SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1997 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Series J Voting Cumulative Preferred Stock Pacific
9-3/4% Debentures due April 20, 2004 Pacific
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and need not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 1998, there were 10,593,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc. At that date there were 2,886,161
shares of Series J Voting Preferred Stock outstanding (all of
which were owned by non-affiliates). All shares of Common and
Preferred Stock are entitled to one vote per share and generally
vote as a single class. The aggregate market value of the
Preferred Stock at that date was approximately $82.6 million.
_____________
Documents Incorporated by Reference:
Proxy Statement for the 1998 Annual Meeting of Shareholders
(portions of which are incorporated by reference into Part III
hereof).
<PAGE>
AMERICAN FINANCIAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 16
Other Companies 20
Investment Portfolio 20
Regulation 22
Item 2 - Properties 24
Item 3 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders 26
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6 - Selected Financial Data 27
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk (a)
Item 8 - Financial Statements and Supplementary Data 37
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (b)
Part III
Item 10 - Directors and Executive Officers of the Registrant 37
Item 11 - Executive Compensation 37
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 37
Item 13 - Certain Relationships and Related Transactions 37
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) Not required - market capitalization on January 28,
1997 was less than $2.5 billion.
(b) The response to this Item is "none".
<PAGE>
Forward-Looking Statements The Private Securities Litigation
Reform Act of 1995 encourages corporations to provide investors
with information about the company's anticipated performance and
provides protection from liability if future results are not the
same as management's expectations. This document contains certain
forward-looking statements that are based on assumptions which
management believes are reasonable, but by their nature,
inherently uncertain. Future results could differ materially from
those projected. Factors that could cause such differences
include, but are not limited to: changes in economic conditions,
regulatory actions, level of catastrophe losses, and competitive
pressures. AFC undertakes no obligation to update any forward-
looking statements.
<PAGE>
PART I
ITEM 1
Business
Introduction
American Financial Corporation ("AFC") was incorporated as an
Ohio corporation in 1955. Its address is One East Fourth Street,
Cincinnati, Ohio 45202; its phone number is (513) 579-2121. At
December 31, 1997, American Financial Group, Inc. ("AFG") owned
all of the outstanding Common Stock of AFC (see "Mergers" below).
AFC is a holding company which, through its subsidiaries, is
engaged primarily in specialty and multi-line property and
casualty insurance businesses and in the sale of tax-deferred
annuities and certain life and health insurance products. AFC's
property and casualty operations originated in 1872 and were the
20th largest property and casualty group in the United States
based on 1996 statutory net premiums written of $2.8 billion.
Mergers/Capital Contribution
On April 3, 1995, AFC merged with a subsidiary of AFG, a new
company formed to own 100% of the common stock of both AFC and
American Premier Underwriters, Inc. ("American Premier" or "APU").
In the transaction, Carl H. Lindner and members of his family, who
owned 100% of the Common Stock of AFC, exchanged their AFC Common
Stock for approximately 55% of AFG voting common stock. Former
shareholders of American Premier, including AFC and its
subsidiaries, received shares of AFG stock on a one-for-one basis.
AFC receives dividends paid on AFG common stock; however, its
shares generally will not be eligible to be voted as long as AFC
is owned by AFG. No gain or loss was recorded on the exchange of
shares. AFC continues to be a separate SEC reporting company with
publicly traded debentures and preferred stock.
At the close of business on December 31, 1996, AFG contributed
to AFC 81% of the common stock of American Premier. Since AFC and
American Premier were under the common control of AFG, the
acquisition of American Premier has been recorded by AFC at AFG's
historical cost in a manner similar to a pooling of interests.
Accordingly, the historical consolidated financial statements of
AFC for periods subsequent to the April 1995 Mergers have been
restated to include the accounts of American Premier.
<PAGE>
General
Generally, companies have been included in AFC's consolidated
financial statements when AFC's ownership of voting securities has
exceeded 50%; for investments below that level but above 20%, AFC
has accounted for the investments as investees. (See Note F to
AFC's financial statements.) The following table shows AFC's
percentage ownership of voting securities of its significant
affiliates over the past several years:
Voting Ownership at December 31,
1997 1996 1995 1994 1993
American Premier Underwriters 81% 81% (a) 42% 41%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 81% 81% 81% 80% 80%
American Financial Enterprises 80% 83% 83% 83% 83%
Chiquita Brands International 39% 43% 44% 46% 46%
Citicasters - (b) 38% 37% 20%
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
1
<PAGE>
The following summarizes the more significant changes in
ownership percentages shown in the above table.
American Premier Underwriters In April 1995, APU became a
subsidiary of AFG as a result of the Mergers. At the close of
business on December 31, 1996, AFG contributed to AFC 81% of the
Common stock of American Premier.
Chiquita Brands International During the second half of 1997,
Chiquita issued an aggregate of 4.6 million shares of its common
stock in connection with the purchase of new businesses.
Citicasters In 1994, AFEI purchased approximately 10% of
Citicasters common stock. In the second half of 1994,
Citicasters repurchased and retired approximately 21% of its
common stock. In September 1996, the investments in Citicasters
were sold to an unaffiliated company.
Property and Casualty Insurance Operations
AFC manages and operates its property and casualty business in
three major business segments: Nonstandard Automobile Insurance,
Specialty Lines and Commercial and Personal Lines. Each segment
is comprised of multiple business units which operate
autonomously but with strong central financial controls and full
accountability. Decentralized control allows each unit the
autonomy necessary to respond to local and specialty market
conditions while capitalizing on the efficiencies of centralized
investment, actuarial, financial and legal support functions.
AFC's property and casualty insurance operations employ
approximately 8,100 persons.
AFC operates in a highly competitive industry that is affected
by many factors which can cause significant fluctuations in its
results of operations. The property and casualty insurance
industry has historically been subject to pricing cycles
characterized by periods of intense competition and lower premium
rates (a "downcycle") followed by periods of reduced competition,
reduced underwriting capacity due to lower policyholders' surplus
and higher premium rates (an "upcycle"). The property and
casualty insurance industry is currently in an extended
downcycle, which has lasted nearly a decade. AFC's premiums have
been adversely affected by this downcycle, particularly in the
extremely competitive pricing environment in certain standard
commercial lines of business.
The primary objective of AFC's property and casualty insurance
operations is to achieve underwriting profitability.
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting losses, loss
adjustment expenses ("LAE"), underwriting expenses and
policyholder dividends to premiums. When the combined ratio is
under 100%, underwriting results are generally considered
profitable; when the ratio is over 100%, underwriting results are
generally considered unprofitable. The combined ratio does not
reflect investment income, other income or federal income taxes.
<PAGE>
Management's focus on underwriting performance has resulted in
a statutory combined ratio averaging 101.3% for the period 1993
to 1997, as compared to 105.8% for the property and casualty
industry over the same period (Source: "Best's Review/Preview -
Property/Casualty" - January 1998 Edition). AFC believes that
its product line diversification and underwriting discipline have
contributed to the Company's ability to consistently outperform
the industry's underwriting results. Management's philosophy is
to refrain from writing business that is not expected to produce
an underwriting profit even if it is necessary to limit premium
growth to do so.
2
<PAGE>
Generally, while financial data is reported on a statutory basis for
insurance regulatory purposes, it is reported in accordance with
generally accepted accounting principles ("GAAP") for shareholder
and other investment purposes. In general, statutory accounting
results in lower capital surplus and net earnings than result
from application of GAAP. Major differences include charging
policy acquisition costs to expense as incurred rather than
spreading the costs over the periods covered by the policies;
recording bonds and redeemable preferred stocks primarily at
amortized cost; netting of reinsurance recoverables and prepaid
reinsurance premiums against the corresponding liability;
requiring additional loss reserves; and charging to
surplus certain assets, such as furniture and fixtures and
agents' balances over 90 days old. Unless indicated otherwise,
the financial information presented for the property and casualty
insurance operations herein is presented based on GAAP and
includes the insurance operations of AFC and American Premier for
all periods.
The following table shows (in millions) certain information of
AFC's property and casualty insurance operations.
1997 1996 1995
Statutory Basis
Premiums Earned $2,802 $2,821 $3,006
Admitted Assets 6,983 6,603 6,753
Unearned Premiums 1,133 1,104 1,160
Loss and LAE Reserves 3,475 3,397 3,394
Capital and Surplus 1,916 1,659 1,595
GAAP Basis
Premiums Earned $2,824 $2,845 $3,031
Total Assets 9,212 8,623 9,002
Unearned Premiums 1,329 1,248 1,294
Loss and LAE Reserves 4,225 4,124 4,097
Shareholder's Equity 3,019 2,695 2,893
<PAGE>
The following table shows the size (in millions), segment and
A.M. Best rating of AFC's major property and casualty insurance
subsidiaries. AFC continues to focus on growth opportunities in
what it believes to be more profitable specialty lines and
nonstandard auto businesses which represented the bulk of 1997
net written premiums.
1997 Net Written Premiums
NSA Commercial
Company (A.M. Best Rating) Group Specialty and Personal
Great American (A) $ - $ 724 $507
Republic Indemnity (A) - 224 -
Mid-Continent (A) - 104 -
American Empire Surplus Lines (A+) - 23 -
Atlanta Casualty (A) 399 - -
Windsor (A) 339 - -
Infinity (A) 331 - -
Leader National (A-) 59 - -
Transport (A) 93 - -
Other 27 28 -
$1,248 $1,103 $507
3
<PAGE>
The following table shows the performance of AFC's property
and casualty insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $2,858 $2,788 $3,092
Net earned premiums $2,824 $2,845 $3,031
Loss and LAE 2,076 2,132 2,265
Underwriting expenses 783 780 792
Policyholder dividends 7 14 8
Underwriting loss ($ 42) ($ 81) ($ 34)
GAAP ratios:
Loss and LAE ratio 73.5% 75.0% 74.8%
Underwriting expense ratio 27.7 27.4 26.1
Policyholder dividend ratio .2 .5 .3
Combined ratio (a) 101.4% 102.9% 101.2%
Statutory ratios:
Loss and LAE ratio 73.4% 74.8% 74.8%
Underwriting expense ratio 27.3 27.2 25.9
Policyholder dividend ratio .7 .4 1.7
Combined ratio (a) 101.4% 102.4% 102.4%
Industry statutory combined ratio (b) 101.6% 105.8% 106.5%
(a) The 1996 combined ratios include an increase of 2.8 percentage
points attributable to the strengthening of insurance reserves
relating to asbestos and other environmental matters ("A&E").
(b) Ratios are derived from "BestWeek" (March 16, 1998 Edition).
As with other property and casualty insurers, AFC's operating
results can be adversely affected by unpredictable catastrophe
losses. Certain natural disasters (hurricanes, tornadoes,
floods, forest fires, etc.) and other incidents of major loss
(explosions, civil disorder, fires, etc.) are classified as
catastrophes by industry associations. Losses from these
incidents are usually tracked separately from other business of
insurers because of their sizable effects on overall operations.
AFC generally seeks to reduce its exposure to such events through
individual risk selection and the purchase of reinsurance. Major
catastrophes in recent years included Hurricane Fran in 1996 and
the Texas hailstorms in 1995. Total net losses to AFC's
insurance operations from catastrophes were $20 million in 1997;
$85 million in 1996; and $70 million in 1995. These amounts are
included in the tables herein.
4
<PAGE>
Nonstandard Automobile Insurance
General The Nonstandard Automobile Insurance segment ("NSA
Group") underwrites primarily private passenger automobile
liability and physical damage insurance policies for
"nonstandard" risks. Nonstandard insureds are those individuals
who are unable to obtain insurance through standard market
carriers due to factors such as age, record of prior accidents,
driving violations, particular occupation or type of vehicle.
Premium rates for nonstandard risks are generally higher than for
standard risks. Total private passenger automobile insurance net
premiums written by insurance carriers in the United States in
1997 have been estimated by A.M. Best to be approximately
$115 billion. Because it can be viewed as a residual market, the
size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when
standard coverage becomes more restrictive. When this occurs,
the criteria which differentiate standard from nonstandard
insurance risks change. The size of the voluntary nonstandard
market is also affected by rate levels adopted by state
administered involuntary plans. According to A.M. Best, the
voluntary nonstandard market has accounted for about one-sixth of
total private passenger automobile insurance premiums written in
recent years.
While the NSA Group's implementation of significant rate
increases during 1995 and early 1996 led to a reduction of
premiums written in 1996, it also led to improved underwriting
profitability in 1996 and 1997. Premium growth resumed in 1997
as a result of more moderate rate activity and California's
stronger enforcement of its mandatory insurance law.
The NSA Group writes business in 42 states and holds licenses
to write policies in 49 states and the District of Columbia. The
U.S. geographic distribution of the NSA Group's statutory direct
written premiums in 1997 compared to 1993, was as follows:
1997 1993 1997 1993
California 15.2% 6.9% Mississippi 2.3% 3.1%
Florida 11.1 13.2 Arizona 2.1 5.8
Georgia 10.2 12.0 Kentucky 2.1 2.0
Pennsylvania 8.3 * Ohio * 4.0
Texas 5.9 5.6 Alabama * 3.7
Connecticut 5.2 3.6 Washington * 3.3
New York 4.3 * Oregon * 3.1
Indiana 3.3 3.7 Utah * 2.7
Tennessee 2.7 4.5 Arkansas * 2.5
Missouri 2.6 3.7 Virginia * 2.4
Oklahoma 2.6 3.0 Other 22.1 11.2
100.0% 100.0%
_____________
(*) less than 2%
In addition, the NSA Group has written approximately 4% of its
net premiums annually in the United Kingdom.
<PAGE>
Management believes that the NSA Group's underwriting success
has been due, in part, to the refinement of various risk
profiles, thereby dividing the consumer market into more defined
segments which can be underwritten or priced properly. The NSA
Group also generally writes policies of short duration which
allow more frequent rating evaluations of individual risks,
providing management greater flexibility in the ongoing
assessment of the business. In addition, the NSA Group has
implemented cost control measures both in the underwriting and
claims handling areas.
5
<PAGE>
The following table shows the performance of AFC's NSA Group
insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $1,248 $1,135 $1,277
Net earned premiums $1,205 $1,183 $1,246
Loss and LAE 898 904 1,036
Underwriting expenses 274 278 273
Underwriting profit (loss) $ 33 $ 1 ($ 63)
GAAP ratios:
Loss and LAE ratio 74.5% 76.4% 83.2%
Underwriting expense ratio 22.7 23.5 22.0
Combined ratio 97.2% 99.9% 105.2%
Statutory ratios:
Loss and LAE ratio 74.1% 75.8% 83.1%
Underwriting expense ratio 21.9 22.5 21.6
Combined ratio 96.0% 98.3% 104.7%
Industry statutory combined ratio (a) 98.0% 101.0% 101.3%
(a) Represents the private passenger automobile industry statutory
combined ratio derived from "Best's Review/Preview -
Property/Casualty" (January 1998 Edition). Although AFC believes
that there is no reliable regularly published combined ratio data
for the nonstandard automobile insurance industry, AFC believes
that such a combined ratio would be lower than the private
passenger automobile industry average shown above.
Marketing Each of the principal units in the NSA Group is
responsible for its own marketing, sales, underwriting and claims
processing. Sales efforts are directed primarily toward
independent agents. These units each write policies through
several thousand independent agents.
The NSA Group had approximately one million policies in force
at December 31, 1997, just under 90% of which had policy limits
of $50,000 or less per occurrence. Most NSA Group policies are
written for policy periods of six months or less.
Competition A large number of national, regional and local
insurers write nonstandard private passenger automobile insurance
coverage. Insurers in this market generally compete on the basis
of price (including differentiation on liability limits, variety
of coverages offered and deductibles), geographic availability and
ease of enrollment and, to a lesser extent, reputation for claims
handling, financial stability and customer service. NSA Group
management believes that sophisticated data analysis for
refinement of risk profiles has helped the NSA Group to compete
successfully. The NSA Group attempts to provide selected pricing
for a wider spectrum of risks and with a greater variety of
payment options, deductibles and limits of liability than are
offered by many of its competitors.
6
<PAGE>
Specialty Lines
General The Specialty Lines segment emphasizes the writing of
specialized insurance coverage where AFC personnel are experts in
particular lines of business or customer groups. The following
are examples of such Specialty Lines and the businesses which they
operate:
Workers' Compensation Writes coverage for prescribed benefits
payable to employees (principally in
California) who are injured on the job.
Executive Liability Markets liability coverage for attorneys
and corporate directors and officers.
Inand and Ocean Marine Provides coverage primarily for marine
cargo, boat dealers, marina
operators/dealers, excursion vessels,
builder's risk, contractor's equipment,
excess property and transportation
cargo.
Japanese division Provides coverage primarily for workers'
compensation, commercial auto, umbrella,
and general liability of Japanese
businesses operating in the U.S.
Agricultural-related Provides multi-peril crop insurance
(allied lines) covering weather and disease perils as
well as coverage for full-time operating
farms/ranches and agribusiness operations
on a nationwide basis.
Non-profit Liability Provides property, general/professional
liability, automobile, trustee liability,
umbrella and crime coverage for a wide
range of non-profit organizations.
General Aviation Provides coverage for corporate and
private aircraft and airports.
Fidelity and Surety Bonds Provides surety coverage for various types
of contractors and public and private
corporations and fidelity and crime
coverage for government, mercantile and
financial institutions.
Umbrella and Excess Provides large capacity coverage in excess
of primary layers.
Specialization is the key element to the underwriting success
of these business units. Each unit has independent management
with significant operating autonomy to oversee the important
operational functions of its business such as underwriting,
pricing, marketing, policy processing and claims service. These
specialty lines are opportunistic and their premium volume will
vary based on current market conditions. AFC continually
evaluates expansion in existing markets and opportunities in new
specialty markets.
<PAGE>
The U.S. geographic distribution of the Specialty Lines statutory
direct written premiums in 1997 compared to 1993, was as follows:
1997 1993 1997 1993
California 29.5% 46.7% Oklahoma 3.5% 4.2%
Texas 8.4 5.0 New Jersey 2.2 2.5
Massachusetts 4.7 3.2 Pennsylvania 2.0 *
New York 4.6 5.2 Ohio 2.0 *
Florida 4.5 2.6 Michigan * 2.0
Illinois 3.7 2.9 Other 34.9 25.7
100.0% 100.0%
_____________
(*) less than 2%
7
<PAGE>
The following table sets forth a distribution of statutory net
written premiums for AFC's Specialty Lines by NAIC annual
statement line for 1997 compared to 1993:
1997 1993
Workers' compensation 23.5% 47.2%
Other liability 20.3 16.9
Inland marine 9.2 6.5
Commercial multi-peril 8.4 4.7
Auto physical damage 7.5 2.0
General aviation 7.2 0.1
Allied lines 5.8 4.5
Fidelity and surety 4.1 2.8
Auto liability 3.9 5.7
Ocean marine 3.6 4.2
Other 6.5 5.4
100.0% 100.0%
The following table shows the performance of AFC's Specialty
Lines insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $1,103 $993 $1,097
Net earned premiums $1,056 $976 $1,085
Loss and LAE 706 527 730
Underwriting expenses 344 295 302
Policyholder dividends (5) - (3)
Underwriting profit $ 11 $154 $ 56
GAAP ratios:
Loss and LAE ratio 66.8% 53.9% 67.2%
Underwriting expense ratio 32.6 30.2 27.9
Policyholder dividend ratio (.4) - (.3)
Combined ratio (a) 99.0% 84.1% 94.8%
Statutory ratios:
Loss and LAE ratio 66.7% 54.1% 67.5%
Underwriting expense ratio 31.9 30.3 28.1
Policyholder dividend ratio 1.0 .5 4.2
Combined ratio (a) 99.6% 84.9% 99.8%
Industry statutory combined ratio (b) 103.7% 108.9% 109.9%
(a) The 1996 combined ratios reflect a reduction of 4.1 percentage
points attributable to a reallocation of loss reserves in
connection with the strengthening of A&E reserves.
(b) Represents the commercial industry statutory combined ratio
derived from "BestWeek" (March 16, 1998 Edition).
Marketing The Specialty Lines operations direct their sales
efforts primarily toward independent property and casualty
insurance agents and brokers. These businesses write insurance
through several thousand agents and brokers and have nearly
290,000 policies in force.
<PAGE>
Competition These businesses compete with other individual
insurers, state funds and insurance groups of varying sizes, some
of which are mutual insurance companies possessing competitive
advantages in that all their profits inure to their policyholders.
Because of the specialty nature of these coverages, competition is
based primarily on service to policyholders and agents, specific
characteristics of products offered and reputation for claims
handling. Price, commissions and profit sharing terms are also
important factors. Management believes that sophisticated data
analysis for refinement of risk profiles, extensive specialized
knowledge and loss prevention service have helped AFC's specialty
lines compete successfully.
8
<PAGE>
Commercial and Personal Lines
General Major commercial lines of business are workers'
compensation, commercial multi-peril, umbrella (including primary
and excess layers) and commercial auto. The workers' compensation
business has experienced solid growth and profitability due to
adequate rate structures and favorable trends in medical care
costs and the success of its Drug-Free Workplace and SafetyWorks
programs.
AFC's Drug-Free Workplace and SafetyWorks programs for workers'
compensation customers assist insureds in setting up drug testing
programs (as permitted by law), drug and alcohol education
programs and work safety programs. In 1997, there were more than
1,400 insureds in 23 states with such programs producing
approximately $83 million in annual net written premiums.
Commercial business is written in 26 states where management
believes adequate rates can be obtained and where assigned risk
costs are not excessive. AFC's approach focuses on specific
customer groups, such as fine restaurants, light manufacturers,
hotels/motels, workers' compensation safety groups and insureds
with large umbrella coverages. The approach also emphasizes site
visits at prospective customers to ensure underwriter familiarity
with risk factors relating to each insured and to avoid those
risks which have unacceptable exposures.
Personal lines business consists primarily of
preferred/standard private passenger automobile and homeowners'
insurance and is currently being marketed in 25 states. AFC's
approach is to develop tailored rates for its personal automobile
customers based on a variety of factors, including the driving
record of the insureds. The approach to homeowners business is to
limit exposure in locations which are likely to be unprofitable
and those which have significant catastrophic potential (such as
windstorms, earthquakes and hurricanes). During 1997, AFC had a
reinsurance agreement under which 80% of its homeowners' business
was reinsured.
<PAGE>
The U.S. geographic distribution of the Commercial and Personal Line
s statutory direct written premiums in 1997 compared to 1993, was
as follows:
1997 1993 1997 1993
Connecticut 13.1% 14.5% Florida 2.7% 4.3%
New Jersey 13.0 8.4 Texas 2.5 3.3
New York 11.8 9.8 Illinois 2.3 2.8
North Carolina 10.5 9.4 Kentucky 2.3 *
Pennsylvania 5.6 6.0 Utah 2.1 *
Maryland 3.9 3.9 Tennessee 2.0 *
Ohio 3.7 4.3 California * 3.9
Massachusetts 3.4 * Washington * 2.4
Michigan 3.4 3.5 Oregon * 2.4
Other 17.7 21.1
100.0% 100.0%
_____________
(*) less than 2%
9
<PAGE>
The following table sets forth a distribution of statutory net
written premiums for AFC's Commercial and Personal Lines by NAIC
annual statement line for 1997 compared to 1993:
1997 1993
Auto liability 34.6% 32.0%
Workers' compensation 27.5 12.3
Commercial multi-peril 19.4 19.6
Other liability 8.1 6.2
Auto physical damage 4.5 12.3
Homeowners 2.5 12.1
Other 3.4 5.5
100.0% 100.0%
<PAGE>
The following table shows the performance of AFC's Commercial
and Personal Lines insurance operations (dollars in millions):
1997 1996 1995
Net written premiums $ 507 $ 660 $ 717
Net earned premiums $ 563 $ 685 $ 698
Loss and LAE 421 538 468
Underwriting expenses 165 206 214
Policyholder dividends 11 14 11
Underwriting profit (loss) ($ 34) ($ 73) $ 5
GAAP ratios:
Loss and LAE ratio 74.8% 78.5% 66.9%
Underwriting expense ratio 29.2 30.0 30.6
Policyholder dividend ratio 2.0 2.1 1.6
Combined ratio (a) 106.0% 110.6% 99.1%
Statutory ratios:
Loss and LAE ratio 74.6% 78.8% 67.2%
Underwriting expense ratio 30.2 30.4 29.9
Policyholder dividend ratio 1.6 1.0 .6
Combined ratio (a) 106.4% 110.2% 97.7%
Industry statutory combined ratio (b) 101.6% 105.8% 106.5%
(a) The 1996 combined ratios include 3.9 percentage points (GAAP) and 3.8
percentage points (statutory) due to losses from Hurricane Fran.
(b) Ratios are derived from "BestWeek" (March 16, 1998 Edition).
Marketing The Commercial and Personal Lines business units
direct their sales efforts primarily toward independent agents and
brokers. These businesses write insurance through more than 5,000
agents and have approximately 350,000 policies in force.
Competition These businesses compete with other insurers,
primarily on the basis of price (including differentiation on
policy limits, coverages offered and deductibles), agent
commissions and profit sharing terms. Customer service, loss
prevention and reputation for claims handling are also important
factors. Competitors include individual insurers and insurance
groups of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all their
profits inure to their policyholders. Management believes that
sophisticated data analysis for refinement of risk profiles,
disciplined underwriting practices and aggressive loss prevention
procedures have enabled these businesses to compete on the basis
of price without negatively affecting underwriting profitability.
10
<PAGE>
Reinsurance
Consistent with standard practice of most insurance companies,
AFC reinsures a portion of its business with other reinsurance
companies and assumes a relatively small amount of business from
other insurers. Ceding reinsurance permits diversification of
risks and limits the maximum loss arising from large or unusually
hazardous risks or catastrophic events. The availability and cost
of reinsurance are subject to prevailing market conditions which
may affect the volume and profitability of business that is
written. AFC is subject to credit risk with respect to its
reinsurers, as the ceding of risk to reinsurers does not relieve
AFC of its liability to its insureds.
Reinsurance is provided on one of two bases, facultative or
treaty. Facultative reinsurance is generally provided on a risk by
risk basis. Individual risks are ceded and assumed based on an
offer and acceptance of risk by each party to the transaction.
Treaty reinsurance provides for risks meeting prescribed criteria
to be automatically ceded and assumed according to contract
provisions.
In order to limit the maximum loss arising out of any one
occurrence, AFC's insurance companies reinsure a portion of their
exposure under treaty and facultative reinsurance programs. The
following table presents (by type of coverage) the amount of each
loss above the specified retention maximum generally covered by
treaty reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
California Workers' Compensation $1.5 $150.0
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(b)
Property - Catastrophe 20.0 130.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) In 1997, AFC ceded 80% of its homeowners insurance coverage through
a reinsurance agreement; beginning in 1998, it will cede 90%.
AFC purchases facultative reinsurance providing coverage on a
risk by risk basis, both pro rata and excess of loss, depending on
the risk and available reinsurance markets. Due in part to the
limited exposure on individual policies, the NSA Group is not
materially involved in reinsuring risks with third party insurance
companies.
<PAGE>
Included in the balance sheet caption "recoverables from
reinsurers and prepaid reinsurance premiums" were $82 million on
paid losses and LAE and $736 million on unpaid losses and LAE at
December 31, 1997. The collectibility of a reinsurance balance is
based upon the financial condition of a reinsurer as well as
individual claim considerations. Market conditions over the past
few years have forced many reinsurers into financial difficulties
or liquidation proceedings. At December 31, 1997, AFC's insurance
subsidiaries had allowances of approximately $78 million for
doubtful collection of reinsurance recoverables, substantially all
related to unpaid losses. AFC regularly monitors the financial
strength of its reinsurers. This process periodically results in
the transfer of risks to more financially secure reinsurers.
Substantially all reinsurance is ceded to reinsurers having more
than $100 million in capital and A.M. Best ratings of "A-" or
better. AFC's major reinsurers include American Re-Insurance
Company, Employers Reinsurance Corporation, NAC Reinsurance
Corporation, Mitsui Marine and Fire Insurance Company, Continental
Casualty Company, Transatlantic Reinsurance Company, General
Reinsurance Corporation and Vesta Fire Insurance Company. These
companies have assumed nearly half of AFC's ceded reinsurance.
11
<PAGE>
Premiums written for reinsurance ceded and assumed are presented
in the following table (in millions):
1997 1996 1995
Reinsurance ceded $614 $518 $482
Reinsurance assumed - including
involuntary pools and associations 89 58 98
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of AFC's insurance
subsidiaries. This liability represents estimates of the ultimate
net cost of all unpaid losses and LAE and is determined by using
case-basis evaluations and actuarial projections. These estimates
are subject to the effects of changes in claim amounts and
frequency and are periodically reviewed and adjusted as additional
information becomes known. In accordance with industry practices,
such adjustments are reflected in current year operations.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy provisions,
product mix and other factors. Estimating the liability for
unpaid losses and LAE is inherently judgmental and is influenced
by factors which are subject to significant variation. Through
the use of analytical reserve development techniques, management
monitors items such as the effect of inflation on medical,
hospitalization, material, repair and replacement costs, general
economic trends and the legal environment. Although management
believes that the reserves currently established reflect a
reasonable provision for the ultimate cost of all losses and
claims, actual development may vary materially.
<PAGE>
AFC recognizes underwriting profit only when realization is
reasonably determinable and assured. In certain specialty lines,
where experience is limited or where there is potential for
volatile results, AFC holds reasonable "incurred but not reported"
reserves and does not recognize underwriting profit until the
experience matures.
Generally, reserves for reinsurance and involuntary pools and
associations are reflected in AFC's results at the amounts
reported by those entities.
Unless otherwise indicated, the following discussion of
insurance reserves includes the reserves of American Premier's
subsidiaries for only those periods following the Mergers. See Note Q
to the Financial Statements for an analysis of changes in AFC's estimated
liability for losses and LAE, net and gross of reinsurance, over the
past three years on a GAAP basis.
12
<PAGE>
The following table presents the development of AFC's liability
for losses and LAE, net of reinsurance, on a GAAP basis for the
last ten years, excluding reserves of American Premier
subsidiaries prior to the Mergers. The top line of the table
shows the estimated liability (in millions) for unpaid losses and
LAE recorded at the balance sheet date for the indicated years.
The second line shows the re-estimated liability as of December 31,
1997. The remainder of the table presents development as percentages
of the estimated liability. The development results from additional
information and experience in subsequent years. The middle line shows
a cumulative deficiency (redundancy) which represents the aggregate
percentage increase (decrease) in the liability initially estimated.
The lower portion of the table indicates the cumulative amounts paid
as of successive periods as a percentage of the original loss reserve
liability.
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,024 $2,209 $2,246 $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489
As re-estimated at
December 31, 1997 2,482 2,531 2,520 2,337 2,247 2,178 2,089 2,185 3,342 3,435 N/A
Liability re-estimated (*):
One year later 102.5% 99.8% 100.4% 98.6% 99.3% 99.9% 98.2% 95.8% 98.7% 100.9%
Two years later 103.6% 100.0% 99.3% 97.7% 98.7% 98.3% 94.0% 99.3% 98.5%
Three years later 103.1% 99.7% 98.4% 97.4% 98.0% 95.2% 97.4% 99.9%
Four years later 102.5% 98.7% 98.2% 99.2% 97.3% 100.3% 98.9%
Five years later 102.6% 99.1% 101.1% 100.0% 103.0% 102.6%
Six years later 103.5% 103.0% 102.7% 106.3% 105.6%
Seven years later 109.4% 104.7% 109.2% 109.4%
Eight years later 111.7% 111.4% 112.2%
Nine years later 119.2% 114.5%
Ten years later 122.6%
Cumulative deficiency
(redundancy) 22.6% 14.5% 12.2% 9.4% 5.6% 2.6% (1.1%) (0.1%) (1.5%) 0.9% N/A
Cumulative paid as of:
One year later 29.2% 29.4% 32.3% 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8%
Two years later 49.0% 48.6% 48.2% 43.2% 43.0% 43.7% 40.6% 42.5% 51.6%
Three years later 63.5% 59.8% 59.2% 55.3% 55.4% 54.2% 50.9% 54.4%
Four years later 72.2% 67.9% 67.6% 64.8% 63.3% 60.8% 59.1%
Five years later 78.5% 74.0% 74.3% 71.1% 67.8% 67.0%
Six years later 83.6% 79.5% 78.8% 74.5% 72.7%
Seven years later 87.7% 83.2% 81.2% 78.6%
Eight years later 91.1% 85.2% 84.8%
Nine years later 92.7% 88.5%
Ten years later 96.2%
(*) Reflects significant A&E charges and reallocations in 1994 and 1996 for prior years losses.
</TABLE>
<PAGE>
The following is a reconciliation of the net liability to the
gross liability for unpaid losses and LAE.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489
Add reinsurance recoverables 611 730 704 720 736
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225
As re-estimated at
December 31, 1997:
Net liability shown above $2,089 $2,185 $3,342 $3,435
Add reinsurance recoverables 791 782 790 748
Gross liability $2,880 $2,967 $4,132 $4,183 N/A
Gross cumulative deficiency
(redundancy) 5.7% 1.8% 0.9% 1.5% N/A
</TABLE>
13
<PAGE>
The following table presents certain data from the table above,
adjusted to include reserves of American Premier's subsidiaries for
periods subsequent to their entry into the insurance business in
1989 and prior to the Mergers in 1995.
1989 1990 1991 1992 1993 1994
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,616 $2,739 $2,793 $2,886 $3,029 $3,267
As re-estimated at
December 31, 1997 2,831 2,873 2,848 2,824 2,871 3,138
Cumulative deficiency
(redundancy) 8.2% 4.9% 2.0% (2.1%) (5.2%) (3.9%)
Reconciliation of net
liability to gross liability:
As originally estimated:
Net liability shown above $3,029 $3,267
Add reinsurance recoverables 617 742
Gross liability $3,646 $4,009
As re-estimated at
December 31, 1997:
Net liability shown above $2,871 $3,138
Add reinsurance recoverables 800 766
Gross liability $3,671 $3,904
Gross cumulative deficiency
(redundancy) 0.6% (2.6%)
These tables do not present accident or policy year development
data. Furthermore, in evaluating the re-estimated liability and
cumulative deficiency (redundancy), it should be noted that each
percentage includes the effects of changes in amounts for prior
periods. For example, AFC's $80 million charge for A&E claims
related to losses recorded in 1996, but incurred before 1987, is
included in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the previous years shown.
Conditions and trends that have affected development of the
liability in the past may not necessarily exist in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
The adverse development in the tables is due primarily to A&E
exposures for which AFC has been held liable under general
liability policies written years ago where environmental coverage
was not intended. Other factors affecting development included
higher than projected inflation on medical, hospitalization,
material, repair and replacement costs. Additionally, changes in
the legal environment have influenced the development patterns over
the past ten years. For example, changes in the California workers'
compensation law in 1993 and subsequent court decisions, primarily in
late 1996, greatly limited the ability of insurers to challenge medical
assessments and treatments. These limitations, together with
changes in work force characteristics and medical delivery costs,
are contributing to an increase in claims severity. Two changes
influencing development patterns in the 1980s were the trend
towards an adverse litigious climate and the change from
contributory to comparative negligence.
<PAGE>
The differences between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
("SAP") and that reported in the accompanying consolidated
financial statements in accordance with GAAP at December 31, 1997,
are as follows (in millions):
Liability reported on a SAP basis $3,475
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (22)
Reserves of foreign operations 37
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables 736
Liability reported on a GAAP basis $4,225
14
<PAGE>
Asbestos and Environmental Reserves ("A&E") In defining
environmental exposures, the insurance industry typically includes
claims relating to polluted waste sites and asbestos as well as
other mass tort claims such as those relating to breast implants,
repetitive stress on keyboards, DES (a drug used in pregnancies
years ago alleged to cause cancer and birth defects) and other
latent injuries.
Establishing reserves for A&E claims is subject to
uncertainties that are greater than those presented by other types
of claims. Factors contributing to those uncertainties include a
lack of sufficiently detailed historical data, long reporting
delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy
coverage, and the extent and timing of any such contractual
liability. Courts have reached different and sometimes
inconsistent conclusions as to when a loss is deemed to have
occurred, what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined and other policy provisions. Management
believes these issues are not likely to be resolved in the near
future.
Significant industrywide information concerning A&E reserves
first became broadly available in mid-1996 following the
publication of new data relating to that subject in the 1995
Annual Statements of insurance companies. During 1995 and 1996, a
number of insurers recorded large reserve increases for A&E
exposures. By the end of 1995, the industry's survival ratio
(reserves divided by annual paid losses) had increased from a
multiple of six times in the early 1990's to more than nine times.
The following table compares AFC's three-year survival ratio for
A&E claims with that of the industry.
December 31,
Survival Ratio: 1997 1996 1995 1994
AFC 10.0 10.5 6.5 7.0
Industry(a) 7.6 8.2 9.4 7.9
(a) Source: 1996-1994 "BestWeek - Property and Casualty
Supplement" (September 15, 1997 Edition); 1997 is an
estimate.
Industry actions and statistics in 1995 caused AFC to re-
evaluate its position in relation to its peers as part of the
continuing process of obtaining additional information and
revising accounting estimates. This process led management to
conclude that the A&E reserves should be increased sufficiently to
bring AFC's three-year survival ratio in line with those of the
top 50 companies. In the third quarter of 1996, AFC strengthened
its A&E reserve to approximately 10.5 times average annual paid
losses based upon these revised industry standards for reserving
such claims. AFC recorded a non-cash, pretax charge of
$80 million and reallocated $40 million in reserves from its
Specialty Operations. Based on known facts, current law, and
current industry practices, management believes that its reserves
for such claims are appropriate.
<PAGE>
The following table (in millions) is a progression of A&E
reserves.
1997 1996 1995
Reserves at beginning of year $343.4 $225.7 $224.9
Incurred losses and LAE 43.2 149.0 35.2
Paid losses and LAE (38.7) (31.3) (34.4)
Reserves at end of year, net of
reinsurance recoverable 347.9 343.4 225.7
Reinsurance recoverable 173.2 162.7 164.2
Gross reserves at end of year $521.1 $506.1 $389.9
Since the mid-1980's, AFC has also written certain
environmental coverages (asbestos abatement and underground
storage tank liability) in which the premium charged is intended
to provide coverage for the specific environmental exposures
inherent in these policies. The business has been profitable
since its inception. To date, approximately $182 million of
premiums has been written, $23 million in losses and LAE have been
paid and reserves for unpaid losses and LAE aggregated $29 million
at December 31, 1997 (not included in the above table).
15
<PAGE>
Annuity and Life Operations
General
AFC's annuity operations are conducted through American Annuity
Group ("AAG"), a holding company whose primary subsidiary is Great
American Life Insurance Company ("GALIC") which it acquired from
Great American in 1992. GALIC sells (i) flexible premium and
single premium annuities in the qualified (not-for-profit) market
and (ii) single premium annuities in the non-qualified market.
AAG and its subsidiaries employ approximately 1,700 persons.
Acquisitions in recent years have supplemented AAG's internal
growth as the company's assets increased from $4.5 billion at year
end 1992 to over $7.7 billion at year end 1997. In addition, these
acquisitions have expanded AAG's focus from primarily traditional
fixed annuity products to three areas: (i) retirement products
(fixed and variable annuities); (ii) pre-need funding products (life
insurance and fixed annuities) and (iii) other life, accident and
health insurance. Premiums over the last three years were as
follows (in millions):
Premiums*
Insurance Product 1997 1996 1995
Retirement $489 $540 $457
Pre-need Funding 111 97 -
Other Life, Accident and Health 42 43 2
$642 $680 $459
________________
(*) The table does not include premiums of subsidiaries until
their first full year following acquisition.
Retirement Products
Annuities AAG's retirement products consist primarily of
annuities, which are long-term retirement saving instruments that
benefit from income accruing on a tax-deferred basis. The issuer
of the annuity collects premiums, credits interest on the policy
and pays out a benefit upon death, surrender or annuitization.
Annuity contracts are generally classified as either fixed rate or
variable. With a fixed rate annuity, the interest crediting rate is
initially set by the issuer and thereafter may be changed from time to
time by the issuer subject to any guaranteed minimum interest
crediting rates in the policy. With a variable annuity, the value of
the policy is tied to an underlying securities portfolio or underlying
mutual funds.
Employees of qualified not-for-profit organizations are
eligible to save for retirement through contributions made on a
before-tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free
"rollovers" of funds. Federal income taxes are not payable on
contributions or earnings until amounts are withdrawn.
16
<PAGE>
GALIC entered the tax-deferred annuity business in 1976 and
currently sells fixed rate annuities - both traditional and equity-
indexed. The following table (in millions) presents financial
information concerning GALIC.
1997 1996 1995
Statutory Basis
Total Assets $5,917 $5,752 $5,414
Annuity Reserves 5,446 5,298 4,974
Capital and Surplus 317 285 273
Asset Valuation Reserve (a) 65 91 90
Interest Maintenance Reserve (a) 24 25 32
Annuity Receipts:
Flexible Premium:
First Year $ 32 $ 35 $ 42
Renewal 160 182 196
192 217 238
Single Premium 241 319 219
Total Annuity Receipts $ 433 $ 536 $ 457
________________
(a) Allocation of surplus.
GAAP Basis
Total Assets $6,223 $5,934 $5,608
Annuity Benefits Accumulated 5,330 5,205 4,917
Stockholder's Equity 770 658 623
GALIC's principal products are Flexible Premium Deferred
Annuities ("FPDAs") and Single Premium Deferred Annuities
("SPDAs"). FPDAs are characterized by premium payments that are
flexible in both amount and timing as determined by the
policyholder. SPDAs are issued in exchange for a one-time lump-
sum premium payment.
At December 31, 1997, all of GALIC's annuity reserves consisted
of fixed rate annuities which offered a minimum interest rate
guarantee of 3% or 4%. The majority of GALIC's annuity policies
are traditional fixed rate annuities which permit GALIC to change
the crediting rate at any time (subject to the minimum guaranteed
interest rate). In determining the frequency and extent of
changes in the crediting rate, GALIC takes into account the
economic environment and the relative competitive position of its
products.
Over the last few years, traditional fixed rate annuities have
met substantial competition from mutual funds and other equity-
based investments. In response, GALIC developed an equity-indexed
annuity which provides policyholders with a crediting rate tied,
in part, to the performance of an existing stock market index
while protecting them against the related downside risk through a
guarantee of principal. AAG hedges the equity-based risk
component of this product through the purchase of call options on
the appropriate index. These options are designed to offset
substantially all of the increases in the fair values of the
equity-indexed annuities. Sales of equity-indexed annuities
accounted for 9% of GALIC's premiums in 1997.
<PAGE>
GALIC seeks to maintain a desired spread between the yield on
its investment portfolio and the rate it credits to its policies.
GALIC accomplishes this by: (i) offering crediting rates which it
has the option to change; (ii) designing annuity products that
encourage persistency and (iii) maintaining an appropriate
matching of assets and liabilities. GALIC designs its products
with certain surrender penalties to discourage policyholders from
surrendering or withdrawing funds during the first five to ten
years after issuance of a policy. Partly due to these features,
GALIC's annuity surrenders have averaged approximately 7% of
statutory reserves over the past five years.
17
<PAGE>
Marketing and Distribution Sales of fixed rate annuities are
affected by many factors, including: (i) competitive annuity
products and rates; (ii) the general level of interest rates;
(iii) the favorable tax treatment of annuities; (iv) commissions
paid to agents; (v) services offered; (vi) ratings from
independent insurance rating agencies; (vii) other alternative
investments and (viii) general economic conditions. At December
31, 1997, GALIC had more than 265,000 annuity policies in force.
GALIC markets its FPDAs principally to employees of educational
institutions in the kindergarten through high school segment.
Written premiums from this market segment represented the majority
of GALIC's total tax-qualified premiums in 1997.
GALIC distributes its annuity products through approximately 80
managing general agents ("MGAs") who, in turn, direct over 1,000
actively producing independent agents. GALIC has developed its
business on the basis of its relationships with MGAs and
independent agents primarily through a consistent marketing
approach and responsive service.
GALIC is licensed to sell its products in all states (except New
York) and in the District of Columbia. The following table
reflects the geographical distribution of GALIC's annuity premiums
in 1997 compared to 1993.
1997 1993 1997 1993
California 21.9% 21.8% New Jersey 3.8% 5.5%
Texas 8.0 3.3 Michigan 3.4 8.5
Washington 7.6 2.4 Indiana 2.9 *
Ohio 6.4 5.5 Connecticut 2.8 5.2
Florida 5.4 9.8 Iowa 2.5 *
Massachusetts 5.0 8.0 Illinois 2.2 3.3
North Carolina 4.4 3.3 Rhode Island * 2.2
Minnesota 3.9 * Other 19.8 21.2
100.0% 100.0%
_____________
(*) less than 2%
AAG began marketing variable annuities in the fourth quarter of
1995 through Annuity Investors Life Insurance Company ("AILIC").
With a variable annuity, the earnings credited to the policy vary
based on the investment results of the underlying investment
options chosen by the policyholder. Policyholders may also choose
to direct all or a portion of their premiums to various fixed rate
options. For these annuity products, all premiums directed to the
variable options are placed in funds managed by third party
investment advisers. AILIC had variable annuity sales of
$43 million in 1997.
<PAGE>
Pre-need Funding Products
Through American Memorial Life Insurance Company, AAG offers a
variety of life insurance and annuity products to finance pre-
arranged funerals. In 1997, American Memorial sold its products
through over 1,200 funeral homes nationwide. In addition to a
general agency force of approximately 200 agents, American
Memorial has approximately 800 actively-producing corporate and
individual funeral home operators who sell its products. Rapid
consolidation is making large chains an important segment of the
funeral home industry. American Memorial is a leader in this
segment, working with several of the major corporations. In 1997,
about one-half of American Memorial's premiums were generated by
the largest owner of funeral homes in the world. The remaining
one-half was split between other funeral homes and the general
agency force. As the funeral home industry continues to
consolidate, increased reliance on large funeral home operators
may be required.
In 1997, American Memorial collected $111 million in life and
annuity premiums. At December 31, 1997, American Memorial had total
statutory assets of approximately $468 million; reserves for future
policy benefits of approximately $424 million; and capital and
surplus of approximately $26 million.
18
<PAGE>
In March 1998, AAG acquired Arkansas National Life Insurance
Company, which also specializes in pre-arranged funeral
insurance products. Arkansas National had statutory assets of
approximately $74 million at December 31, 1997 and 1997
premiums of $5 million.
Life, Accident and Health Products
AAG offers a variety of life, accident and health products
through Loyal American Life Insurance Company, General Accident
Life Assurance Company of Puerto Rico, Inc. and GALIC's life
division, which began offering certain term, universal and whole
life insurance products in December 1997. Also in 1997, Loyal
relocated its home office from Mobile, Alabama to Cincinnati, Ohio
to more closely coordinate its efforts with those of other AAG
operations.
Loyal offers a variety of supplemental life and health
insurance products through payroll deduction plans and credit
unions. Loyal's products are marketed with the endorsement or
consent of the employer or the credit union management. The
products currently being offered include traditional whole life,
universal life, term life, hospital indemnity, cancer and short-
term disability.
In 1997, Loyal collected $40 million in life and accident and
health premiums. At December 31, 1997, Loyal had total statutory
assets of approximately $258 million; reserves for future policy
benefits of approximately $197 million; and capital and surplus of
approximately $39 million.
In December 1997, AAG acquired General Accident which
specializes in home service life and supplemental health products
as well as credit and ordinary life products, including those
utilized in the funeral industry. General Accident had statutory
assets of $110 million at December 31, 1997 and 1997 premiums of
$46 million (excluding premiums of certain operations sold prior to
its acquisition by AAG). General Accident sells its in-home
service life and supplemental health products through a network of
company agents. Its ordinary life and cancer products are sold
through independent agents.
Independent Ratings
AAG's principal insurance subsidiaries are currently rated by
A.M. Best and Duff & Phelps. Such ratings are generally based on
items of concern to policyholders and agents and are not directed
toward the protection of investors.
A.M. Best Duff & Phelps
GALIC A (Excellent) AA- (Very high claims paying ability)
American Memorial A- (Excellent) AA- (Very high claims paying ability)
Loyal A (Excellent) AA- (Very high claims paying ability)
AILIC A (Excellent) Not currently rated
General Accident A (Excellent) Not currently rated
In 1997, A.M. Best increased its ratings of American Memorial (up
two levels) and Loyal (up one level); none of the insurance
companies received a downgrade from either agency.
<PAGE>
AAG believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often
use a company's rating as an initial screening device in considering
annuity products. AAG believes that a rating in the "A" category by
at least one rating agency is necessary for GALIC to successfully
market tax-deferred annuities to public education employees and
other not-for-profit groups.
Although AAG believes that its insurance companies' ratings are
very stable, those companies' operations could be materially
adversely affected by a downgrade in ratings.
19
<PAGE>
Competition
AAG's insurance companies operate in highly competitive markets.
They compete with other insurers and financial institutions based on
many factors, including: (i) ratings; (ii) financial strength; (iii)
reputation; (iv) service to policyholders; (v) product design
(including interest rates credited and premium rates charged); (vi)
commissions; and (vii) service to agents. Since policies are
marketed and distributed primarily through independent agents
(except at General Accident), the insurance companies must also
compete for agents. AAG believes that consistently targeting the
same market and emphasizing service to agents and policyholders
provides a competitive advantage.
No single insurer dominates the annuity marketplace.
Competitors include (i) individual insurers and insurance groups,
(ii) mutual funds and (iii) other financial institutions of
varying sizes. In a broader sense, AAG's insurance companies
compete for retirement savings with a variety of financial
institutions offering a full range of financial services.
Financial institutions have demonstrated a growing interest in
marketing investment and savings products other than traditional
deposit accounts. In addition, recent judicial and regulatory
decisions have expanded powers of financial institutions in this
regard. It is too early to predict what impact, if any, these
developments will have on the insurance companies.
Other Companies
Through subsidiaries, AFC is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and
tennis facility) in the Greater Cincinnati area; commercial
real estate operations in Cincinnati (office buildings and The
Cincinnatian Hotel), Louisiana (Le Pavillon Hotel),
Massachusetts (Chatham Bars Inn), Texas (Driskill Hotel) and
apartments in Florida, Kentucky, Louisiana, Minnesota,
Pennsylvania, Texas and Wisconsin. These operations employ
approximately 700 full-time employees.
In December 1997, AFC sold the assets of its software
solutions and consulting services subsidiary, Millennium
Dynamics, Inc., to a subsidiary of Peritus Software Services,
Inc. for $30 million in cash and 2,175,000 shares of Peritus
common stock.
<PAGE>
Investment Portfolio
General
A breakdown of AFC's December 31, 1997, investment portfolio by
business segment follows (excluding investment in equity
securities of investee corporations) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and short-term investments $ 145 $ 51 $ 35 $ 231 $ 231
Bonds and redeemable preferred
stocks 4,362 6,262 29 10,653 10,735
Other stocks, options and
warrants 321 78 47 446 446
Loans receivable 101 407 5 513 513 (a)
Real estate and other investments 132 58 25 215 215 (a)
$5,061 $6,856 $141 $12,058 $12,140
(a) Carrying value used since market values are not readily available.
20
<PAGE>
The following tables present the percentage distribution and yields
of AFC's investment portfolio (excluding investment in equity
securities of investee corporations) as reflected in its financial
statements.
1997 1996 1995 1994 1993
Cash and Short-term Investments 1.9% 3.5% 4.0% 2.2% 2.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 5.0 4.1 3.7 4.0 2.8
State and Municipal 1.3 1.0 .7 .8 .8
Public Utilities 6.8 8.2 9.8 9.1 9.3
Mortgage-Backed Securities 21.4 22.3 20.9 21.8 24.7
Corporate and Other 50.7 49.5 47.2 48.6 42.0
Redeemable Preferred Stocks 0.6 0.5 1.0 1.4 1.3
85.8 85.6 83.3 85.7 80.9
Net Unrealized Gains (Losses) on Bonds
and Redeemable Preferred Stocks held
Available for Sale 2.5 1.1 2.7 (1.0) 1.8
88.3 86.7 86.0 84.7 82.7
Other Stocks, Options and Warrants 3.7 2.9 2.3 2.7 4.6
Loans Receivable 4.3 4.9 5.7 8.4 8.5
Real Estate and Other Investments 1.8 2.0 2.0 2.0 1.9
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.8% 7.9% 7.9% 8.1% 8.0%
Including realized gains and losses 7.9% 7.7% 8.8% 8.1% 8.7%
Yield on Stocks:
Excluding realized gains and losses 5.6% 5.8% 3.9% 5.1% 4.4%
Including realized gains and losses 30.2% 15.1% 8.4% 35.4% 16.9%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.8% 7.9% 8.1% 7.9%
Including realized gains and losses 8.2% 7.8% 8.8% 8.8% 9.0%
(*) Excludes "Real Estate and Other Investments".
<PAGE>
Fixed Maturity Investments
Unlike many insurance groups which have portfolios that are
invested heavily in tax-exempt bonds, AFC's bond portfolio is
invested primarily in taxable bonds. The NAIC assigns quality
ratings which range from Class 1 (highest quality) to Class 6
(lowest quality). The following table shows AFC's bonds and
redeemable preferred stocks, by NAIC designation (and comparable
Standard & Poor's Corporation rating) as of December 31, 1997
(dollars in millions):
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $ 6,970 $ 7,223 68%
2 BBB 2,624 2,714 25
Total investment grade 9,594 9,937 93
3 BB 400 417 4
4 B 330 347 3
5 CCC, CC, C 22 34 *
6 D - - -
Total non-investment grade 752 798 7
Total $10,346 $10,735 100%
_______________
(*) Less than 1%
Risks inherent in connection with fixed income securities
include loss upon default and market price volatility. Factors
which can affect the market price of securities include:
creditworthiness, changes in interest rates, the number of market
makers and investors and defaults by major issuers of securities.
21
<PAGE>
AFC's primary investment objective for bonds and redeemable
preferred stocks is to earn interest and dividend income rather
than to realize capital gains. AFC invests in bonds and redeemable
preferred stocks that have primarily short-term and intermediate-
term maturities. This practice allows flexibility in reacting to
fluctuations of interest rates.
Equity Investments
AFC's equity investment practice permits concentration of
attention on a relatively limited number of companies. Some of
the equity investments, because of their size, may not be as
readily marketable as the typical small investment position.
Alternatively, a large equity position may be attractive to
persons seeking to control or influence the policies of a company
and AFC's concentration in a relatively small number of companies
may permit it to identify investments with above average potential
to increase in value.
Chiquita At December 31, 1997, AFC owned 24 million shares
of Chiquita common stock representing 39% of its outstanding
shares. The carrying value and market value of AFC's investment
in Chiquita were approximately $201 million and $391 million,
respectively, at December 31, 1997. Chiquita is a leading
international marketer, producer and distributor of bananas and
other quality fresh and processed food products. In addition to
bananas, these products include other tropical fruit and fresh
produce; fruit and vegetable juices and beverages; processed
fruits and vegetables; salads; and edible oil-based consumer
products.
Citicasters In September 1996, AFC sold its investment in
Citicasters to Jacor Communications for approximately
$220 million in cash plus warrants to purchase Jacor common
stock. Citicasters owned radio and television stations in major
markets throughout the country.
Regulation
AFC's insurance company subsidiaries are subject to
regulation in the jurisdictions where they do business. In
general, the insurance laws of the various states establish
regulatory agencies with broad administrative powers governing,
among other things, premium rates, solvency standards,
licensing of insurers, agents and brokers, trade practices,
forms of policies, maintenance of specified reserves and
capital for the protection of policyholders, deposits of
securities for the benefit of policyholders, investment
activities and relationships between insurance subsidiaries and
their parents and affiliates. Material transactions between
insurance subsidiaries and their parents and affiliates
generally must be disclosed and prior approval of the
applicable insurance regulatory authorities generally is
required for any such transaction which may be deemed to be
material or extraordinary. In addition, while differing from
state to state, these regulations typically restrict the
maximum amount of dividends that may be paid by an insurer to
its shareholders in any twelve-month period without advance
<PAGE>
regulatory approval. Such limitations are generally based on
net earnings or statutory surplus. Under applicable
restrictions, the maximum amount of dividends available to AFC
in 1998 from its insurance subsidiaries without seeking
regulatory clearance is approximately $221 million.
Changes in state insurance laws and regulations have the
potential to materially affect the revenues and expenses of the
insurance operations. The Company is unable to predict whether or
when laws or regulations may be adopted or enacted in such states
or what the impact of such developments would be on the future
operations and revenues of its insurance businesses in such
states.
Prior to 1995, minimum premium rates for California workers'
compensation insurance were determined by the California
Commissioner based in part upon recommendations of the Workers'
Compensation Insurance Rating Bureau of
22
<PAGE>
California. In July 1993, California enacted legislation (the
"Reform Legislation") effecting an immediate overall 7% reduction
in workers' compensation insurance premium rates and replaced the
workers' compensation insurance minimum rate law, effective
January 1, 1995, with a procedure permitting insurers to use any
rate within 30 days after its filing with the California
Commissioner unless the rate is disapproved by the California
Commissioner. Between December 1, 1993 and January 1, 1995, when
the "open rating" policy went into effect, the California
Commissioner ordered additional rate decreases totaling more than
25%.
Most states have created insurance guarantee associations to
provide for the payment of claims of insurance companies that
become insolvent. Annual assessments for AFC's insurance
companies have not been material. In addition, many states have
created "assigned risk" plans or similar arrangements to provide
state mandated minimum levels of automobile liability coverage to
drivers whose driving records or other relevant characteristics
make it difficult for them to obtain insurance otherwise.
Automobile insurers in those states are required to provide such
coverage to a proportionate number of those drivers applying as
assigned risks. Premium rates for assigned risk business are
established by the regulators of the particular state plan and are
frequently inadequate in relation to the risks insured, resulting
in underwriting losses. Assigned risks accounted for
approximately one percent of AFC's net written premiums in 1997.
The NAIC is an organization which is comprised of the chief
insurance regulator for each of the 50 states and the District of
Columbia. In 1990, the NAIC began an accreditation program to
ensure that states have adequate procedures in place for effective
insurance regulation, especially with respect to financial
solvency. The accreditation program requires that a state meet
specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an
ongoing process and once accredited, a state must enact any new or
modified standards approved by the NAIC within two years following
adoption. As of December 31, 1997, the District of Columbia and
48 states were accredited including states which regulate AFC's
largest insurance subsidiaries.
The NAIC model law for Risk Based Capital applies to both
life and property and casualty companies. The risk-based
capital formulas determine the amount of capital that an
insurance company needs to ensure that it has an acceptably low
expectation of becoming financially impaired. The model law
provides for increasing levels of regulatory intervention as
the ratio of an insurer's total adjusted capital and surplus
decreases relative to its risk-based capital, culminating with
mandatory control of the operations of the insurer by the
domiciliary insurance department at the so-called "mandatory
control level". At December 31, 1997, the capital ratios of
all AFC insurance companies substantially exceeded the risk-
based capital requirements.
23
<PAGE>
ITEM 2
Properties
Subsidiaries of AFC own several buildings in downtown
Cincinnati. AFC and its affiliates occupy about three-fifths
of the aggregate 650,000 square feet of commercial and office
space.
AFC's insurance subsidiaries lease the majority of their
office and storage facilities in numerous cities throughout the
United States, including GAI's and AAG's home offices in
Cincinnati. Two AAG subsidiaries own office buildings in Rapid
City, South Dakota and Mobile, Alabama. The office building in
Rapid City contains about 52,000 square feet, approximately three-
fourths of which is utilized for company purposes. The building
in Mobile is being marketed for sale or lease; one-fifth of its
82,000 square feet is company occupied.
AFC subsidiaries own transferable rights to develop
approximately one million square feet of floor space in the Grand
Central Terminal area in New York City. The development rights
were derived from ownership of the land upon which the terminal
is constructed.
ITEM 3
Legal Proceedings
AFC and its subsidiaries are involved in various litigation,
most of which arose in the ordinary course of business. Except
for the following, management believes that none of the
litigation meets the threshold for disclosure under this Item.
In May 1994, lawsuits were filed against American Premier by
USX Corporation ("USX") and its former subsidiary, Bessemer and
Lake Erie Railroad Company ("B&LE"), seeking contribution by
American Premier, as the successor to the railroad business
conducted by Penn Central Transportation Company ("PCTC") prior
to 1976, for all or a portion of the approximately $600 million
that USX paid in satisfaction of a judgment against B&LE for its
participation in an unlawful antitrust conspiracy among certain
railroads commencing in the 1950's and continuing through the
1970's. The lawsuits argue that USX's liability for that payment
was attributable to PCTC's alleged activities in furtherance of
the conspiracy. On October 13, 1994, the U.S. District Court for
the Eastern district of Pennsylvania enjoined USX and B&LE from
continuing their lawsuits against American Premier, ruling that
their claims are barred by the 1978 Consummation Order issued by
that Court in PCTC's bankruptcy reorganization proceedings. USX
and B&LE appealed the District Court's ruling to the U.S. Court
of Appeals for the Third Circuit. On December 13, 1995, the Court
of Appeals reversed the U.S. District Court decision. In its
opinion, the Court of Appeals only addressed American Premier's
procedural argument that the claims of USX could not proceed
because they are barred by the Consummation Order. The Third
Circuit expressly recognized in its opinion that it was not
deciding any of American Premier's defenses on the merits.
<PAGE>
In January 1996, American Premier filed a petition for
rehearing en banc, which requests all of the judges of the Third
Circuit to review the three-judge panel's decision. That
petition was denied in February 1996. In May 1996, the U.S.
Supreme Court declined to hear American Premier's petition with
respect to the bankruptcy bar issue, thereby permitting USX's
lawsuits to proceed. American Premier and its outside counsel
believe that American Premier has substantial defenses to these
lawsuits, besides the bankruptcy bar issue, and should not suffer
a material loss as a result of this litigation.
24
<PAGE>
American Premier is a party or named as a potentially
responsible party in a number of proceedings and claims by
regulatory agencies and private parties under various
environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act
("CERCLA"), seeking to impose responsibility on American
Premier for hazardous waste remediation costs at certain
railroad sites formerly owned by PCTC and at certain other
sites where hazardous waste allegedly generated by PCTC's
railroad operations is present. It is difficult to estimate
American Premier's liability for remediation costs at these
sites for a number of reasons, including the number and
financial resources of other potentially responsible parties
involved at a given site, the varying availability of evidence
by which to allocate responsibility among such parties, the
wide range of costs for possible remediation alternatives,
changing technology and the period of time over which these
matters develop. Nevertheless, American Premier believes that
its previously established loss accruals for potential pre-
reorganization environmental liabilities at such sites are
adequate to cover the probable amount of such liabilities,
based on American Premier's estimates of remediation costs and
related expenses at such sites and its estimates of the
portions of such costs that will be borne by other parties.
Such estimates are based on information currently available to
American Premier and are subject to future change as additional
information becomes available. American Premier intends to
seek reimbursement from certain insurers for portions of
whatever remediation costs it incurs.
In terms of potential liability to American Premier, the
company believes that the most significant such site is the
railyard at Paoli, Pennsylvania ("Paoli Yard") which PCTC
transferred to Consolidated Rail Corporation ("Conrail") in
1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial
action for clean-up of polychlorinated biphenyls ("PCB's") at
Paoli Yard having an estimated cost of approximately
$28 million. American Premier has accrued its portion of such
estimated clean-up costs in its financial statements (in
addition to other expenses) but has not accrued the entire
amount because it believes it is probable that other parties,
including Conrail, will be responsible for substantial
percentages of the clean-up costs by virtue of their operation
of electrified railroad cars at Paoli Yard that discharged
PCB's at higher levels than discharged by cars operated by
PCTC.
In management's opinion, the outcome of the foregoing
environmental claims and contingencies will not, individually
or in the aggregate, have a material adverse effect on the
financial condition of American Premier. In making this
assessment, management has taken into account previously
established loss accruals in its financial statements and
probable recoveries from third parties.
25
<PAGE>
ITEM 4
Submission of Matters to a Vote of Security Holders
At a Special Meeting of AFC's Shareholders on December 2, 1997,
two matters were voted upon: (Item 1) a plan of reorganization pursuant
to which all Series F and G Preferred Stock was retired in exchange for
Series J Preferred Stock and/or cash, and (Item 2) election of eleven
directors.
With respect to Item 1, votes cast were as follows:
56,129,555 - For; 335,927 - Against; and 1,352,202 - Abstain or
Broker Non-Vote. The votes cast for, or withheld with respect
to Item 2 are set forth below:
Name For Withheld
Theodore H. Emmerich 57,745,234 72,450
James E. Evans 57,745,258 72,426
Thomas M. Hunt 57,745,234 72,450
Carl H. Lindner 57,743,934 73,750
Carl H. Lindner III 57,743,756 73,928
Keith E. Lindner 57,743,756 73,928
S. Craig Lindner 57,743,756 73,928
William R. Martin 57,745,234 72,450
Alfred W. Martinelli 57,745,634 72,050
Gregory C. Thomas 57,745,658 72,026
William W. Verity 57,745,658 72,026
26
<PAGE>
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable - Registrant's Common Stock is owned by
American Financial Group, Inc. See the Consolidated Financial
Statements for information regarding dividends.
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods
indicated (dollars in millions).
1997 1996 1995 1994 1993
Earnings Statement Data:
Total Revenues $ 4,053 $ 4,114 $ 3,628 $ 2,104 $ 2,721
Earnings Before Income Taxes
and Extraordinary Items 334 340 252 44 262
Earnings Before Extraordinary
Items 208 250 195 19 225
Extraordinary Items (7) (28) 2 (17) (5)
Net Earnings 201 222 197 2 220
Ratio of Earnings to
Fixed Charges (a) 4.20 4.99 3.10 1.69 2.62
Ratio of Earnings to
Fixed Charges and
Preferred Dividends (a) 3.52 3.96 2.60 1.40 2.26
Balance Sheet Data:
Total Assets $15,738 $14,999 $14,851 $10,593 $10,077
Long-term Debt:
Holding Companies 287 340 648 849 771
Subsidiaries 194 178 234 258 283
Minority Interest 510 307 327 106 109
Capital Subject to
Mandatory Redemption - - - 3 49
Other Capital 1,393 1,277 1,248 396 537
(a) 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.
27
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial
statements and other statistical data that management believes
will enhance the understanding of AFC's financial condition
and results of operations. This discussion should be read in
conjunction with the financial statements beginning on page F-1.
As discussed in Note A to the financial statements, at the
close of business on December 31, 1996, AFG contributed to AFC
81% of the common stock of American Premier. Since AFC and
American Premier are under the common control of AFG, the
acquisition of American Premier has been recorded by AFC at
AFG's historical cost in a manner similar to a pooling of
interests. Accordingly, the historical consolidated financial
statements of AFC for periods subsequent to the April 3, 1995
Mergers have been restated to include the accounts of American
Premier.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's debt to total capital ratio at the parent
holding company level (excluding amounts due AFG) improved
from nearly 60% at the date of the Mergers to approximately
17% at December 31, 1997. Including amounts due AFG, the
ratio was 31% at the end of 1997.
AFC's ratio of earnings to fixed charges, excluding and
including preferred dividends, on a total enterprise basis for
the three years ended December 31, 1997, are shown below.
1997 1996 1995
Earnings to fixed charges 4.20 4.99 3.10
Earnings to fixed charges plus preferred
dividends 3.52 3.96 2.60
The National Association of Insurance Commissioners' model
law for risk based capital ("RBC") applies to both life and
property and casualty companies. RBC formulas determine the
amount of capital that an insurance company needs to ensure
that it has an acceptable expectation of not -becoming
financially impaired. At December 31, 1997, the capital ratios
of all AFC insurance companies substantially exceeded the RBC
requirements (the lowest capital ratio of any AFC subsidiary
was 3.5 times its authorized control level RBC; weighted
average of all AFC subsidiaries was 5.2 times).
<PAGE>
Sources of Funds AFC and American Premier are organized as
holding companies with almost all of their operations being
conducted by subsidiaries. These parent corporations, however,
have continuing cash needs for administrative expenses, the
payment of principal and interest on borrowings, and
shareholder dividends. Funds to meet these obligations come
primarily from dividend and tax payments from their
subsidiaries.
Management believes these parent holding companies have
sufficient resources to meet their liquidity requirements
through operations in the short-term and long-term future. If
funds generated from operations, including dividends from
subsidiaries, are insufficient to meet fixed charges in any
period, AFC would be required to generate cash through
borrowings, sales of securities or other assets, or similar
transactions.
28
<PAGE>
Prior to the Mergers, American Premier had substantial cash and short-
term investments at the parent company level. Subsequent to
the Mergers, AFC and two of its subsidiaries entered into
separate credit agreements with American Premier. Funds
borrowed from American Premier under these agreements were used
for debt retirements, capital contributions to subsidiaries,
and other corporate purposes. In December 1996, American
Premier paid a dividend to AFG in the form of a $675 million
note receivable from AFC under the credit agreement plus
$18.7 million of related accrued interest. AFG then
contributed $450 million of the note (without accrued interest)
to the capital of AFC. Subsequent to the Mergers, American
Premier entered into a credit agreement with AFG under which
American Premier and AFG made loans of up to $250 million
available to each other.
The AFC and APU credit agreements with AFG were replaced in
December 1997 with a reciprocal Master Credit Agreement among
the various AFG holding companies under which funds are made
available to each other for general corporate purposes.
Amounts due AFG under the above agreements were $377 million
and $401 million at December 31, 1997 and 1996, respectively.
In 1996, three nationally recognized rating agencies issued
or upgraded ratings on AFC, American Premier and AAG public
debentures. All of the AFC and AAG senior debentures are now
rated investment grade; the APU and AAG subordinated debentures
are rated investment grade by two of the agencies. Generally,
the upgrades reflect the expectation that AFC's consolidated
debt to total capital will remain conservative and that
coverage ratios will benefit from higher subsidiary earnings
and a lower level of fixed charges at AFG's subsidiaries.
A new five-year, $300 million bank credit line was
established by AFC in February 1998 replacing two subsidiary
holding company lines. The new credit line provides ample
liquidity and can be used to obtain funds for operating
subsidiaries or, if necessary, for the parent companies. At
December 31, 1997, there was $45 million borrowed under the two
holding company lines.
In the past, funds have been borrowed under bank facilities
and used for working capital, capital infusions into
subsidiaries, and to retire other issues of short-term or high-
rate debt and preferred stock. Also, AFC believes it may be
prudent and advisable to utilize portions of the bank debt in
the normal course over the next year or two.
In 1996 and 1997, wholly-owned trust subsidiaries of AAG
sold preferred securities for cash proceeds totaling
$225 million. Proceeds were used to retire outstanding debt
and AAG preferred stock and for general corporate purposes,
including a capital contribution to a subsidiary.
<PAGE>
Payments of dividends by AFC's insurance subsidiaries are
subject to various laws and regulations which limit the amount
of dividends that can be paid without regulatory approval.
Under Ohio law, the maximum amount of dividends which may be
paid without (i) prior approval or (ii) expiration of a 30 day
waiting period without disapproval is the greater of statutory
net income or 10% of policyholders' surplus as of the preceding
December 31, but only to the extent of earned surplus as of the
preceding December 31. The maximum amount of dividends payable
(without prior approval) to AFC in 1998 from its insurance
subsidiaries is approximately $221 million.
For statutory accounting purposes, equity securities are
generally carried at market value. At December 31, 1997,
AFC's insurance companies owned publicly traded equity
securities with a market value of $1.5 billion, including
equity securities of AFC affiliates (including subsidiaries)
of $1.1 billion. Since significant amounts of these are
concentrated in a relatively small number of companies,
decreases in the market prices could adversely affect the
insurance group's capital, potentially impacting the amount of
dividends available or necessitating a capital contribution.
Conversely, increases in the market prices could have a
favorable impact on the group's dividend-paying capability.
29
<PAGE>
Beginning with the 1997 federal tax return, American
Premier will join AFC's consolidated return. Under tax
allocation agreements with AFC, its 80%-owned U.S.
subsidiaries generally compute tax provisions as if filing
separate returns based on book taxable income computed in
accordance with generally accepted accounting principles. The
resulting provision (or credit) is currently payable to (or
receivable from) AFC.
Uncertainties Two lawsuits were filed in 1994 against
American Premier by USX Corporation ("USX") and a former USX
subsidiary. The lawsuits seek contribution from American
Premier for all or a portion of a $600 million final antitrust
judgment entered against a USX subsidiary in 1994. The
lawsuits argue that USX's liability for that judgment is
attributable to the alleged activities of American Premier's
predecessor in an unlawful antitrust conspiracy among certain
railroad companies. American Premier and its outside counsel
believe that American Premier has substantial defenses and
should not suffer a material loss as a result of this
litigation.
Great American's liability for unpaid losses and loss
adjustment expenses includes amounts for various liability
coverages related to environmental, hazardous product and
other mass tort claims. At December 31, 1997, Great American
had recorded $348 million (net of reinsurance recoverables of
$173 million) for such claims on policies written many years
ago where, in most cases, coverage was never intended. Due to
inconsistent court decisions on many coverage issues and the
difficulty in determining standards acceptable for cleaning up
pollution sites, significant uncertainties exist which are not
likely to be resolved in the near future.
AFC's subsidiaries are parties in a number of proceedings
relating to former operations. See Note O to the financial
statements.
Most businesses utilizing computing technology are facing
a problem with the year 2000. The Year 2000 problem is caused
by the widespread use of computer programs that lack the
ability to properly interpret two-digit codes representing the
year 2000 and beyond. This program flaw can cause computation
errors, faulty information processing and reporting and, in
some instances, complete shutdown of critical applications.
During the early 1990's Great American designed and
developed software to automate the Year 2000 conversion
process. In 1995 Great American formed Millennium Dynamics,
Inc. ("MDI") to publicly market its software and consultative
services worldwide. In connection with the sale of MDI in the
fourth quarter of 1997, AFC retained licenses to utilize MDI's
software internally.
Each segment of AFC's operations is comprised of multiple
business units most of which utilize stand-alone computer
programs. These businesses are in the process of either (i)
modifying their programs utilizing the MDI software along with
<PAGE>
other internal and external resources or (ii) replacing
programs with new software that is Year 2000 compliant. AFC's
goal is to have program modifications and new software
installations substantially completed by the end of 1998. A
significant portion of AFC's Year 2000 project will be
completed using internal staff. Incremental Year 2000 costs
are not expected to have a material effect on AFC's financial
statements.
Projected Year 2000 costs and completion dates are based
on management's best estimate. However, there can be no
assurance that these estimates will be achieved. Factors such
as the availability of trained personnel could affect the
successful completion of the project. Should software
modifications and new software installation not be completed
on a timely basis, the resulting disruptions could have a
material adverse impact on operations.
30
<PAGE>
AFC's operations could also be affected by the inability of
third parties such as agents and vendors to successfully become
Year 2000 compliant. In addition, AFC's property and casualty
insurance operations are reviewing policy forms and amendatory
endorsements and examining coverage issues for Year 2000
exposures. Management believes that these issues will not have
a material impact on AFC's financial statements.
While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts,
circumstances and applicable laws, management believes that
sufficient reserves have been provided.
Investments Approximately 70% of AFC's consolidated assets
are invested in marketable securities. A diverse portfolio of
primarily publicly traded bonds and notes accounts for 95% of
these securities. AFC attempts to optimize investment income
while building the value of its portfolio, placing emphasis
upon long-term performance. AFC's goal is to maximize return
on an ongoing basis rather than focusing on short-term
performance.
Fixed income investment funds are generally invested in
securities with short-term and intermediate-term maturities
with an objective of optimizing total return while allowing
flexibility to react to changes in market conditions. At
December 31, 1997, the average life of AFC's bonds and
redeemable preferred stocks was just over 6 years.
Approximately 93% of the bonds and redeemable preferred
stocks held by AFC were rated "investment grade" (credit
rating of AAA to BBB) by nationally recognized rating agencies
at December 31, 1997. Investment grade securities generally
bear lower yields and lower degrees of risk than those that
are unrated and non-investment grade. Management believes
that the high quality investment portfolio should generate a
stable and predictable investment return.
Investments in mortgage-backed securities ("MBSs")
represented approximately one-fourth of AFC's bonds and
redeemable preferred stocks at December 31, 1997. AFC invests
primarily in MBSs which have a reduced risk of prepayment.
In addition, the majority of MBSs held by AFC were purchased at
a discount. Management believes that the structure and discounted
nature of the MBSs will mitigate the effect of prepayments on
earnings over the anticipated life of the MBSs portfolio. More than
90% of AFC's MBSs are rated "AAA" with substantially all being of
investment grade quality. The market in which these securities trade
is highly liquid. Aside from interest rate risk, AFC does not believe
a material risk (relative to earnings or liquidity) is inherent in
holding such investments.
Because most income of the property and casualty insurance
subsidiaries has been sheltered from income taxes through
1997, non-taxable municipal bonds represent only a small
portion (less than 1%) of the portfolio.
<PAGE>
AFC's equity securities are concentrated in a relatively
limited number of major positions. This approach allows
management to more closely monitor the companies and
industries in which they operate.
Prior to the Mergers, the realization of capital gains,
primarily through sales of equity securities, was an integral
part of AFC's investment program. Individual securities are
sold creating gains or losses as market opportunities exist.
Pretax capital gains recognized upon disposition of
securities, including investees, during the past five years
have been: 1997 - $57 million; 1996 - $166 million; 1995 -
$84 million; 1994 - $50 million and 1993 - $165 million. At
December 31, 1997, the net unrealized gain on AFC's bonds and
redeemable preferred stocks was $389 million; the net
unrealized gain on equity securities was $293 million.
31
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1997
General As previously noted, financial statements for periods
subsequent to the April 1995 Mergers include the accounts of
American Premier. AFC had accounted for American Premier as an
investee from the second quarter of 1993 through the first
quarter of 1995. Accordingly, income statement components for
1997 and 1996 are not comparable to prior years.
Pretax earnings before extraordinary items were
$334 million in 1997, $340 million in 1996 and $252 million in 1995.
Results for 1997 include $91 million in pretax gains
primarily on the sales of affiliates and other securities,
and reflect declines of $41 million in underwriting results
in AFC's property and casualty insurance business.
Results for 1996 include $203 million in pretax gains
primarily on the sales of Citicasters and Buckeye Management
Company, reduced by a charge of $80 million resulting from a
decision to strengthen insurance reserves relating to
asbestos and other environmental matters ("A&E").
In addition to the earnings contribution resulting from the
Mergers, results for 1995 include $84 million in pretax
gains on the sale of securities.
Property and Casualty Insurance - Underwriting AFC manages and
operates its property and casualty business as three major
sectors. The nonstandard automobile insurance companies (the
"NSA Group") insure risks not typically accepted for standard
automobile coverage because of the applicant's driving record,
type of vehicle, age or other criteria. The specialty lines
are a diversified group of over twenty-five business lines that
offer a wide variety of specialty insurance products. Some of
the more significant areas are California workers'
compensation, executive liability, inland and ocean marine,
U.S.-based operations of Japanese companies, agricultural-
related coverages, non-profit liability, general aviation
coverages, fidelity and surety bonds, and umbrella and excess.
The commercial and personal lines provide coverages in worker's
compensation, commercial multi-peril, umbrella and commercial
automobile, standard private passenger automobile and
homeowners insurance.
To understand the overall profitability of particular lines,
the timing of claims payments and the related impact of
investment income must be considered. Certain "short-tail"
lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby
limiting investment income earned thereon. On the other hand,
"long-tail" lines of business (primarily liability coverages
and workers' compensation) have payouts that are either
structured over many years or take many years to settle,
thereby significantly increasing investment income earned on
related premiums received.
<PAGE>
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting losses, loss
adjustment expenses, underwriting expenses and policyholder
dividends to premiums. When the combined ratio is under 100%,
underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
For certain lines of business and products where the
credibility of the range of loss projections is less certain
(primarily the various specialty lines listed above),
management believes that it is prudent and appropriate to use
conservative assumptions until such time as the data,
experience and projections have more credibility, as evidenced
by data volume, consistency and maturity of the data. While
this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
32
<PAGE>
While AFC desires and seeks to earn an underwriting profit
on all of its business, it is not always possible to do so. As
a result, AFC attempts to expand in the most profitable areas
and control growth or even reduce its involvement in the least
profitable ones.
In 1997, underwriting results of AFC's insurance operations
outperformed the industry average for the twelfth consecutive
year. AFC's insurance operations have been able to exceed the
industry's results by focusing on growth opportunities in the
more profitable areas of the specialty lines and nonstandard
auto businesses.
Comparisons made in the following discussion of AFC's
insurance operations include American Premier's insurance
operations even though they were not consolidated in the
financial statements prior to the Mergers.
Net written premiums and combined ratios for AFC's property
and casualty insurance subsidiaries were as follows (dollars in
millions):
1997 1996 1995
Net Written Premiums (GAAP)
NSA Group $1,248 $1,135 $1,277
Specialty Operations 1,103 993 1,097
Commercial and Personal Operations 507 660 717
Other Lines - - 1
$2,858 $2,788 $3,092
Combined Ratios (GAAP)
NSA Group 97.2% 99.9% 105.2%
Specialty Operations 99.0 84.1 94.8
Commercial and Personal Operations 106.0 110.6 99.1
Aggregate (including A&E and other lines) 101.4 102.9 101.2
Operating results for 1996 were adversely impacted by two
unusual items: (i) higher than normal catastrophe losses
including approximately $30 million in losses due to Hurricane
Fran and (ii) increases in A&E reserves (exposures for which
AFC may be liable under general liability policies written
years ago). A standard insurance measure used in analyzing the
adequacy of A&E reserves is the "survival ratio" (reserves
divided by three-year average annual paid losses). Due in part
to the greater uncertainties inherent in estimating A&E claims,
management evaluates its survival ratio in relation to those
published for the industry. Based primarily on industry
survival ratios published in mid-1996, AFC increased A&E
reserves of its discontinued insurance lines by $120 million by
recording a third quarter, non-cash pretax charge of
$80 million and reallocating $40 million, or approximately 2%,
of reserves from its Specialty Operations. Reserves for unpaid
losses and loss adjustment expenses of the Specialty Lines were
approximately $2.0 billion, $2.1 billion and $2.2 billion at
December 31, 1997, 1996 and 1995, respectively. A&E reserves
at December 31, 1997, were approximately $348 million, an
amount equal to approximately 10 times the preceding three
years' average claim payments.
<PAGE>
NSA Group The NSA Group's 10% increase in net written
premiums during 1997 is due primarily to volume increases in
California resulting from enactment of legislation which
requires drivers to provide proof of insurance in order to
obtain a valid permit. During 1995 and early 1996, the NSA
Group implemented premium rate increased in various states. In
1996, the higher rate levels along with competitive pressures
in the nonstandard automobile insurance industry resulted in an
11% decline in net written premiums. These rate increases
contributed to the improvement in combined ratio in 1997 and
1996.
33
<PAGE>
Specialty Operations Net written premiums for the specialty
operations increased 11% in 1997 due primarily to premiums
recorded by a newly acquired aviation division and the return
of premiums in 1996 related to the withdrawal from a voluntary
pool. The specialty operations had profitable underwriting
results for 1997 despite a significant decline in the results
of AFC's California workers' compensation business relating to
(i) deteriorating underwriting margins on business written in
1996 and 1997 and (ii) reserve reductions in 1996 primarily for
business written prior to 1995 in response to fundamental
changes in the California workers' compensation market and
actuarial evaluations. The specialty lines combined ratio was
unusually low in 1996 due primarily to the reallocation of
$40 million in reserves to A&E reserves (a combined ratio
impact of 4.1 percentage points) and the 1996 reductions in
California workers' compensation reserves mentioned above.
Net written premiums for the specialty operations declined
9% during 1996 due primarily to a decrease in the California
workers' compensation business and withdrawal from an
unprofitable pool at the end of 1995, partially offset by
increases in other specialty niche lines. The decline in
California workers' compensation premiums reflects (i)
extremely competitive pricing in the marketplace as a result of
the repeal of the California workers' compensation minimum rate
law effective January 1, 1995 and (ii) the impact of mandatory
premium rate reductions which took effect a year earlier.
Excluding the impact of the decreases in the California
workers' compensation business and the withdrawal from the
voluntary pool, specialty net written premiums increased
$16 million (2%) in 1996. The increase is due in part to
increases in specialized coverages for fidelity and surety
bonds, executive liability, animal mortality and collateral
protection exposures.
Commercial and Personal Operations Net written premiums for
the commercial and personal operations decreased 23% in 1997
due primarily to a reinsurance agreement, effective January 1,
1997, under which 80% of all AFC's homeowners' business was
reinsured, and reduced writings of personal automobile
coverages in certain states. Excluding the impact of the
reinsurance agreement, premiums decreased 10%. Even though
underwriting results for 1997 were impacted by several current
year commercial casualty losses as well as adverse development
in certain prior year claims, improvements in personal lines
contributed to a lower combined ratio.
<PAGE>
Net written premiums for the commercial and personal
operations decreased 8% in 1996. The decrease is due primarily
to significant reductions in homeowners coverages in certain
states as well as competitive pricing conditions in the
commercial casualty market, partially offset by increases in
writings of workers' compensation coverages. The profitability
of the commercial and personal operations declined in 1996 due
primarily to deterioration in personal lines operations as well
as weather-related losses, including losses from Hurricane
Fran.
Life, Accident and Health Premiums and Benefits Life, accident
and health premiums and benefits increased in 1997 due
primarily to an increase in pre-need life insurance sales
through the largest owner of funeral homes in the world. The
increase in life, accident and health premiums and expenses in
1996 reflects AAG's acquisition of American Memorial and Loyal.
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested
assets.
1997 compared to 1996 Investment income increased
$23.4 million (3%) from 1996 due primarily to an increase in
the average amount of investments held partially offset by
lower interest rates available in the marketplace.
34
<PAGE>
1996 compared to 1995 Investment income increased
$96 million (13%) from 1995; adjusting for the effects of the
Mergers retroactively to January 1, 1995, investment income
increased $55 million (7%) from 1995 due primarily to an
increase in the average amount of investments held.
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFC owns a significant portion of
the voting stock) represents AFC's proportionate share of the
investees' earnings and losses.
1997 compared to 1996 AFC recorded equity in net losses of
investee corporations of $5.6 million in 1997 and $17 million in
1996. Chiquita's loss attributable to common shareholders was $17
million for 1997; results were adversely affected by a stronger
dollar in relation to major European currencies (mitigated in part
by the company's foreign currency hedging program) and by
increased banana production costs resulting primarily from
widespread flooding in 1996. These factors more than offset the
benefit of higher local currency banana pricing in Europe during
the second half of the year. For 1996, the loss attributable to
common shareholders was $63 million and included pretax writedowns
and costs of $70 million resulting from (i) industry-wide flooding
in Costa Rica, Guatemala and Honduras, (ii) certain strategic
undertakings designed to achieve further long-term reductions in
the delivered product cost of Chiquita bananas and (iii) certain
claims relating to prior European Union quota restructuring
actions.
1996 compared to 1995 AFC's equity in net earnings of
investee corporations decreased $32 million in 1996 compared to
1995. Chiquita reported a decrease in earnings attributable to
common shareholders of $63 million in 1996 due primarily to the
pretax writedowns and costs of $70 million mentioned above.
Earnings attributable to common shareholders for 1995 were
$946,000 and included a pretax gain of $19 million primarily
resulting from divestitures of operations and other actions
taken as part of the company's ongoing program to improve
shareholder value. These divestitures and other actions
included sales of older ships, the sale of Chiquita's Costa
Rican edible oils operations, the shut-down of a portion of
Chiquita's juice operations and the reconfiguration of banana
production assets.
Gains on Sales of Investees The gain on sale of investee in
1997 represents a pretax gain to AFC as a result of Chiquita's
public issuance of 4.6 million shares of its common stock. The
gain on sale of investee in 1996 represents a pretax gain,
before $6.5 million of minority interest, on the sale of
Citicasters common stock.
Gains on Sales of Subsidiaries The gains on sales of
subsidiaries in 1997 include (i) a pretax gain of $49.9 million
on the sale of MDI and (ii) a charge of $17 million relating to
operations expected to be sold or otherwise disposed of in 1998.
<PAGE>
The gains on sales of subsidiaries in 1996 include a pretax gain
of $33.9 million on the sale of Buckeye Management Company and
the settlement of litigation related to a subsidiary sold in
1993.
Other Income Other income increased $18.0 million (13%) in 1997
compared to 1996 due primarily to income of $46.3 million from
the sale of development rights in New York City (including
$32.5 million on rights sold to AFG), partially offset by the
absence of revenues from a non-insurance subsidiary which was
sold in the first quarter of 1997.
Annuity Benefits For GAAP financial reporting purposes,
annuity receipts are accounted for as interest-bearing deposits
("annuity benefits accumulated") rather than as revenues.
Under these contracts, policyholders' funds are credited with
interest on a tax-deferred basis until withdrawn by the
policyholder. Annuity benefits represent primarily interest
related to annuity policyholders' funds held. The rate at which AAG
credits interest on most of its annuity policyholders' funds is
subject to change based on management's judgment of market
conditions.
35
<PAGE>
Fixed annuity receipts totaled approximately $490 million in
1997, $570 million in 1996 and $460 million in 1995. Annuity
receipts increased each year from 1993 through 1996 due
primarily to sales of newly introduced single premium products
and, in 1995, the development of new distribution channels.
Annuity receipts in 1997 reflect the decrease of business
written by a single agency from $99 million in 1996 to
$23 million in 1997. AAG is no longer writing business through
this agency.
Annuity benefits increased $7 million (3%) in 1997 and
$17.2 million (7%) in 1996 due primarily to an increase in
average annuity benefits accumulated partially offset by
decreases in crediting rates on AAG's fixed rate annuities.
Interest on Borrowed Money Changes in interest expense result
from fluctuations in market rates as well as changes in
borrowings. AFC has generally financed its borrowings on a
long-term basis which has resulted in higher current costs.
1997 compared to 1996 Interest expense increased
$1.0 million (1%) from 1996. The increase reflects increased
borrowings from AFG, partially offset by the effect of
significant debt reductions during 1996.
1996 compared to 1995 Interest expense for 1996 was
$86.1 million and interest expense for 1995, adjusted to
reflect the effect of the Mergers retroactively to January 1,
1995, was $116.3 million. The $30 million (26%) decrease
reflects significant debt retirements during both 1995 and
1996.
Minority Interest Expense Minority interest expense represents
the interests of AFG (parent) and non-controlling shareholders of
AFC subsidiaries in the earnings of those subsidiaries as well as
accrued distributions on trust preferred securities. Minority
interest expense for 1996 includes $6.5 million related to the
sale of Citicasters shares held by AFEI.
Other Operating and General Expenses Operating and general
expenses in 1997 include third quarter charges of $5.5 million
relating to an arbitration settlement and $4.0 million relating
to relocating a subsidiary's operations to Cincinnati. These
charges were more than offset by a reduction caused by the
absence of expenses from a non-insurance subsidiary which was
sold in the first quarter of 1997.
Income Taxes See Note M to the Financial Statements for an
analysis of items affecting AFC's effective tax rate.
<PAGE>
New Accounting Standards to be Implemented During 1997, the
Financial Accounting Standards Board issued the following
Statement of Financial Accounting Standards ("SFAS"); the
implementation of these standards will not have a significant
effect on AFC's financial position or results of operations.
SFAS # Subject of Standard Period to be Implemented
130 Comprehensive Income 1st quarter of 1998
131 Segment Information 4th quarter of 1998
SFAS No. 130 establishes standards for the reporting of a
company's change in equity during the period from non-owner
sources. For AFC, comprehensive income will principally
consist of net income and the change in net unrealized gains on
marketable securities. SFAS No. 131 establishes standards for
the way companies report information about operating segments,
products and services, geographic areas and major customers.
Implementation of these standards will not have a significant
effect on AFC's financial position, net income or reported
segments.
36
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1997 and 1996 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Changes in Shareholders' Equity:
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note P to the
Consolidated Financial Statements.
_______________________________________________
PART III
The information required by the following Items will be
included in AFC's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders which will be filed with the
Securities and Exchange Commission within 120 days after the
end of Registrant's fiscal year and is incorporated herein by
reference.
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Corporation
We have audited the accompanying consolidated balance sheet of
American Financial Corporation and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of earnings,
changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of American Financial Corporation and
subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 6, 1998
F-1
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
December 31,
1997 1996
Assets:
Cash and short-term investments $ 231,227 $ 404,831
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,202,300 and $3,528,100) 3,120,106 3,491,126
Available for sale - at market
(amortized cost - $7,225,736 and $6,362,597) 7,532,836 6,494,597
Other stocks - principally at market
(cost - $153,322 and $142,364) 446,222 327,664
Investment in investee corporations 200,714 199,651
Loans receivable 512,608 568,055
Real estate and other investments 215,472 205,021
Total investments 12,027,958 11,286,114
Recoverables from reinsurers and prepaid
reinsurance premiums 998,743 942,450
Agents' balances and premiums receivable 691,005 609,403
Deferred acquisition costs 521,898 452,041
Other receivables 261,454 272,766
Deferred tax asset 41,413 137,284
Assets held in separate accounts 300,491 247,579
Prepaid expenses, deferred charges and other assets 364,385 368,114
Cost in excess of net assets acquired 299,408 278,581
$15,737,982 $14,999,163
<PAGE>
Liabilities and Shareholders' Equity:
Unpaid losses and loss adjustment expenses $ 4,225,336 $ 4,123,701
Unearned premiums 1,328,910 1,247,806
Annuity benefits accumulated 5,528,111 5,365,612
Life, accident and health reserves 709,899 575,380
Payable to American Financial Group, Inc. 352,766 422,015
Other long-term debt:
Holding companies 286,661 339,504
Subsidiaries 194,084 178,415
Liabilities related to separate accounts 300,491 247,579
Accounts payable, accrued expenses and other
liabilities 908,622 915,398
Total liabilities 13,834,880 13,415,410
Minority interest 509,619 306,858
Shareholders' Equity:
Preferred Stock (liquidation value
- $72,154 and $258,638) 72,154 162,760
Common Stock, no par value
- 20,000,000 and 53,500,000 shares authorized
- 10,593,000 and 45,000,000 shares outstanding 9,625 9,625
Capital surplus 936,154 919,746
Retained earnings 34,350 1,364
Net unrealized gain on marketable securities,
net of deferred income taxes 341,200 183,400
Total shareholders' equity 1,393,483 1,276,895
$15,737,982 $14,999,163
See notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Year ended December 31,
1997 1996 1995
Income:
Property and casualty insurance premiums $2,824,381 $2,844,512 $2,648,703
Life, accident and health premiums 121,506 103,552 15,691
Investment income 868,689 845,330 749,510
Equity in net earnings (losses) of
investees (5,564) (16,955) 15,237
Realized gains (losses) on sales of
securities 46,006 (3,470) 84,028
Gains on sales of investees 11,428 169,138 335
Gains on sales of subsidiaries 33,602 36,837 -
Other income 152,854 134,904 114,602
4,052,902 4,113,848 3,628,106
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,075,616 2,131,421 1,977,395
Commissions and other underwriting
expenses 790,324 793,800 707,340
Annuity benefits 278,829 271,821 254,650
Life, accident and health benefits 110,082 92,315 13,202
Interest charges on borrowed money 87,155 86,148 122,568
Minority interest expense 45,477 54,748 28,165
Other operating and general expenses 331,655 344,052 272,888
3,719,138 3,774,305 3,376,208
Earnings before income taxes and
extraordinary items 333,764 339,543 251,898
Provision for income taxes 125,227 89,658 56,447
Earnings before extraordinary items 208,537 249,885 195,451
Extraordinary items - gain (loss) on
prepayment of debt (7,147) (27,889) 1,832
Net Earnings $ 201,390 $ 221,996 $ 197,283
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Net
Preferred and Capital Retained Unrealized
Stock Surplus Earnings Gain
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $168,484 $ 904 $223,095 $ 3,500
Adjustment for pooling of
interests at April 3, 1995 - 454,969 - 2,400
Net earnings - - 197,283 -
Change in unrealized - - - 234,600
Exercise of stock options - 8,721 - -
Dividends on:
Preferred Stock - - (25,397) -
Common Stock - - (29,855) -
Capital contribution from parent - 9,333 - -
Change in foreign currency translation - 64 - -
Balance at December 31, 1995 168,484 473,991 365,126 240,500
Net earnings - - 221,996 -
Change in unrealized - - - (57,100)
Dividends on:
Preferred Stock - - (24,898) -
Common Stock - - (560,860) -
Purchases and redemptions (22,524) (14,388) - -
Sale of preferred shares to
employee benefit plan 16,800 - - -
Capital contribution from parent - 468,666 - -
Change in foreign currency translation - 1,102 - -
Balance at December 31, 1996 162,760 929,371 1,364 183,400
Net earnings - - 201,390 -
Change in unrealized - - - 157,800
Dividends on:
Preferred Stock - - (15,071) -
Common Stock - - - -
Purchases and redemptions (162,760) - (153,333) -
Issuance of Preferred Stock 72,154 - - -
Capital contribution from parent - 16,707 - -
Change in foreign currency translation - (299) - -
Balance at December 31, 1997 $ 72,154 $945,779 $ 34,350 $341,200
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
Operating Activities: 1997 1996 1995
<S> <C> <C> <C>
Net earnings $ 201,390 $ 221,996 $ 197,283
Adjustments:
Extraordinary items 7,147 27,889 (1,832)
Depreciation and amortization 76,434 79,425 47,760
Annuity benefits 278,829 271,821 254,650
Equity in net (earnings) losses of
investee corporations 5,564 16,955 (15,237)
Changes in reserves on assets 7,610 5,656 2,302
Realized gains on investing activities (135,657) (198,676) (84,995)
Decrease (increase) in reinsurance and
other receivables (189,643) 95,553 25,781
Decrease (increase) in other assets (48,309) 23,665 (10,955)
Increase in insurance claims and reserves 206,900 9,171 137,180
Decrease in other liabilities (29,935) (211,697) (255,404)
Increase in minority interest 36,440 52,333 18,989
Dividends from investees 4,799 4,799 9,568
Other, net (25,711) (3,989) (1,233)
395,858 394,901 323,857
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,555,060) (2,128,015) (2,378,427)
Equity securities (37,107) (10,528) (1,034)
Investees and subsidiaries (93,841) - (68,591)
Real estate, property and equipment (64,915) (38,035) (42,579)
Maturities and redemptions of fixed maturity
investments 897,786 615,849 308,526
Sales of:
Fixed maturity investments 1,407,598 881,114 2,310,837
Equity securities 104,960 53,195 17,379
Investees and subsidiaries 32,500 284,277 -
Real estate, property and equipment 23,289 7,981 27,759
Cash and short-term investments of acquired
(former) subsidiary 2,714 (4,589) 392,100
Decrease (increase) in other investments (12,892) 594 (7,326)
(294,968) (338,157) 558,644
<PAGE>
Financing Activities:
Fixed annuity receipts 493,708 573,741 457,525
Annuity surrenders, benefits and withdrawals (607,174) (517,881) (412,854)
Additional long-term borrowings 184,150 288,775 337,076
Reductions of long-term debt (230,688) (582,288) (1,061,187)
Borrowings from AFG 201,000 152,471 102,202
Payments to AFG (224,500) (61,000) (18,174)
Issuance of Preferred Stock - 16,800 -
Repurchases of Preferred Stock (243,939) (36,912) (2,880)
Exercise of stock options - - 8,721
Issuance of trust preferred securities 149,353 72,412 -
Capital contribution 18,667 18,666 9,333
Cash dividends paid (15,071) (24,898) (25,397)
(274,494) (100,114) (605,635)
Net Increase (Decrease) in Cash and Short-term
Investments (173,604) (43,370) 276,866
Cash and short-term investments at beginning
of period 404,831 448,201 171,335
Cash and short-term investments at end of
period $ 231,227 $ 404,831 $ 448,201
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________________
INDEX TO NOTES
A. Mergers J. Minority Interest
B. Accounting Policies K. Preferred Stock
C. Acquisitions and Sales of Subsidiaries L. Common Stock
and Investees M. Income Taxes
D. Segments of Operations N. Extraordinary Items
E. Investments O. Commitments and Contingencies
F. Investment in Investee Corporations P. Quarterly Operating Results
G. Cost in Excess of Net Assets Acquired Q. Insurance
H. Payable to American Financial Group R. Additional Information
I. Other Long-Term Debt
_______________________________________________________________________________
A. Mergers On April 3, 1995, American Financial Corporation
("AFC") merged with a newly formed subsidiary of American
Financial Group, Inc. ("AFG"), a new company formed to own
100% of the common stock of both AFC and American Premier
Underwriters, Inc. ("American Premier" or "APU"). In the
transaction, Carl H. Lindner and members of his family, who
owned 100% of the Common Stock of AFC, exchanged their AFC
Common Stock for approximately 55% of American Financial
Group voting common stock. Former shareholders of American
Premier, including AFC and its subsidiaries, received shares
of American Financial Group stock on a one-for-one basis.
No gain or loss was recorded on the exchange of shares.
AFC continues to be a separate SEC reporting company with
publicly traded debentures and preferred stock. Holders of
AFC Series F and G Preferred Stock were granted voting rights
equal to approximately 21% of the total voting power of AFC
shareholders immediately prior to the Mergers.
At the close of business on December 31, 1996, AFG contributed
to AFC 81% of the common stock of American Premier. Since AFC
and American Premier are under the common control of AFG, the
acquisition of American Premier has been recorded by AFC at
AFG's historical cost in a manner similar to a pooling of
interests. Accordingly, the historical consolidated financial
statements of AFC for periods subsequent to the April 3, 1995
Mergers have been restated to include the accounts of American
Premier.
<PAGE>
B. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of AFC and its subsidiaries. Mergers and
changes in ownership levels of subsidiaries and affiliates
have resulted in certain differences in the financial
statements and have affected comparability between years.
Certain reclassifications have been made to prior years to
conform to the current year's presentation. All significant
intercompany balances and transactions have been eliminated.
With the exception of the acquisition of American Premier, all
acquisitions have been treated as purchases and the results of
operations of companies since their formation or acquisition
are included in the consolidated financial statements.
The preparation of the financial statements in conformity with g
enerally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Changes in circumstances could cause actual results to differ
materially from those estimates.
F-6
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's voting ownership of subsidiaries and significant
affiliates at December 31, was as follows:
1997 1996 1995
American Annuity Group, Inc. ("AAG") 81% 81% 81%
American Financial Enterprises, Inc. ("AFEI") 80% 83% 83%
American Premier Underwriters, Inc. 81% 81% -
Chiquita Brands International, Inc. 39% 43% 44%
Citicasters Inc. - (a) 38%
(a) Sold in September 1996.
Investments Debt securities are classified as "held to
maturity" and reported at amortized cost if AFC has the
positive intent and ability to hold them to maturity. Debt
and equity securities are classified as "available for sale"
and reported at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity if
the securities are not classified as held to maturity or
bought and held principally for selling in the near term.
Only in certain limited circumstances, such as significant
issuer credit deterioration or if required by insurance or
other regulators, may a company change its intent to hold a
certain security to maturity without calling into question its
intent to hold other debt securities to maturity in the
future.
Premiums and discounts on mortgage-backed securities are
amortized over their expected average lives using the interest
method. Gains or losses on sales of securities are recognized
at the time of disposition with the amount of gain or loss
determined on the specific identification basis. When a
decline in the value of a specific investment is considered to
be other than temporary, a provision for impairment is charged
to earnings and the carrying value of that investment is
reduced.
Short-term investments are carried at cost; loans receivable
are stated primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in securities
of 20%- to 50%-owned companies are generally carried at cost,
adjusted for AFC'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 AFC's equity in the underlying
net assets ("goodwill") is being amortized over 40 years.
Insurance As discussed under "Reinsurance" below, unpaid
losses and loss adjustment expenses and unearned premiums have
not been reduced for reinsurance recoverable.
<PAGE>
Reinsurance In the normal course of business, AFC'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, AFC's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in
a manner consistent with the claim liability associated with
the reinsurance policies. AFC'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. AFC's insurance
subsidiaries also assume reinsurance from other companies.
Income on reinsurance assumed is recognized based on reports
received from ceding reinsurers.
F-7
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Acquisition Costs Policy acquisition costs
(principally commissions, premium taxes and other underwriting
expenses) related to the production of new business are
deferred ("DPAC"). For the property and casualty companies,
the deferral of acquisition costs is limited based upon their
recoverability without any consideration for anticipated
investment income. DPAC is charged against income ratably
over the terms of the related policies. For the annuity
companies, DPAC is amortized, with interest, in relation to
the present value of expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net
liabilities stated for unpaid claims and for expenses of
investigation and adjustment of unpaid claims are based upon
(a) the accumulation of case estimates for losses reported
prior to the close of the accounting period on the direct
business written; (b) estimates received from ceding
reinsurers and insurance pools and associations; (c) estimates
of unreported losses based on past experience; (d) estimates
based on experience of expenses for investigating and
adjusting claims and (e) the current state of the law and
coverage litigation. These liabilities are subject to the
impact of changes in claim amounts and frequency and other
factors. In spite of the variability inherent in such
estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are adequate. Changes in
estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the
period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged
to expense and decreases for surrender charges are credited to
other income.
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional ordinary life, accident and
health policies are computed using a net level premium method.
Computations are based on anticipated investment yield
(primarily 7%), mortality, morbidity and surrenders and
include provisions for unfavorable deviations. Reserves are
modified as necessary to reflect actual experience and
developing trends.
Assets Held In and Liabilities Related to Separate
Accounts Investment annuity deposits and related liabilities
represent primarily deposits maintained by several banks under
a previously offered tax-deferred annuity program. AAG
receives an annual fee from each bank for sponsoring the
program; if depositors elect to purchase an annuity from AAG,
funds are transferred to AAG.
<PAGE>
Premium Recognition Property and casualty premiums are
earned over the terms of the policies on a pro rata basis.
Unearned premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in
force. On reinsurance assumed from other insurance companies
or written through various underwriting organizations,
unearned premiums are based on reports received from such
companies and organizations. For traditional life, accident
and health products, premiums are recognized as revenue when
legally collectible from policyholders. For interest-
sensitive life and universal life products, premiums are
recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed
against the policyholder account for mortality coverage and
contract expenses.
F-8
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
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.
Income Taxes AFC and American Premier have each filed
consolidated federal income tax returns which include all
80%-owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. At the close of business
on December 31, 1996, AFG contributed 81% of the common stock
of American Premier to AFC. Accordingly, AFC and American
Premier will file a consolidated return for 1997.
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.
Benefit Plans AFC provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans. Contributions to
benefit plans are charged against earnings in the year for
which they are declared. Prior to 1997, both AFC and American
Premier had contributory employee savings plans and
noncontributory Employee Stock Ownership Retirement Plans
("ESORP"). Effective January 1, 1997, these ESORP plans were
combined into a new retirement and savings plan. Under the
retirement portion of the plan, company contributions
(approximately 6% of covered compensation in 1997) are
invested primarily in securities of AFG and affiliates. Under
the savings portion of the plan, AFC matches a specific
portion of employee contributions.
AFC and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFC 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>
Minority Interest For balance sheet purposes, minority
interest represents the interests of non-controlling
shareholders in AFC subsidiaries, including preferred
securities issued by trust subsidiaries of AAG, and AFG's
direct ownership interest in American Premier and AFEI. For
income statement purposes, minority interest expense
represents those shareholders' interest in the earnings of AFC
subsidiaries as well as accrued distributions on the trust
preferred securities.
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.
F-9
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Issuances of Stock by Subsidiaries and Investees Changes in
AFC's equity in a subsidiary or an investee caused by
issuances of the subsidiary's or investee's stock are
accounted for as gains or losses where such issuance is not a
part of a broader reorganization.
Fair Value of Financial Instruments Methods and assumptions
used in estimating fair values are described in Note R to the
financial statements. These fair values represent point-in-
time estimates of value that might not be particularly
relevant in predicting AFC's future earnings or cash flows.
C. Acquisitions and Sales of Subsidiaries and Investees
Millennium Dynamics, Inc. In December 1997, AFC completed
the sale of the assets of its software solutions and
consulting services subsidiary, Millennium Dynamics, Inc.
("MDI"), to a subsidiary of Peritus Software Services, Inc.
for $30 million in cash and 2,175,000 shares of Peritus
common stock. AFC recognized a pretax gain of approximately
$50 million on the sale.
Chiquita During the second half of 1997, Chiquita issued
4.6 million shares of its common stock in acquisitions of
operating businesses. AFC recorded a pretax gain in the
fourth quarter of 1997 of approximately $11 million
representing the excess of AFC's equity in Chiquita following
the issuances of its common stock over AFC's previously
recorded carrying value.
Citicasters In September 1996, AFC sold its investment in
Citicasters to Jacor Communications for approximately
$220 million in cash plus warrants to purchase Jacor common
stock. AFC realized a pretax gain of approximately
$169 million, before minority interest of $6.5 million, on
the sale.
Buckeye In March 1996, American Premier sold Buckeye
Management Company to Buckeye's management (including an AFG
director who resigned in March 1996) and employees for $60
million in cash, net of transaction costs. AFC recognized a
$33.9 million pretax gain on the sale.
D. Segments of Operations AFC operates its property and
casualty insurance business in three major segments:
nonstandard automobile, specialty lines, and commercial and
personal lines. AFC's annuity and life
business primarily sells tax-deferred annuities to employees of
primary and secondary educational institutions and hospitals.
These insurance businesses operate throughout the United
States. In addition, AFC has owned significant portions of
the voting equity securities of certain companies (investee
corporations - see Note F).
<PAGE>
The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is scheduled to become effective during
the fourth quarter of 1998. The implementation of SFAS No.
131 is not expected to have a material effect on the segments
currently disclosed by AFC.
F-10
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables (in thousands) show AFC's assets, revenues
and operating profit (loss) by significant business segment.
Capital expenditures, depreciation and amortization are not
significant. Operating profit (loss) represents total revenues
less operating expenses. Goodwill and its amortization have
been allocated to the various segments to which they apply.
General corporate assets and expenses have not been identified
or allocated by segment.
1997 1996 1995
Assets
Property and casualty insurance (a) $ 7,517,856 $ 7,116,088 $ 7,443,115
Annuities and life 7,693,463 7,009,127 6,600,377
Other 325,949 674,297 501,417
15,537,268 14,799,512 14,544,909
Investment in investees 200,714 199,651 306,545
$15,737,982 $14,999,163 $14,851,454
Revenues (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 1,205,200 $ 1,183,098 $ 954,210
Specialty lines 1,055,935 976,150 995,528
Commercial and personal lines 563,217 684,776 697,512
Other lines 29 488 1,453
2,824,381 2,844,512 2,648,703
Investment and other income 448,849 500,897 465,998
3,273,230 3,345,409 3,114,701
Annuities and life (c) 638,348 585,079 444,082
Other 146,888 200,315 54,086
4,058,466 4,130,803 3,612,869
Equity in net earnings (losses)
of investees (5,564) (16,955) 15,237
$ 4,052,902 $ 4,113,848 $ 3,628,106
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Nonstandard automobile $ 33,456 $ 1,015 ($ 60,316)
Specialty lines 10,888 154,329 50,690
Commercial and personal lines (33,882) (72,513) 5,315
Other lines (d) (52,021) (163,540) (31,721)
(41,559) (80,709) (36,032)
Investment and other income 311,169 359,002 357,617
269,610 278,293 321,585
Annuities and life 93,794 77,119 79,579
Other (e) (24,076) 1,086 (164,503)
339,328 356,498 236,661
Equity in net earnings (losses) of
investees (5,564) (16,955) 15,237
$ 333,764 $ 339,543 $ 251,898
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other
income earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and
other environmental matters ("A&E").
(e) Includes holding company expenses.
F-11
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investments Bonds, redeemable preferred stocks and other stocks
at December 31, consisted of the following (in millions):
1997
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 72.0 73.6 1.8 (.2)
Foreign government 8.3 8.9 .6 -
Public utilities 459.7 466.7 8.3 (1.3)
Mortgage-backed securities 868.9 899.4 30.6 (.1)
All other corporate 1,711.2 1,753.7 43.6 (1.1)
Redeemable preferred stocks - - - -
$3,120.1 $3,202.3 $84.9 ($2.7)
1997
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 600.8 $ 618.6 $ 18.1 ($ .3)
States, municipalities and
political subdivisions 86.7 89.3 2.6 -
Foreign government 55.9 57.9 2.1 (.1)
Public utilities 359.3 374.7 15.7 (.3)
Mortgage-backed securities 1,715.7 1,779.4 65.5 (1.8)
All other corporate 4,336.9 4,536.9 200.0 -
Redeemable preferred stocks 70.4 76.0 5.9 (.3)
$7,225.7 $7,532.8 $309.9 ($ 2.8)
Other stocks $ 153.3 $ 446.2 $293.7 ($ .8)
<PAGE>
1996
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 80.0 79.9 1.1 (1.2)
Foreign government 8.5 9.0 .5 -
Public utilities 501.4 501.4 6.4 (6.4)
Mortgage-backed securities 935.9 949.0 18.8 (5.7)
All other corporate 1,965.3 1,988.8 34.8 (11.3)
Redeemable preferred stocks - - - -
$3,491.1 $3,528.1 $61.6 ($24.6)
1996
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 472.2 $ 475.7 $ 7.3 ($ 3.8)
States, municipalities and
political subdivisions 39.6 39.7 .5 (.4)
Foreign government 94.5 94.3 .8 (1.0)
Public utilities 443.8 453.6 13.1 (3.3)
Mortgage-backed securities 1,626.3 1,637.9 28.1 (16.5)
All other corporate 3,624.4 3,733.0 122.2 (13.6)
Redeemable preferred stocks 61.8 60.4 1.5 (2.9)
$6,362.6 $6,494.6 $173.5 ($41.5)
Other stocks $ 142.4 $ 327.7 $191.6 ($ 6.3)
<PAGE>
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1997. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 6.5 years at December 31, 1997.
Held to Available
Maturity Maturity for Sale
One year or less 6% 3%
After one year through five years 32 18
After five years through ten years 30 37
After ten years 4 18
72 76
Mortgage-backed securities 28 24
100% 100%
Certain risks are inherent in connection with fixed maturity
securities, including loss upon default, price volatility in
reaction to changes in interest rates, and general market
factors and risks associated with reinvestment of proceeds
due to prepayments or redemptions in a period of declining
interest rates.
Included in equity securities at December 31, 1997 and 1996
are $313 million and $220 million, respectively, of
securities of Provident Financial Group, Inc. which
exceeded 10% of Shareholders' Equity.
F-12
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments
are summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1997
Realized $ 11,542 $ 34,464 ($ 16,102) $ 29,904
Change in Unrealized 220,320 107,600 (114,772) 213,148
1996
Realized (16,545) 13,075 8,199 4,729
Change in Unrealized (272,583) 70,000 70,904 (131,679)
1995
Realized 77,963 6,065 (13,915) 70,113
Change in Unrealized 810,690 43,700 (288,001) 566,389
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
1997
Held to Maturity $ 5.6 $422.3 $ 8.0 $ .5 ($ 1.0)
Available for Sale 2,549.5 475.5 1,399.6 37.7 (25.7)
Total $2,555.1 $897.8 $1,407.6 $38.2 ($26.7)
1996
Held to Maturity $ 202.2 $331.0 $ 9.3 $ 2.4 ($ 1.2)
Available for Sale 1,925.8 284.8 871.8 29.6 (47.3)
Total $2,128.0 $615.8 $ 881.1 $32.0 ($48.5)
1995
Held to Maturity $ 774.8 $175.2 $ 12.9 $ 1.9 ($ 2.3)
Available for Sale 1,603.6 133.3 2,297.9 88.0 (9.6)
Total $2,378.4 $308.5 $2,310.8 $89.9 ($11.9)
Securities classified as "held to maturity" having an amortized cost of
$8.2 million, $9.5 million and $14.7 million were sold for a loss of
$170,000, $159,000 and $1.8 million in 1997, 1996 and 1995, respectively,
due to significant deterioration in the issuers' creditworthiness.
F-13
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investee Corporations All of the companies named
in the following table have been subject to the rules and
regulations of the SEC. The market value of AFC's investment in
Chiquita was $391 million and $306 million at December 31, 1997
and 1996, respectively. AFC's investment (and common stock
ownership percentage) and equity in net earnings and losses of
investees are stated below (dollars in thousands):
<TABLE>
<CAPTION>
Investment (Ownership %) Equity in Net Earnings (Losses)
12/31/97 12/31/96 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Chiquita (a) $200,714 (39%) $199,651 (43%) ($5,564) ($18,415) $ 3,628
Citicasters (b) - - - 1,460 4,702
American Premier(c) - - - - 6,907
$200,714 $199,651 ($5,564) ($16,955) $15,237
<FN>
(a) Equity in net earnings (losses) excludes AFC's share of amounts included in
extraordinary items.
(b) Sold in September 1996.
(c) Accounted for as an 81% subsidiary beginning in April 1995.
</FN>
</TABLE>
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed
food products. Summarized financial information for Chiquita at
December 31, is shown below (in millions):
1997 1996 1995
Current Assets $ 783 $ 844
Non-current Assets 1,618 1,623
Current Liabilities 483 464
Non-current Liabilities 1,138 1,279
Shareholders' Equity 780 724
Net Sales of Continuing Operations $2,434 $2,435 $2,566
Operating Income 100 84 176
Income (Loss) from Continuing Operations - (28) 28
Discontinued Operations - - (11)
Extraordinary Loss from Debt Refinancings - (23) (8)
Net Income (Loss) - (51) 9
Net Income (Loss) Attributable to Common Shares (17) (63) 1
G. Cost in Excess of Net Assets Acquired At December 31, 1997 and
1996, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately
$133 million and $121 million, respectively. Amortization
expense was $11.6 million in 1997, $10.8 million in 1996 and
$9.2 million in 1995.
F-14
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Payable to American Financial Group Following the Mergers,
American Premier agreed to lend up to $675 million to AFC under
a line of credit. Borrowings under the credit line bore
interest at 11-5/8%. On December 27, 1996, American Premier
paid a dividend to AFG which consisted of the $675 million note
receivable plus accrued interest. Subsequently, AFG
contributed $450 million of the note to AFC.
Also subsequent to the Mergers, American Premier entered into
a credit agreement with AFG under which American Premier and
AFG made loans of up to $250 million available to each other.
The balance outstanding under the credit line bore interest at
a variable rate of one percent over LIBOR.
In December 1997, AFG's credit agreements with AFC and APU
were replaced with a ten-year reciprocal Master Credit
Agreement among AFG, three AFG subsidiary holding companies
including APU, AFC and AFC's direct parent, AFC Holding
Company, under which funds are made available to each other at
one percent over LIBOR.
At December 31, 1997 and 1996, AFC and APU had outstanding
borrowings due AFG and AFC Holding under the above agreements
of $344.5 million (plus accrued interest of $8.3 million) and
$400.4 million (plus accrued interest of $21.6 million),
respectively.
<PAGE>
I. Other Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1997 1996
Holding Companies:
AFC 9-3/4% Debentures due April 2004,
less discount of $737 and $1,146
(imputed rate - 9.8%) $ 79,792 $164,368
APU 9-3/4% Subordinated Notes due August 1999,
including premium of $1,224 and $1,912
(imputed rate - 8.8%) 92,127 93,604
APU 10-5/8% Subordinated Notes due April 2000,
including premium of $1,559 and $2,629
(imputed rate - 8.8%) 43,889 54,595
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $1,584 and $1,642
(imputed rate - 9.6%) 17,586 18,496
GAHC notes payable under bank line 45,000 -
Other 8,267 8,441
$286,661 $339,504
Subsidiaries:
AAG notes payable under bank lines $107,000 $ 44,700
AAG 11-1/8% Senior Subordinated Notes
due February 2003 24,080 24,080
AAG 9-1/2% Senior Notes - 40,845
Notes payable secured by real estate 49,525 52,543
Other 13,479 16,247
$194,084 $178,415
F-15
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1997, sinking fund and other scheduled
principal payments on debt for the subsequent five years,
adjusted to reflect financing transactions through February
1998, were as follows (in thousands):
Holding
Companies Subsidiaries Total
1998 $ - $ 1,983 $ 1,983
1999 90,903 2,087 92,990
2000 42,330 8,803 51,133
2001 - 38,509 38,509
2002 50,399 61,440 111,839
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The
scheduled principal payments shown above assume that
debentures previously purchased are applied to the earliest
scheduled retirements.
At December 31, 1997, the weighted average interest rate on
amounts borrowed under Great American Holding Corporation's
("GAHC") bank credit line was 6.81%. In February 1998, AFC
entered into a new unsecured credit agreement with a group of
banks and the GAHC and APU agreements were terminated. Under
the terms of the new agreement, AFC can borrow up to
$300 million through December 2002. Borrowings bear interest
at floating rates based on prime or LIBOR.
At December 31, 1997 and 1996, the weighted average interest
rate on amounts borrowed under AAG's bank credit lines was
6.80% and 6.68%, respectively. In January 1998, AAG replaced
its existing bank lines with a new $200 million unsecured
credit agreement. Loans under the credit agreement mature
from 2000 to 2003 and bear interest at floating rates based
on prime or LIBOR. In February 1998, AAG borrowed
$50 million under the line and retired its 11-1/8% Notes
(including $24.3 million principal amount held by AAG
entities).
Significant retirements of long-term debt since January 1,
1996, have been as follows (in millions):
Year Principal Cost
AFC Debentures 1996 $138.2 $147.9
1997 85.0 96.7
American Premier Notes 1996 160.1 177.2
1997 11.3 12.5
AAG Notes 1996 78.0 84.2
1997 40.8 42.5
1998 (2 mos) 24.1 24.8
<PAGE>
Cash interest payments of $98 million, $83 million and
$137 million were made on long-term borrowings in 1997,
1996 and 1995, respectively.
J. Minority Interest Minority interest in AFC's balance sheet
is comprised of the following (in thousands):
1997 1996
Interest of AFG (parent) and
non-controlling shareholders
in subsidiaries' common stock $284,619 $231,858
Preferred securities issued by
subsidiary trusts 225,000 75,000
$509,619 $306,858
F-16
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Trust Issued Preferred Securities Wholly-owned subsidiary trusts
of AAG have issued $225 million of preferred securities and, in
turn, purchased $225 million of newly-authorized AAG subordinated
debt issues which provide interest and principal payments to fund
the respective trusts' obligations. The preferred securities are
mandatorily redeemable upon maturity or redemption of the
subordinated debt.
The preferred securities are summarized as follows:
Date of Optional
Issuance Issue (Maturity Date) Amount Redemption Dates
November 1996 9-1/4% TOPrS (2026) $75,000,000 On or after 11/7/2001
March 1997 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
AAG effectively provides unconditional guarantees of its trusts'
obligations.
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
1997 1996 1995
Interest of AFG (parent) and
non-controlling shareholders
in earnings of subsidiaries $29,978 $53,717 $28,165
Accrued distributions on trust issued
preferred securities 15,499 1,031 -
$45,477 $54,748 $28,165
K. Preferred Stock Under provisions of both the Nonvoting
(4.0 million shares authorized) and Voting (4.0 million
shares authorized) Cumulative Preferred Stock, the Board of
Directors may divide the authorized stock into series and set
specific terms and conditions of each series. At
December 31, 1997, the outstanding shares of AFC's Preferred
Stock consisted of the following:
Series J, no par value; $25.00 liquidating value per
share; annual dividends per share $2.00; redeemable at
$25.75 per share beginning December 2005 declining to
$25.00 at December 2007; 2,886,161 shares (stated value
$72.2 million) outstanding at December 31, 1997.
At December 31, 1996, AFC's outstanding 11,900,725 shares of
Series F Preferred Stock had a stated value of
$145.4 million; its 1,964,158 shares of Series G Preferred
Stock had a stated value of $17.4 million.
<PAGE>
In December 1997, AFC retired all shares of its Series F and
G Preferred Stock in exchange for approximately $244 million
in cash and 2,886,161 million shares of the Series J
Preferred Stock. AFC recognized a charge to retained
earnings of $153.3 million representing the excess of total
consideration paid over the stated value of the preferred
stock retired.
In December 1996, AFC redeemed 1.6 million shares of its
Series F Preferred Stock for $31.9 million and, in October
1996, purchased 250,000 shares of Series F from its ESORP for
$5.0 million. In December 1996, AFC issued 1.6 million
shares of its Series G Preferred Stock to its ESORP for
$16.8 million. During 1995, AFC retired its mandatory
redeemable preferred stock for an aggregate of $2.9 million.
F-17
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Common Stock At December 31, 1997, American Financial Group
owned all of the outstanding shares of AFC's Common Stock.
The number of shares of AFC Common Stock outstanding were
reduced from 45,000,000 to 10,593,000 in connection with the
retirement of Series F and G Preferred Stock in December 1997.
M. Income Taxes The following is a reconciliation of income
taxes at the statutory rate of 35% and income taxes as shown
in the Statement of Earnings (in thousands):
1997 1996 1995
Earnings before income taxes and
extraordinary items $333,764 $339,543 $251,898
Extraordinary items before income taxes (11,201) (34,892) 1,551
Adjusted earnings before income taxes $322,563 $304,651 $253,449
Income taxes at statutory rate $112,897 $106,628 $ 88,707
Effect of:
Minority interest 10,168 18,507 9,533
Losses utilized (3,164) (43,789) (40,292)
Amortization of intangibles 3,362 3,065 3,015
Foreign income taxes 2,954 3,474 359
State income taxes (2,739) 4,140 81
Dividends received deduction (2,002) (7,450) (7,823)
Tax exempt interest (384) (597) (897)
Other 81 (1,323) 3,483
Total provision 121,173 82,655 56,166
Amounts applicable to
extraordinary items 4,054 7,003 281
Provision for income taxes as shown
on the Statement of Earnings $125,227 $ 89,658 $ 56,447
<PAGE>
Adjusted earnings before income taxes consisted of the following
(in thousands):
1997 1996 1995
Subject to tax in:
United States $331,855 $318,919 $256,417
Foreign jurisdictions (9,292) (14,268) (2,968)
$322,563 $304,651 $253,449
The total income tax provision consists of (in thousands):
1997 1996 1995
Current taxes (credits):
Federal $ 27,875 $ 22,450 $ 38,512
Foreign - (1,735) (1,213)
State (2,544) 6,369 124
Deferred taxes:
Federal 96,301 55,250 18,191
Foreign (459) 321 552
$121,173 $ 82,655 $ 56,166
F-18
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For income tax purposes, certain members of the AFC consolidated
tax group had the following carryforwards available at Decem
ber 31, 1997 (in millions):
Expiring Amount
{ 1998 - 2002 $ 35
Operating Loss{ 2003 - 2007 95
{ 2008 - 2012 60
Capital Loss 1999 91
Other - Tax Credits 23
Deferred income tax assets and liabilities reflect temporary
differences between the carrying amounts of assets and
liabilities recognized for financial reporting purposes and
the amounts recognized for tax purposes. The significant
components of deferred tax assets and liabilities included in
the Balance Sheet at December 31, were as follows (in millions):
1997 1996
Deferred tax assets:
Net operating loss carryforwards $ 66.6 $ 83.7
Capital loss carryforwards 32.0 68.2
Insurance claims and reserves 287.5 289.8
Other, net 148.8 142.2
534.9 583.9
Valuation allowance for deferred
tax assets (97.9) (131.9)
437.0 452.0
Deferred tax liabilities:
Deferred acquisition costs (127.4) (124.9)
Investment securities (268.2) (189.8)
(395.6) (314.7)
Net deferred tax asset $ 41.4 $137.3
The gross deferred tax asset has been reduced by a valuation
allowance based on an analysis of the likelihood of
realization. Factors considered in assessing the need for a
valuation allowance include: (i) recent tax returns, which
show neither a history of large amounts of taxable income nor
cumulative losses in recent years, (ii) opportunities to
generate taxable income from sales of appreciated assets, and
(iii) the likelihood of generating larger amounts of taxable
income in the future. The likelihood of realizing this asset
will be reviewed periodically; any adjustments required to
the valuation allowance will be made in the period in which
the developments on which they are based become known. The
aggregate valuation allowance decreased by $34 million in
1997 due primarily to the expiration of American Premier's
loss carryforwards.
<PAGE>
Cash payments for income taxes, net of refunds, were
$43.7 million, $40.2 million and $14.8 million for 1997, 1996
and 1995, respectively.
F-19
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. Extraordinary Items Extraordinary items represent AFC's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are
net of minority interest and income tax benefits (in
thousands):
1997 1996 1995
Holding Companies:
AFC (parent) ($5,395) ($ 9,672) ($1,713)
APU (parent) (502) (2,636) 7,102
GAHC - - (611)
Subsidiaries:
AAG (1,250) (7,159) (201)
Other - 57 -
Investee:
Chiquita - (8,479) (2,745)
($7,147) ($27,889) $1,832
O. Commitments and Contingencies Loss accruals have been recorded
for various environmental and occupational injury and disease
claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978. Any ultimate liability arising
therefrom in excess of previously established loss accruals
would normally be attributable to pre-reorganization events and
circumstances and accounted for as a reduction in capital
surplus. However, under purchase accounting in connection with
the Mergers, any such excess liability will be charged to
earnings in AFC's financial statements.
American Premier's liability for environmental claims
($39.5 million at December 31, 1997) consists of a number of
proceedings and claims seeking to impose responsibility for
hazardous waste remediation costs at certain railroad sites
formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad operation. It
is difficult to estimate remediation costs for a number of
reasons, including the number and financial resources of other
potentially responsible parties, the range of costs for
remediation alternatives, changing technology and the time
period over which these matters develop. American Premier's
liability is based on information currently available and is
subject to change as additional information becomes available.
<PAGE>
American Premier's liability for occupational injury and disease
claims of $58.1 million (included in other liabilities) at
December 31, 1997, includes pending and expected claims by
former employees of PCTC for injury or disease allegedly caused
by exposure to excessive noise, asbestos or other substances in
the railroad workplace. Anticipated recoveries of $35.2 million
on these liabilities are included in other assets. Recorded
amounts are based on the accumulation of estimates of reported
and unreported claims and related expenses and estimates of
probable recoveries from insurance carriers.
AFC has accrued approximately $14.2 million at December 31,
1997, for environmental costs and certain other matters
associated with the sales of former operations.
In management's opinion, the outcome of the items discussed
under "Uncertainties" in Management's Discussion and Analysis
and the above claims and contingencies will not, individually or
in the aggregate, have a material adverse effect on AFC's
financial condition or results of operations.
F-20
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
P. Quarterly Operating Results (Unaudited) The operations of
certain of AFC's business segments are seasonal in nature.
While insurance premiums are recognized on a relatively level
basis, claim losses related to adverse weather (snow, hail,
hurricanes, tornadoes, etc.) may be seasonal. Historically,
Chiquita's operations are significantly stronger in the first
and second quarters than in the third and fourth quarters.
Quarterly results necessarily rely heavily on estimates.
These estimates and certain other factors, such as the nature
of investees' operations and discretionary sales of assets,
cause the quarterly results not to be necessarily indicative
of results for longer periods of time. The following are
quarterly results of consolidated operations for the two
years ended December 31, 1997 (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1997
Revenues $ 945.6 $ 987.5 $1,034.7 $1,085.1 $4,052.9
Earnings before
extraordinary items 62.0 60.7 34.9 50.9 208.5
Extraordinary items (.1) - (6.9) (.1) (7.1)
Net earnings 61.9 60.7 28.0 50.8 201.4
1996
Revenues $1,030.2 $1,032.8 $1,163.5 $ 887.3 $4,113.8
Earnings (loss) before
extraordinary items 78.6 58.5 119.2 (6.4) 249.9
Extraordinary items (7.4) (10.0) (8.3) (2.2) (27.9)
Net earnings (loss) 71.2 48.5 110.9 (8.6) 222.0
In the fourth quarter of 1997, AFC increased California
workers' compensation reserves by approximately $25 million
due to increased claims severity related to business written
in 1996 and 1997. The fourth quarter of 1997 also includes
income of $46.3 million (included in "other income") from the
sale of development rights in New York City partially offset
by a $9.0 million charge related to insurance recoverables of
American Premier's prior railroad business. In the third
quarter of 1996, AFC increased A&E reserves by recording a
non-cash pretax charge of $80 million and recorded losses due
to Hurricane Fran of approximately $30 million.
<PAGE>
During the past two years, AFC has continued a strategy of
disposing of non-core investments. Sales of significant
affiliates have included the following: MDI (December 1997);
Citicasters (September 1996); and Buckeye (March 1996). See
Note C for a more detailed description of these and other
transactions. Sales of subsidiaries in 1997 also includes a
fourth quarter pretax charge of $17 million relating to
operations expected to be sold or otherwise disposed of in
1998. Realized gains (losses) on sales of securities and
affiliates amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1997 $ 2.5 $4.2 $ 29.7 $54.6 $ 91.0
1996 52.6 5.7 172.5 (28.3) 202.5
F-21
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Q. Insurance Securities owned by insurance subsidiaries having
a carrying value of approximately $1.4 billion at
December 31, 1997, were on deposit as required by regulatory
authorities.
Insurance Reserves The liability for losses and loss
adjustment expenses for certain long-term scheduled payments
under workers' compensation, auto liability and other
liability insurance has been discounted at rates ranging from
4% to 8%. As a result, the total liability for losses and
loss adjustment expenses at December 31, 1997, has been
reduced by $60 million.
The following table provides an analysis of changes in the
liability for losses and loss adjustment expenses, net of
reinsurance (and grossed up), over the past three years on a
GAAP basis (in millions):
1997 1996 1995
Balance at beginning of period $3,404 $3,393 $2,187
Reserves of American Premier at date
of the Mergers - - 1,090
Provision for losses and loss adjustment
expenses occurring in the current year 2,045 2,179 2,116
Net increase (decrease) in provision
for claims occurring in prior years 31 (48) (139)
2,076 2,131 1,977
Payments for losses and loss adjustment
expenses occurring during:
Current year (840) (999) (987)
Prior years (1,151) (1,121) (874)
(1,991) (2,120) (1,861)
Balance at end of period $3,489 $3,404 $3,393
Add back reinsurance recoverables 736 720 704
Unpaid losses and loss adjustment
expenses included in Balance Sheet,
gross of reinsurance $4,225 $4,124 $4,097
<PAGE>
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by
AFC's insurance companies.
1997 1996 1995
Insurance group investment income:
Fixed maturities $830.6 $817.8 $727.3
Equity securities 6.4 8.2 5.3
Other 10.6 13.5 7.9
847.6 839.5 740.5
Insurance group investment expenses (*) (37.3) (38.5) (33.8)
$810.3 $801.0 $706.7
(*) Included primarily in "Other operating and general
expenses" in the Statement of Earnings.
F-22
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statutory Information AFC's insurance subsidiaries are required
to file financial statements with state insurance regulatory
authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Net earnings and
policyholders' surplus on a statutory basis for the insurance
subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
1997 1996 1995 1997 1996
Property and casualty companies $159 $276 $200 $1,916 $1,659
Life insurance companies 74 67 76 324 287
Reinsurance In the normal course of business, AFC's
insurance subsidiaries assume and cede reinsurance with other
insurance companies. The following table shows (in millions)
(i) amounts deducted from property and casualty premiums in
connection with reinsurance ceded, (ii) amounts included in
income for reinsurance assumed and (iii) reinsurance
recoveries deducted from losses and loss adjustment expenses.
1997 1996 1995
Reinsurance ceded to:
Non-affiliates $614 $518 $476
Affiliates - - 33
Reinsurance assumed - including
involuntary pools and associations 89 58 93
Reinsurance recoveries 296 306 304
R. Additional Information Total rental expense for various
leases of office space, data processing equipment and
railroad rolling stock was $36 million, $34 million and
$35 million for 1997, 1996 and 1995, respectively. Sublease
rental income related to these leases totaled $5.4 million in
1997, $6.1 million in 1996 and $6.2 million in 1995.
Future minimum rentals, related principally to office space
and railroad rolling stock, required under operating leases
having initial or remaining noncancelable lease terms in
excess of one year at December 31, 1997, were as follows:
1998 - $37 million; 1999 - $31 million; 2000 - $22 million;
2001 - $18 million; 2002 - $13 million; and $30 million
thereafter. At December 31, 1997, minimum sublease rentals
to be received through the expiration of the leases
aggregated $14 million.
Other operating and general expenses included charges for
possible losses on agents' balances, reinsurance recoverables
and other receivables in the following amounts: 1997 -
$7.6 million; 1996 - $0; and 1995 - $0. The aggregate
allowance for such losses amounted to approximately
$131 million and $123 million at December 31, 1997 and 1996,
respectively.
F-23
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fair Value of Financial Instruments The following table
presents (in millions) the carrying value and estimated fair
value of AFC's financial instruments at December 31.
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $10,653 $10,735 $ 9,986 $10,023
Other stocks 446 446 328 328
Investment in investee
corporations 201 391 200 306
Liabilities:
Annuity benefits
accumulated $ 5,528 $ 5,319 $ 5,366 $ 5,180
Long-term debt:
Holding companies 287 301 340 362
Subsidiaries 194 195 178 183
Trust preferred securities 225 230 75 77
AFC Preferred Stock 72 74 163 264
When available, fair values are based on prices quoted in the
most active market for each security. If quoted prices are
not available, fair value is estimated based on present
values, discounted cash flows, fair value of comparable
securities, or similar methods. The fair value of the
liability for annuities in the payout phase is assumed to be
the present value of the anticipated cash flows, discounted
at current interest rates. Fair value of annuities in the
accumulation phase is assumed to be the policyholders' cash
surrender amount.
Financial Instruments with Off-Balance-Sheet Risk On
occasion, AFC and its subsidiaries have entered into
financial instrument transactions which may present off-
balance-sheet risks of both credit and market risk nature.
These transactions include commitments to fund loans, loan
guarantees and commitments to purchase and sell securities or
loans. At December 31, 1997, AFC and its subsidiaries had
commitments to fund credit facilities and contribute limited
partnership capital totaling $29 million.
<PAGE>
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by AFC's
subsidiaries are subject to various state laws, federal
regulations and debt covenants which limit the amount of
dividends, loans and advances that can be paid. Under
applicable restrictions, the maximum amount of dividends
available to AFC in 1998 from its insurance subsidiaries
without seeking regulatory clearance is approximately
$221 million. Total "restrictions" on intercompany transfers
from AFC's subsidiaries cannot be quantified due to the
discretionary nature of the restrictions.
Benefit Plans AFC expensed approximately $21 million in
1997, $17 million in 1996 and $16 million in 1995 for
contributions to its retirement and employee savings plans.
Transactions With Affiliates In December 1997, AFC
recognized a gain of $32.5 million on the sale of development
rights to AFG at their appraised value. In 1995, a
subsidiary of AFC sold a house to its Chairman for its
appraised value of $1.8 million.
F-24
<PAGE>
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note P
to the Consolidated Financial Statements.
B. Schedules filed herewith for 1997, 1996 and 1995:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable,
not required, or the information required thereby is set
forth in the Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
_____________________________________________________________________
Condensed Balance Sheet
December 31,
Assets: 1997 1996
Cash and short-term investments $ 10,793 $ 46,493
Investment in securities 908 100,871
Receivables from affiliates 577,661 606,416
Investment in subsidiaries 1,960,328 1,494,447
Investment in investees 22,680 22,647
Other assets 9,550 7,807
$2,581,920 $2,278,681
Liabilities and Capital:
Accounts payable, accrued expenses and other
liabilities $ 95,513 $ 37,156
Payable to affiliates 1,004,865 791,821
Long-term debt 88,059 172,809
Shareholders' equity 1,393,483 1,276,895
$2,581,920 $2,278,681
<PAGE>
Condensed Statement of Earnings
Year ended December 31,
Income: 1997 1996 1995
Dividends from:
Subsidiaries $ 1,247 $861,178 $195,578
Investees 177 177 1,012
1,424 861,355 196,590
Equity in undistributed earnings
of subsidiaries and investees 358,816 (470,879) 154,346
Realized gains (losses) on sales of:
Securities (2,618) 963 2,389
Investees 421 33,950 (5,034)
Subsidiaries 731 - -
Investment and other income 55,404 46,980 35,226
414,178 472,369 383,517
Costs and Expenses:
Interest charges on intercompany borrowings 28,772 81,623 4,198
Interest charges on other borrowings 15,250 21,796 86,655
Other operating and general expenses 36,392 29,407 40,766
80,414 132,826 131,619
Earnings before income taxes and
extraordinary items 333,764 339,543 251,898
Provision for income taxes 125,227 89,658 56,447
Earnings before extraordinary items 208,537 249,885 195,451
Extraordinary items - gain (loss) on
prepayment of debt (7,147) (27,889) 1,832
Net Earnings $201,390 $221,996 $197,283
S-2
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
______________________________________________________________________
Condensed Statement of Cash Flows
Year ended December 31,
1997 1996 1995
Operating Activities:
Net earnings $201,390 $221,996 $197,283
Adjustments:
Extraordinary items 7,147 27,889 (1,832)
Equity in earnings of subsidiaries (224,949) (291,270) (235,448)
Equity in net (earnings) losses of investees 212 379 (4,254)
Depreciation and amortization 1,086 505 492
Realized losses (gains) on sales of
subsidiaries and investments 2,262 (34,913) 2,797
Change in receivables from and payables
to affiliates 69,603 (10,497) (103,634)
Increase (decrease) in payables 57,017 12,790 (50,718)
Dividends from subsidiaries and investees 1,424 105,485 166,337
Other 841 7,522 38,421
116,033 39,886 9,444
Investing Activities:
Purchases of subsidiaries and other
investments (122,969) (43,491) (154,404)
Sales of subsidiaries and other investments 143,728 104,967 46,831
Other, net 250 265 (73)
21,009 61,741 (107,646)
Financing Activities:
Additional long-term borrowings 150 75 98,828
Reductions of long-term debt (94,049) (177,899) (252,880)
Borrowings from affiliates 315,000 407,500 785,876
Repayments of borrowings from affiliates (153,500) (263,564) (523,197)
Issuance of Preferred Stock - 16,800 -
Repurchases of Preferred Stock (243,939) (36,912) (2,880)
Exercise of stock options - - 8,721
Capital contributions from parent 18,667 18,666 9,333
Cash dividends paid (15,071) (24,898) (25,397)
(172,742) (60,232) 98,404
Net Increase (Decrease) in Cash and
Short-term Investments (35,700) 41,395 202
Cash and short-term investments at beginning
of period 46,493 5,098 4,896
Cash and short-term investments at end
of period $ 10,793 $ 46,493 $ 5,098
S-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
(a)
RESERVES FOR
DEFERRED UNPAID CLAIMS (b)
AFFILIATION POLICY AND CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES (d)
1997 $260 $4,225 $60 $1,329 $2,824
1996 $257 $4,124 $64 $1,248 $2,845
1995 $2,649
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES AMORTIZATION PAID
INCURRED RELATED TO OF DEFERRED CLAIMS
NET POLICY AND CLAIM
INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUM
INCOME YEARS YEARS COST EXPENSE WRITTEN
CONSOLIDATED PROPERTY-CASUALTY ENTITIES (d)
1997 $316 $2,045 $ 31 $620 $1,991 $2,858
1996 $335 $2,179 ($ 48) $628 $2,120 $2,788
1995 $303 $2,116 ($139) $577 $1,861 $2,688
(a) Grossed up for reinsurance recoverables of $736 and $720 at December 31,
1997 and 1996, respectively.
(b) Discounted at rates ranging from 4% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $189 and $153 at
December 31, 1997 and 1996, respectively.
(d) Includes American Premier's Insurance Group after April 1, 1995.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Financial Corporation has duly caused
this Report to be signed on its behalf by the undersigned, duly
authorized.
American Financial Corporation
Signed: March 26, 1998 BY:s/Carl H. Lindner
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Capacity Date
s/Carl H. Lindner Chairman of the Board March 26, 1998
Carl H. Lindner of Directors
s/Carl H. Lindner, III Director March 26, 1998
Carl H. Lindner, III
s/Theodore H. Emmerich Director* March 26, 1998
Theodore H. Emmerich
s/James E. Evans Director March 26, 1998
James E. Evans
s/S. Craig Lindner Director March 26, 1998
S. Craig Lindner
s/William R. Martin Director* March 26, 1998
William R. Martin
s/Fred J. Runk Senior Vice President and March 26, 1998
Fred J. Runk Treasurer (principal
financial and accounting
officer)
* Member of the Audit Committee
<PAGE>
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3(a) Amended Articles of Incorporation ____
3(b) Amended Code of Regulations ____
4 Instruments defining the The rights of holders of
rights of security holders. Registrant's Preferred Stock are
defined in the Articles of Incor-
poration. Registrant has no out-
standing debt issues exceeding
10% of the assets of Registrant
and consolidated subsidiaries.
10(a) Nonqualified Auxiliary RASP ____
10(b) 1997 Bonus Plan. ____
12 Computation of ratios of earnings
to fixed charges and fixed charges
and preferred dividends. ____
21 Subsidiaries of the Registrant. ____
27 Financial data schedule. (**)
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the Securities
and Exchange Commission.
E-1
AMENDED ARTICLES OF INCORPORATION
OF
AMERICAN FINANCIAL CORPORATION
FIRST. The name of the corporation shall be AMERICAN
FINANCIAL CORPORATION (the "Corporation").
SECOND. The place in Ohio where its principal office is to
be located is the City of Cincinnati in Hamilton County,
Ohio 45202.
THIRD. The purpose for which the Corporation is organized
shall be to engage in any lawful act or acts for which corpora
tions may be formed under the Ohio General Corporation Law, Ohio
Revised Code '1701.01 et seq..
FOURTH. The aggregate number of shares of stock which the
Corporation shall have authority to issue is Twenty-Eight Million
(28,000,000) shares, which shall be divided into two classes,
consisting of:
(a) Eight Million (8,000,000) shares of preferred
stock ("Preferred Shares") without par value; and
(b) Twenty Million (20,000,000) shares of common stock
("Common Shares") without par value.
PART ONE: PREFERRED STOCK
Clause 1. Except as otherwise provided by this Article
Fourth or by the amendment or amendments adopted by the Board of
Directors providing for the issue of any series of Preferred
Shares, the Preferred Shares may be issued at any time or from
time to time in any amount, not exceeding in the aggregate,
including all shares of any and all series thereof theretofore
issued, the Eight Million (8,000,000) Preferred Shares
hereinabove authorized, as Preferred Shares of one or more
series, as hereinafter provided, and for such lawful
consideration as shall be fixed from time to time by the Board of
Directors.
Four Million (4,000,000) Preferred Shares shall have voting
rights as provided in Clause 2 of this Part One of Article Fourth
(collectively, "Voting Preferred Shares"). Two Million Nine
Hundred Thousand (2,900,000) Voting Preferred Shares shall be
designated "Series J Preferred Stock" and shall have the voting
rights, designations, powers, preferences and related
participating, optional and other special rights and the
qualifications, limitations or restrictions thereof set forth in
Part Two of this Article Fourth.
<PAGE>
Four Million (4,000,000) Preferred Shares shall have no
voting power whatsoever, except as may be otherwise provided by
law or except as may arise upon a default, failure or other
contingency (collectively, "Non-Voting Preferred Shares").
All shares of any one series of Preferred Shares shall be
alike in every particular, each series thereof shall be
distinctively designated by letter or descriptive words, and all
series of Preferred Shares shall rank equally and be identical in
all respects except as provided above with respect to Voting
Preferred Shares and Non-Voting Preferred Shares or as permitted
by the provisions of Clause 2 of this Part One of Article Fourth.
Clause 2. Authority is hereby expressly granted to the Board
of Directors from time to time to adopt amendments to these
Articles of Incorporation providing for the issue in one or more
series of any unissued or treasury Preferred Shares, and
providing, to the fullest extent now or hereafter permitted by
the laws of the State of Ohio and notwithstanding the provisions
of any other Article of these Articles of Incorporation of the
Corporation, in respect of the matters set forth in the following
subdivisions (i) to (x), inclusive, as well as any other rights
or matters pertaining to such series:
(i) The designation and number of shares of such
series;
(ii) With respect to the Voting Preferred Shares only,
voting rights (to the fullest extent now or hereafter
permitted by the laws of the State of Ohio);
(iii) With respect to the Non-Voting Preferred
Shares only, voting rights upon a default, failure or other
contingency;
(iv) The dividend rate or rates of such series (which
may be a variable or adjustable rate and which may be
cumulative);
(v) The dividend payment date or dates of such series;
(vi) The price or prices at which shares of such series
may be redeemed;
(vii) The amount of the sinking fund, if any, to be
applied to the purchase or redemption of shares of such
series and the manner of its application;
(viii) The liquidation price or prices of such
series;
(ix) Whether or not the shares of such series shall be
made convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the same
class of stock of the Corporation or any other property, and
if made so convertible or exchangeable, the conversion price
or prices, or the rates of exchange at which such conversion
or exchange may be made and the adjustments thereto, if any;
and
<PAGE>
(x) Whether or not the issue of any additional shares
of such series or any future series in addition to such
series shall be subject to any restrictions and, if so, the
nature of such restrictions.
Any of the voting rights (with respect to the Voting Preferred
Shares only), voting rights upon a default, failure or other
contingency (with respect to the Non-Voting Preferred Shares
only), dividend rate or rates, dividend payment date or dates,
redemption rights and price or prices, sinking fund requirements,
liquidation price or prices, conversion or exchange rights and
restrictions on issuance of shares of any such series of
Preferred Shares may, to the fullest extent now or hereafter
permitted by the laws of the State of Ohio, be made dependent
upon facts ascertainable outside these Articles of Incorporation
or outside the amendment or amendments providing for the issue of
such Preferred Shares adopted by the Board of Directors pursuant
to authority expressly vested in it by this Article Fourth. If
the then-applicable laws of the State of Ohio do not permit the
Board of Directors to fix, by the amendment creating a series of
Voting Preferred Shares, the voting rights of shares of such
series, each holder of a share of such series of Voting Preferred
Shares shall, except as may be otherwise provided by law, be
entitled to one (1) vote for each share of Voting Preferred
Shares of such series held by such holder.
Clause 3. Before any dividends shall be declared or paid
upon or set apart for, or distribution made on, the Common Shares
and before any sum shall be paid or set apart for the purchase or
redemption of Preferred Shares of any series, except for any
series that may be established as senior to or having preference
over the terms of any other series, whether or not outstanding at
the time of adoption of the amendment creating such Preferred
Series by the Board of Directors, or for the purchase of the
Common Shares, the holders of Preferred Shares of each series
shall be entitled to receive, if and when declared by the Board
of Directors, dividends at the rate or rates fixed for such
series in accordance with the provisions of this Article Fourth,
and no more, from the dividend payment date of, or next preceding
the date of, issue thereof, payable on the payment date or dates
fixed from time to time by the Board of Directors.
Clause 4. After full dividends as aforesaid upon the
Preferred Shares of all series then outstanding shall have been
paid for all past dividend periods, and after or concurrently
with making payment of or provision for full dividends on the
Preferred Shares of all series then outstanding for the current
dividend period, then and not otherwise dividends may be declared
upon the Common Shares at such rate as the Board of Directors may
determine and no holders of any series of the Preferred Shares,
as such, shall be entitled to share therein.
<PAGE>
Clause 5. If upon any dissolution, liquidation or winding up
of the Corporation or reduction of its capital stock, the assets
so to be distributed among the holders of the Preferred Shares
pursuant to the provisions of this Article Fourth or of the
amendment or amendments providing for the issue of such Preferred
Shares adopted by the Board of Directors pursuant to authority
expressly vested in it by this Article Fourth shall be
insufficient to permit the payment to such holders of the full
preferential amounts aforesaid, the entire assets of the
Corporation shall be distributed ratably among the holders of the
Preferred Shares in proportion to the full preferential amounts
to which they are respectively entitled as in proportion to the
full preferential amounts to which they are respectively entitled
as aforesaid. After payment to the holders of the Preferred
Shares of the full preferential amounts hereinbefore provided
for, the holders of the Preferred Shares, as such, shall have no
right or claim to any of the remaining assets of the Corporation
and the remaining assets to be distributed, if any, shall be
distributed to the holders of the Common Shares.
Clause 6. The term "accrued dividends", whenever used herein
with respect to the Preferred Shares of any series, means those
amounts which would have been paid as dividends on the Preferred
Shares of such series to date had full dividends been paid
thereon at the rate and on the dates fixed for payment for such
series in accordance with the provisions of this Article Fourth,
less in each case the amount of all dividends paid upon the
shares of such series and the dividends deemed to have been paid
as provided in Clause 3 of this Part One of Article Fourth.
Clause 7. Preferred Shares of any series redeemed or
purchased by the Corporation shall be retired and canceled and
shall not be reissued by the Board of Directors of the
Corporation and shall be restored to the status of authorized but
unissued Preferred Shares. The Board of Directors shall, upon
the redemption or repurchase of all the outstanding shares of any
series of Preferred Shares, adopt an amendment to these Articles
of Incorporation to eliminate all references to the shares of
such series of Preferred Shares and to make such other
appropriate changes as are required by such elimination.
<PAGE>
PART TWO: SERIES J PREFERRED STOCK
Pursuant to the Amended and Restated Merger Agreement dated
October 3, 1997 pursuant to which AFC Acquisition Corp., a wholly-
owned subsidiary of the Corporation, shall merge with and into
the Corporation ("Merger"), the Articles of Incorporation of the
Corporation are amended and restated as of the Effective Time of
the Merger, thereby providing, among other things, for the issue
of a series of Preferred Shares of the Corporation from the
Corporation's class of Four Million (4,000,000) shares of Voting
Preferred Shares, without par value, to be designated "Series J
Preferred Stock" ("Series J Preferred Stock"), such issue to
consist of up to Two Million Nine Hundred (2,900,000) shares,
which number of shares may be increased or decreased (but not
below the number of shares thereof then outstanding) from time to
time by the Board of Directors, and to the extent that the voting
rights, designations, powers, preferences and relative
participating, optional or other special rights and the
qualifications, limitations or restrictions of the Series J
Preferred Stock are not stated and expressed in these Articles of
Incorporation, the Board of Directors does hereby fix and herein
state and express the voting rights, designations, powers,
preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions
thereof, as follows (all terms used herein which are defined in
these Articles of Incorporation shall be deemed to have the
meanings provided therein):
1. Voting. Except as provided below in Paragraph 5 of this
Part Two of Article Fourth, holders of shares of Series J
Preferred Stock are entitled to one (1) vote per share on all
matters to be voted upon by shareholders of the Corporation, with
holders of the Corporation's Common Shares, and not as a separate
class.
2. Dividends. The holders of the Series J Preferred Stock
shall be entitled to receive, when, as, and if declared by the
Board of Directors and out of the assets of the Corporation which
are by law available for the payment of dividends, cumulative
preferential dividends in the manner and at the rates set forth
below. Each of said shares shall have an annual dividend rate of
$2.00 and no more. Dividends shall be payable in equal payments
of $1.00 per share semi-annually on May 1 and November 1 of each
year to holders of record as of the preceding April 15 and
October 15.
Dividends on shares of Series J Preferred Sock shall be
paid in cash.
<PAGE>
No dividend or other distribution whatsoever shall be
declared or paid upon or set apart for any class of stock or
series thereof ranking junior to the Series J Preferred Stock as
to the payment of dividends, nor shall any shares of any class of
stock or series thereof ranking junior to the Series J Preferred
Stock as to payment of dividends be redeemed or purchased by the
Corporation or any subsidiary thereof, nor shall any moneys be
paid to or made available for a sinking fund for the redemption
or purchase of any shares of any class of stock or series thereof
ranking junior to the Series J Preferred Stock as to payment of
dividends, unless in each instance, full dividends on all
outstanding shares of Series J Preferred Stock for all past
dividend periods shall have been paid at the rate fixed therefor.
Dividends upon shares of the Series J Preferred Stock
shall be payable by check to the registered holders of Series J
Preferred Stock at the address set forth in the books and records
of the Corporation or any transfer agent and/or registrar
appointed for the Series J Preferred Stock and shall commence to
accrue and be cumulative from their respective dates of issuance.
3. Rights on Liquidation or Cash-Out Merger.
A. (1) Upon the liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary,
holders of shares of Series J Preferred Stock shall be entitled
to receive, out of assets of the Corporation available for
distribution to stockholders after satisfying claims of
creditors, a liquidating distribution in the amount of $25.00 per
share, which shall be the liquidation preference of such shares,
plus an amount equal to accrued dividends on each such share to
and including the date fixed for payment of Series J Preferred
Stock, and no more.
(2) Such amount shall be paid to the holders of the
Series J Preferred Stock prior to any distribution or payment to
the holders of any class of stock or series thereof ranking
junior to the Series J Preferred Stock in the payment of
dividends or distributions of assets on liquidation, dissolution
or winding up of the affairs of the Corporation.
(3) After the payment to holders of shares of Series J
Preferred Stock of the full amount of the liquidating
distributions to which they are entitled pursuant to the second
next preceding sentence, holders of the shares of Series J
Preferred Stock (in their capacity as such holders) shall have no
right or claim to any of the remaining assets of the Corporation.
<PAGE>
B. In any merger or consolidation of the Corporation with or
into any other corporation, including any person (including any
individual, partnership, corporation, trust, unincorporated
association, joint venture or other entity) controlled by, in
control of, or under common control with the Corporation
("Affiliate"), or a merger or consolidation of any other
corporation, including any Affiliate, with or into the
Corporation, which merger or consolidation by its terms provides
for the payment of only cash to holders of the Series J Preferred
Stock, each holder of Series J Preferred Stock shall be entitled
to receive an amount equal to the liquidation preference of the
shares of Series J Preferred Stock held by such holder, plus an
amount equal to accrued dividends on such shares to and including
the date of payment thereof, and no more, in exchange for such
shares of Series J Preferred Stock (a "Cash-Out Merger").
C. Neither the sale, lease or exchange (for cash, stock,
securities or other consideration) of all or substantially all of
the property and assets of the Corporation, nor the merger or
consolidation of any other corporation with or into the
Corporation, nor the merger or consolidation of the Corporation
with or into any other corporation, shall be deemed to be a
dissolution, liquidation or winding up of the affairs of the
Corporation, voluntary or involuntary, for the purposes of this
Paragraph 3 of Part Two of Article Fourth; provided, however,
that any Cash-Out Merger shall be deemed to be a liquidation of
the Corporation solely for purposes of determining the rights of
the holders of shares of Series J Preferred Stock in respect of
such Cash-Out Merger.
D. If upon liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the
assets of the Corporation available for distribution to the
holders of Series J Preferred Stock and any other preferred stock
of the Corporation, ranking upon liquidation on a parity with the
Series J Preferred Stock (the "Liquidation Preferred"), shall be
insufficient to pay the full amount of the liquidating
distributions to which holders of Series J Preferred Stock are
entitled pursuant to Paragraph 3A of this Part Two of Article
Fourth and liquidating distributions to which holders of the
Liquidation Preferred are entitled, then such assets shall be
distributed among the holders of Series J Preferred Stock and
Liquidation Preferred ratably in proportion to the full amount of
distributions to which each holder of Series J Preferred Stock
and Liquidation Preferred would have been entitled.
<PAGE>
4. Redemption.
A. Optional Redemption. The Corporation shall not have the
right to redeem any shares of Series J Preferred Stock until
December 2, 2005. Thereafter, the Corporation shall have the
right, at its option, and by resolution of its Board of
Directors, upon notice as required by Paragraph 4B of this Part
Two of Article Fourth, to redeem the Series J Preferred Stock out
of funds legally available therefor, as a whole or in part, at
the redemption prices set forth below, plus all accrued dividends
thereon to the date fixed for redemption (against receipt of
certificates evidencing the shares redeemed), if redeemed during
the twelve month period beginning on December 2 of the years
indicated:
Year Amount Per Share
2005 $25.75
2006 $25.375
2007 and thereafter $25.00
B. Notice of Redemption. Notice of any redemption
specifying the date fixed for said redemption shall be mailed,
postage prepaid, at least 25 days but not more than 60 days prior
to said redemption date to the holders of record of the Series J
Preferred Stock to be redeemed at their respective addresses as
the same shall appear on the books and records of the Corporation
or any transfer agent and/or registrar for the Series J Preferred
Stock. If less than all of the Series J Preferred Stock
outstanding is to be redeemed, the Corporation shall select by
lot those shares which are to be redeemed. If such notice of
redemption shall have been mailed, and if on or before the
redemption date specified in such notice all funds necessary for
such redemption shall have been set aside by the Corporation
separate and apart from its other funds, in trust for the account
of the holders of the shares so to be redeemed, so as to be and
continue to be available therefor, then, on and after said
redemption date, notwithstanding that any certificate for shares
of the Series J Preferred Stock so called for redemption shall
not have been surrendered for cancellation, the shares
represented thereby so called for redemption shall be deemed to
be no longer outstanding, the right to receive dividends thereon
shall cease to accrue, and all rights with respect to such shares
of the Series J Preferred Stock so called for redemption shall
forthwith cease and terminate, except for the right to receive
the amount set aside in trust for redemption thereof, but without
interest.
5. Rights in the Event of Dividend Arrearage; Class Voting
Rights. In addition to the voting rights set forth in Paragraph
1 of this Part Two of Article Fourth, holders of Series J
Preferred Stock shall have the voting rights set forth below:
<PAGE>
A. If at any time the Corporation shall not have paid full
dividends for each of four or more consecutive semi-annual
dividends payable on the Series J Preferred Stock pursuant to
Paragraph 2 hereof, the number of directors constituting the
Board of Directors of the Corporation shall be increased by two
and the holders of the Series J Preferred Stock shall have the
right, voting as one class, to elect the directors to fill such
newly created directorships. This right shall remain vested
until all accrued dividends on any Series J Preferred Stock have
been paid, or declared and set apart for payment, at which time
(i) the right to so elect directors shall terminate (subject to
revesting in the case of any subsequent default of the kind
described above); (ii) the term of the directors then in office
elected by such holders shall terminate; and (iii) the number of
directors constituting the Board of Directors of the Corporation
shall be reduced by the number of directors by which it was
increased pursuant to this subparagraph.
Whenever such right shall vest, it may be exercised
initially either at a special meeting of holders of such
preferred stock or at any annual stockholders' meeting, but
thereafter it may be exercised at stockholders' meetings called
for the purpose of electing directors. A special meeting for the
exercise of such right shall be called by the Secretary of the
Corporation as promptly as possible, and in any event within 10
days after receipt of a written request signed by the holders of
record of at least 50% of the outstanding shares of such
preferred stock. Notwithstanding the provisions of this
subparagraph 5A of this Part Two of Article Fourth, no such
special meeting shall be held during the 90-day period preceding
the date regularly fixed for the annual meeting of stockholders.
Any director who shall have been elected by the holders
of Series J Preferred Stock shall hold office for a term expiring
(subject to the earlier termination of the arrearage in
dividends) at the next annual meeting of stockholders. During
such term such directors may be removed at any time, without
cause, by, and only by, the affirmative votes of the holders of
record of a majority of the outstanding shares of Series J
Preferred Stock given at a special meeting of such stockholders
called for the purpose, except as otherwise provided by Ohio law
with respect to cumulative voting rights. Any vacancy created by
such removal may also be filled at such meeting. A meeting for
the removal of a director elected by the holders of Series J
Preferred Stock and the filling of the vacancy created thereby
shall be called by the Secretary of the Corporation within 10
days after receipt of a written request signed by the holders of
record of at least 50% of the outstanding shares of such
preferred stock.
<PAGE>
Any vacancy caused by the death or resignation of a
director who shall have been elected by the holders of the Series
J Preferred Stock may be filled by the remaining director elected
under these provisions, or if none, by the holders of Series J
Preferred Stock at a meeting called for such purpose. Such
meeting shall be called by the Secretary of the Corporation at
the earliest practicable date after any such death or resignation
and in any event within 10 days after receipt of a written
request signed by the holders of record of at least 50% of the
outstanding shares of such preferred stock.
At such meeting, the presence in person or by proxy of
the holders of a majority of the outstanding shares of the Series
J Preferred Stock, as the case may be, shall be required to
constitute a quorum; in the absence of a quorum, a majority of
the holders of the Series J Preferred Stock present in person or
by proxy shall have the power to adjourn the meeting from time to
time without notice, other than announcement at the meeting,
until a quorum shall be present.
B. Any action requiring the vote of the Series J Preferred
Stock voting separately as a class under Ohio law shall be taken
by the affirmative vote of the holders of a two-thirds of such
class or, if permitted by Ohio law, by the affirmative vote of a
majority of such class.
FIFTH. No holder of any shares of this Corporation shall
have any preemptive rights to subscribe for or to purchase any
shares of this Corporation of any class, whether such shares or
such class be now or hereafter authorized, or to purchase or
subscribe for securities convertible into, or exchangeable for,
shares of any class or to which shall be attached or appertained
any warrants or rights entitling the holder thereof to purchase
or subscribe for shares of any class.
SIXTH. This Corporation, through its Board of Directors,
shall have the right and power to purchase any of its outstanding
shares at such price and upon such terms as may be agreed upon
between the Corporation and any selling shareholder.
SEVENTH. The affirmative vote of shareholders entitled to
exercise a majority of the voting power of this Corporation shall
be required to amend these Articles of Incorporation, approve
mergers and to take any other action which by law must be
approved by a specified percentage of the voting power of the
Corporation or all outstanding shares entitled to vote.
EIGHTH. The provisions of Ohio Revised Code '1701.831 or
any successor provisions relating to control share acquisitions
shall not be applicable to this Corporation.
NINTH. The provisions of Ohio Revised Code Chapter 1704 or
any successor provisions relating to the transactions involving
interested shareholders shall not be applicable to this Corpo
ration.
TENTH. No shareholder shall have the right to vote
cumulatively in the election of directors.
<PAGE>
ELEVENTH. These Amended Articles of Incorporation take the
place of and supersede the existing Articles of Incorporation as
heretofore amended and restated.
AMENDED CODE OF REGULATIONS
OF
AMERICAN FINANCIAL CORPORATION
(Adopted December 2, 1997)
ARTICLE I
Fiscal Year
Unless otherwise designated by the Board of Directors, the
fiscal year of the Corporation after the adoption of this Code of
Regulations shall end each December 31.
ARTICLE II
Shareholders
Section 1. Meetings of the Shareholders.
1.1 Annual Meetings. The Annual Meeting of the Sharehold
ers of this Corporation, for the election of the Board of
Directors and the transaction of such other business as may
properly be brought before such meeting, shall be held at 10:00
a.m. on the third Monday in May each year or such other time and
at such place as designated by the Board of Directors. If the
Annual Meeting is not held or if Directors are not elected
thereat, a Special Meeting may be called and held for that
purpose.
1.2 Special Meetings. Special meetings of the
Shareholders may be held on any business day when called by the
Chairman of the Board, the President, a majority of Directors, or
persons holding twenty-five percent of all voting power of the
Corporation and entitled to vote. Calls for special business
shall be considered at any such meeting other than that specified
in the call therefor.
1.3 Place of Meetings. Any meeting of Shareholders may
be held at such place within or without the State of Ohio as may
be designated in the Notice of said meeting.
<PAGE>
1.4 Notice of Meeting and Waiver of Notice
1.4.1 Notice. Written notice of the time, place and
purposes of any meeting of Shareholders shall be given to
each Shareholder entitled thereto not less than seven (7)
days nor more than sixty (60) days before the date fixed
for the meeting and as prescribed by law. Such notice
shall be given either by personal delivery or mail to the
Shareholders at their respective addresses as they appear
upon the records of the Corporation. Notice shall be
deemed to have been given on the day mailed. If any
meeting is adjourned to another time or place, no notice as
to such adjourned meeting need be given other than by
announcement at the meeting at which such an adjournment is
taken. No business shall be transacted at any such
adjourned meeting except as might have been lawfully
transacted at the meeting at which such adjournment was
taken.
1.4.2 Notice to Joint Owners. All notices with
respect to any shares to which persons are entitled by
joint or common ownership may be given to that one of such
persons who is named first upon the books of this
Corporation, and notice so given shall be sufficient notice
to all the holders of such shares.
1.4.3 Waiver. Notice of any meeting may be waived
in writing by any Shareholder either before or after any
meeting, or by attendance at such meeting without protest
to its commencement.
1.5 Shareholders Entitled to Notice and to Vote. If a
record date shall not be fixed, the record date for the determina
tion of Shareholders entitled to notice of or to vote at any
meeting of Shareholders shall be the close of business on the
forty-fifth prior to the date of the meeting and only Sharehold
ers of record at such record date shall be entitled to notice of
and to vote at such meeting.
1.6 Quorum and Voting. The holders of shares entitling
them to exercise a majority of the voting power of the
Corporation, present in person or by proxy, shall constitute a
quorum for any meeting. The Shareholders present in person or by
proxy, whether or not a quorum be present, may adjourn the
meeting from time to time without notice other than by
announcement at the meeting.
Except as provided by statute or in the Articles, every
Shareholder entitled to vote shall be entitled to cast one vote
on each proposal submitted to the meeting for each share held of
record on the record date for the determination of the
Shareholders entitled to vote at the meeting. At any meeting at
which a quorum is present, all questions and business which may
come before the meeting shall be determined by a majority of
votes cast, except when a greater proportion is required by law,
the Articles, or these Regulations.
<PAGE>
1.7 Organization of Meetings.
1.7.1 Presiding Officer. The Chairman of the Board,
or in his absence, the President, or in the absence of both
of them, a Vice President of the Corporation, shall call
all meetings of the Shareholders to order and shall act as
Chairman thereof; if all are absent, the Shareholders shall
elect a Chairman.
1.7.2 Minutes. The Secretary of the Corporation, or
in his absence, an Assistant Secretary, or, in the absence
of both, a person appointed by the Chairman of the meeting,
shall act as Secretary of the meeting and shall keep and
make a record of the proceedings thereat.
1.8 Order of Business. The order of business shall be as
established by the Chairman or by a majority of the directors.
1.9 Proxies. A person who is entitled to attend a Share
holders' meeting, to vote thereat, or to execute consents,
waivers and releases, may be represented at such meeting or vote
thereat, and execute consents, waivers, and releases and exercise
any of his rights, by proxy or proxies appointed by a writing
signed by such person, or by his duly authorized attorney which
may be transmitted physically, or by mail, by facsimile or other
electronic medium.
1.10 List of Shareholders. At any meeting of Shareholders
a list of Shareholders, alphabetically arranged, showing the
number and classes of shares held by each on the record date
applicable to such meeting, shall be produced on the request of
any Shareholder.
Section 2. Notice of Shareholder Business and Nominations.
2.1 Annual Meetings of Shareholders. Nominations of
persons for election to the Board of Directors and the proposal
of business to be considered by the shareholders may be made at
an annual meeting of shareholders pursuant to the Corporation's
notice of the meeting, by or at the direction of the Board of
Directors or by any shareholder of the Corporation who was a
shareholder of record at the time of giving of notice provided
for in this Regulation, who is entitled to vote at the meeting
and who complies with the notice procedures set forth herein.
<PAGE>
For nominations or other business properly to be brought
before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in writing to the Secretary of
the Corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a
shareholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that if the
date of the annual meeting is more than 30 days before or more
than 60 days after such anniversary date, notice must be so
delivered not earlier than the close of business on the 90th day
prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for
the giving of notice. Such notice shall set forth as to each
person whom the shareholder proposes to nominate for election as
a director all information relating to such person that is
required to be disclosed in solicitations of proxies for election
of directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 14a-11
thereunder including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director
if elected. As to any other business that the shareholder
proposes to bring before the meeting, such notice shall include a
brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such
shareholder and the beneficial owner, if any, on whose behalf the
proposal is made. The shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or
proposal is made shall state the name and address of such
shareholder, as they appear on the Corporation's books, and of
such beneficial owner and the class and number of shares of the
Corporation which are owned beneficially and of record by such
shareholder and such beneficial owner.
If the number of directors to be elected is increased and
there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased
Board of Directors at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Regulation shall also be
considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to
the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made
by the Corporation.
<PAGE>
2.2 Special Meetings of Shareholders. Only such business
shall be conducted at a special meeting of shareholders as shall
have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special
meeting of shareholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the
Board of Directors has determined that directors shall be elected
at such meeting, by any shareholder of the Corporation who is a
shareholder of record at the time of giving notice provided for
in this Regulation, who shall be entitled to vote at the meeting
and who complies with the notice procedures set forth in this
Regulation. If the Corporation calls a special meeting of
shareholders for the purpose of electing one or more directors to
the Board of Directors, any such shareholder may nominate a
person or persons for election to such position(s) as specified
in the Corporation's notice of meeting, if the shareholder's
notice required by this Regulation shall be delivered to the
Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 90th day prior to
such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the
10th day following the day on which public announcement is first
made of the date of the special meeting and of the nominees
proposed by the Board of Directors to be elected at such meeting.
In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a
shareholder's notice as described above.
2.3 General. Only such persons who are nominated in
accordance with the procedures set forth in this Regulation shall
be eligible to serve as directors and only such business shall be
conducted at a meeting of shareholders as shall have been brought
before the meeting in accordance with the procedures set forth in
this Regulation. Except as otherwise provided by law, the
Articles of Incorporation or these Code of Regulations, the
Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this
Regulation and, if any proposed nomination or business is not in
compliance with this Regulation, to declare that such defective
proposal or nomination shall be disregarded.
<PAGE>
ARTICLE III
Directors
Section 1. General Powers.
The authority of this Corporation shall be exercised by or
under the direction of the Board of Directors, except where the
law, the Articles or these Regulations require action to be
authorized or taken by the Shareholders.
Section 2. Election, Number and Qualification of Directors.
2.1 Election. The Directors shall be elected at the
annual meeting of the Shareholders, or if not so elected, at a
special meeting of Shareholders called for that purpose.
2.2 Number. The number of Directors, which shall not be
less than the lesser of three or the number of Shareholders of
record, may be fixed or changed at a meeting of the Shareholders
called for the purpose of electing Directors at which a quorum is
present, by a majority of votes cast at the meeting. In
addition, the number of Directors may be fixed or changed by
action of the Directors at a meeting called for that purpose at
which a quorum is present by a majority vote of the Directors
present at the meeting. The Directors then in office may fill
any Director's office that is created by an increase in the
number of Directors. The number of Directors elected shall be
deemed to be the number of Directors fixed unless otherwise fixed
by resolution adopted at the meeting at which such Directors are
elected.
2.3 Qualifications. Directors need not be Shareholders
of the Corporation.
Section 3. Term of Office of Directors.
3.1 Term. Each Director shall hold office until the next
annual meeting of the Shareholders and until his successor has
been elected or until his earlier resignation, removal from
office, or death. Directors shall be subject to removal as
provided by statute or by other lawful procedures and nothing
herein shall be construed to prevent the removal of any or all
Directors in accordance therewith.
3.2 Resignation. A resignation from the Board of
Directors shall be deemed to take effect immediately upon its
being received by any incumbent corporate officer other than an
officer who is also the resigning Director, unless some other
time is specified therein.
3.3 Vacancy. In the event of any vacancy in the Board of
Directors for any cause, the remaining Directors, though less
than a majority of the whole Board, may fill any such vacancy for
the unexpired term.
<PAGE>
Section 4. Meetings of Directors.
4.1 Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately following the adjournment of
the meeting of Shareholders at which Directors are elected. The
holding of such Shareholders' meeting shall constitute notice of
such Directors' meeting and such meeting shall be held without
further notice. Other regular meetings shall be held at such
other times and places as may be fixed by the Directors.
4.2 Special Meetings. Special Meetings of the Board of
Directors may be held at any time upon call of the Chairman of
the Board, the President, any Vice President, or any two Direc
tors.
4.3 Place of Meeting. Any meeting of Directors may be
held at such place within or without the State of Ohio as may be
designated in the notice of said meeting.
4.4 Notice of Meeting and Waiver of Notice. Notice of
the time and place of any regular or special meeting of the Board
of Directors shall be given to each Director by personal
delivery, telephone, facsimile transmission or mail at least
forty-eight hours before the meeting, which notice need not
specify the purpose of the meeting.
Section 5. Quorum and Voting.
At any meeting of Directors, not less than one-half of the
whole authorized number of Directors is necessary to constitute a
quorum for such meeting, except that a majority of the remaining
Directors in office constitutes a quorum for filling a vacancy in
the Board. At any meeting at which a quorum is present, all
acts, questions, and business which may come before the meeting
shall be determined by a majority of votes cast by the Directors
present at such meeting, unless the vote of a greater number is
required by the Articles, Regulations or By-Laws.
Section 6. Committees.
6.1 Appointment. The Board of Directors may from time to
time appoint certain of its members to act as a committee or
committees in the intervals between meetings of the Board and may
delegate to such committee or committees power to be exercised
under the control and direction of the Board. Each committee
shall be composed of at least three directors unless a lesser
number is allowed by law. Each such committee and each member
thereof shall serve at the pleasure of the Board.
6.2 Executive Committee. In particular, the Board of
Directors may create from its membership and define the powers
and duties of an Executive Committee. During the intervals
between meetings of the Board of Directors, the Executive Commit
tee shall possess and may exercise all of the powers of the Board
of Directors in the management and control and the business of
the Corporation to the extent permitted by law.
<PAGE>
6.3 Committee Action. Unless otherwise provided by the
Board of Directors, a majority of the members of any committee
appointed by the Board of Directors pursuant to this Section
shall constitute a quorum at any meeting thereof and the act of a
majority of the members present at a meeting at which a quorum is
present shall be the act of such committee. Action may be taken
by any such committee without a meeting by a writing signed by
all its members. Any such committee shall prescribe its own
rules for calling and holding meetings and its method of
procedure, subject to any rules prescribed by the Board of
Directors, and shall keep a written record of all action taken by
it.
Section 7. Action of Directors Without a Meeting.
Any action which may be taken at a meeting of Directors or
any committee thereof may be taken without a meeting if
authorized by a writing or writings signed by all the Directors
or all of the members of the particular committee, which writing
or writings shall be filed or entered upon the records of the
Corporation.
Section 8. Compensation of Directors.
The Board of Directors may allow compensation to directors
for performance of their duties and for attendance at meetings or
for any special services, may allow compensation to members of
any committee, and may reimburse any Director for his expenses in
connection with attending any Board or committee meeting.
Section 9. Relationship with Corporation.
Directors shall not be barred from providing professional
or other services to the Corporation. No contract, action or
transaction shall be void or voidable with respect to the Cor
poration for the reason that it is between or affects the Corpora
tion and one or more of its Directors, or between or affects the
Corporation and any other person in which one or more of its
Directors are directors, trustees or officers or have a financial
or personal interest, or for the reason that one or more inter
ested Directors participate in or vote at the meeting of the
Directors or committee thereof that authorizes such contract,
action or transaction, if in any such case any of the following
apply:
9.1 the material facts as to the Director's relationship
or interest and as to the contract, action or transaction are
disclosed or are known to the Directors or the committee and the
Directors or committee, in good faith, reasonably justified by
such facts, authorize the contract, action or transaction by the
affirmative vote of a majority of the disinterested Directors,
even though the disinterested Directors constitute less than a
quorum;
<PAGE>
9.2 the material facts as to the Director's relationship
or interest and as to the contract, action or transaction are
disclosed or are known to the shareholders entitled to vote
thereon and the contract, action or transaction is specifically
approved at a meeting of the shareholders held for such purpose
by the affirmative vote of the holders of shares entitling them
to exercise a majority of the voting power of the Corporation
held by persons not interested in the contract, action or
transaction; or
9.3 the contract, action or transaction is fair as to the
Corporation as of the time it is authorized or approved by the
Directors, a committee thereof or the shareholders.
Section 10. Attendance at Meetings of Persons
Who Are Not Directors
Unless waived by the Chairman, any Director who desires the
presence at any regular or special meeting of the Board of
Directors of a person who is not a Director, shall notify all
other Directors, not less than twenty-four hours before such
meeting, request the presence of such person and state the reason
in writing. Such person will not be permitted to attend the
Directors' meeting unless a majority of the Directors in
attendance vote to admit such person to the meeting. Such vote
shall constitute the first order of business for any such meeting
of the Board of Directors. Such right to attend, whether granted
by waiver or vote, may be revoked at any time during any such
meeting by the vote of a majority of the Directors in attendance.
<PAGE>
ARTICLE IV
Officers
Section 1. General Provisions.
The Board of Directors shall elect a President, a Secretary
and a Treasurer, and may elect a Chairman of the Board, one or
more Vice Presidents, and such other officers and assistant offi
cers as the Board may from time-to-time deem necessary. The
Chairman of the Board, if any, shall be a Director, but none of
the other officers need be a Director. Any two or more offices
may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if
such instrument is required to be executed, acknowledged or veri
fied by two or more officers.
Section 2. Powers and Duties.
All officers, as between themselves and the Corporation,
shall respectively have such authority and perform such duties as
are customarily incident to their respective offices, and as may
be specified from time to time by the Board of Directors, regard
less of whether such authority and duties are customarily inci
dent to such office. In the absence of any officer of the Cor
poration, or for any other reason the Board of Directors may deem
sufficient, the powers or duties of such officer, or any of them
may be delegated, to any other officer or to any Director. The
Board of Directors may from time to time delegate to any officer
authority to appoint and remove subordinate officers and to pre
scribe their authority and duties.
Section 3. Term of Office and Removal.
3.1 Term. Each officer of the Corporation shall hold
office at the pleasure of the Board of Directors, and unless
sooner removed by the Board of Directors, until the meeting of
the Board of Directors following the date of election of Direc
tors and until his successor is elected and qualified.
3.2 Removal. The Board of Directors may remove any
officer at any time with or without cause by the affirmative vote
of a majority of Directors in office.
Section 4. Compensation of Officers.
Unless compensation is otherwise determined by a majority
of the Directors at a regular or special meeting of the Board of
Directors or unless such determination is delegated by the Board
of Directors to a committee of directors, the President, or a
Chief Executive Officer, if one has been elected, of the
Corporation from time to time shall determine the compensation to
be paid to all officers and other employees for services rendered
to the Corporation.
<PAGE>
ARTICLE V
Indemnification
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to
be made a party to or is otherwise involved (including, without
limitation, as a witness) in any actual or threatened action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative (hereinafter a "proceeding"), by reason of the fact
that he or she is or was a director or officer of the Corporation
or that, being or having been such a director or officer of the
Corporation, he or she is or was serving at the request of an
executive officer of the Corporation as a director, officer,
partner, employee, or agent of another corporation, partnership,
joint venture, trust, limited liability company, or other enter
prise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as such a
director, officer, partner, employee, or agent, shall be indemni
fied and held harmless by the Corporation to the fullest extent
permitted by the General Corporation Law of Ohio, as the same
exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than
permitted prior thereto), or by other applicable law as then in
effect, against all expense, liability, and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) actually and
reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an
indemnitee who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators. Except as provided in Section 2
with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part
thereof) was authorized or ratified by the Board of Directors of
the Corporation.
The right to indemnification conferred in this Section 1
shall be a contract right and shall include the right to be paid
by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"). An advancement of expenses incurred
by an indemnitee in his or her capacity as a director, officer or
employee (and not in any other capacity in which service was or
is rendered by such indemnitee including, without limitation,
service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which
there is no further right to appeal that such indemnitee is not
entitled to be indemnified for such expenses under this Section 1
or otherwise. An advancement of expenses shall not be made if
the Corporation's Board of Directors makes a good faith determina
tion that such payment would violate law or public policy.
<PAGE>
Section 2. Right of Indemnitee to Bring Suit.
If a claim under Section 1 is not paid in full by the
Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking,
the indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Article V
upon submission of a written claim (and, in an action brought to
enforce a claim for an advancement of expenses, where the
required undertaking has been tendered to the Corporation), and
thereafter the Corporation shall have the burden of proof to
overcome the presumption that the indemnitee is not so entitled.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its shareholders) to
have made a determination prior to the commencement of such suit
that indemnification of the indemnitee is proper in the
circumstances, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or
its shareholders) that the indemnitee is not entitled to
indemnification shall be a defense to the suit or create a
presumption that the indemnitee is not so entitled.
Section 3. Nonexclusivity and Survival of Rights.
The rights to indemnification and to the advancement of
expenses conferred in this Article V shall not be exclusive of
any other right which any person may have or hereafter acquire
under any statute, provisions of the Articles of Incorporation,
Code of Regulation, agreement, vote of shareholders or
disinterested directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article
V, or of any of the procedures established by the Board of
Directors pursuant to Section 7, any indemnitee shall be entitled
to indemnification in accordance with the provisions hereof and
thereof with respect to any acts or omissions of such indemnitee
occurring prior to such amendment or repeal.
Without limiting the generality of the foregoing paragraph,
the rights to indemnification and to the advancement of expenses
conferred in this Article V shall, notwithstanding any amendment
to or repeal of this Article V, inure to the benefit of any
person who otherwise may be entitled to be indemnified pursuant
to this Article V (or the estate or personal representative of
such person) for a period of six years after the date such
person's service to or in behalf of the Corporation shall have
terminated or for such longer period as may be required in the
event of a lengthening in the applicable statute of limitations.
<PAGE>
Section 4. Insurance, Contracts, and Funding.
The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of
the Corporation or another corporation, partnership, joint
venture, trust, or other enterprise against any expense,
liability, or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability,
or loss under the General Corporation Law of Ohio. The
Corporation may enter into contracts with any indemnitee in
furtherance of the provisions of this Article V and may create a
trust fund, grant a security interest, or use other means
(including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect
indemnification as provided in this Article V.
Section 5. Persons Serving Other Entities.
Any person who is or was a director, officer, or employee
of the Corporation who is or was serving (i) as a director or
officer of another corporation of which a majority of the shares
entitled to vote in the election of its directors is held by the
Corporation or (ii) in an executive or management capacity in a
partnership, joint venture, trust, limited liability company or
other enterprise of which the Corporation or a wholly-owned
subsidiary of the Corporation is a general partner or member or
has a majority ownership shall be deemed to be so serving at the
request of an executive officer of the Corporation and entitled
to indemnification and advancement of expenses under Section 1.
Section 6. Indemnification of Employees and
Agents of the Corporation.
The Corporation may, by action of its Board of Directors,
authorize one or more executive officers to grant rights to
advancement of expenses to employees or agents of the Corporation
on such terms and conditions no less stringent than provided in
Section 1 hereof as such officer or officers deem appropriate
under the circumstances. The Corporation may, by action of its
Board of Directors, grant rights to indemnification and
advancement of expenses to employees or agents or groups of
employees or agents of the Corporation with the same scope and
effect as the provisions of this Article V with respect to the
indemnification and advancement of expenses of directors and
officers of the Corporation; provided, however, that an
undertaking shall be made by an employee or agent only if
required by the Board of Directors.
Section 7. Procedures for the Submission of Claims.
The Board of Directors may establish reasonable procedures
for the submission of claims for indemnification pursuant to this
Article V, determination of the entitlement of any person
thereto, and review of any such determination. Such procedures
shall be set forth in an appendix to these Code of Regulations
and shall be deemed for all purposes to be a part hereof.
<PAGE>
ARTICLE VI
Amendments
This Code of Regulations may be amended by the affirmative
vote or the written consent of the Shareholders entitled to
exercise a majority of the voting power on such proposal. If an
amendment is adopted by written consent the Secretary shall mail
a copy of such amendment to each Shareholder who would be
entitled to vote thereon and did not participate in the adoption
thereof. This Code of Regulations may also be amended by the
affirmative vote of a majority of the directors to the extent
permitted by Ohio law at the time of such amendment.
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AS OF JANUARY 1, 1997
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
As of January 1, 1997
Page
ARTICLE 1. ESTABLISHMENT AND PURPOSE 1
ARTICLE 2. DEFINITIONS 1
2.1 "Account" 1
2.2 "Administrator" 1
2.3 "AFG" 1
2.4 "AFG RASP" 1
2.5 "Agreement" 1
2.6 "American Financial Group" 1
2.7 "Code" 1
2.8 "Employee" 2
2.9 "Employer" 2
2.10 "ERISA" 2
2.11 "Expiration Date" 2
2.12 "Hour of Service" 2
2.13 "One Year Period of Severance" 2
2.14 "Participant" 2
2.15 "Plan Year" 2
2.16 "RASP" 2
2.17 "Retirement Contribution" 2
2.18 "Year of Service" 2
ARTICLE 3. PARTICIPATION 2
3.1 Eligibility 2
3.2 Participation in the Plan 2
3.3 Vesting 3
ARTICLE 4. COMPENSATION ALLOCATED 4
4.1 AFG Auxiliary RASP Account 4
4.2 Amount of Allocation 4
4.3 Term of Deferral 5
4.4 Investment Performance 5
4.5 Statement of Account 5
ARTICLE 5. PAYMENT OF ACCOUNT 5
5.1 Payment After the Expiration Date, Death,
Retirement or Disability. 5
5.2 Hardship Distribution 6
5.3 Beneficiary Designation and Payment 7
ARTICLE 6. GENERAL PROVISIONS 7
6.1 Employee's Rights Unsecured 7
6.2 Non-Assignability 7
6.3 Administration 7
6.4 Amendment and Termination 8
6.5 Construction 8
6.6 Limitations 8
6.7 Subsidiaries. 8
APPENDIX I
APPENDIX II
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
As of January 1, 1997
ARTICLE 1. ESTABLISHMENT AND PURPOSE
The American Financial Group, Inc. Auxiliary RASP
Plan ("Plan") is established as of January 1,
1997. The purpose of the Plan is to enable
eligible Employees of American Financial Group,
Inc. ("AFG"), and certain of its subsidiaries and
affiliates (collectively "Employers" and
singularly "Employer"), who are eligible to
participate in the Retirement Contribution portion
of the American Financial Group Retirement and
Savings Plan (the "RASP") or any other defined
contribution plan sponsored by an AFG subsidiary
to have an alternative to the RASP or such other plan.
The Plan is being established by AFG and the other
Employers for the benefit of their respective
eligible Employees who are not eligible for
another nonqualified Plan of AFG or any other
Employer. With respect to Employees not directly
employed by AFG, such Employers shall annually
forward the amount necessary to fund the
contributions for the Account of each eligible
Employee as determined pursuant to Section 4.2 and
thereafter the Account (the investment performance
as determined pursuant to Section 4.4) of each
Employee is the obligation of AFG.
ARTICLE 2. DEFINITIONS
2.1 "Account" means the account established by the
Administrator pursuant to Section 3.1.
2.2 "Administrator" means the person or committee
appointed by the President of AFG responsible for
the administration of the Plan.
2.3 "AFG" means American Financial Group.
2.4 "AFG RASP" means the American Financial Group
Retirement and Savings Plan.
2.5 "Agreement" means the written election of a
Participant to participate in the Plan in the form
attached hereto as Appendix I.
2.6 "American Financial Group" means American
Financial Group, Inc., its successors and assigns.
2.7 "Code"means the Internal Revenue Code of 1986, as
amended.
<PAGE>
2.8 "Employee" means all common law employees of an
Employer as further described in the AFG RASP.
2.9 "Employer" means AFG and certain of its
subsidiaries and affiliates who have adopted the
Plan.
2.10 "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
2.11 "Expiration Date" means the date in which a
Participant incurs five consecutive One Year
Periods of Severance.
2.12 "Hour of Service" means each hour an Employee is
entitled to payment by an Employer as further
described in the AFG RASP.
2.13 "One Year Period of Severance" means any 12-month
period during which a Participant does not
complete a month of service pursuant to the terms
of the RASP.
2.14 "Participant" means an Employee who becomes
eligible pursuant to Article 3.
2.15 "Plan Year" means the twelve month period
beginning each January 1 and ending December 31 on
which the records of the Plan are kept.
2.16 "RASP" means the AFG RASP.
2.17 "Retirement Contribution" means the employer
retirement contribution made by an Employer
pursuant to the terms of the AFG RASP.
2.18 "Year of Service" means each 12-month period
beginning on the Employee's employment
commencement date during which a Participant
completes at least one Hour of Service, as
determined pursuant to the RASP.
<PAGE>
ARTICLE 3. PARTICIPATION
3.1 Eligibility. The Employees who are eligible to
become a Participant in the Plan are those
officers and other key employees of an Employer
who are authorized by the Board of Directors of
AFG to participate in the Plan or have been
specifically authorized to participate in the Plan
by an employment agreement between an Employer and
a person employed by an Employer.
3.2 Participation in the Plan. A Participant elects,
subject to the provisions of the Plan, to
participate in the Plan by delivering before March
15, or such earlier time as may be directed by the
Plan Administrator, of the first Plan Year the
Participant is eligible to participate, a properly
executed Agreement to the Administrator. The
Agreement shall conform to the terms and
conditions of the Plan and shall include an
election not to participate in the Retirement
Contribution of the AFG RASP or any other defined
contribution plan sponsored by an AFG subsidiary.
An Employee's election to participate in the Plan
may not be revoked during the Plan Year. An
employee may only revoke this election by
notifying the Plan Administrator in writing by
December 1 of the Plan Year for the termination to
be effective in the next following Plan Year. All
Employees who were participants of the AFC
Auxiliary ESORP shall automatically be
participants in this Plan subject to the elections
made under such plan without executing a new Agreement.
3.3 Vesting.
(a) A Participant's interest in his Account shall
become vested and nonforfeitable to the
extent of the following percentages based
upon full Years of Service with an Employer:
Percentage Percentage
Year of Service Vested Forfeited
Fewer than five years 0% 100%
At least five years 100% 0%
An Employee forfeits all non-vested rights to an Account
after the Plan Year after five consecutive One Year
Periods of Severance have occurred.
(b) For purposes of vesting, a Year of Service shall
be credited for each 12-month period beginning on the
Employee's employment commencement date during which
an Employee completes a month of service. In
addition, each Employee participating in the Plan
shall be credited, for Service purposes, for his
employment with any subsidiary or affiliate of AFG.
<PAGE>
(c) In computing full Years of Service hereunder, any
Employee who has a One Year Period of Severance shall
not receive credit for Years of Service prior to such
break until one full Year of Service has been
completed after return to service. In addition,
Years of Service by any Employee after any five
consecutive One Year Periods of Severance shall not
be taken into account for purposes of determining the
nonforfeitable percentage of an Employee's interest
derived from compensation deferred by the Employee
which accrued before such five consecutive One Year
Periods of Severance.
Further, when computing full Years of Service
hereunder, the Employer shall establish and
maintain a separate Account for each Employee
who has incurred a One Year Period of
Severance and has subsequently returned to
the employment of an Employer. The purpose of
maintaining such separate Accounts will be to
insure that allocations to any Employee are
properly made to determine the nonforfeitable
percentage of accrued interest in accordance
with the above.
(d) Participation in the Plan will continue until
an Employee terminates his employment as
provided for in Section or for as long as he
has an interest in the Plan that has not been
distributed to him or for his benefit.
ARTICLE 4. COMPENSATION ALLOCATED
4.1 AFG Auxiliary RASP Account. An Account will be
established for each Employee who elects to
participate in the Plan. The Account will be
maintained by the Administrator. All allocations
on behalf of an Employee shall be deferred and all
increases or decreases in the Account due to
investment performance of the Retirement
Contributions in the AFG RASP (see Section ), all
distributions to the Employee or beneficiary or
estate, and any other interest earned on the
balance thereof, shall be reflected in the Account.
<PAGE>
4.2 Amount of Allocation.
(a) The amount allocated to an Employee's Account
shall be deferred and shall be the same
percentage of an Employee's gross income (as
defined in Section 61(a) of the Code) paid by
any Employer as would have been allocated to
an Employee's Retirement Contributions
account in the AFG RASP (or any other defined
contribution plan sponsored by an AFG
subsidiary) up to a maximum of $30,000, which
amount shall be increased (but not decreased)
with respect to adjustments allowed by
Section 415 of the Code.
Provided, however, that the initial amount
of compensation allocated and deferred shall
include an amount equivalent to the amount
that would have been allocated in an
Employee's Retirement Contributions account
or predecessor defined contribution plan
account for the Plan Year prior to
participation in this Plan but for
limitations and rules existing in the Code as
of the date hereof.
(b) Allocations under this Plan for any Plan Year
shall be credited to an Employee's Account as
of December 31 of such Plan Year.
(c) A Participant's Accounts shall also include
amounts previously credited under the AFC
Auxiliary ESORP, if any.
4.3 Term of Deferral. The Agreement shall provide
that all amounts posted to the Account shall be
paid upon the earlier of (1) retirement or
termination of employment at age 60 or over, (2)
death, (3) Total Disability or (4) the Expiration
Date. Commencing in the first quarter of the year
following an Expiration Date, payments from the
Account shall be made in accordance with the
provisions specified in Section hereof.
4.4 Investment Performance. The Participant's Account
shall be credited (or charged) with interest at a
rate determined by the Treasurer of AFG to be the
same rate as earned on the Retirement
Contributions accounts under the RASP (investment
income plus or minus "investment performance"
under the Retirement Contributions account of the
RASP) as of each December 31 prior to the
Expiration Date. Such determination shall be
final, binding and conclusive on all parties.
4.5 Statement of Account. A statement of Account for the
preceding calendar year will be sent to each Participant
annually no later than February 28 until the complete
distribution of the Participant's Account.
<PAGE>
ARTICLE 5. PAYMENT OF ACCOUNT
5.1 Payment After the Expiration Date, Death,
Retirement or Disability.
(a) Within 90 days following the end of the year
in which Expiration Date occurs, termination
of employment after age 60, death or
disability, the Participant, or in the event
of death, the Beneficiary, shall choose
payment or distribution of the Account under
one of the following payment options:
(1) The Account may be applied to the
purchase of an immediate or deferred
life annuity contract, on the sole life
of the Participant, or jointly on the
lives of the Participant and a
beneficiary named by the Participant.
The annuity contract shall be purchased
from an insurance company to be
determined at the sole discretion of AFG
provided that such insurance company
shall have a current rating of A
(Excellent) or better from Bests'
Insurance Reports.
(2) The Account may be paid out as if the
Participant purchased an immediate or
deferred life annuity contract, on the
sole life of the Participant, or jointly
on the lives of the Participant and the
beneficiary named by the Participant.
Such payment of the Account shall be as
if AFG purchased an annuity contract
from an insurance company to be
determined at the sole discretion of AFG
provided that such insurance company
shall have a rating of A (Excellent) or
better from Bests' Insurance Reports and
using as the interest rate assumption,
the same interest rate as such insurance
company would provide.
(3) The Account may be paid in a lump sum in
cash.
The Employer may take into consideration, but
is not bound by, the Employee's preference as
to the payment options.
The annuity contract provided for in
paragraph 5.l(a)(l) shall provide for, and
payments provided for in paragraph 5.l(a)(2)
shall be made, in equal installments over the
expected life span of Participant which shall
be determined by standard actuarial tables
then in existence.
<PAGE>
(b) Within 30 days of AFG's choice of payment
option, AFG will purchase such annuity, begin
to make payments or make the lump sum
payment.
(c) Notwithstanding the payment option chosen by
AFG, after the commencement of payments from
the Account, the Administrator, at his sole
discretion, may accelerate payment of any
amount remaining in the Account to the extent
that the amounts being paid are not
sufficiently large to warrant the
administrative expense then being incurred to
administer such payments.
(d) Any applicable federal, state and local taxes
will be withheld from the gross amounts paid.
Neither the Participant nor any designated
beneficiary shall have any right, directly or
indirectly, to alienate, assign, pledge or in
any way encumber any amount that is payable
from the Account.
5.2 Hardship Distribution. Distribution of payments
from a Participant's Account prior to the
Expiration Date shall be made only if the
Administrator, after consideration of an
application by the Participant, determines that
the Participant has sustained financial hardship
caused by events beyond the Participant's control.
In such event, the Administrator may, at his sole
discretion, direct that all or a portion of the
Account be paid to the Participant in such manner,
and at such times as determined by the Administrator.
5.3 Beneficiary Designation and Payment.
(a) The Participant shall have the right to
designate a beneficiary hereunder and to
change any beneficiary previously designated.
Such designation shall be made by the
Participant delivering to the Administrator a
writing setting forth the name and address of
the person or persons so designated with a
statement by the Participant of the intention
that the person or persons so designated be
the beneficiary or beneficiaries hereunder.
The last-dated and filed beneficiary
designation shall cancel all earlier filed
designations. (Appendix II provides the
acceptable form of beneficiary designation.)
(b) In the event of the Participant's death
before or after the commencement of payments
from the Account, then the amount otherwise
payable to the Participant shall be paid to
the designated beneficiary or, if none, to
the estate, which beneficiary or estate shall
have all the rights conferred by Section above.
<PAGE>
ARTICLE 6. GENERAL PROVISIONS
6.1 Employee's Rights Unsecured. The right of any
Employee to receive payments under the provisions
of the Plan shall be an unsecured claim against
the general assets of the Employers. It is not
required or intended that the amounts credited to
the Employee's Account be segregated on the books
of AFG or be held by the Employers in trust for
the Employee. All credits to the Account are for
bookkeeping purposes only.
6.2 Non-Assignability. The right to receive payments
hereunder shall not be transferable or assignable
by an Employee, except by will or by the laws of
descent and distribution. Any other attempted
assignment or alienation of payments hereunder
shall be void and of no force or effect.
6.3 Administration. The Administrator shall have the
authority to adopt rules, regulations and
interpret, construe and implement the provisions
of the Plan according to the laws of the State of
Ohio, to the extent not preempted by ERISA.
6.4 Amendment and Termination. The Plan may at any
time or from time to time be amended or terminated
by AFG. No amendment, modification or termination
shall adversely affect the Employee's accrued
rights under the Plan. Any such amendment,
modification or termination shall be in a writing
signed by an officer of AFG and approved by the
Board of Directors of AFG.
6.5 Construction. The masculine gender, where
appearing in this Plan, shall be deemed to also
include the feminine and neuter genders. The
singular shall also include the plural, and the
plural, the singular, where appropriate.
6.6 Limitations. The Plan does not constitute a
contract of employment, and participation in the
Plan will not give any Employee the right to be
retained in the employ of an Employer or any right
or claim to any benefit under the terms of the
Plan, unless such right or claim has specifically
accrued pursuant to the provisions of his
Agreement with the Employer. This Plan does not
confer the right for an Employee to receive a
bonus.
6.7 Subsidiaries. Each subsidiary of AFG who employs
an Employee shall be obligated to make payments to
AFG to fund each eligible Employee's Account. The
amount paid to AFG shall be in the proportion that
such subsidiary's compensation paid to an Employee
bears to an Employee's gross income determined
under Section .
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
BY:
Its:
<PAGE>
APPENDIX I
PARTICIPATION AGREEMENT
American Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Secretary
Gentlemen:
I am in receipt of the American Financial Group, Inc.
Auxiliary RASP Plan (the "Plan"), as adopted by the Board of
Directors of American Financial Group, Inc.. I have read and
reviewed the Plan, and I hereby elect to participate in the Plan
and agree to be bound by and fully comply with the terms and
conditions of the Plan. I acknowledge that my election to
participate in the Plan means that I am not going to participate,
beginning _________________ and forward, in the [American
Financial Group Retirement and Savings Plan] or [subsidiary
defined contribution plan].
I acknowledge that it is my obligation to notify the Administrator
of the Plan in writing by December 1 of any year in the event I wish to
terminate participation in the Plan for the following Plan Year and
re-activate participation in the American Financial Group Retirement
and Savings Plan or [subsidiary defined contribution plan].
I hereby acknowledge that I am not relying on any tax advice
given to me by American Financial Group, Inc. or by any
affiliate, employee, contractee, agent, director or officer
thereof regarding federal or state income or estate tax
consequences arising to me or my estate, heirs or devisees as a
result of my participation in the Plan. I further hereby
acknowledge that I have been advised to consult with my own tax
advisors regarding any such tax consequences to me.
Very truly yours, Employee
_______________________________
Signature
_______________________________
Name typed or printed
S.S. No.________________________
Date:__________________________
<PAGE>
APPENDIX II
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP
DESIGNATION OF BENEFICIARY
___________________________
TO: The Board of Directors
American Financial Group, Inc.
I hereby direct that upon my death all or any payments to be
made or remaining to be paid in accordance with rights granted to
me under the Auxiliary RASP Plan shall be paid as follows:
(A) Primary Beneficiary
Name or Names of Persons or
Trust:
Address:
Date of Birth or of Trust:
Name of Trustee if applicable:
Telephone Number:
Social Security Number or
T.I.N.:
(B) Alternative Beneficiary (in the event of the death or
non-existence of the Primary Beneficiary listed above):
Name:
Address:
Date of Birth or of Trust:
Name of Trustee if applicable:
Telephone Number:
Social Security Number or
T.I.N.:
The undersigned hereby reserves the right to change the
beneficiary or beneficiaries designated herein at any time by
filing in writing a new Designation of Beneficiary form with the
Plan Administrator.
WITNESS:
EMPLOYEE:
Date:
ACKNOWLEDGMENT
AMERICAN FINANCIAL GROUP, INC.
Date: By:
S1-8
AMERICAN FINANCIAL GROUP, INC.
1997 ANNUAL BONUS PLAN
Adopted on March 11, 1997
AMERICAN FINANCIAL GROUP, INC.
ANNUAL BONUS PLAN
<PAGE>
1. PURPOSE
The purpose of the Annual Bonus Plan (the "Plan") is to
further the profitability of American Financial Group, Inc.
(the "Company") to the benefit of the shareholders of the
Company by providing incentive to the Plan participants.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan
shall be administered by the Compensation Committee or a
successor committee or subcommittee (the "Committee") of the
Board of Directors of the Company (the "Board") composed
solely of two or more "outside directors" as defined
pursuant to Section 162(m) of the Internal Revenue Code. No
member of the Committee while serving as such shall be
eligible to be granted a bonus under the Plan. Subject to
the provisions of the Plan (and to the approval of the Board
where specified in the Plan), the Committee shall have
exclusive power to determine the conditions (including
performance requirements) to which the payment of the
bonuses may be subject and to certify that performance goals
are attained. Subject to the provisions of the Plan, the
Committee shall have the authority to interpret the Plan and
establish, adopt or revise such rules and regulations and to
make all determinations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan.
The Committee's interpretation of the Plan and all of its
actions and decisions with respect to the Plan shall be
final, binding and conclusive on all parties.
3. PLAN TERM AND BONUS YEARS
The term of the Plan is one year, commencing January 1,
1997, which term shall be renewed from year to year unless
and until the Plan shall be terminated or suspended as
provided in Section 9. As used in the Plan the term "Bonus
Year" shall mean a calendar year.
4. PARTICIPATION
Subject to the approval of the Committee and the Board
of Directors (based on the recommendation of the Committee),
management of the Company shall suggest those persons who
are deemed to be key employees of the Company for
participation in the Plan (the "Participants").
<PAGE>
5. ESTABLISHMENT OF INDIVIDUAL BONUS TARGETS AND
PERFORMANCE CRITERIA
The Committee shall establish the individual target
amount of bonus (the "Bonus Target") that may be awarded to
each Participant and recommend that the Board adopt such
action. In no event shall the establishment of any
Participant's Bonus Target give a Participant any right to
be paid all or any part of such amount unless and until a
bonus is actually awarded pursuant to Section 6.
The Committee shall establish the performance criteria
(the "Performance Criteria") that will apply to the
determination of each Participant's bonus for that Bonus
Year and recommend that the Board adopt such action. The
individuals, their Bonus Targets and Performance Criteria
set forth on Schedules I and II have been recommended by the
Committee and approved by the Board.
6. DETERMINATION OF BONUSES AND TIME OF PAYMENT
As soon as practicable after the end of 1997, the
Committee shall certify whether or not the performance
criteria of each Participant has been attained and shall
recommend to the Board, and the Board shall determine, the
amount of the bonus, if any, to be awarded to each
Participant for 1997 according to the terms of this Plan.
Such bonus determinations shall be based on achievement of
the Performance Criteria for 1997.
Once the bonus is so determined for a Participant, it
shall be paid seventy-five percent in cash and twenty-five
percent in Company Common Stock to the Participant (less any
applicable withholding and employment taxes) as soon as
practicable. The number of shares of Company Common Stock
to be issued to a Participant shall be determined by
dividing twenty-five percent of the bonus payable (before
applicable taxes and deductions) by the average of the per
share Fair Market Value of the Common Stock for the last
twenty trading days of 1997; the resulting number shall then
be rounded to the nearest hundred.
"Fair Market Value" means the last sale price reported
on any stock exchange or over-the-counter trading system on
which Company Common Stock is trading on the last trading
day prior to a specified date or, if no last sales price is
reported, the average of the closing bid and asked prices
for a share of Common Stock on a specified date. If no sale
has been made on any date, then prices on the last preceding
day on which any such sale shall have been made be used in
determining Fair Market Value under either method prescribed
in the previous sentence.
<PAGE>
7. TERMINATION OF EMPLOYMENT
If a Participant's employment with the Company or a
subsidiary, as the case may be, is terminated for any reason
other than discharge for cause, he may be entitled to such
bonus, if any, as the Committee, in its sole discretion,
may determine.
In the event of a Participant's discharge for cause
from the employ of the Company or a Subsidiary, as the case
may be, he shall not be entitled to any amount of bonus
unless the Committee, in its sole discretion, determines
otherwise.
8. MISCELLANEOUS
A. Government and Other Regulations. The
obligation of the Company to make payment of bonuses
shall be subject to all applicable laws, rules and
regulations and to such approvals by governmental
agencies as may be required.
B. Tax Withholding. The Company or a
Subsidiary, as appropriate, shall have the right to
deduct from all bonuses paid in cash any federal, state
or local taxes required by law to be withheld with
respect to such cash payments.
C. Claim to Bonuses and Employment Rights. The
designation of persons to participate in the Plan shall
be wholly at the discretion of the Board. Neither this
Plan nor any action taken hereunder shall be construed
as giving any Participant any right to be retained in
the employ of the Company or a Subsidiary.
D. Beneficiaries. Any bonuses awarded under
this Plan to a Participant who dies prior to payment
shall be paid to the beneficiary designated by the
Participant on a form filed with the Company. If no
such beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's
legal representative. A beneficiary designation may be
changed or revoked by a Participant at any time
provided the change or revocation is filed with the
Company.
E. Nontransferability. A person's rights and
interests under the Plan may not be assigned, pledged
or transferred except, in the event of a Participant's
death, to his designated beneficiary as provided in the
Plan or, in the absence of such designation, by will or
the laws of descent and distribution.
<PAGE>
F. Indemnification. Each person who is or shall
have been a member of the Committee or of the Board
shall be indemnified and held harmless by the Company
(to the extent permitted by the Articles of
Incorporation and Code of Regulations of the Company
and applicable law) against and from any loss, cost,
liability or expense that may be imposed upon or
reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to
which he may be a party or in which they may be
involved by reason of any action taken or failure to
act under the Plan and against and from any and all
amounts paid by him in settlement thereof, with the
Company's approval, or paid by him, in satisfaction of
judgment in any such action, suit or proceeding against
him. He shall give the Company an opportunity, at its
own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf.
The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to
which such person may be entitled under the Company's
Articles of Incorporation or Code of Regulations, as a
matter of law or otherwise or of any power that the
Company may have to indemnify him or hold him harmless.
G. Reliance on Reports. Each member of the
Committee and each member of the Board shall be fully
justified in relying or acting in good faith upon any
report made by the independent certified public
accountants of the Company or of its Subsidiaries or
upon any other information furnished in connection with
the Plan by any officer or director of the Company or
any of its Subsidiaries. In no event shall any person
who is or shall have been a member of the Committee or
of the Board be liable for any determination made or
other action taken or any omission to act in reliance
upon any such report or information or for any action
taken, including the furnishing of information, or
failure to act, if in good faith.
H. Expenses. The expenses of administering the
Plan shall be borne by the Company and its Subsidiaries
in such proportions as shall be agreed upon by them
from time to time.
I. Pronouns. Masculine pronouns and other words
of masculine gender shall refer to both men and women.
J. Titles and Headings. The titles and headings
of the sections in the Plan are for convenience of
reference only, and, in the event of any conflict
between any such title or heading and the text of the
Plan, such text shall control.
<PAGE>
9. AMENDMENT AND TERMINATION
The Board may at any time terminate the Plan. The
Board may at any time, or from time to time, amend or
suspend and, if suspended, reinstate the Plan in whole or in
part. Notwithstanding the foregoing, the Plan shall
continue in effect to the extent necessary to settle all
matters relating to the payment of bonuses awarded prior to
any such termination or suspension.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Pretax income $322,563 $304,651 $253,449 $ 26,376 $257,426
Minority interest in subsidiaries
having fixed charges(*) 45,098 52,838 27,076 8,565 34,800
Less undistributed equity in
(earnings) losses of investees 10,363 31,353 (1,559) 49,010 (25,067)
Fixed charges:
Interest expense 88,402 88,144 124,633 114,803 153,836
Debt discount (premium) and expense (701) (1,174) (1,023) 1,240 5,273
One-third of rentals 10,152 9,279 9,471 5,119 5,801
EARNINGS $475,877 $485,091 $412,047 $205,113 $432,069
Fixed charges:
Interest expense $ 88,402 $ 88,144 $124,633 $114,803 $153,836
Debt discount (premium) and expense (701) (1,174) (1,023) 1,240 5,273
One-third of rentals 10,152 9,279 9,471 5,119 5,801
Accrued distributions on subsidiary
trust preferred securities 15,499 1,031 - - -
FIXED CHARGES $113,352 $ 97,280 $133,081 $121,162 $164,910
Fixed charges and preferred dividends:
Fixed charges - per above $113,352 $ 97,280 $133,081 $121,162 $164,910
Preferred dividends 21,967 25,190 25,376 25,709 26,122
FIXED CHARGES AND PREFERRED DIVIDENDS $135,319 $122,470 $158,457 $146,871 $191,032
Ratio of Earnings to Fixed Charges 4.20 4.99 3.10 1.69 2.62
Earnings in Excess of Fixed Charges $362,525 $387,811 $278,966 $ 83,951 $267,159
Ratio of Earnings to Fixed
Charges and Preferred Dividends 3.52 3.96 2.60 1.40 2.26
Earnings in Excess of Fixed
Charges and Preferred Dividends $340,558 $362,621 $253,590 $ 58,242 $241,037
</TABLE>
(*) Amounts include accrued distributions on trust preferred securities.
E-2
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31,
1997. All corporations are subsidiaries of AFC and, if indented,
subsidiaries of the company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
American Premier Underwriters, Inc. Pennsylvania 81%
Pennsylvania Company Delaware 100
Atlanta Casualty Company Illinois 100
Infinity Insurance Company Indiana 100
Leader National Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Holding Corporation Ohio 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 81
AAG Holding Company, Inc. Ohio 100
Great American Life Insurance Company Ohio 100
Loyal American Life Insurance Company Alabama 100
Prairie National Life Insurance Company South Dakota 100
American Memorial Life Insurance Company South Dakota 100
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
American Empire Surplus Lines Insurance Company Delaware 100
American National Fire Insurance Company New York 100
Brothers Property Corporation Ohio 80
Mid-Continent Casualty Company Oklahoma 100
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AFC owns a significant portion and accounts for
under the equity method.
E-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation Form 10-K for December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $231,227
<SECURITIES> 11,299,878<F1>
<RECEIVABLES> 691,005
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,737,982
<CURRENT-LIABILITIES> 0
<BONDS> 480,745
0
0
<COMMON> 9,625
<OTHER-SE> 1,311,704
<TOTAL-LIABILITY-AND-EQUITY> 15,737,982
<SALES> 0
<TOTAL-REVENUES> 4,052,902
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 331,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,155
<INCOME-PRETAX> 333,764
<INCOME-TAX> 125,227
<INCOME-CONTINUING> 208,537
<DISCONTINUED> 0
<EXTRAORDINARY> (7,147)
<CHANGES> 0
<NET-INCOME> $201,390
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $201 million.
<F2>Not applicable since all common shares are owned by American Financial
Group, Inc.
</FN>
</TABLE>
