<PAGE>
SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-
12
AMERICAN FINANCIAL CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
Title of each class of securities to which transaction
applies:
Aggregate number of securities to which transaction
applies:
Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined)
Proposed maximum aggregate value of transaction:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identity the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held on May 28, 1998
To our Shareholders:
The Annual Meeting of Shareholders of American Financial
Corporation will be held on Thursday, May 28, 1998, at 10:30
a.m., at The Cincinnatian Hotel, 601 Vine Street, Cincinnati,
Ohio. The purposes of the meeting are:
1. To elect eight directors; and
2. To transact such other business as may
properly come before the meeting or any
adjournment thereof.
Only holders of record of Common Stock and Series J
Preferred Stock of the Company at the close of business on March
31, 1998 are entitled to receive notice of and to vote at the
meeting or any adjournment thereof.
You are invited to be present at the meeting so that you can
vote in person. Whether or not you plan to attend the meeting,
please date, sign and return the accompanying proxy form in the
enclosed, postage-paid envelope. If you do attend the meeting,
you may either vote by proxy or revoke your proxy and vote in
person. You may also revoke your proxy at any time before the
vote is taken at the meeting by written revocation or by
submitting a later-dated proxy form.
Sincerely,
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Cincinnati, Ohio
April 21, 1998
<PAGE>
AMERICAN FINANCIAL CORPORATION
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of American
Financial Corporation ("AFC" or the "Company") for use at the
Annual Meeting of Shareholders (the "Meeting") to be held on
Thursday, May 28, 1998, and any adjournment thereof. The Meeting
will be held concurrently with the meeting of American Financial
Group, Inc. ("AFG"), the Company's parent company. The
approximate mailing date of this Proxy Statement and accompanying
proxy form is April 21, 1998. At the Meeting, shareholders will
be asked to elect eight directors and to transact such other
business as may properly come before the Meeting or any
adjournment thereof.
VOTING AT THE MEETING
Record Date; Shares Outstanding
As of March 31, 1998, the record date for determining
shareholders entitled to notice of and to vote at the Meeting
(the "Record Date"), the Company had outstanding two classes of
voting securities, its common stock, no par value ("Common
Stock") and its Series J Preferred Stock ("Preferred Stock"). At
the Record Date, 10,593,000 shares of Common Stock were
outstanding, all of which were held by AFG, and 2,886,161 shares
of Preferred Stock were outstanding. Each share of outstanding
Common Stock and Preferred Stock is entitled to one vote on each
matter to be presented at the Meeting. Abstentions and broker
non-votes will have no effect on any item voted on at the
Meeting.
Proxies
If a choice is specified on a properly executed proxy form,
the shares will be voted accordingly. If a proxy form is signed
without a preference indicated, those shares will be voted "FOR"
the election of the eight nominees proposed by the Board of
Directors. If any other matters properly come before the Meeting
or any adjournment thereof, each properly executed proxy form
will be voted in the discretion of the proxies named therein.
<PAGE>
Shareholders may vote in person or by proxy at the Meeting.
Proxies given may be revoked at any time by filing with the
Company either a written revocation or a duly executed proxy
bearing a later date, or shareholders may appear at the Meeting
and vote in person.
Solicitation of proxies is being made by management at the
direction of the Company's Board of Directors, without additional
compensation, through the mail, in person, by facsimile or by
telephone. The cost will be borne by the Company. In addition,
the Company will request brokers and other custodians, nominees
and fiduciaries to forward proxy soliciting material to the
beneficial owners of shares held of record by such persons, and
the Company will reimburse them for their expenses in so doing.
Adjournment and Other Matters
Approval of a motion for adjournment or other matters
brought before the Meeting requires the affirmative vote of a
majority of the shares voting at the Meeting. Management knows
of no other matters to be presented at the Meeting other than
those stated in the Notice.
Principal Shareholders
The following shareholders are the only persons known by the
Company to own beneficially 5% or more of its outstanding voting
securities as of March 31, 1998:
Name and Address Amount and Nature of
of Voting Percent of
Beneficial Owner Securities Voting Securities
- -------------------- ------------------- -----------------
American Financial
Group, Inc. (a) 10,593,000 78.6%
One East Fourth Street shares
Cincinnati, Ohio 45202 of Common Stock
(a) Carl H. Lindner, Carl H. Lindner III, S. Craig Lindner,
Keith E. Lindner and trusts for their benefit (collectively
the "Lindner Family") are the beneficial owners of
approximately 44% of the voting stock of AFG. AFG and the
Lindner Family may be deemed to be controlling persons of
the Company.
2
<PAGE>
PROPOSAL Election of Directors
The Board of Directors has nominated eight directors to hold
office until the next Annual Meeting of Shareholders and until
their successors are elected and qualified. If any of the
nominees should become unable to serve as a director, the proxies
will be voted for any substitute nominee designated by the Board
of Directors but, in any event, no proxy may be voted for more
than eight nominees. The eight nominees who receive the greatest
number of votes will be elected.
The nominees for election to the Board of Directors are CARL
H. LINDNER, KEITH E. LINDNER, CARL H. LINDNER III, S. CRAIG
LINDNER, THEODORE H. EMMERICH, JAMES E. EVANS, THOMAS M. HUNT and
WILLIAM R. MARTIN. All of these nominees were elected directors
at the Company's last Annual Meeting of Shareholders held on
December 2, 1997. Three directors who were elected at that
meeting are not standing for election. William W. Verity
resigned as a director in January 1998 and Messrs. Gregory C.
Thomas and Alfred W. Martinelli have indicated to management that
they did not wish to be nominated to serve past the date of the
Meeting. See "Management" below for information concerning the
background, securities holdings, remuneration and certain other
matters relating to the nominees.
The Board of Directors recommends that shareholders vote FOR
the election of the eight nominees as directors.
3
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Director or
Age* Position Executive Since
<S> <C> <C> <C>
Carl H. Lindner 78 Chairman of the Board
and Chief Executive Officer 1959
S. Craig Lindner 43 Co-President and a Director 1979
Keith E. Lindner 38 Co-President and a Director 1981
Carl H. Lindner III 44 Co-President and a Director 1980
Theodore H. Emmerich 71 Director 1995
James E. Evans 52 Senior Vice President,
General Counsel and a
Director 1976
Thomas M. Hunt 74 Director 1995
William R. Martin 69 Director 1995
Sandra W. Heimann 55 Vice President 1984
Robert C. Lintz 64 Vice President 1979
Thomas E. Mischell 50 Senior Vice President - Taxes 1985
Fred J. Runk 55 Senior Vice President and Treasurer 1978
*As of March 31, 1998
Carl H. Lindner (Chairman of the Executive Committee) Mr.
Lindner is the Chairman of the Board and Chief Executive Officer
of the Company. During the past five years, Mr. Lindner has also
been Chairman of the Board and Chief Executive Officer of
AFG. He is Chairman of the Board of Directors of American
Annuity Group, Inc. ("AAG") and Chiquita Brands International,
Inc. ("Chiquita"). Mr. Lindner is the father of Keith E.
Lindner, Carl H. Lindner III and S. Craig Lindner.
S. Craig Lindner (Member of the Executive Committee) Since
March 1996, Mr. Lindner has served as Co-President and a director
of the Company. For over five years, Mr. Lindner has been
President of AAG, an 81%-owned subsidiary of the Company that
markets tax-deferred annuities principally to employees of
educational institutions. Mr. Lindner is also President of
American Money Management Corporation ("AMMC"), a subsidiary of
AFC which provides investment services for the Company and its
affiliated companies. Mr. Lindner is also a director of AAG and
AFG.
4
<PAGE>
Keith E. Lindner (Member of the Executive Committee) Since
March 1996, Mr. Lindner has served as Co-President and a director
of the Company. In March 1997, Mr. Lindner was named Vice
Chairman of the Board of Directors of Chiquita, a worldwide
marketer and producer of bananas and other food products in which
the Company has a 37.5% ownership interest. For more than five
years prior to that time, Mr. Lindner had been President and
Chief Operating Officer and a director of Chiquita. Mr. Lindner
is also a director of AFG.
Carl H. Lindner III (Member of the Executive Committee) Mr.
Lindner was President of AFG's predecessor from February 1992
until he became Co-President in March 1996. During the last five
years, Mr. Lindner has been President of Great American Insurance
Company ("Great American"), the principal property and casualty
insurance subsidiary of AFC. Mr. Lindner is also a director of
AFG.
Theodore H. Emmerich (Chairman of the Audit Committee;
Member of the Compensation Committee) Until his retirement in
1986, Mr. Emmerich was managing partner of the Cincinnati office
of the independent accounting firm of Ernst & Whinney. He is
also a director of AFG, Carillon Fund, Inc., Carillon Investment
Trust, Gradison Custodial Trust, Gradison-McDonald Municipal
Custodial Trust, Gradison-McDonald Cash Reserve Trust and Summit
Investment Trust.
James E. Evans Since April 1995, Mr. Evans has served as
Senior Vice President and General Counsel of the Company. For
more than five years prior thereto, he had been Vice President
and General Counsel of AFC. Mr. Evans is also a director of AFG.
Thomas M. Hunt (Member of the Compensation Committee)
During the past five years, Mr. Hunt has been Chairman of the
Board of Hunt Petroleum Corporation, an oil and gas production
company. He is also a director of AFG.
William R. Martin (Chairman of the Compensation Committee;
Member of the Audit Committee) During the past five years, Mr.
Martin has been Chairman of the Board (since 1993) and President
and Chief Executive Officer (until 1993) of MB Computing, Inc., a
computer software and services company. Mr. Martin is also a
director of AAG and AFG.
Thomas E. Mischell Since April 1995, Mr. Mischell has
served as Senior Vice President - Taxes of the Company. For more
than five years prior thereto, he had served as a Vice President
of AFC.
5
<PAGE>
Fred J. Runk Since April 1995, Mr. Runk has served as Senior
Vice President and Treasurer of the Company. For more than five
years prior thereto, he had served as Vice President and
Treasurer of AFC.
Sandra W. Heimann has served as a Vice President of the
Company for more than five years.
Robert C. Lintz has served as a Vice President of the
Company for more than five years.
In December 1993, Great American Communications Company,
which subsequently changed its name to Citicasters Inc.,
completed a comprehensive financial restructuring that included a
prepackaged plan of reorganization under Chapter 11 of the
Bankruptcy Code. Messrs. Carl H. Lindner, Mischell and Runk had
been executive officers of that company within two years before
its bankruptcy reorganization. The Company sold its interest in
Citicasters in September 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires AFC's officers,
directors and persons who own more than ten percent of AFC's
voting stock to file reports of ownership with the Securities and
Exchange Commission and to furnish AFC with copies of these
reports. The Company believes that all filing requirements were
met during 1997.
Securities Ownership
The following table sets forth information, as of March 31,
1998, concerning the beneficial ownership of equity securities of
the Company and its subsidiaries by each director, nominee for
director, the executive officers named in the Summary
Compensation Table (see "Compensation" below) and by all
directors and executive officers as a group. Such information is
based on data
6
<PAGE>
furnished by the persons named. Except as set forth in the
following table, no director or executive officer beneficially
owned 1% or more of any class of equity security of the Company
or any of its subsidiaries outstanding at March 31, 1998.
Amount and Nature of Beneficial Ownership (a)
---------------------------------------------
Name of Shares of Common Shares of Preferred
Beneficial Owner Stock Held Stock Held
- ---------------------------------------- --------------------
Carl H. Lindner 10,593,000 (b) ---
Carl H. Lindner III 10,593,000 (b) ---
S. Craig Lindner 10,593,000 (b) ---
Keith E. Lindner 10,593,000 (b) ---
Theodore H. Emmerich --- ---
James E. Evans --- ---
Thomas M. Hunt --- ---
William R. Martin --- 40,126 (b)
All directors and executive
officers as a group
(12 persons) 10,593,000 (c) 60,684 (d)
(a) Does not include the following ownership interests in AAG
common stock: Messrs. Emmerich, Evans, Hunt, S.C. Lindner
and Martin, and all directors and executive officers as a
group beneficially own 1,561; 19,638; 382; 69,308; 10,632
and 164,273 shares, respectively. Also excludes the
following ownership of Chiquita common stock: Messrs.
Emmerich, C.H. Lindner and K.E. Lindner, and all directors
and executive officers as a group beneficially own 1,000;
44,873; 13,759 and 268,963 shares, respectively. This table
also excludes the ownership of shares of common stock of
AFG, the Company's parent, as follows: Carl H. Lindner -
6,735,045; Carl H. Lindner III - 4,483,665; S. Craig Lindner
- 4,199,244; Keith E. Lindner - 6,392,209; Mr. Emmerich -
18,663, Mr. Evans - 135,301; Mr. Hunt - 17,991; Mr. Martin -
42,044; and all directors and executive officers as a group
- 22,845,708.
7
<PAGE>
(b) Represents 1.4% of the Preferred Stock outstanding.
(c) Represents shares held by AFG. The Lindner Family may be
deemed to be the beneficial owners of these shares, which
represent 100% of the Common Stock outstanding.
(d) Represents 2.1% of the Preferred Stock outstanding.
8
<PAGE>
COMPENSATION
The following table summarizes the aggregate cash
compensation for 1997, 1996 and 1995 of the Company's Chairman of
the Board and Chief Executive Officer and its four other most
highly compensated executive officers during 1997 (such five
executive officers being herein referred to as the "Named
Executive Officers"). Such compensation includes amounts paid by
AFC and AFG as well as its subsidiaries and certain affiliates
during the years indicated.
</TABLE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
Annual Compensation Long-Term
Compensation
---------------------------------- ------------------
Securities Under
Name Other Annual lying All Other
and Salary Bonus Compensation Options Granted Compensation
Principal Position Year (a) (b) (c) (# of Shares) (d)
- ---------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner 1997 $957,000 $370,000 $107,000 --- $75,000
Chairman of the Board 1996 913,000 900,000 156,000 --- 118,400
and Chief Executive 1995 1,364,000 900,000 254,000 --- 169,000
Officer
Keith E. Lindner 1997 957,000 370,000 14,000 50,000 31,000
Co-President 1996 917,000 900,000 28,000 --- 31,000
1995 935,000 900,000 --- 400,000 30,000
Carl H. Lindner III 1997 957,000 370,000 117,000 50,000 34,000
Co-President 1996 917,000 900,000 174,000 --- 60,500
1995 1,076,000 900,000 223,000 --- 103,000
S. Craig Lindner 1997 957,000 370,000 132,000 50,000 34,000
Co-President 1996 917,000 900,000 137,000 --- 32,000
1995 1,121,000 900,000 142,000 388,181 83,000
James E. Evans 1997 957,000 350,000 2,000 30,000 260,000
Senior Vice President 1996 917,000 639,000 14,000 --- 49,500
and General Counsel 1995 948,000 850,000 10,000 150,000 58,000
</TABLE>
9
<PAGE>
(a) This column includes salary paid by Chiquita to Carl H.
Lindner of $200,000 in 1997 and 1996 and $269,000 in 1995,
and to Keith E. Lindner of $381,000 in 1997, $900,000 in
1996 and $935,000 in 1995.
(b) Bonuses are for the year shown, regardless of when paid.
Approximately one-fourth of the 1997 and 1996 bonus for each
individual was paid in shares of AFG Common Stock.
(c) This column includes amounts for personal homeowners and
automobile insurance coverage, and the use of corporate
aircraft and value of automobiles as follows.
Aircraft &
Name Year Insurance Automobile
- ------------------------ ----- --------- -----------
Carl H. Lindner 1997 $19,000 $88,000
1996 16,000 140,000
1995 18,000 236,000
Keith E. Lindner 1997 6,000 8,000
1996 12,000 16,000
1995 -- --
Carl H. Lindner III 1997 23,000 94,000
1996 19,000 155,000
1995 17,000 206,000
S. Craig Lindner 1997 26,000 106,000
1996 23,000 114,000
1995 20,000 122,000
James E. Evans 1997 -- 2,000
1996 -- 14,000
1995 -- 10,000
10
<PAGE>
(d) Represents options to purchase shares of AFG common stock.
(e) Includes Company or subsidiary contributions or allocations
under the (i) defined contribution retirement plans and
(ii) employee savings plan in which the following Named
Executive Officers participate (and related accruals for
their benefit under the Company's benefit equalization plan
which generally makes up certain reductions caused by
Internal Revenue Code limitations in the Company's
contributions to certain of the Company's retirement plans)
and Company paid group life insurance as set forth below.
For Mr. Evans only, this column also includes the fair
market value of a special 1997 award of 5,000 shares of AFG
common stock.
<TABLE>
<CAPTION>
AFG
Auxiliary Retirement Directors' Savings Term
Name Year RASP Plan Fees Plan Life
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner 1997 $30,000 -- $2,000 $15,000 $28,000
1996 21,400 $55,000 4,500 14,500 23,000
1995 30,000 56,000 18,000 25,000 40,000
Keith E. Lindner 1997 30,000 -- -- -- 1,000
1996 30,000 -- -- -- 1,000
1995 30,000 -- -- -- --
Carl H. Lindner III 1997 30,000 -- 2,000 -- 2,000
1996 30,000 28,500 -- -- 2,000
1995 30,000 67,000 -- -- 6,000
S. Craig Lindner 1997 30,000 -- 2,000 -- 2,000
1996 30,000 -- -- -- 2,000
1995 30,000 -- -- 51,000 2,000
James E. Evans 1997 30,000 -- 2,000 -- 5,000
1996 30,000 -- -- 14,500 5,000
1995 30,000 -- -- 25,000 3,000
</TABLE>
11
<PAGE>
Stock Options
The tables set forth below disclose AFG stock options
granted to, or exercised by, the Named Executive Officers during
1997, as well as the number and value of unexercised options held
by them at December 31, 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1997
-----------------------
Individual Grants
--------------------------------------------------- Potential Realizable
Number of Securities Percent of Exercise Value at Assumed Annual
Underlying Options Total Price per Rates of Stock Price
Options Share Appreciation for Option
Granted to (fair market Term (b)
Granted (a) Employees value at date Expiration
Name (# of shares) in 1997 of grant Date 5% 10%
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carl H. Lindner - - - - - - -
Carl H. Lindner III AFG 50,000 6.5% $37.88 3/14/07 $1,191,12 $3,018,548
S. Craig lindner AFG 50,000 6.5% $37.88 3/14/07 $1,191,12 $3,018,548
Keith E. Lindner AFG 50,000 6.5% $37.88 3/14/07 $1,191,12 $3,018,548
James E. Evans AFG 30,000 3.9% $37.88 3/14/07 $714,676 $1,811,129
</TABLE>
(a) The options were granted under AFG's Stock Option Plan and
cover AFG Common Stock. They vest (become exercisable) to
the extent of 20% per year, beginning one year from the
respective dates of grant, and become fully exercisable in
the event of death, disability or retirement or in the event
of involuntary termination of employment without cause
within one year after a change of control of AFG.
(b) Represents the hypothetical future values that would be
realizable if all of the options were exercised immediately
prior to their expiration in 2007 and the market price of
AFG's Common Stock had appreciated in value through the year
2007 at the annual rate of 5% (to $61.70 per share) or 10%
(to $98.25 per share). Such hypothetical future values have
not been discounted to their respective present values,
which are lower.
12
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
Shares Number of Securities
Acquir- Underlying Unexer- Value of Unexercised
ed on cised Options In-the-Money Options
Exer- at Year End at Year End (a)
cise -------------------- ---------------------
(# of Value Exer- Unexer- Exer- Unexer-
Name Company Shares) Realized cisable cisable cisable cisable
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carl H. Lindner AFG - - 41,818 10,000 $703,187 $121,225
Carl H. Lindner III AFG - - 400,000 50,000 $6,536,883 $121,625
S. Craig Lindner AFG - - 167,091 282,909 $2,744,976 $3,927,940
Keith E. Lindner AFG - - 160,000 290,000 $2,614,800 $4,043,825
James E. Evans AFG - - 61,000 120,000 $624,083 $995,700
AFEI(b) 115,000 $1,878,750 - - - -
</TABLE>
(a) The value of unexercised in-the-money options is calculated
based on the closing market price on December 31, 1997 for
AFG's Common Stock on the New York Stock Exchange of
$40.3125 per share.
(b) American Financial Enterprises, Inc., formerly an 83%-owned
subsidiary of the Company, which became wholly-owned in
December 1997.
Compensation Committee Report
The Compensation Committee of the Board of Directors
consists of three directors, none of whom is an employee of the
Company, AFG or any of its subsidiaries. This Committee also
acts as the Compensation Committee for AFG. The Committee's
functions include reviewing and making recommendations to the
Board of Directors with respect to the compensation of the
Company's senior executive officers, as defined from time to time
by the Board. The term senior executive officers currently
includes the Chairman of the Board and Chief Executive Officer
(the "CEO"), the Co-Presidents and each other executive officer
whose annual base salary exceeds $500,000. The Compensation
Committee has the exclusive authority to grant stock options
under AFG's Stock Option Plan to employees of the Company and its
subsidiaries, including senior executive officers.
Compensation of Executive Officers. AFG's compensation
policy for all executive officers has three principal components:
annual base salary, annual incentive bonuses and stock option
grants.
Before decisions were made regarding 1997 compensation for
senior executives, the Committee first had discussions with
senior executives to solicit their thoughts regarding
compensation. Based in part on such discussions as well as AFG's
financial results for the preceding year, the Committee
deliberated and formed its recommendations, and presented its
determinations regarding salary and bonus to the full Board for
its review and approval. The compensation decisions discussed in
this report conformed with recommendations made by the Committee,
the CEO and the Co-Presidents.
Annual Base Salaries. The Committee approved annual base
salaries and salary increases for senior executive officers that
were appropriate, in the Committee's subjective judgment, for
their respective positions and levels of responsibilities. In
March 1997, the Committee approved the 1997 salaries of the CEO,
the Co-Presidents and the other senior executive officers, noting
that such salaries would be about 5% more than in 1996 and 1995.
Annual Bonuses. As in 1996, in 1997 the Committee developed
an annual bonus plan for the CEO, the Co-Presidents and the
senior executive officers that would make a substantial portion
of their total compensation dependent on the Company's
performance, including achievement of pre-established earnings
per share targets.
The annual bonus plan for 1997 made 60% of each
participant's annual bonus dependent on AFG attaining certain
earnings per share targets and 40% on AFG's overall performance,
as determined by the Committee. A significant aspect of the 1997
annual bonus plan is that it provided that 25% of any bonuses be
paid in AFG Common Stock. As in the grant of stock options
discussed below, the Committee believes that payment of a
substantial portion of annual bonuses in AFG Common Stock align
further the interests of AFG's senior executives with those of
its shareholders. The Committee also selected the senior
executive officers whose 1997 bonus would be subject to this
plan, including the CEO, the Co-Presidents and the Senior Vice
Presidents. The Committee recommended to the Board the earnings
per share targets that were the measure for the greater part of
such bonus payments.
14
<PAGE>
Under the 1997 annual bonus plan, the bonus target amount
for the CEO and each of the Co-Presidents was $925,000, with 0%
to 150% of $555,000 (60% of $925,000) to be paid depending on
AFG's earnings per share for 1997 allocable to the Company's
insurance operations (as determined pursuant to the Committee's
annual bonus plan guidelines) and 0% to 150% of $370,000 (40% of
$925,000) to be paid based on AFG's performance, as determined by
the Committee. In recommending the 1997 annual bonus plan to the
Board for adoption in March 1997, the Committee noted that no
bonus should be paid under the plan if 1997 earnings per share
from insurance operations are less than 75% of the 1997 goals for
such earnings. Such earnings per share were less than 75% of the
1997 goals and as a result, no 1997 bonus allocable to the
earnings per share component was paid.
The Committee then evaluated AFG's performance during 1997.
The Committee considered a number of factors, with no relative
weight being given to any specific factor. In determining that
each of the CEO and the Co-Presidents should receive $370,000
(100% of the target amount under the company performance
component), the Committee concluded that a number of 1997
developments enhanced the value and operations of AFG and its
subsidiaries, including maintaining the debt-to-capital ratio in
a range desirable for investment grade companies, other favorable
operating criteria, successfully completing comprehensive
restructurings to simplify AFG's corporate structure, selling a
technology subsidiary and the upgrade of the debt ratings of AFG
and certain AFG subsidiaries. The Board adopted all of the
Committee's recommendations with respect to the determination of
amounts paid under the annual bonus plan for 1997. Under the
1997 Plan, 25% of the bonus payment was paid in AFG Common Stock.
The annual base salary and bonuses received by the CEO and
the Co-Presidents from AFG and its affiliates are virtually
identical because the Committee views them as working as a
management team whose skills and areas of expertise complement
each other.
In 1993, Congress enacted a $1 million ceiling on tax-
deductible remuneration paid after January 1, 1994 to the five
most highly compensated executive officers of a publicly held
corporation. The limitation does not apply to remuneration
payable solely on account of the attainment of one or more
performance goals pursuant to a plan approved by the compensation
committee of outside directors. The Company does not anticipate
that this limitation will apply to the compensation paid to any
of its employees in 1997.
15
<PAGE>
Stock Option Grants. Stock options represent an important
part of AFG's performance-based compensation plan. The Committee
believes that AFG shareholders' interests are well served by
aligning AFG's senior executives' interests with those of its
shareholders through the grant of stock options in addition to
paying a portion of any annual bonus in AFG Common Stock.
Options under AFG's Stock Option Plan are granted at exercise
prices equal to the fair market value of Common Stock on the date
of grant and vest at the rate of 20% per year. The Committee
believes that these features provide an optionee with substantial
incentive to maximize AFG's long-term success. Options for
50,000 shares were granted to the Co-Presidents and additional
options were granted to the other senior executives of AFG in
1997. No options were granted to the CEO in 1997.
Other Information. In April 1998, the Committee discussed
the 1998 salaries, bonuses and stock option grants of the CEO,
the Co-Presidents and certain other senior executives. The
Committee approved the 1998 salaries for such persons which are
the same as in 1997 for the CEO and each of the Co-Presidents and
the same bonus target amounts for them for 1998 as in 1997.
Earlier in 1998, the Committee granted each of the Co-Presidents
options to purchase 40,000 shares of AFG Common Stock.
Members of the
Compensation Committee: William R.Martin, Chairman
Theodore H. Emmerich
Thomas H. Hunt
Performance Graph
No performance graph is included as the Company's Common
Stock is not publicly traded.
<PAGE>
Certain Transactions
AFC and its subsidiaries have had and expect to continue to
have transactions with AFC's directors, officers, principal
shareholders, their affiliates and members of their families.
AFC believes that the financial terms of these transactions are
comparable to those that would apply to unrelated parties and are
fair to AFC.
Members of the Lindner Family are the principal owners of
Provident Financial Group, Inc. ("Provident"). AFC provides
security guard and surveillance services at the main office of
Provident for which Provident paid $92,000 in 1997. Provident
leases its main banking and corporate office from AFC for which
Provident paid rent of $1,963,000 in 1997. In addition, a former
subsidiary of AFG provided Year 2000 programming and consulting
services to Provident in 1997 for which Provident paid $164,000.
In July 1997, Carl H. Lindner and a subsidiary of AFC
purchased 51% and 49%, respectively, of common stock of a newly
incorporated entity formed to acquire the assets of a company
engaged in the production of ethanol. The AFC subsidiary
invested $4.9 million and Mr. Lindner invested $5.1 million; the
asset purchase was completed in December 1997. In connection
with their investment, the AFC subsidiary and Mr. Lindner entered
into a Shareholders' Agreement which provides, among other
things, for restrictions on transfer of shares of such company
and that Mr. Lindner will have the ability to nominate a majority
of such company's directors. Certain AFC subsidiaries have
entered into a credit facility under which the ethanol producer
may borrow up to $10 million at a rate of prime plus 3%. The
highest outstanding balance during 1997 was $1.2 million, all of
which was repaid in 1997.
In December 1997, AFC purchased $138,000 of ice cream from
United Dairy Farmers, Inc. ("UDF"). UDF is owned by one of Carl
H. Lindner's brothers and his family.
During 1997, AFC and its subsidiaries chartered an aircraft
from an entity owned by one of Carl H. Lindner's brothers. The
total charges for such aircraft usage was $678,000.
17
<PAGE>
Directors' Compensation
AFC's Board of Directors receives no annual compensation
from AFC. However, they are paid as directors of AFG, as
follows:
Pursuant to the AFG Non-Employee Directors' Compensation
Plan (the "Directors' Plan") implemented in 1996, all directors
who are not officers or employees of AFG are paid the following
fees: an annual retainer of $40,000; an additional annual
retainer of $12,000 for each Board Committee on which the non-
employee director serves; and an attendance fee of $1,000 for
each Board or Committee meeting attended. Non-employee directors
who become directors during the year receive a pro rata portion
of these annual retainers. The retainers and fees to be paid
under the Directors' Plan are reviewed by the Board of Directors
from time to time and are subject to change at its discretion.
In order to align further the interests of AFG's non-
employee directors with the interests of its shareholders, the
Directors' Plan provides that a minimum of 50% of such directors'
annual retainers are paid through the issuance of shares of AFG
Common Stock.
The Board of Directors has a program under which a retiring
AFG director (other than an officer or employee of AFG or any of
its subsidiaries) will, if he has met certain eligibility
requirements, receive upon his retirement (in a lump sum or, at
his election, in deferred payments) an amount equal to five times
the then current annual director's fee. For purposes of this
program, retirement means resignation as a director or not being
nominated for reelection by shareholders as a director. To be
eligible for the retirement benefit, a person must have served as
a director for at least four years while not an officer or
employee of AFG or any of its subsidiaries. In addition, a
director will not become eligible for the retirement benefit
until reaching age 55. A director who receives a retirement
benefit must provide consulting services to AFG on request for
five years following retirement without further compensation
(except reimbursement for expenses). Under the program, a death
benefit equal to the retirement benefit will be paid (in lieu of
any retirement benefit under the program) to the designated
beneficiary or legal representative of any person who dies while
serving as a director, whether or not eligible for a retirement
benefit at time of death. This death benefit will not be
available to a director who at any time during the two years
immediately preceding death was an officer or employee of AFG or
any of its subsidiaries.
18
<PAGE>
In addition to providing for the grant of stock options to
key employees, the Stock Option Plan provides for automatic
annual grants of options to each non-employee director of AFG.
During 1997, each non-employee director was granted an option
under the foregoing provisions of the Stock Option Plan to
purchase 1,000 shares at an exercise price of $37.75 per share on
June 1, 1997, the exercise price being the fair market value of
AFG's Common Stock on the date of grant.
Committees and Meetings of the Board of Directors
The Company's Board of Directors held seven meetings and
took action in writing seven times in 1997. The Company's Board
of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. There is no Nominating Committee.
Executive Committee: The Executive Committee consists of
Carl H. Lindner (Chairman), Carl H. Lindner III, S. Craig Lindner
and Keith E. Lindner. The Committee's functions include
analyzing the future development of the business affairs and
operations of the Company, including further expansion of
businesses in which the Company is engaged and acquisitions and
dispositions of businesses. With certain exceptions, the
Executive Committee is generally authorized to exercise the
powers of the Board of Directors between meetings of the Board of
Directors. The Executive Committee consulted among themselves
informally many times throughout the year and took action in
writing on twelve occasions in 1997.
Audit Committee. The Audit Committee consists of Theodore
H. Emmerich (Chairman) and William R. Martin. Neither is an
officer or employee of the Company or any of its subsidiaries.
The Committee's functions include recommending to the Board of
Directors the engagement of independent accounting firms to audit
the financial statements of the Company and its subsidiaries and
to provide other audit-related services and recommending the
terms of such firms' engagements; reviewing the engagement of
independent accounting firms to provide non-audit services,
including the terms of their engagements; reviewing the adequacy
and implementation of the Company's internal audit function;
reviewing the policies, procedures and principles of the
management of the Company for purposes of conformity to the
standards required by the Foreign Corrupt Practices Act;
establishing procedures designed to provide and encourage timely
access to the Committee by the independent accounting firms
19
<PAGE>
engaged by the Company, its internal audit department and its
principal financial officers; and conducting such investigations
relating to the Company's financial affairs as the Committee or
the Board of Directors deems desirable. The Committee's
functions also include supervising, reviewing and reporting to
the Board of Directors on the performance of management
committees of the Company responsible for the administration of
the employee benefit plans of the Company and its subsidiaries.
The Audit Committee met five times in 1997.
Compensation Committee The Compensation Committee consists
of William R. Martin (Chairman), Theodore H. Emmerich and Thomas
M. Hunt. The functions of the Compensation Committee are
discussed under "Compensation - Compensation Committee Report."
The Compensation Committee met two times and took action in
writing on six occasions in 1997.
INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP served as the
Company's independent auditors for the fiscal year ended December
31, 1997. Representatives of that firm will attend the Meeting
and will be given the opportunity to comment, if they so desire,
and to respond to appropriate questions that may be asked by
shareholders. No auditor has yet been selected for the current
year because it is generally the practice of the Company not to
select independent auditors prior to the annual shareholders
meeting.
SHAREHOLDER PROPOSALS
If a shareholder desires to have a proposal included in the
proxy statement for the 1999 annual shareholders meeting, such
proposal must be received by the Company's Secretary at his
office by December 31, 1998 in order to be considered for
inclusion.
20
<PAGE>
REQUESTS FOR FORM 10-K
The Company will send, upon written request, without charge,
a copy of the Company's most current Annual Report on Form 10-K
to any shareholder who writes to Fred J. Runk, Senior Vice
President and Treasurer, American Financial Corporation, One East
Fourth Street, Cincinnati, Ohio 45202.
By order of the Board of Directors,
James C. Kennedy
Vice President and Secretary
Cincinnati, Ohio
April 21, 1998
<PAGE>
Pages F1 though F-35 which follow are taken from AFC's Annual
Report on Form 10-K for the year ended December 31, 1997. This
information is being included herein in accordance with Rule 14a-
3 promulgated under the Securities Act of 1934.
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
<PAGE>
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.
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.
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.
F-1
<PAGE>
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.
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<PAGE>
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-12
Consolidated Balance Sheet:
December 31, 1997 and 1996 F-13
Consolidated Statement of Earnings:
Years ended December 31, 1997, 1996 and 1995 F-14
Consolidated Statement of Changes in Shareholders' Equity:
Years ended December 31, 1997, 1996 and 1995 F-15
Consolidated Statement of Cash Flows:
Years ended December 31, 1997, 1996 and 1995 F-16
Notes to Consolidated Financial Statements F-17
"Selected Quarterly Financial Data" has been included in Note P to the
Consolidated Financial Statements.
_______________________________________________
F-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
