents called
"indentures." The indenture is a contract between American Financial Group and
the trustee named in the applicable prospectus supplement, which acts as trustee
for the debt securities. There may be more than one trustee under each indenture
for different series of debt securities. The trustee has two main roles. First,
the trustee can enforce your rights against us if we default. There are some
limitations on the extent to which the trustee acts on your behalf, described
later on page 10 under "Remedies If An Event of Default Occurs." Second, the
trustee may perform administrative duties for us, such as sending you interest
payments, transferring your debt securities to a new buyer if you sell, and
sending you notices. We anticipate that we will perform these duties with
respect to the debt securities.
The debt securities will be unsecured general obligations of the Company
and may include:
- senior debt securities, to be issued under the senior indenture;
- subordinated debt securities, to be issued under the subordinated
indenture; and
- junior subordinated debt securities, to be issued under the junior
subordinated indenture.
If issued, the junior subordinated debt securities will be purchased by the
Trust using proceeds from issuances of trust preferred securities. When we refer
to the indenture we mean the senior indenture, the subordinated indenture and
the junior subordinated indenture collectively, unless we indicate otherwise.
When we refer to the trustee we mean the senior trustee, the subordinated
trustee and the junior subordinated trustee collectively, unless we indicate
otherwise.
This section summarizes the general terms of the debt securities we may
offer. The prospectus supplement relating to any particular debt securities
offered will indicate whether the debt securities are senior debt securities,
subordinated debt securities or junior subordinated debt securities and will
describe the specific terms of the debt securities, which may be in addition to
or different from the general terms summarized in this section. The summary in
this section and in any prospectus supplement does not describe
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<PAGE> 56
every aspect of the senior, subordinated or junior subordinated indenture or the
debt securities, and is subject to and qualified in its entirety by reference to
all the provisions of the applicable indenture and the debt securities. The
forms of the senior indenture, subordinated indenture and junior subordinated
indenture and the forms of the debt securities are or will be filed as exhibits
to or incorporated by reference in the registration statement. See "Where You
Can Find More Information" on page 2 for information on how to obtain a copy.
The prospectus supplement relating to any debt securities will describe the
following specific financial, legal and other terms particular to such debt
securities:
- the title of the debt securities;
- any limit on the aggregate principal amount of the debt securities;
- the date or dates on which the debt securities will mature;
- the annual rate or rates (which may be fixed or variable) at which the
debt securities will bear interest, if any, and the date or dates from
which the interest will accrue;
- the dates on which interest on the debt securities will be payable and
the regular record dates for those interest payment dates;
- any mandatory or optional sinking funds or analogous provisions or
provisions for redemption at the holder's option;
- the date, if any, after which and the price or prices at which the debt
securities may, in accordance with any option or mandatory redemption
provisions, be redeemed and the other detailed terms and provisions of
any such optional or mandatory redemption provision;
- if other than denominations of $1,000 and any integral multiple thereof,
the denomination in which the debt securities will be issuable;
- if other than the principal amount thereof, the portion of the principal
amount of the debt securities which will be payable upon the declaration
of acceleration of the maturity of those debt securities;
- any index or formula used to determine the amount of payment of principal
of, premium, if any, and interest on the debt securities;
- whether any debt securities will be issued in the form of a global
security, the wording of any legal legend to be placed on any global
security in addition to or instead of a legend describing the
restrictions on exchanges and transfers listed under "Global Securities"
on page 7 and, if different from those described in that subsection, any
circumstances under which a global security may be exchanged for debt
securities registered in the names of persons other than the depositary
for the global security or its nominee;
- whether the debt securities are senior, subordinated or junior
subordinated debt securities;
- the subordination provisions applicable to the subordinated debt
securities or junior subordinated debt securities; and
- any other material terms of the debt securities.
Those terms may vary from the terms described here. Thus, this summary also
is subject to and qualified by reference to the description of the particular
terms of your debt securities to be described in the prospectus supplement. The
prospectus supplement relating to your debt securities will be attached to the
front of this prospectus.
The indenture and its associated documents contain the full legal text of
the matters described in this section. The indenture and the debt securities are
governed by New York law.
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<PAGE> 57
EVENTS OF DEFAULT
General. You will have special rights if an "event of default" occurs and
is not cured, as described later in this subsection. Under the indentures, the
term "event of default" means any of the following:
- We do not pay the principal or any premium on a debt security on its due
date;
- We do not pay interest on a debt security, in the case of senior debt
securities or subordinated debt securities, within 30 days of its due
date and, in the case of junior subordinated debt securities, within 60
days after its due date;
- We remain in breach of any restrictive covenant described in the
indenture for 60 days after we receive a notice stating we are in breach.
In the case of senior debt securities or subordinated debt securities,
the notice must be sent by either the trustee or direct holders of at
least 25% of the principal amount of outstanding debt securities of the
affected series, and in the case of the junior subordinated debt
securities, the notice must be sent by the trustee;
- We fail to pay an amount of debt (other than the debt securities)
totaling more than $10,000,000 ($15,000,000 in the case of junior
subordinated debt securities), our obligation to repay is accelerated by
our lenders, and this payment obligation remains accelerated for 60 days
after we receive notice of default as described in the previous
paragraph; or
- We become subject to judgments, orders or decrees requiring payments of
more than $10,000,000 ($15,000,000 in the case of junior subordinated
debt securities) and 60 days have passed during which a stay of
enforcement has not been in effect after we receive notes as described
two paragraphs above.
Remedies if an Event of Default Occurs. If an event of default has occurred
and has not been cured, the trustee or the direct holders of 25% in principal
amount of the outstanding debt securities of the affected series may declare the
entire principal amount of all the debt securities of that series to be due and
immediately payable. This is called a "declaration of acceleration of maturity."
Except in cases of default, where a trustee has some special duties, a
trustee is not required to take any action under the indenture at the request of
any direct holders unless the direct holders offer the trustee reasonable
protection from expenses and liability (called an "indemnity"). If reasonable
indemnity is provided, the direct holders of a majority in principal amount of
the outstanding debt securities of the relevant series may direct the time,
method and place of conducting any lawsuit or other formal legal action seeking
any remedy available to the trustee. These majority direct holders may also
direct the trustee in performing any other action under the indenture.
In general, before you bypass the trustee and bring your own lawsuit or
other formal legal action or take other steps to enforce your rights or protect
your interests relating to the debt securities, the following must occur:
- You must give the trustee written notice that an event of default has
occurred and remains uncured;
- The direct holders of 25% in principal amount of all outstanding debt
securities of the relevant series must make a written request that the
trustee take action because of the default, and must offer reasonable
indemnity to the trustee against the cost and other liabilities of taking
that action;
- The trustee must have not taken action for 60 days after receipt of the
above notice and offer of indemnity; and
- The trustee must not have received from direct holders of a majority in
principal amount of the outstanding debt securities of that series a
direction inconsistent with the written notice during the 60 day period
after receipt of the above notice.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your debt security on or after its due date.
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<PAGE> 58
MODIFICATION
There are three types of changes we can make to the indentures and the debt
securities.
Changes Requiring Your Approval. First, there are changes that cannot be
made to your debt securities without your specific approval. Following is a list
of those types of changes:
- change the payment due date of the principal or interest on a debt
security;
- reduce any amounts due on a debt security;
- reduce the amount of principal payable upon acceleration of the maturity
of a debt security following a default;
- change the place of payment on a debt security;
- impair your right to sue for payment;
- reduce the percentage of direct holders of debt securities whose consent
is needed to modify or amend the indenture;
- reduce the percentage of direct holders of debt securities whose consent
is needed to waive compliance with certain provisions of the indenture or
to waive certain defaults; and
- modify any other aspect of the provisions dealing with modification and
waiver of the indenture.
Changes Requiring a Majority Vote. The second type of change to the
indentures and the debt securities is the kind that requires a vote in favor by
direct holders of debt securities owning a majority of the principal amount of
the particular series affected. The same majority vote would be required for us
to obtain a waiver of a past default. However, we cannot obtain a waiver of a
payment default or any other aspect of the indenture or the debt securities
listed in the first category described previously under "Changes Requiring Your
Approval" unless we obtain your individual consent to the waiver.
Changes Not Requiring Approval. The third type of change does not require
any vote by direct holders of debt securities. This type is limited to
clarifications and certain other changes that would not adversely affect holders
of the debt securities.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We are generally permitted to consolidate or merge with another entity. We
are also permitted to sell or lease substantially all of our assets to another
company, or to buy or lease substantially all of the assets of another entity.
However, unless AFG survives the consolidation or merger, we may not take any of
these actions unless the following conditions (among others) are met:
- Where we merge out of existence or sell or lease substantially all our
assets, the other entity must be a corporation, partnership or trust
organized under the laws of a State or the District of Columbia or under
federal law, and it must agree to be legally responsible for the debt
securities.
- The merger, sale of assets or other transaction must not cause a default
on the debt securities, and we must not already be in default (unless the
merger or other transaction would cure the default). For purposes of this
no-default test, a default would include an event of default.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Debt securities will be issuable in definitive, registered form. Debt
securities are also issuable in temporary or permanent global form. See
"Description of the Securities We May Offer -- Book-Entry System" on page 6.
You may have your debt securities broken into more debt securities of
smaller denominations or combined into fewer debt securities of larger
denominations, as long as the total principal amount is not changed. This is
called an "exchange."
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<PAGE> 59
You may exchange or transfer debt securities at the office of the trustee.
The trustee acts as our agent for registering debt securities in the names of
holders and transferring debt securities. We may appoint another entity or
perform this role ourselves. The entity performing the role of maintaining the
list of registered direct holders is called the "security registrar." It will
also perform transfers. You will not be required to pay a service charge to
transfer or exchange debt securities, but you may be required to pay for any tax
or other governmental charge associated with the exchange or transfer. The
transfer or exchange will only be made if the security registrar is satisfied
with your proof of ownership.
If the debt securities are redeemable and we redeem less than all of the
debt securities of a particular series, we may block the transfer or exchange of
those debt securities during the period beginning 15 days before the day we mail
the notice of redemption and ending on the day of that mailing, in order to
freeze the list of holders to prepare the mailing. We may also refuse to
register transfers or exchanges of debt securities selected for redemption,
except that we will continue to permit transfers and exchanges of the unredeemed
portion of any debt security being partially redeemed.
PAYMENT AND PAYING AGENTS
We will pay interest to you if you are a direct holder listed in the
trustee's records at the close of business on a particular day in advance of
each due date for interest, even if you no longer own the debt security on the
interest due date. That particular day, usually about two weeks in advance of
the interest due date, is called the "regular record date" and will be stated in
the prospectus supplement. Holders buying and selling debt securities must work
out between them how to compensate for the fact that we will pay all the
interest for an interest period to the one who is the registered holder on the
regular record date. The most common manner is to adjust the sales price of the
debt securities to prorate interest fairly between buyer and seller. This
prorated interest amount is called "accrued interest."
In the past, AFG has chosen to pay interest by mailing checks. AFG may also
choose to pay interest, principal and any other money due on the debt securities
at the corporate trust office of the trustee. You must make arrangements to have
your payments picked up at or wired from the trust office.
We may also arrange for additional payment offices, and may cancel or
change these offices, including our use of the trustee's corporate trust office.
These offices are called "paying agents." We may also choose to act as our own
paying agent. We must notify you of changes in the paying agents for any
particular series of debt securities.
NOTICES
Notices to holders of debt securities will be given by mail to the
addresses of such holders as they appear in the security register.
PROVISIONS APPLICABLE TO JUNIOR SUBORDINATED DEBT SECURITIES
Events of Default. In addition to the events described above under
"Description of Debt Securities -- Events of Default" applicable to all debt
securities, the voluntary or involuntary dissolution, winding up or termination
of the Trust that owns the series of junior subordinated debt securities will
constitute an event of default for any series of junior subordinated debt
securities issued pursuant to the junior subordinated indenture, except in
connection with:
- the distribution of such junior subordinated debt securities to holders
of trust securities of the Trust;
- the redemption of all of the trust securities of the Trust; and
- mergers, consolidations or similar events permitted by the amended
declaration of the Trust.
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The holders of at least a majority in aggregate liquidation amount of the
trust preferred securities of the Trust may waive any default or event of
default with respect to such series and its consequences, except defaults or
events of default that:
- are not waivable under the junior subordinated indenture (such as
defaults regarding payment of principal, premium, if any, or interest);
or
- require the consent or vote of greater than a majority in principal
amount of the holders of junior subordinated debt securities to be waived
under the junior subordinated indenture, in which case the event of
default may only be waived by the holders of the same "super-majority" in
liquidation amount of the trust preferred securities.
Any such waiver shall cure such default or event of default. If, under the
amended declaration of the Trust, an event of default has occurred and is
attributable to the failure of the Company to pay principal, premium, if any, or
interest on, such junior subordinated debt securities, then each holder of the
trust preferred securities of the Trust may sue the Company or seek other
remedies, to force payment to such holder of the principal of, premium, if any,
or interest on, such junior subordinated debt securities having a principal
amount equal to the aggregate liquidation amount of the trust preferred
securities held by such holder.
Modification of Junior Subordinated Indenture. Under the junior
subordinated indenture, the Company and the indenture trustee may change certain
rights of holders of a series of junior subordinated debt securities with the
written consent of the holders of a majority in principal amount of the series
of junior subordinated debt securities that are affected. Any such change will
be subject to the limitations described above under "Modification" on page 12
applicable to the other debt securities. If the property trustee of the Trust,
as a holder of junior subordinated debt securities, is required to consent to
any amendment, modification or termination of the junior subordinated indenture,
the property trustee will request directions from the holders of the trust
securities of the Trust.
Subordination of Junior Subordinated Debt Securities. The junior
subordinated debt securities will be unsecured and will be subordinate and
junior in priority of payment to certain of the Company's other indebtedness to
the extent described in a prospectus supplement. The junior subordinated
indenture will not limit the amount of junior subordinated debt securities which
the Company may issue, nor does it limit the Company from issuing any other
secured or unsecured debt.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
GENERAL
The amended declaration of the Trust will authorize the trustees to issue,
on behalf of the Trust, one series of trust preferred securities. The Trust will
use the proceeds from the sale of the trust preferred securities to purchase a
series of junior subordinated debt securities issued by the Company. The
property trustee will hold these junior subordinated debt securities in trust
for the benefit of the holders of such trust preferred securities.
This section summarizes the general terms of the preferred securities that
the Trust may offer. The prospectus supplement relating to any particular
preferred securities offered by the Trust will describe the specific terms of
the preferred securities, which may be in addition to or different from the
general terms summarized in this section. The summary in this section and in any
prospectus supplement does not describe every aspect of the trust preferred
securities offered and is subject to and qualified in its entirety by reference
to all the provisions of the amended declaration and the trust preferred
securities. The forms of the amended declarations and the trust preferred
securities are or will be filed as exhibits to or incorporated by reference in
the registration statement.
The Company will guarantee the payments of distributions and payments on
redemption or liquidation with respect to the trust preferred securities, but
only to the extent the Trust has funds available to make
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<PAGE> 61
those payments and has not made the payments. The trust preferred securities
guarantee by the Company is described in more detail below under "Description of
the Trust Preferred Securities Guarantee."
The assets of the Trust available for distribution to the holders of its
trust preferred securities will be limited to payments from the Company under
the series of junior subordinated debt securities held by the Trust. If the
Company fails to make a payment on the junior subordinated debt securities, the
Trust will not have sufficient funds to make related payments, including
distributions, on its trust preferred securities.
The trust preferred securities guarantee, when taken together with the
Company's obligations under the series of junior subordinated debt securities,
the junior subordinated indenture and the amended declaration of the Trust, will
provide a full and unconditional guarantee of amounts due on the trust preferred
securities issued by the Trust.
The prospectus supplement relating to any particular preferred securities
offered by the Trust will describe the specific terms of the preferred
securities, which may be in addition to or different from the general terms
summarized in this section. In particular, the prospectus supplement will
describe:
- the name of such trust preferred securities;
- the designation of the trust preferred securities;
- the dollar amount and number of trust preferred securities issued;
- the annual distribution rate(s) or method of determining such rate(s),
the payment date(s) and the record dates used to determine the holders
who are to receive distributions;
- the date(s) or the method to determine the date(s) from which
distributions shall be cumulative;
- the optional redemption provisions, if any, including the prices, time
periods and other terms and conditions for which such trust preferred
securities shall be purchased or redeemed, in whole or in part;
- the optional right of the Trust to defer quarterly distributions on the
preferred securities;
- the terms and conditions, if any, upon which the applicable series of
junior subordinated debt securities and the related trust preferred
securities guarantee may be distributed to holders of the trust preferred
securities upon liquidation, dissolution, termination or winding up of
the Trust;
- any voting rights of the trust preferred securities other than those
described in this section;
- any securities exchange on which the trust preferred securities will be
listed;
- whether the trust preferred securities are to be issued in book-entry
form and represented by one or more global certificates, and if so, the
depositary for the global certificates and the specific terms of the
depositary arrangements;
- any other relevant rights, preferences, privileges, limitations or
restrictions of such trust preferred securities; and
- any applicable United States Federal income tax considerations.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amended declaration of the Trust will state that the Trust shall be
dissolved:
- on the expiration of the term of the Trust;
- upon the bankruptcy, dissolution or liquidation of the Company;
- upon a change in law requiring the Trust to register as an investment
company under the Investment Company Act of 1940;
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- unless the Company takes certain actions, upon a change in the law
resulting in the Trust being subject to United States Federal income tax
on income received from the junior subordinated debt securities held by
the Trust, the interest payable by the Company on the junior subordinated
debt securities not being deductible for United State Federal income tax
purposes, or the Trust being subject to more than a de minimus amount of
other taxes;
- upon the redemption, conversion or exchange of all of the trust
securities of the Trust;
- upon the repayment of all of the junior subordinated debt securities held
by the Trust or at such time as no such junior subordinated debt
securities are outstanding;
- upon entry of a court order for the dissolution of the Trust; or
- upon the election of the Company to terminate the Trust and distribute
the related junior subordinated debt securities directly to the holders
of the trust securities.
In the event of a dissolution, after the Trust pays all amounts owed to
creditors, the holders of the trust securities will be entitled to receive:
- cash equal to the aggregate liquidation amount of each trust security
specified in an accompanying prospectus supplement, plus accumulated and
unpaid distributions to the date of payment; or
- junior subordinated debt securities in an aggregate principal amount
equal to the aggregate liquidation amount of the trust securities.
If the Trust cannot pay the full amount due on its trust securities because
insufficient assets are available for payment, then the amounts payable by the
Trust on its trust securities shall be paid pro rata. However, if an event of
default under the related indenture has occurred, the total amounts due on the
trust preferred securities will be paid before any distribution on the trust
common securities.
EVENTS OF DEFAULT
An event of default under the junior subordinated indenture relating to a
series of junior subordinated debt securities is an event of default under the
amended declaration of the Trust. We have described these events of default
under the sections entitled "Description of Debt Securities -- Provisions
Applicable to All Debt Securities -- Events of Default" on page 10 and
" -- Provisions Applicable to Junior Subordinated Debt Securities Events of
Default" on page 12.
The Company and the regular trustees of the Trust must file annually with
the property trustee for the Trust a certificate stating whether or not they are
in compliance with all the applicable conditions and covenants under the related
amended declaration.
Upon the occurrence of an event of default, the property trustee of the
Trust, as the sole holder of the junior subordinated debt securities held by the
Trust, will have the right under the junior subordinated indenture to declare
the principal of, premium, if any, and interest on such junior subordinated debt
securities to be immediately due and payable.
If a property trustee fails to enforce its rights under the amended
declaration or the junior subordinated indenture then, to the fullest extent
permitted by law, and subject to the terms of the amended declaration and the
junior subordinated indenture, any holder of trust preferred securities may sue
the Company, or seek other remedies, to enforce the property trustee's rights
under the amended declaration or the junior subordinated indenture without first
instituting a legal proceeding against such property trustee or any other
person.
If the Company fails to pay principal, premium, if any, or interest on a
series of junior subordinated debt securities when payable, then a holder of
such trust preferred securities may directly sue the Company or seek other
remedies, to collect its pro rata share of payments owned.
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REMOVAL AND REPLACEMENT OF TRUSTEES
Only the holders of trust common securities may remove or replace the
trustees of the Trust. The resignation or removal of any trustee and the
appointment of a successor trustee will be effective only on the acceptance of
appointment by the successor trustee in accordance with the provisions of the
amended declaration for the Trust.
MERGERS, CONSOLIDATIONS, CONVERSIONS OR AMALGAMATIONS OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
converted into or replaced by or convey, transfer or lease their properties and
assets substantially as an entirety to any other corporation or other body,
except as described below. The Trust may, with the consent of a majority of its
regular trustees and without the consent of the holders of its trust securities
or the other trustees, engage in any of the merger events referred to above
under the conditions set forth in the declaration and described in a prospectus
supplement.
In addition, unless all of the holders of the trust preferred securities
and trust common securities approve otherwise, the Trust may not consent to or
engage in a merger event if that event would cause the Trust or the successor
entity to be classified other than as a grantor trust for United States federal
income tax purposes.
INFORMATION CONCERNING DUTIES OF THE PROPERTY TRUSTEE
For matters relating to compliance with the Trust Indenture Act, the
property trustee of the Trust will have all of the duties and responsibilities
of an indenture trustee under the Trust Indenture Act. The property trustee,
other than during the occurrence and continuance of an event of default under
the Trust, undertakes to perform only such duties as are specifically set forth
in the amended declaration and, upon an event of default, must use the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the property
trustee is under no obligation to exercise any of the powers given it by the
applicable amended declaration at the request of any holder of trust preferred
securities unless it is offered reasonable security or indemnity against the
costs, expenses and liabilities that it might incur. However, the holders of the
trust preferred securities will not be required to offer such an indemnity where
the holders, by exercising their voting rights, direct the property trustee to
take any action following an event of default.
MISCELLANEOUS
The regular trustees of the Trust are authorized and directed to conduct
the affairs of the Trust and to operate the Trust in such a way that:
- it will not be deemed to be an "investment company" required to be
registered under the Investment Company Act;
- it will be classified as a grantor trust for United States federal income
tax purposes; and
- the junior subordinated debt securities held by it will be treated as
indebtedness of the Company for United States federal income tax
purposes.
The Company and the regular trustees of the Trust are authorized to take
any action (so long as it is consistent with applicable law or the certificate
of trust or amended declaration) that the Company and the regular trustees of
the Trust determine to be necessary or desirable for such purposes.
Holders of trust preferred securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
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GOVERNING LAW
The amended declaration and the related trust preferred securities will be
governed by and construed in accordance with the laws of the State of Delaware
and the Trust Indenture Act.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES GUARANTEE
GENERAL
The Company will execute a trust preferred securities guarantee, which
benefits the holders of trust preferred securities, at the time that the Trust
issues those trust preferred securities. The trust preferred securities
guarantee will be qualified as an indenture under the Trust Indenture Act and
will be held for the benefit of holders of trust preferred securities by a
guarantee trustee meeting the requirements of the Trust Indenture Act. Unless
otherwise indicated in a prospectus supplement, DTC will be the guarantee
trustee.
GUARANTEE PAYMENT
This section summarizes the general terms of the guarantees that the
Company will provide in respect of the preferred securities that the Trust may
offer. The summary in this section does not describe every aspect of the
guarantee and is subject to and qualified in its entirety by reference to any
description in the related prospectus supplement and to all the provisions of
the guarantee agreements. The form of the guarantee agreement is filed as an
exhibit to the registration statement.
The Company will irrevocably agree, as described in the trust preferred
securities guarantee, to pay in full, to the holders of the trust preferred
securities issued by the Trust, the following trust preferred securities
guarantee payments when due to the extent not paid by the Trust, regardless of
any defense, right of set-off or counterclaim which the Trust may have or
assert:
- any accrued and unpaid distributions required to be paid on the trust
preferred securities, to the extent that the Trust has funds available to
make the payment;
- the redemption price, to the extent that the Trust has funds available to
make the payment; and
- upon a voluntary or involuntary dissolution and liquidation of the Trust
(other than in connection with a distribution of junior subordinated debt
securities to holders of such trust preferred securities or the
redemption of all such trust preferred securities), the lesser of
(1) the aggregate of the liquidation amount specified in the
prospectus supplement for each trust preferred security plus all
accrued and unpaid distributions on the trust preferred securities
to the date of payment, to the extent the Trust has funds
available to make the payment and
(2) the amount of assets of the Trust remaining available for
distribution to holders of its trust preferred securities upon a
dissolution and liquidation of the Trust ("Liquidation Payment").
The Company's obligation to make a trust preferred securities guarantee
payment may be satisfied by directly paying the required amounts to the holders
of the trust preferred securities or by causing the Trust to pay the amounts to
the holders.
The combined operation of the Company's obligations under the junior
subordinated indenture and the trust preferred securities guarantee and amended
declaration has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust's obligations under its trust preferred securities.
STATUS OF THE TRUST PREFERRED SECURITIES GUARANTEE
The trust preferred securities guarantee will constitute an unsecured
obligation of the Company and will rank:
- subordinated and junior in right of payment to all the Company's other
liabilities except those liabilities made equal or subordinate to the
guarantee by their terms; and
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- senior to the following:
(1) all capital stock (other than the most senior preferred shares
issued, from time to time, by the Company, which will rank equally
with the guarantee) issued by the Company; and
(2) any guarantee entered into by the Company relating to its capital
stock (other than the most senior preferred shares issued, from
time to time, by the Company).
The trust preferred securities guarantee will rank equally with obligations
under other guarantee agreements that the Company may enter into from time to
time if both:
- the agreements are in substantially the form of the preferred
securities guarantee and provide for comparable guarantees by the
Company of payment on preferred securities issued by other trusts or
financing vehicles of the Company; and
- the debt relating to those preferred securities are subordinated,
unsecured indebtedness of the Company.
By acceptance of the trust preferred securities, holders accept the
subordination provisions and other terms of the trust preferred securities
guarantee. The trust preferred securities guarantee will constitute a guarantee
of payment and not of collection (in other words, the holder of the guaranteed
security may sue the Company, or seek other remedies, to enforce its rights
under the trust preferred securities guarantee without first suing any other
person or entity). The trust preferred securities guarantee will not be
discharged except by payment of the guarantee payments in full to the extent not
previously paid or upon distribution of the corresponding series of junior
subordinated debt securities to the holders of trust preferred securities
pursuant to the amended declaration.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of trust preferred securities in any material respect (in which case
no consent of such holders will be required), a trust preferred securities
guarantee may only be amended with the prior approval of the holders of a
majority in aggregate liquidation amount of such trust preferred securities. All
guarantees and agreements contained in the trust preferred securities guarantee
will be binding on the Company's successors, assigns, receivers, trustees and
representatives and are for the benefit of the holders of the applicable trust
preferred securities.
TRUST PREFERRED SECURITIES GUARANTEE EVENTS OF DEFAULT
An event of default under the trust preferred securities guarantee occurs
if the Company fails to make any of its required payments or perform its
obligations under the trust preferred securities guarantee.
The holders of at least a majority in aggregate liquidation amount of the
trust preferred securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the guarantee
trustee or to direct the exercise of any trust or power given to the guarantee
trustee under the trust preferred securities guarantee.
INFORMATION CONCERNING DUTIES OF THE TRUST PREFERRED GUARANTEE TRUSTEE
The guarantee trustee under the trust preferred securities guarantee, other
than during the occurrence and continuance of an event of default under the
trust preferred securities guarantee, will only perform the duties that are
specifically described in the trust preferred securities guarantee. After such a
default, the trust preferred guarantee trustee will exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the guarantee trustee is under no
obligation to exercise any of its powers as described in the trust preferred
securities guarantee at the request of any holder of covered trust preferred
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that it might incur.
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TERMINATION OF THE TRUST PREFERRED SECURITIES GUARANTEE
The trust preferred securities guarantee will terminate once the trust
preferred securities are paid in full or upon distribution of the corresponding
series of junior subordinated debt securities to the holders of the trust
preferred securities. The trust preferred securities guarantee will continue to
be effective or will be reinstated if at any time any holder of trust preferred
securities must restore payment of any sums paid under such trust preferred
securities or such trust preferred securities guarantee.
GOVERNING LAW
The trust preferred securities guarantee will be governed by and construed
in accordance with the laws of the State of New York and the Trust Indenture
Act.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE TRUST PREFERRED SECURITIES GUARANTEE AND THE
JUNIOR SUBORDINATED DEBT SECURITIES HELD BY THE TRUST
Payments of distributions and redemption and liquidation payments due on
the trust preferred securities, to the extent the Trust has funds available for
the payments, will be guaranteed by the Company to the extent described above
under "Description of the Trust Preferred Securities Guarantee." The combined
operation of the Company's obligations under the trust preferred securities
guarantee, amended declaration and the junior subordinated indenture has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under its trust preferred securities.
As long as the Company makes payments of interest and other payments when
due on the junior subordinated debt securities held by the Trust, such payments
will be sufficient to cover the payment of distributions and redemption and
liquidation payments due on the trust preferred securities issued by the Trust
because:
- the aggregate principal amount of the junior subordinated debt securities
will be equal to the sum of the aggregate liquidation amount of the trust
securities;
- the interest rate and interest and other payment dates on the junior
subordinated debt securities will match the distribution rate and
distribution and other payment dates for the trust preferred securities;
- the Company will pay for any and all costs, expenses and liabilities of
the Trust except the Trust's obligations under its trust preferred
securities; and
- the amended declaration provides that the Trust will not engage in any
activity that is not consistent with the limited purposes of the Trust.
If and to the extent that the Company does not make payments on such junior
subordinated debt securities, the Trust will not have funds available to make
payments of distributions or other amounts due on its trust preferred
securities. In those circumstances, you will not be able to rely upon the trust
preferred securities guarantee for payment of these amounts. Instead, you may
directly sue the Company or seek other remedies to collect your pro rata share
of payments owed. If you sue the Company to collect payment, then the Company
will assume your rights as a holder of trust preferred securities under the
amended declaration to the extent the Company makes a payment to you in any such
legal action.
A holder of any trust preferred security may sue the Company, or seek other
remedies, to enforce its rights under the trust preferred securities guarantee
without first suing the guarantee trustee, the Trust or any other person or
entity.
DESCRIPTION OF COMMON STOCK
This section summarizes the general terms of the common stock that we may
offer. The prospectus supplement relating to the common stock offered will set
forth the number of shares offered, the initial
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offering price and recent market prices, dividend information and any other
relevant information. The summary in this section and in the prospectus
supplement does not describe every aspect of the common stock and is subject to
and qualified in its entirety by reference to all the provisions of our Amended
and Restated Articles of Incorporation and Code of Regulations and to the
provisions of the Ohio General Corporation Law.
The total number of authorized shares of AFG common stock is 200,000,000,
without par value. Holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. Holders
of common stock have the right to cumulate their votes in the election of
directors but are not entitled to any preemptive rights.
As of June 15, 1999, there were 59,750,920 shares of common stock issued
and outstanding, including 1,366,812 shares held by a subsidiary for
distribution to certain creditors. All shares of common stock have equal rights
to participate in dividends and, in the event of liquidation, assets available
for distribution to shareholders, subject to any preference established with
respect to preferred stock. Shares of common stock carry no conversion
subscription rights, and are not subject to redemption. All outstanding shares
of common stock are, and any shares of common stock issued upon conversion of
any convertible securities will be, fully paid and nonassessable. The Company
may pay dividends on the common stock when, as and if declared by the Board of
Directors. Dividends may be declared in the discretion of the Board of Directors
from funds legally available therefore, subject to restrictions under agreements
related to Company indebtedness.
AFG is authorized to issue 12,500,000 shares of voting preferred stock and
12,500,000 shares of nonvoting preferred stock, each without par value, none of
which is outstanding. AFG's Articles of Incorporation authorize the board of
directors, without further shareholder approval, to designate for any series of
preferred stock not fixed in AFG's Articles of Incorporation the designations,
preferences, conversion rights, and relative, participating, optional and other
special rights, and such qualifications, limitations or restrictions, as they
determine and as are permitted by law.
The affirmative vote of the holders of a majority of the outstanding shares
of common stock is required to amend the Articles of Incorporation and to
approve mergers, reorganizations, share exchanges and similar transactions.
The outstanding shares of common stock are listed on the New York Stock
Exchange and trade under the symbol "AFG." AFG acts as its own transfer agent
and registrar.
PLAN OF DISTRIBUTION
AFG and the Trust may sell the securities (a) through underwriters or
dealers, (b) directly to one or more purchasers, or (c) through agents. The
prospectus supplement will include the names of underwriters, dealers or agents
retained. The prospectus supplement also will include the purchase price of the
securities, AFG's proceeds from the sale, any underwriting discounts or
commissions and other items constituting underwriters' compensation, and any
securities exchanges on which the securities may be listed.
The underwriters will acquire the securities for their own account. They
may resell the securities in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of the underwriters to purchase the
securities will be subject to certain conditions. The underwriters will be
obligated to purchase all the securities offered if any of the securities are
purchased. Any initial public offering price and any discounts or concessions
allowed or re-allowed or paid to dealers may be changed from time to time.
Underwriters, dealers, and agents that participate in the distribution of
the securities may be underwriters as defined in the Securities Act, and any
discounts or commissions received by them from AFG and any profit on the resale
of the securities by them may be treated as underwriting discounts and
commissions under the Securities Act.
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AFG may have agreements with the underwriters, dealers, and agents to
indemnify them against certain civil liabilities, including liabilities under
the Securities Act, or to contribute with respect to payments which the
underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, AFG or its subsidiaries in the ordinary course of their
business.
LEGAL MATTERS
The validity of the securities offered hereby other than the preferred
securities will be passed upon for the Company and the Trust by Keating,
Muething & Klekamp, P.L.L., Cincinnati, Ohio. Certain United States federal
income taxation matters also will be passed upon for the Company and the Trust
by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Washington, D.C. Attorneys in the
Keating, Muething & Klekamp law firm hold certain securities of the Company and
the Trust. Certain matters of Delaware law relating to the validity of the
preferred securities will be passed upon for the Trust by Morris, Nichols, Arsht
& Tunnell, Wilmington, Delaware.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules included in our Annual Report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedules are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
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