<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 2000 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 1, 2000, there were 59,040,004 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 20
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<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
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
<PAGE>
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>
2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Property and casualty insurance
premiums $ 661,077 $585,560 $1,856,935 $1,680,561
Life, accident and health premiums 66,523 26,463 166,146 77,418
Investment income 216,623 216,927 639,134 632,302
Realized gains (losses) on sales of:
Securities (15,223) (5,744) (20,563) 5,997
Subsidiaries (5,962) - 19,038 -
Other investments 27,230 - 27,230 -
Other income 53,258 45,709 145,381 100,343
---------- -------- ---------- ----------
1,003,526 868,915 2,833,301 2,496,621
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 562,308 423,402 1,463,456 1,188,050
Commissions and other underwriting
expenses 195,267 171,824 556,272 506,646
Annuity benefits 72,139 66,516 203,783 194,977
Life, accident and health benefits 50,699 17,365 124,308 52,238
Interest charges on borrowed money 18,182 17,175 51,007 48,122
Other operating and general expenses 104,292 99,482 335,766 264,210
---------- -------- ---------- ----------
1,002,887 795,764 2,734,592 2,254,243
---------- -------- ---------- ----------
Operating earnings before income taxes 639 73,151 98,709 242,378
Provision (credit) for income taxes (1,595) 24,696 28,767 80,563
---------- -------- ---------- ----------
Net operating earnings 2,234 48,455 69,942 161,815
Minority interest expense, net of tax (10,839) (10,229) (26,699) (30,735)
Equity in net earnings (loss) of investee,
net of tax (13,570) (9,618) (4,368) 1,715
---------- -------- ---------- ----------
Earnings (loss) before extraordinary
items and accounting change (22,175) 28,608 38,875 132,795
Extraordinary items - gain (loss) on
prepayment of debt - 1,477 - (2,261)
Cumulative effect of accounting change - - - (3,854)
---------- -------- ---------- ----------
Net Earnings (Loss) ($ 22,175) $ 30,085 $ 38,875 $ 126,680
========== ======== ========== ==========
<PAGE>
Basic earnings (loss) per Common Share:
Before extraordinary items and
accounting change ($.38) $.48 $.66 $2.21
Gain (loss) on prepayment of debt - .02 - (.04)
Cumulative effect of accounting change - - - (.06)
---- ---- ---- -----
Net earnings (loss) available to
Common Shares ($.38) $.50 $.66 $2.11
==== ==== ==== =====
Diluted earnings (loss) per Common Share:
Before extraordinary items and
accounting change ($.38) $.48 $.66 $2.18
Gain (loss) on prepayment of debt - .02 - (.04)
Cumulative effect of accounting change - - - (.06)
---- ---- ---- -----
Net earnings (loss) available to
Common Shares ($.38) $.50 $.66 $2.08
==== ==== ==== =====
Average number of Common Shares:
Basic 58,561 59,623 58,525 60,177
Diluted 58,797 60,002 58,731 60,764
Cash dividends per Common Share $.25 $.25 $.75 $.75
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
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
========== ======== ======== ======== ==========
Balance at January 1, 1999 60,928,322 $831,649 $527,028 $357,500 $1,716,177
Net earnings - - 126,680 - 126,680
Change in unrealized - - - (283,400) (283,400)
----------
Comprehensive income (loss) (156,720)
Dividends on Common Stock - - (45,152) - (45,152)
Shares issued:
Exercise of stock options 74,853 2,060 - - 2,060
Dividend reinvestment plan 6,099 222 - - 222
Employee stock purchase plan 48,064 1,695 - - 1,695
Retirement plan contributions 57,888 2,171 - - 2,171
Portion of bonuses paid in stock 38,640 1,438 - - 1,438
Directors fees paid in stock 1,865 68 - - 68
Shares repurchased (2,757,226) (37,726) (51,176) - (88,902)
Tax effect of intercompany dividends - (4,800) - - (4,800)
Other - 3,635 - - 3,635
---------- -------- -------- -------- ----------
Balance at September 30, 1999 58,398,505 $800,412 $557,380 $ 74,100 $1,431,892
========== ======== ======== ======== ==========
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
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)
---------- ----------
<PAGE>
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>
5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for American Financial Group, Inc. ("AFG") and subsidiaries are unaudited;
however, management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein) necessary for
fair presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
Certain reclassifications have been made to prior 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.
<PAGE>
REINSURANCE In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFG's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policies.
AFG's insurance subsidiaries report as
6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
assets (a) the estimated reinsurance recoverable on unpaid losses,
including an estimate for losses incurred but not reported, and (b) amounts
paid to reinsurers applicable to the unexpired terms of policies in force.
AFG's insurance subsidiaries also assume reinsurance from other companies.
Income on reinsurance assumed is recognized based on reports received from
ceding reinsurers.
DEFERRED ACQUISITION COSTS Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related to the
production of new business are deferred ("DPAC"). For the property and
casualty companies, 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.
<PAGE>
PREMIUM RECOGNITION Property and casualty premiums are earned over the
terms of the policies on a pro rata basis. Unearned premiums represent that
portion of premiums written which is applicable to the unexpired terms of
policies in force. On reinsurance assumed from other insurance companies or
written through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations. For
traditional life, accident and health products, premiums are recognized as
revenue when legally collectible from policyholders. For interest-sensitive
life and universal life products, premiums are recorded in a policyholder
account which is reflected as a liability. Revenue is recognized as amounts
are assessed against the policyholder account for mortality coverage and
contract expenses.
7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
<PAGE>
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
8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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.
COMMERCIAL LINES DIVISION In 1998, AFG sold its Commercial lines division
to Ohio Casualty Corporation. 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" in the second quarter of 2000.
<PAGE>
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.
9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
UNITED TEACHER ASSOCIATES In October 1999, GAFRI acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA") for $81 million in
cash, pending post-closing adjustments under which GAFRI may receive as
much as several million dollars. UTA 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.
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).
The following table (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>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (a)
Property and casualty insurance:
Premiums earned:
Personal $ 326,591 $288,454 $ 940,237 $ 875,036
Specialty 334,846 296,254 917,057 804,957
Other lines - primarily
discontinued (360) 852 (359) 568
---------- -------- ---------- ----------
661,077 585,560 1,856,935 1,680,561
Investment and other income 98,703 110,923 349,181 329,885
---------- -------- ---------- ----------
759,780 696,483 2,206,116 2,010,446
Annuities and life (b) 226,792 161,474 596,574 465,348
Other 16,954 10,958 30,611 20,827
---------- -------- ---------- ----------
$1,003,526 $868,915 $2,833,301 $2,496,621
========== ======== ========== ==========
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($ 34,704) ($ 3,167) ($ 72,029) ($ 1,121)
Specialty (56,580) (9,246) (81,758) (7,925)
Other lines - primarily
discontinued (5,214) 2,747 (9,006) (5,089)
---------- -------- ---------- ----------
(96,498) (9,666) (162,793) (14,135)
Investment and other income 57,450 66,006 235,457 204,095
---------- -------- ---------- ----------
(39,048) 56,340 72,664 189,960
Annuities and life 50,501 29,152 75,806 95,050
Other (c) (10,814) (12,341) (49,761) (42,632)
---------- -------- ---------- ----------
$ 639 $ 73,151 $ 98,709 $ 242,378
========== ======== ========== ==========
</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) Includes holding company expenses.
10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
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):
Nine months ended September 30,
-------------------------------
2000 1999
---- ----
Net Sales $1,725 $1,937
Operating Income 88 93
Net Income (Loss) (6) 19
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
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>
<PAGE>
In April 2000, AFG redeemed the APU 10-5/8% Notes at maturity using funds
borrowed under the AFC bank line.
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):
Holding
Companies Subsidiaries Total
--------- ------------ ------
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
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.
11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 (2026) $98,750 $100,000 On or after 10/22/2001
November 1996 GAFRI 9-1/4% TOPrS (2026) 72,913 74,600 On or after 11/7/2001
March 1997 GAFRI 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007
May 1997 GAFRI 7-1/4% ROPES (2041) 75,000 75,000 Prior to 9/28/2000 and
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.
<PAGE>
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):
Nine months ended
September 30,
--------------------
2000 1999
---- ----
Interest of noncontrolling shareholders
in earnings of subsidiaries $ 9,011 $12,899
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities, net of tax 13,359 13,507
AFC preferred stock 4,329 4,329
------- -------
$26,699 $30,735
======= =======
12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. SHAREHOLDERS' EQUITY At September 30, 2000, there were 58,754,411 shares of
AFG Common Stock outstanding, including 1,364,478 shares held by American
Premier for possible distribution to certain creditors and other claimants
upon proper claim presentation and settlement pursuant to the 1978 plan of
reorganization of American Premier's predecessor, The Penn Central
Corporation. Shares being held for distribution are not eligible to vote
but otherwise are accounted for as issued and outstanding. AFG is
authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5
million shares of Nonvoting Preferred Stock, each without par value.
At September 30, 2000, there were 6.8 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date, AFG
had options for 5.5 million shares outstanding. Options generally become
exercisable at the rate of 20% per year commencing one year after grant;
those granted to non-employee directors of AFG are fully exercisable upon
grant. All options expire ten years after the date of grant.
The change in unrealized gain (loss) on marketable securities for the nine
months ended September 30 included the following (in millions):
<TABLE>
<CAPTION>
Minority
Pretax Taxes Interest Net
------ ----- -------- -----
<S> <C> <C> <C> <C>
2000
---------------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($ 9.9) $4.3 ($2.3) ($ 7.9)
Reclassification adjustment for
realized losses included in net income and
unrealized losses of subsidiary sold 25.2 (8.8) (1.4) 15.0
----- ---- ---- -----
Change in unrealized gain (loss) on
marketable securities, net $15.3 ($4.5) ($3.7) $ 7.1
===== ===== ===== =====
1999
---------------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($471.7) $163.4 $29.4 ($278.9)
Reclassification adjustment for
realized gains included in net income (6.0) 2.1 (.6) (4.5)
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net ($477.7) $165.5 $28.8 ($283.4)
====== ====== ===== ======
</TABLE>
<PAGE>
H. EXTRAORDINARY ITEMS Extraordinary items represents gains and losses related
to debt retirements by the following companies. Amounts shown are net of
income taxes (in thousands):
Nine months ended
September 30, 1999
------------------
Holding Companies:
AFG (parent) $1,735
AFC (parent) (2,993)
APU (parent) (1,003)
------
($2,261)
======
I. COMMITMENTS AND CONTINGENCIES Other than as disclosed in "Legal
Proceedings" in Part II of this report, there have been no significant
changes to the matters discussed and referred to in Note L "Commitments and
Contingencies" of AFG's Annual Report on Form 10-K for 1999.
13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
------------------------------------------------
GENERAL
AFG and its subsidiaries, AFC Holding, AFC and American Premier, are
organized as holding companies with almost all of their operations being
conducted by subsidiaries. These parent corporations, however, have
continuing cash needs for administrative expenses, the payment of principal
and interest on borrowings, shareholder dividends, and taxes. 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 should 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 The Private Securities Litigation Reform Act of
1995 encourages corporations to provide investors with information about
the company's anticipated performance and provides protection from
liability if future results are not the same as management's expectations.
This document contains certain forward-looking statements that are based on
assumptions which management believes are reasonable, but by their nature,
inherently uncertain. Future results could differ materially from those
projected. Factors that could cause such differences include, but are not
limited to: changes in economic conditions especially with regard to
availability of and returns on capital, regulatory actions, changes in
legal environment, levels of catastrophe and other major losses,
availability of reinsurance, and competitive pressures. AFG undertakes no
obligation to update any forward-looking statements.
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.
<PAGE>
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.
AFC has a revolving credit agreement with several banks under which it can
borrow up to $300 million. 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.
14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
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
GENERAL Pretax operating earnings for the third quarter and nine months
ended September 30, 2000, were $639,000 and $98.7 million, respectively,
compared to $73.2 million and $242.4 million in the comparable 1999
periods. 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 ($10.8) million ($.18 loss
per share, diluted) and $28 million ($.48 per share) in the third quarter
and nine months of 2000 compared to $41 million ($.68 per share) and $126.6
million ($2.08 per share) in the third quarter and 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.
<PAGE>
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, U.S.-based operations of Japanese companies,
fidelity and surety bonds, collateral protection, and umbrella and excess
coverages.
15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
Underwriting profitability is measured by the combined ratio which is a sum
of the ratios of underwriting losses, loss adjustment expenses,
underwriting expenses and policyholder dividends to premiums. When the
combined ratio is under 100%, underwriting results are generally considered
profitable; when the ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect investment
income, other income or federal income taxes.
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various specialty
businesses listed above), management believes that it is prudent and
appropriate to use conservative assumptions until such time as the data,
experience and projections have more credibility, as evidenced by data
volume, consistency and maturity of the data. While this practice mitigates
the risk of adverse development on this business, it does not eliminate it.
Net written premiums and combined ratios for AFG's property and casualty
insurance subsidiaries were as follows (dollars in millions):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Written Premiums (GAAP)
---------------------------
Personal $299.4 $287.3 $ 997.3 $ 839.2
Specialty 341.7 323.7 974.9 850.4
Other lines (.3) .7 (.3) (.8)
------ ------ -------- --------
$640.8 $611.7 $1,971.9 $1,688.8
====== ====== ======== ========
Combined Ratios (GAAP) (*)
----------------------
Personal 110.6% 101.1% 107.6% 100.2%
Specialty 116.8 103.2 108.9 101.0
Aggregate (including
discontinued lines) 114.7 101.7 108.8 100.8
</TABLE>
(*) Combined ratios for the entire year of 1999 were: Personal -
100.7%, Specialty - 102.7% and aggregate - 102.0%.
<PAGE>
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. In the third quarter, these items were partially offset by the
expected decline in premiums caused by rate increases implemented
throughout 2000. The combined ratio for the third quarter and 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.
16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
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 1% for the third quarter and 10% for the nine months as
premium levels moderated during the third quarter due to increasing rates
and the absence of premiums from certain unprofitable business which is no
longer being written.
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 third quarter and nine months of 2000 reflects this reserve
strengthening (a combined ratio effect of 10.4 points and 3.8 points for
the third quarter and nine months, respectively) 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.
START-UP MANUFACTURING BUSINESSES AFG's pretax operating earnings include
losses of $4.1 million for the third quarter of 2000 ($6.7 million for the
first nine months) 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 $7.5 million (17%) in the third quarter
of 2000 compared to 1999 as $11.2 million in income from the sale of
certain lease rights and increased fee income generated by certain
insurance operations were partially offset by a decrease in income from the
sale of operating assets. For the nine months, other income increased $45
million (45%) 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.
<PAGE>
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.
17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
------------------------------------------------------------
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 third quarter and 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. Other operating and general expenses
increased $4.8 million (5%) in the third quarter and, excluding these
litigation charges, $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. Chiquita reported net losses
for the third quarter of 2000 and 1999 of $53.7 million and $36.7 million,
respectively. For the nine months of 2000, Chiquita reported a net loss of
$6.0 million compared to net income of $19.4 million for the 1999 period.
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
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.
-----------------------------------------------------------
<PAGE>
Item 3
Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
As of September 30, 2000, there were no material changes to the information
provided in AFG's Form 10-K for 1999 under the caption "Exposure to Market
Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 1
Legal Proceedings
-----------------
In February 1994, the USX Corporation ("USX") paid nearly $600 million in
satisfaction of antitrust judgments entered against its subsidiary, The
Bessemer & Lake Erie Railroad ("B&LE"). In May 1994, USX/B&LE filed two
lawsuits, one in state and the other in federal court, against American
Premier as the reorganized successor of The Penn Central Corporation
seeking to recover this amount (plus interest) under theories of indemnity
and contribution law.
In 1998, all pending suits were dismissed on American Premier's Motions for
Summary Judgment. These decisions were appealed by USX/B&LE and each
appellate court affirmed the decision of the lower court dismissing the
lawsuits. Plaintiffs then petitioned for and were denied re-hearings by
panels of federal and state appellate court judges.
Plaintiffs did not appeal the federal courts' decisions to the U.S. Supreme
Court and the time for doing so has now expired.
Plaintiffs appealed the state decision to the Ohio Supreme Court, which, on
August 4, 2000, agreed to allow an appeal of the state appellate court's
decision. On August 14, 2000, American Premier filed a Motion to Dismiss
the appeal as being improvidently granted. On October 4, 2000, the Ohio
Supreme Court granted this Motion and dismissed the appeal. Plaintiffs
filed a Motion for Reconsideration of the dismissal on October 16, 2000.
American Premier and its outside counsel continue to believe that American
Premier will not suffer any material loss from the remaining state court
appeal.
In June 2000, Great American Life Insurance Company ("GALIC") entered into
a Memorandum of Understanding to settle a purported class action lawsuit
(Woodward v. Great American Life Insurance Company, Hamilton County Court
of Common Pleas, Case No. A9900587, filed February 2, 1999). In the
settlement, GALIC agreed to (i) create a fund against which certain former
policyholders can submit claims for reimbursement of a portion of surrender
charges incurred, (ii) record lump-sum credits to certain annuities and
(iii) allow certain annuity holders to transfer their annuity value to
other products issued by GALIC or its subsidiaries. The complaint filed in
the lawsuit had sought unspecified money damages based on alleged (i)
failure of GALIC to allow the tax-free transfer of the annuity value of
certain annuities to other product providers, and (ii) misleading
disclosures concerning GALIC's interest crediting practices. The settlement
is set for a fairness hearing in the trial court on November 29, 2000.
19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Item 6
Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27.1 - Financial Data Schedule as of September 30, 2000. For
submission in electronic filing only.
(b) Reports on Form 8-K: none
-----------------------------------------------------------
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Group, Inc. has duly caused this Report to be signed on its behalf by
the undersigned duly authorized.
American Financial Group, Inc.
November 9, 2000 BY: Fred J. Runk
----------------------------------------
Fred J. Runk
Senior Vice President and Treasurer
20
