SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1998 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Series J Voting Cumulative Preferred Stock Pacific Exchange, Inc.
9-3/4% Debentures due April 20, 2004 Pacific Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
As of March 1, 1999, there were 10,593,000 shares of the
Registrant's Common Stock outstanding, all of which were owned by
American Financial Group, Inc. At that date there were 2,886,161
shares of Series J Voting Preferred Stock outstanding (all of which
were owned by non-affiliates). All shares of Common and Preferred
Stock are entitled to one vote per share and generally vote as a
single class. The aggregate market value of the Preferred Stock at
that date was approximately $79.7 million.
_____________
Documents Incorporated by Reference:
Proxy Statement for the 1999 Annual Meeting of Shareholders
(portions of which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN FINANCIAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 16
Other Companies 20
Investment Portfolio 20
Regulation 22
Item 2 - Properties 23
Item 3 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders (a)
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 25
Item 6 - Selected Financial Data 26
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk (b)
Item 8 - Financial Statements and Supplementary Data 37
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
Part III
Item 10 - Directors and Executive Officers of the Registrant 37
Item 11 - Executive Compensation 37
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 37
Item 13 - Certain Relationships and Related Transactions 37
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) The response to this Item is "none".
(b) The response to this Item is included in Item 7.
<PAGE>
Forward-Looking Statements The Private Securities Litigation Reform
Act of 1995 encourages corporations to provide investors with
information about the company's anticipated performance and provides
protection from liability if future results are not the same as
management's expectations. This document, chiefly in Items 1, 3, 5, 7
and 8, contains certain forward-looking statements that are based on
assumptions which management believes are reasonable, but by their
nature, inherently uncertain. Future results could differ materially
from those projected. Factors that could cause such differences
include, but are not limited to: changes in economic conditions
especially with regard to availability of and returns on capital,
regulatory actions, changes in legal environment, levels of
catastrophe and other major losses, availability of reinsurance, the
Year 2000 issue, and competitive pressures. AFC undertakes no
obligation to update any forward-looking statements.
<PAGE>
PART I
ITEM 1
Business
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
Introduction
American Financial Corporation ("AFC") is a holding company which,
through its subsidiaries, is engaged primarily in private passenger
automobile and specialty property and casualty insurance businesses
and in the sale of tax-deferred annuities and certain life and
supplemental health insurance products. AFC's property and casualty
operations originated in the 1800's and is one of the twenty five
largest property and casualty groups in the United States based on
statutory net premiums written. AFC was incorporated as an Ohio
corporation in 1955. Its address is One East Fourth Street,
Cincinnati, Ohio 45202; its phone number is (513) 579-2121. At
December 31, 1998, all of the outstanding Common Stock of AFC was
owned by American Financial Group, Inc. ("AFG").
At the close of business on December 31, 1996, AFG contributed to
AFC 81% of the common stock of American Premier Underwriters, Inc.
("APU" or "American Premier"). Because AFC and American Premier have
been under the common control of AFG since merger transactions
completed in April 1995 (the "Mergers"), 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
Mergers have been restated to include the accounts of American
Premier.
General
Generally, companies have been included in AFC's consolidated
financial statements when the ownership of voting securities has
exceeded 50%; for investments below that level but above 20%, AFC has
accounted for the investments as investees. (See Note E to AFC's
financial statements.) The following table shows AFC's percentage
ownership of voting securities of its significant affiliates over the
past several years:
Voting Ownership at December 31,
1998 1997 1996 1995 1994
American Premier Underwriters 81% 81% 81% (a) 42%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 82% 81% 81% 81% 80%
American Financial Enterprises 80% 80% 83% 83% 83%
Chiquita Brands International 37% 39% 43% 44% 46%
Citicasters - - (b) 38% 37%
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
The following summarizes the more significant changes in ownership
percentages shown in the above table.
<PAGE>
American Premier Underwriters In April 1995, APU became a
subsidiary of AFG as a result of the Mergers.
Chiquita Brands International During the second half of 1997 and
the first half of 1998, Chiquita issued an aggregate of 4.6 million
shares and 4.0 million shares of its common stock, respectively, in
connection with the purchase of new businesses.
Citicasters In 1996, the investment in Citicasters was sold to an
unaffiliated company.
1
<PAGE>
Property and Casualty Insurance Operations
Prior to agreeing in September 1998 to sell substantially all of
its Commercial lines division to the Ohio Casualty Corporation, AFC
managed and operated its property and casualty business in three major
business segments: Nonstandard Automobile Insurance, Specialty lines
and Commercial and Personal lines. Following the sale of its
Commercial lines division, AFC's property and casualty group is
engaged primarily in private passenger automobile and specialty
insurance businesses. Accordingly, AFC has realigned its property and
casualty group into two major business groups: Personal and Specialty.
Each group reports to an individual senior executive and is comprised
of multiple business units which operate autonomously but with strong
central financial controls and full accountability. Decentralized
control allows each unit the autonomy necessary to respond to local
and specialty market conditions while capitalizing on the efficiencies
of centralized investment, actuarial, financial and legal support
functions. AFC's property and casualty insurance operations employ
approximately 7,600 persons.
In December 1998, AFC completed the sale of the Commercial lines
division for approximately $300 million plus warrants to purchase
3 million shares of Ohio Casualty common stock. AFC may receive up to
an additional $40 million in the year 2000 based upon the retention
and growth of the insurance businesses acquired by Ohio Casualty. The
commercial lines sold generated net written premiums of approximately
$250 million in 1998 prior to the sale, $315 million in 1997 and
$314 million in 1996.
In January 1999, AFC agreed to acquire Worldwide Insurance Company
(formerly, Providian Auto and Home Insurance Company), from AEGON
Insurance Group for approximately $160 million. Worldwide is a
provider of direct response private passenger automobile insurance and
is licensed in 45 states. The acquisition will provide AFC with a
significant new distribution channel for its private passenger auto
insurance business and a variety of other insurance products. In
1998, Worldwide generated net written premiums of approximately
$121 million. Completion of the transaction is expected to occur in
the first half of 1999.
AFC operates in a highly competitive industry that is affected by
many factors which can cause significant fluctuations in their results
of operations. The property and casualty insurance industry has
historically been subject to pricing cycles characterized by periods
of intense competition and lower premium rates (a "downcycle")
followed by periods of reduced competition, reduced underwriting
capacity due to lower policyholders' surplus and higher premium rates
(an "upcycle"). The property and casualty insurance industry is
currently in an extended downcycle, which has lasted nearly a decade.
<PAGE>
The primary objective of AFC's property and casualty insurance
operations is to achieve underwriting profitability. Underwriting
profitability is measured by the combined ratio which is a sum of the
ratios of underwriting losses, loss adjustment expenses ("LAE"),
underwriting expenses and policyholder dividends to premiums. When
the combined ratio is under 100%, underwriting results are generally
considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio
does not reflect investment income, other income or federal income
taxes.
Management's focus on underwriting performance has resulted in a
statutory combined ratio averaging 103.5% for the period 1994 to 1998,
as compared to 105.5% for the property and casualty industry over the
same period (Source: "Best's Review/Preview - Property/Casualty" -
January 1999 Edition). AFC believes that its product line
diversification and underwriting discipline have contributed to the
Company's ability to consistently outperform the industry's
underwriting results. Management's philosophy is to refrain from
writing business that is not expected to produce an underwriting
profit even if it is necessary to limit premium growth to do so.
2
<PAGE>
Generally, while financial data is reported on a statutory basis
for insurance regulatory purposes, it is reported in accordance with
generally accepted accounting principles ("GAAP") for shareholder and
other investment purposes. In general, statutory accounting results
in lower capital surplus and net earnings than result from application
of GAAP. Major differences include charging policy acquisition costs
to expense as incurred rather than spreading the costs over the
periods covered by the policies; recording bonds and redeemable
preferred stocks primarily at amortized cost; netting of reinsurance
recoverables and prepaid reinsurance premiums against the
corresponding liability; requiring additional loss reserves; and
charging to surplus certain assets, such as furniture and fixtures and
agents' balances over 90 days old.
Unless indicated otherwise, the financial information presented for
the property and casualty insurance operations herein is presented
based on GAAP and includes for all periods (i) the insurance
operations of AFC and American Premier and (ii) the commercial lines
businesses sold up to the sale date.
The following table shows (in millions) certain information of
AFC's property and casualty insurance operations.
1998 1997 1996
Statutory Basis
Premiums Earned $ 2,657 $2,802 $2,821
Admitted Assets 6,463 6,983 6,603
Unearned Premiums 914 1,133 1,104
Loss and LAE Reserves 3,702 3,475 3,397
Capital and Surplus 1,840 1,916 1,659
GAAP Basis
Premiums Earned $ 2,699 $2,824 $2,845
Total Assets 10,053 9,212 8,623
Unearned Premiums 1,233 1,329 1,248
Loss and LAE Reserves 4,773 4,225 4,124
Shareholder's Equity 3,174 3,019 2,695
<PAGE>
The following table shows the size (in millions), segment and A.M.
Best rating of AFC's major property and casualty insurance
subsidiaries. AFC continues to focus on growth opportunities in what
it believes to be more profitable specialty and private passenger auto
businesses which represented the bulk of 1998 net written premiums.
Net Written Premiums
Company (A.M. Best Rating) Personal Specialty
Great American (A) $ 167 $ 995(*)
Republic Indemnity (A) - 162
Mid-Continent (A) - 108
National Interstate (A-) - 30
American Empire Surplus Lines (A+) - 17
Atlanta Casualty (A) 348 -
Infinity (A) 314 -
Windsor (A) 313 -
Leader (A-) 137 -
$1,279 $1,312
(*) Includes $250 million in premiums written by Great American's
Commercial lines division which was sold in 1998.
3
<PAGE>
The following table shows the performance of AFC's property and
casualty insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $2,609(a) $2,858 $2,788
Net earned premiums $2,699 $2,824 $2,845
Loss and LAE 2,001 2,076 2,052
Special A&E charge 214 - 80
Underwriting expenses 764 783 780
Policyholder dividends 9 7 14
Underwriting loss ($ 289) ($ 42) ($ 81)
GAAP ratios:
Loss and LAE ratio 82.1% 73.5% 75.0%
Underwriting expense ratio 28.3 27.7 27.4
Policyholder dividend ratio .3 .2 .5
Combined ratio (b) 110.7% 101.4% 102.9%
Statutory ratios:
Loss and LAE ratio 82.7% 73.4% 74.8%
Underwriting expense ratio 27.9 27.3 27.2
Policyholder dividend ratio .5 .7 .4
Combined ratio (b) 111.1% 101.4% 102.4%
Industry statutory combined ratio (c) 105.0% 101.6% 105.8%
(a) Before a reduction of $138 million for unearned premium
transfer related to the sale of the Commercial lines division.
(b) The 1998 combined ratios include effects of the strengthening
of insurance reserves relating to asbestos and other
environmental matters ("A&E") of 7.9 percentage points (GAAP)
and 8.0 percentage points (statutory); the 1996 combined ratios
include A&E increases of 2.8 percentage points.
(c) Ratios are derived from "Best's Review/Preview -
Property/Casualty" (January 1999 Edition).
As with other property and casualty insurers, AFC's operating
results can be adversely affected by unpredictable catastrophe losses.
Certain natural disasters (hurricanes, tornadoes, floods, forest
fires, etc.) and other incidents of major loss (explosions, civil
disorder, fires, etc.) are classified as catastrophes by industry
associations. Losses from these incidents are usually tracked
separately from other business of insurers because of their sizable
effects on overall operations. AFC generally seeks to reduce its
exposure to such events through individual risk selection and the
purchase of reinsurance. Major catastrophes in recent years included
midwestern hailstorms and tornadoes and Hurricanes Bonnie and Georges
in 1998 and Hurricane Fran in 1996. Total net losses to AFC's
insurance operations from catastrophes were $60 million in 1998;
$20 million in 1997; and $85 million in 1996. These amounts are
included in the tables herein.
4
<PAGE>
Personal
General The Personal group consists of the nonstandard auto group
along with the preferred/standard private passenger auto and other
personal insurance business.
The nonstandard automobile insurance companies underwrite primarily
private passenger automobile liability and physical damage insurance
policies for "nonstandard" risks. Nonstandard insureds are those
individuals who are unable to obtain insurance through standard market
carriers due to factors such as age, record of prior accidents,
driving violations, particular occupation or type of vehicle. Premium
rates for nonstandard risks are generally higher than for standard
risks. Total private passenger automobile insurance net premiums
written by insurance carriers in the United States in 1998 have been
estimated by A.M. Best to be approximately $120 billion. Because it
can be viewed as a residual market, the size of the nonstandard
private passenger automobile insurance market changes with the
insurance environment and grows when standard coverage becomes more
restrictive. When this occurs, the criteria which differentiate
standard from nonstandard insurance risks change. The size of the
voluntary nonstandard market is also affected by rate levels adopted
by state administered involuntary plans. According to A.M. Best, the
voluntary nonstandard market has accounted for about one-sixth of
total private passenger automobile insurance premiums written in
recent years.
Other personal insurance business consists primarily of
preferred/standard private passenger automobile and homeowners'
insurance. AFC's approach is to develop tailored rates for its
personal automobile customers based on a variety of factors, including
the driving record of the insureds. The approach to homeowners
business is to limit exposure in locations which have significant
catastrophic potential (such as windstorms, earthquakes and
hurricanes). During 1998, AFC had a reinsurance agreement under which
90% of its homeowners' business was reinsured.
The Personal group writes business in 48 states and holds licenses
to write policies in all states and the District of Columbia. The
U.S. geographic distribution of the Personal group's statutory direct
written premiums in 1998 compared to 1994, was as follows:
1998 1994 1998 1994
California 14.8% 2.5% Tennessee * % 4.8%
Georgia 10.1 9.3 Indiana * 3.3
Connecticut 10.0 7.6 Alabama * 3.3
Florida 9.4 9.7 Ohio * 2.8
New York 6.2 * Mississippi * 2.8
Pennsylvania 5.5 4.8 Oklahoma * 2.7
Texas 5.0 11.5 Washington * 2.5
New Jersey 3.3 2.2 Kentucky * 2.0
North Carolina 2.8 3.0 Virginia * 2.0
Arizona 2.6 4.9 Utah * 2.0
Missouri 2.0 2.4 Other 28.3 13.9
_______________ 100.0% 100.0%
(*) less than 2%
<PAGE>
Management believes that the Personal group's underwriting success
has been due, in part, to the refinement of various risk profiles,
thereby dividing the consumer market into more defined segments which
can be underwritten or priced properly. The Personal group generally
writes policies of short duration which allow more frequent rating
evaluations of individual risks, providing management greater
flexibility in the ongoing assessment of the business. In addition,
the Personal group has implemented cost control measures both in the
underwriting and claims handling areas.
5
<PAGE>
The following table shows the performance of AFC's Personal group
insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $1,279 $1,345 $1,384
Net earned premiums $1,290 $1,357 $1,448
Loss and LAE 958 1,019 1,146
Underwriting expenses 298 318 358
Policyholder dividends - (1) -
Underwriting profit (loss) $ 34 $ 21 ($ 56)
GAAP ratios:
Loss and LAE ratio 74.2% 75.1% 79.1%
Underwriting expense ratio 23.1 23.5 24.8
Policyholder dividend ratio - (.1) -
Combined ratio 97.3% 98.5% 103.9%
Statutory ratios:
Loss and LAE ratio 74.3% 75.2% 79.1%
Underwriting expense ratio 22.4 22.9 24.5
Combined ratio 96.7% 98.1% 103.6%
Industry statutory combined ratio (a) 103.5% 100.1% 103.6%
(a) Represents the personal lines industry statutory combined ratio
derived from "Best's Review/Preview - Property/Casualty"
(January 1999 Edition).
Marketing Each of the principal units in the Personal group is
responsible for its own marketing, sales, underwriting and claims
processing. These units each write policies primarily through several
thousand independent agents. The 1999 acquisition of Worldwide will
also enable AFC to sell its products through direct marketing
channels.
The Personal group had approximately 1.1 million policies in force
at December 31, 1998, just under 80% of which had policy limits of
$50,000 or less per occurrence. Most Personal group policies are
written for policy periods of six months or less.
Competition A large number of national, regional and local
insurers write private passenger automobile and homeowners' insurance
coverage. Insurers in this market generally compete on the basis of
price (including differentiation on liability limits, variety of
coverages offered and deductibles), geographic presence and ease of
enrollment and, to a lesser extent, reputation for claims handling,
financial stability and customer service. Management believes that
sophisticated data analysis for refinement of risk profiles has helped
the Personal group to compete successfully. The Personal group
attempts to provide selected pricing for a wider spectrum of risks and
with a greater variety of payment options, deductibles and limits of
liability than are offered by many of its competitors.
6
<PAGE>
Specialty
General The Specialty group emphasizes the writing of specialized
insurance coverage where AFC personnel are experts in particular lines
of business or customer groups. The following are examples of such
specialty businesses:
Executive Liability Markets liability coverage for attorneys
and for directors and officers of
businesses and nonprofit organizations.
Inland and Ocean Marine Provides coverage primarily for marine
cargo, boat dealers, marina
operators/dealers, excursion vessels,
builder's risk, contractor's equipment,
excess property and transportation cargo.
Japanese division Provides coverage primarily for workers'
compensation, commercial auto, umbrella,
and general liability of Japanese
businesses operating in the U.S.
Agricultural-related Provides multi-peril crop insurance covering
(allied lines) weather and disease perils as well as
coverage for full-time operating
farms/ranches and agribusiness operations
on a nationwide basis.
Workers' Compensation Writes coverage for prescribed benefits
payable to employees (principally in
California) who are injured on the job.
Nonprofit Liability Provides property, general/professional
liability, automobile, trustee liability,
umbrella and crime coverage for a wide
range of nonprofit organizations.
General Aviation Provides coverage for corporate and
private aircraft and airports.
Fidelity and Surety Bonds Provides surety coverage for various
types of contractors and public and
private corporations and fidelity and
crime coverage for government, mercantile
and financial institutions. Also,
provides export credit coverage and
insurance and risk management programs for
lending and leasing institutions.
Umbrella and Excess Provides large capacity coverage in excess
of primary layers.
<PAGE>
Specialization is the key element to the underwriting success of
these business units. Each unit has independent management with
significant operating autonomy to oversee the important operational
functions of its business such as underwriting, pricing, marketing,
policy processing and claims service. These specialty businesses are
opportunistic and their premium volume will vary based on current
market conditions. AFC continually evaluates expansion in existing
markets and opportunities in new specialty markets.
The commercial business sold included certain coverages in workers'
compensation, commercial multi-peril, umbrella (including primary and
excess layers) and commercial auto.
7
<PAGE>
The U.S. geographic distribution of the Specialty group statutory
direct written premiums in 1998 (adjusted for the sale of the
Commercial lines division) compared to 1994 is shown below.
1998 1994 1998 1994
California 27.4% 35.1% Ohio 2.3% 2.2%
Texas 8.4 4.1 New Jersey 2.1 3.8
New York 6.0 8.2 Pennsylvania 2.1 2.7
Massachusetts 4.6 3.4 Michigan * 3.1
Florida 4.6 2.8 North Carolina * 3.0
Illinois 4.0 3.2 Connecticut * 2.4
Oklahoma 3.7 2.9 Other 34.8 23.1
_______________ 100.0% 100.0%
(*) less than 2%
The following table sets forth a distribution of statutory net
written premiums for AFC's Specialty group by NAIC annual statement
line for 1998 (adjusted for the sale of the Commercial lines division)
compared to 1994.
1998 1994
Other liability 22.2% 15.8%
Workers' compensation 17.6 38.5
Inland marine 12.4 5.3
Auto liability 8.7 7.4
Commercial multi-peril 6.4 12.1
Allied lines 5.8 4.5
Fidelity and surety 5.7 2.0
General aviation 5.0 -
Auto physical damage 4.7 5.2
Ocean marine 4.0 3.1
Other 7.5 6.1
100.0% 100.0%
8
<PAGE>
The following table shows the performance of AFC's Specialty group
insurance operations (dollars in millions):
1998 1997 1996
Net written premiums $1,312(a) $1,468 $1,367
Net earned premiums $1,372 $1,429 $1,356
Loss and LAE 979 967 781
Underwriting expenses 451 454 406
Policyholder dividends 9 8 14
Underwriting profit (loss) ($ 67) $ - $ 155
GAAP ratios:
Loss and LAE ratio 71.4% 67.6% 57.5%
Underwriting expense ratio 32.9 31.8 29.9
Policyholder dividend ratio .7 .6 1.0
Combined ratio (b) 105.0% 100.0% 88.4%
Statutory ratios:
Loss and LAE ratio 72.1% 67.6% 57.8%
Underwriting expense ratio 34.1 31.5 30.2
Policyholder dividend ratio 1.0 1.4 .9
Combined ratio (b) 107.2% 100.5% 88.9%
Industry statutory combined ratio (c) 107.2% 103.7% 108.9%
(a) Before a reduction of $138 million for unearned premium
transfer related to the sale of the Commercial lines division.
(b) The 1996 combined ratios reflect a reduction of 3.0 percentage
points attributable to a reallocation of loss reserves in
connection with the strengthening of A&E reserves.
(c) Represents the commercial industry statutory combined ratio
derived from "Best's Review/Preview - Property/Casualty"
(January 1999 Edition).
Marketing The Specialty group operations direct their sales
efforts primarily through independent property and casualty insurance
agents and brokers, although portions are written through employee
agents. These businesses write insurance through several thousand
agents and brokers and have approximately 350,000 policies in force.
Competition These businesses compete with other individual
insurers, state funds and insurance groups of varying sizes, some of
which are mutual insurance companies possessing competitive advantages
in that all their profits inure to their policyholders. Because of
the specialty nature of these coverages, competition is based
primarily on service to policyholders and agents, specific
characteristics of products offered and reputation for claims
handling. Price, commissions and profit sharing terms are also
important factors. Management believes that sophisticated data
analysis for refinement of risk profiles, extensive specialized
knowledge and loss prevention service have helped AFC's Specialty
group compete successfully.
9
<PAGE>
Reinsurance
Consistent with standard practice of most insurance companies, AFC
reinsures a portion of its business with other reinsurance companies
and assumes a relatively small amount of business from other insurers.
Ceding reinsurance permits diversification of risks and limits the
maximum loss arising from large or unusually hazardous risks or
catastrophic events. The availability and cost of reinsurance are
subject to prevailing market conditions which may affect the volume
and profitability of business that is written. AFC is subject to
credit risk with respect to its reinsurers, as the ceding of risk to
reinsurers does not relieve AFC of its liability to its insureds.
Reinsurance is provided on one of two bases, facultative or treaty.
Facultative reinsurance is generally provided on a risk by risk basis.
Individual risks are ceded and assumed based on an offer and
acceptance of risk by each party to the transaction. Treaty
reinsurance provides for risks meeting prescribed criteria to be
automatically ceded and assumed according to contract provisions.
In order to limit the maximum loss arising out of any one
occurrence, AFC's insurance companies reinsure a portion of their
exposure under treaty and facultative reinsurance programs. The
following table presents (by type of coverage) the amount of each loss
above the specified retention maximum generally covered by treaty
reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
California Workers' Compensation (b) $150.0(c)
Other Workers' Compensation $ 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(d)
Property - Catastrophe 10.0 90.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) Less than $30,000.
(c) In 1998, AFC ceded 30% of its California workers' compensation
business through a reinsurance agreement.
(d) In 1998 and 1997, AFC ceded 90% and 80% of its homeowners
insurance coverage through a reinsurance agreement,
respectively.
AFC purchases facultative reinsurance providing coverage on a risk
by risk basis, both pro rata and excess of loss, depending on the risk
and available reinsurance markets. Due in part to the limited
exposure on individual policies, the nonstandard auto group is not
materially involved in reinsuring risks with third party insurance
companies.
<PAGE>
Included in the balance sheet caption "recoverables from reinsurers
and prepaid reinsurance premiums" were approximately $150 million on
paid losses and LAE and $1.5 billion on unpaid losses and LAE at
December 31, 1998. The collectibility of a reinsurance balance is
based upon the financial condition of a reinsurer as well as
individual claim considerations. Market conditions over the past few
years have forced many reinsurers into financial difficulties or
liquidation proceedings. At December 31, 1998, AFC's insurance
subsidiaries had allowances of approximately $92 million for doubtful
collection of reinsurance recoverables, most of which related to
unpaid losses. AFC regularly monitors the financial strength of its
reinsurers. This process periodically results in the transfer of
risks to more financially secure reinsurers. Substantially all
reinsurance is ceded to reinsurers having more than $100 million in
capital and A.M. Best ratings of "A-" or better. AFC's major
reinsurers include Reliance Insurance Company, Mitsui Marine and Fire
Insurance Company, American Re-Insurance Company, Employers
Reinsurance Corporation, NAC Reinsurance Corporation, Transatlantic
Reinsurance Company, Vesta Fire Insurance Corporation and Zurich
Reinsurance North America, Inc. These companies have assumed nearly
half of AFC's ceded reinsurance.
10
<PAGE>
Premiums written for reinsurance ceded and assumed are presented in
the following table (in millions):
1998 1997 1996
Reinsurance ceded $788(*) $614 $518
Reinsurance assumed - including
involuntary pools and associations 37 89 58
(*) Includes approximately $170 million of premiums written by the
Commercial lines division that were ceded to Ohio Casualty.
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of AFC's insurance subsidiaries.
This liability represents estimates of the ultimate net cost of all
unpaid losses and LAE and is determined by using case-basis
evaluations and actuarial projections. These estimates are subject to
the effects of changes in claim amounts and frequency and are
periodically reviewed and adjusted as additional information becomes
known. In accordance with industry practices, such adjustments are
reflected in current year operations.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy provisions,
product mix and other factors. Estimating the liability for unpaid
losses and LAE is inherently judgmental and is influenced by factors
which are subject to significant variation. Through the use of
analytical reserve development techniques, management monitors items
such as the effect of inflation on medical, hospitalization, material,
repair and replacement costs, general economic trends and the legal
environment. Although management believes that the reserves currently
established reflect a reasonable provision for the ultimate cost of
all losses and claims, actual development may vary materially.
AFC recognizes underwriting profit only when realization is
reasonably determinable and assured. In certain specialty businesses,
where experience is limited or where there is potential for volatile
results, AFC holds reasonable "incurred but not reported" reserves and
does not recognize underwriting profit until the experience matures.
Generally, reserves for reinsurance and involuntary pools and
associations are reflected in AFC's results at the amounts reported by
those entities.
Unless otherwise indicated, the following discussion of insurance
reserves includes the reserves of American Premier's subsidiaries for
only those periods following the Mergers. See Note O to the Financial
Statements for an analysis of changes in AFC's estimated liability for
losses and LAE, net and gross of reinsurance, over the past three
years on a GAAP basis.
11
<PAGE>
The following table presents the development of AFC's liability for
losses and LAE, net of reinsurance, on a GAAP basis for the last ten
years, excluding reserves of American Premier subsidiaries prior to
the Mergers. The top line of the table shows the estimated liability
(in millions) for unpaid losses and LAE recorded at the balance sheet
date for the indicated years. The second line shows the re-estimated
liability as of December 31, 1998. The remainder of the table
presents development as percentages of the estimated liability. The
development results from additional information and experience in
subsequent years. The middle line shows a cumulative deficiency
(redundancy) which represents the aggregate percentage increase
(decrease) in the liability initially estimated. The lower portion of
the table indicates the cumulative amounts paid as of successive
periods as a percentage of the original loss reserve liability.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,209 $2,246 $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489 $3,305
As re-estimated at
December 31, 1998 2,717 2,771 2,583 2,489 2,412 2,317 2,393 3,526 3,604 3,644 N/A
Liability re-estimated (*):
One year later 99.8% 100.4% 98.6% 99.3% 99.9% 98.1% 95.9% 98.7% 100.9% 104.5%
Two years later 100.0% 99.3% 97.7% 98.7% 98.2% 94.1% 99.3% 98.5% 105.9%
Three years later 99.7% 98.4% 97.4% 98.0% 95.2% 97.4% 99.9% 103.9%
Four years later 98.7% 98.2% 99.2% 97.3% 100.3% 98.9% 109.4%
Five years later 99.1% 101.1% 100.0% 103.0% 102.6% 109.7%
Six years later 103.0% 102.7% 106.3% 105.6% 113.6%
Seven years later 104.7% 109.2% 109.4% 116.9%
Eight years later 111.4% 112.2% 120.9%
Nine years later 114.5% 123.4%
Ten years later 123.0%
Cumulative deficiency
(redundancy) 23.0% 23.4% 20.9% 16.9% 13.6% 9.7% 9.4% 3.9% 5.9% 4.5% N/A
Cumulative paid as of:
One year later 29.4% 32.3% 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8% 41.7%
Two years later 48.6% 48.2% 43.2% 43.0% 43.7% 40.6% 42.5% 51.6% 58.0%
Three years later 59.8% 59.2% 55.3% 55.4% 54.2% 50.9% 54.4% 67.2%
Four years later 67.9% 67.6% 64.8% 63.3% 60.8% 59.1% 66.3%
Five years later 74.0% 74.3% 71.1% 67.8% 67.0% 68.0%
Six years later 79.5% 78.8% 74.5% 72.7% 74.0%
Seven years later 83.2% 81.2% 78.6% 78.6%
Eight years later 85.2% 84.8% 83.9%
Nine years later 88.5% 89.0%
Ten years later 89.9%
</TABLE>
(*) Reflects significant A&E charges and reallocations in 1994,
1996 and 1998 for prior years losses. Excluding these items, the
re-estimated liability shown above would decrease ranging from
approximately 17 percentage points in 1988 to 6 percentage points
in 1997.
<PAGE>
The following is a reconciliation of the net liability to the gross
liability for unpaid losses and LAE.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489 $3,305
Add reinsurance recoverables 611 730 704 720 736 1,468
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225 $4,773
As re-estimated at
December 31, 1998:
Net liability shown above $2,317 $2,393 $3,526 $3,604 $3,644
Add reinsurance recoverables 928 919 993 996 1,065
Gross liability $3,245 $3,312 $4,519 $4,600 $4,709 N/A
Gross cumulative deficiency
(redundancy) 19.0% 13.6% 10.3% 11.5% 11.5% N/A
</TABLE>
12
<PAGE>
The following table presents certain data from the table above,
adjusted to include reserves of American Premier's subsidiaries for
periods subsequent to their entry into the insurance business in 1989
and prior to the Mergers in 1995.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,616 $2,739 $2,793 $2,886 $3,029 $3,267
As re-estimated at
December 31, 1998 3,083 3,121 3,092 3,062 3,103 3,378
Cumulative deficiency
(redundancy) 17.9% 14.0% 10.7% 6.1% 2.4% 3.4%
Reconciliation of net
liability to gross liability:
As originally estimated:
Net liability shown above $3,029 $3,267
Add reinsurance recoverables 617 742
Gross liability $3,646 $4,009
As re-estimated at
December 31, 1998:
Net liability shown above $3,103 $3,378
Add reinsurance recoverables 970 953
Gross liability $4,073 $4,331
Gross cumulative deficiency
(redundancy) 11.7% 8.0%
</TABLE>
These tables do not present accident or policy year development
data. Furthermore, in evaluating the re-estimated liability and
cumulative deficiency (redundancy), it should be noted that each
percentage includes the effects of changes in amounts for prior
periods. For example, AFC's $214 million special charge for A&E
claims related to losses recorded in 1998, but incurred before 1988,
is included in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the previous years shown.
Conditions and trends that have affected development of the liability
in the past may not necessarily exist in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
The adverse development in the tables is due primarily to A&E
exposures for which AFC has been held liable under general liability
policies written years ago where environmental coverage was not
intended. Other factors affecting development included higher than
projected inflation on medical, hospitalization, material, repair and
replacement costs. Additionally, changes in the legal environment
have influenced the development patterns over the past ten years. For
example, changes in the California workers' compensation law in 1993
and subsequent court decisions, primarily in late 1996, greatly
limited the ability of insurers to challenge medical assessments and
treatments. These limitations, together with changes in work force
<PAGE>
characteristics and medical delivery costs, are contributing to an
increase in claims severity. Two changes influencing development
patterns in the 1980s were the trend towards an adverse litigious
climate and the change from contributory to comparative negligence.
The differences between the liability for losses and LAE reported
in the annual statements filed with the state insurance departments in
accordance with statutory accounting principles ("SAP") and that
reported in the accompanying consolidated financial statements in
accordance with GAAP at December 31, 1998, are as follows (in
millions):
Liability reported on a SAP basis, net of $511 million
of retroactive reinsurance $3,191
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (7)
Reserves of foreign operations 45
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables, net of allowance 1,468
Reclassification of allowance for uncollectable
reinsurance 77
Liability reported on a GAAP basis $4,773
13
<PAGE>
Asbestos and Environmental Reserves ("A&E") In defining
environmental exposures, the insurance industry typically includes
claims relating to polluted waste sites and asbestos as well as other
mass tort claims such as those relating to breast implants, repetitive
stress on keyboards, DES (a drug used in pregnancies years ago alleged
to cause cancer and birth defects) and other latent injuries.
Establishing reserves for A&E claims is subject to uncertainties
that are greater than those presented by other types of claims.
Factors contributing to those uncertainties include a lack of
sufficiently detailed historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage, and the
extent and timing of any such contractual liability. Courts have
reached different and sometimes inconsistent conclusions as to when a
loss is deemed to have occurred, what policies provide coverage, what
claims are covered, whether there is an insured obligation to defend,
how policy limits are determined and other policy provisions.
Management believes these issues are not likely to be resolved in the
near future.
Significant industrywide information concerning A&E reserves first
became broadly available in mid-1996 following the publication of new
data relating to that subject in the 1995 Annual Statements of
insurance companies. During 1995 and 1996, a number of insurers
recorded large reserve increases for A&E exposures. During this time,
the industry's survival ratio (reserves divided by annual paid losses)
was used as a benchmark for reserving such claims. The following
table compares AFC's three-year survival ratio for A&E claims with
that of the industry.
December 31,
Survival Ratio: 1998 1997 1996 1995 1994
AFC 19.5 10.0 10.5 6.5 7.0
Industry (a) N/A 8.9 9.0 9.4 7.8
(a) Source: "BestWeek - Property and Casualty Supplement"
(September 21, 1998 Edition); 1998 is not available; the impact
of an extraordinary case payment made in 1996 is excluded for
industry ratios.
Industry actions and statistics in 1995 caused AFC to re-evaluate
its position in relation to its peers as part of the continuing
process of obtaining additional information and revising accounting
estimates. This process led management to conclude in 1996 that the
A&E reserves should be increased sufficiently to bring AFC's three-
year survival ratio in line with those of the top 50 companies. In
the third quarter of 1996, AFC recorded a noncash, pretax charge of
$80 million and reallocated $40 million in reserves from its Specialty
group.
As part of the continuing process of monitoring appropriate reserve
needs and prompted by the retention of certain A&E exposures under the
agreement covering the sale of its Commercial lines division, AFC
began a thorough study of its A&E exposures in 1998. Based on this
study and observations of industry trends in this regard, AFC decided
that the survival ratio may not be the best basis for measuring
ultimate A&E exposures. AFC's study was reviewed by independent
<PAGE>
actuaries who used state of the art actuarial techniques that have
wide acceptance in the industry. AFC recorded a fourth quarter charge
of $214 million in 1998 to increase A&E reserves to its best estimate
of the ultimate liability.
14
<PAGE>
The following table (in millions) is a progression of A&E reserves.
During the review of A&E exposures in 1998, $13.8 million in reserves
recorded prior to 1998 and not identified as A&E were determined to be
A&E reserves. In addition, the allowance for uncollectible
reinsurance applicable to ceded A&E reserves was not reflected in the
following table prior to 1998.
1998 1997 1996
Reserves at beginning of year $347.9 $343.4 $225.7
Incurred losses and LAE (a) 247.5 43.2 149.0
Paid losses and LAE (26.1) (38.7) (31.3)
Reserves transferred with sale of
Commercial lines (11.4) - -
Reserves not classified as A&E prior
to 1998:
Reserves 13.8 - -
Allowance for uncollectable reinsurance
applicable to ceded A&E reserves 53.7 - -
Reserves at end of year, net of
reinsurance recoverable 625.4 347.9 343.4
Reinsurance recoverable, net of
allowance in 1998 240.7 173.2 162.7
Gross reserves at end of year $866.1 $521.1 $506.1
(a) Includes (i) special charges of $214 million in 1998 and
$80 million in 1996 and (ii) a reallocation in 1996 of
$40 million in reserves from its Specialty group.
Since the mid-1980's, AFC has also written certain environmental
coverages (asbestos abatement and underground storage tank liability)
in which the premium charged is intended to provide coverage for the
specific environmental exposures inherent in these policies. The
business has been profitable since its inception. To date,
approximately $182 million of premiums has been written, $20 million
in losses and LAE have been paid and reserves for unpaid losses and
LAE aggregated $30 million at December 31, 1998 (not included in the
above table).
15
<PAGE>
Annuity and Life Operations
General
AFC's annuity and life operations are conducted through American
Annuity Group, Inc. ("AAG"), a holding company which markets primarily
retirement annuity products as well as life and supplemental health
insurance through the following subsidiaries (in millions). AAG and
its subsidiaries employ approximately 1,700 persons.
1998
Statutory
Subsidiary - year acquired Principal Products Premiums
Great American Life Insurance Traditional fixed annuities $301
Company ("GALIC") - 1992(*) Equity-indexed annuities 58
Annuity Investors Life Insurance Variable annuities 89
Company ("AILIC") - 1994 Traditional fixed annuities 73
Loyal American Life Insurance Supplemental health 20
Company ("Loyal") - 1995 Supplemental life 17
Great American Life Assurance
Company of Puerto Rico, Inc. Life 37
("GAPR") - 1997 Supplemental health 11
GALIC's Life Division (formed
in 1997) Term and universal life 19
(*) Acquired from Great American.
Acquisitions in recent years have supplemented AAG's internal
growth as the assets of the holding company and its operating
subsidiaries have increased from $4.5 billion at the end of 1992 to
over $7.1 billion at the end of 1998. Premiums over the last three
years were as follows (in millions):
Insurance Product 1998 1997 1996
Retirement annuities $521 $489 $540
Life and health 104 42 43
$625 $531 $583
________________
Table does not include premiums of subsidiaries or divisions
until their first full year following acquisition or formation.
All periods exclude premiums of subsidiaries sold.
In September 1998, AAG sold its Funeral Services division. This
division had assets of approximately $1 billion as of September 30,
1998 and 1997 premiums of $111 million.
<PAGE>
Retirement Products
AAG's principal retirement products are Flexible Premium Deferred
Annuities ("FPDAs") and Single Premium Deferred Annuities ("SPDAs").
Annuities are long-term retirement saving instruments that benefit
from income accruing on a tax-deferred basis. The issuer of the
annuity collects premiums, credits interest on the policy and pays out
a benefit upon death, surrender or annuitization. FPDAs are
characterized by premium payments that are flexible in both amount and
timing as determined by the policyholder. SPDAs are issued in
exchange for a one-time lump-sum premium payment.
16
<PAGE>
The following table (in millions) presents combined financial
information concerning AAG's principal retirement annuity
subsidiaries, GALIC and AILIC.
1998 1997 1996
GAAP Basis
Total Assets $6,549 $6,289 $5,942
Fixed Annuity Reserves 5,396 5,355 5,211
Variable Annuity Reserves
(separate accounts) 120 37 3
Stockholder's Equity 862 770 658
Statutory Basis
Total Assets $6,159 $5,977 $5,760
Fixed Annuity Reserves 5,538 5,469 5,302
Variable Annuity Reserves
(separate accounts) 120 37 3
Capital and Surplus 350 317 285
Asset Valuation Reserve (a) 63 65 91
Interest Maintenance Reserve (a) 21 24 25
Annuity Receipts:
Flexible Premium:
First Year $ 45 $ 38 $ 36
Renewal 149 160 182
194 198 218
Single Premium 327 291 322
Total Annuity Receipts $ 521 $ 489 $ 540
________________
(a) Allocation of surplus.
Sales of annuities are affected by many factors, including: (i)
competitive annuity products and rates; (ii) the general level of
interest rates; (iii) the favorable tax treatment of annuities; (iv)
commissions paid to agents; (v) services offered; (vi) ratings from
independent insurance rating agencies; (vii) other alternative
investments and (viii) general economic conditions. At December 31,
1998, AAG had approximately 265,000 annuity policies in force.
Annuity contracts are generally classified as either fixed rate
(including equity-indexed) or variable. With a fixed rate annuity,
the interest crediting rate is initially set by the issuer and
thereafter may be changed from time to time by the issuer subject to
any guaranteed minimum interest crediting rates in the policy. With a
variable annuity, the value of the policy is tied to an underlying
securities portfolio or underlying mutual funds. The following table
presents premiums by classification:
Premiums 1998 1997 1996
Traditional fixed 72% 83% 98%
Equity-indexed 11 8 2
Variable 17 9 *
100% 100% 100%
________________
* less than 1%
<PAGE>
AAG seeks to maintain a desired spread between the yield on its
investment portfolio and the rate it credits to its fixed rate
annuities. AAG accomplishes this by: (i) offering crediting rates
which it has the option to change; (ii) designing annuity products
that encourage persistency and (iii) maintaining an appropriate
matching of assets and liabilities. AAG designs its products with
certain surrender penalties to discourage policyholders from
surrendering or withdrawing funds during the first five to ten years
after issuance of a policy. Partly due to these features, annuity
surrenders have averaged less than 10% of statutory reserves over the
past five years.
17
<PAGE>
All of AAG's fixed rate annuities offer a minimum interest rate
guarantee of 3% or 4%; the majority permit AAG to change the crediting
rate at any time (subject to the minimum guaranteed interest rates).
In determining the frequency and extent of changes in the crediting
rate, AAG takes into account the economic environment and the relative
competitive position of its products.
Over the last few years, traditional fixed rate annuities have met
substantial competition from mutual funds and other equity-based
investments. In response, AAG began offering equity-indexed annuities
and variable annuities. An equity-indexed fixed annuity provides
policyholders with a crediting rate tied, in part, to the performance
of an existing stock market index while protecting them against the
related downside risk through a guarantee of principal. AAG hedges
the equity-based risk component of this product through the purchase
of call options on the appropriate index. These options are designed
to offset substantially all of the increases in the liabilities
associated with equity-indexed annuities.
Industry sales of variable annuities have increased substantially
over the last ten years as investors have sought to obtain the returns
available in the equity markets while enjoying the tax-deferred status
of annuities. With a variable annuity, the earnings credited to the
policy vary based on the investment results of the underlying
investment options chosen by the policyholder. Premiums directed to
the variable options in policies issued by AAG are invested in funds
managed by various independent investment managers. AAG earns a fee
on amounts deposited into variable accounts. Policyholders may also
choose to direct all or a portion of their premiums to various fixed
rate options, in which case AAG earns a spread on amounts deposited.
The following table reflects the geographical distribution of AAG's
annuity premiums in 1998 compared to 1994.
1998 1994 1998 1994
California 28.8% 20.5% Michigan 3.4% 9.1%
Ohio 7.5 6.2 New Jersey 3.4 4.5
Texas 4.9 2.6 Indiana 2.8 *
Washington 4.8 3.7 Connecticut 2.4 4.4
Florida 4.7 8.5 Pennsylvania 2.4 *
Massachusetts 4.6 8.0 Illinois 2.2 3.1
North Carolina 4.1 3.0 Iowa 2.1 2.0
Minnesota 3.6 4.6 Rhode Island * 2.0
Other 18.3 17.8
_______________ 100.0% 100.0%
(*) less than 2%
AAG's FPDAs are sold primarily to employees of qualified not-for-
profit organizations. Employees of these organizations are eligible
to save for retirement through contributions made on a before-tax
basis. Contributions are made at the discretion of the participants
through payroll deductions or through tax-free "rollovers" of funds
from other qualified investments. Federal income taxes are not
payable on contributions or earnings until amounts are withdrawn.
<PAGE>
Historically, AAG's principal marketing focus had been on sales to
employees of educational institutions in the kindergarten through high
school segment. However, sales of non-qualified annuities have begun
to represent an increasing percentage of premiums (33% in 1998
compared to 15% in 1994) as AAG has developed products and
distribution channels targeted to the non-qualified markets.
AAG distributes its annuity products through approximately 90
managing general agents ("MGAs") who, in turn, direct approximately
1,000 actively producing independent agents. AAG has developed its
business on the basis of its relationships with MGAs and independent
agents primarily through a consistent marketing approach and
responsive service. To extend the distribution of its annuities to a
broader customer base, AAG developed a personal producing general
agent ("PPGA") distribution system. More than 100 PPGAs are
contracted to sell annuities in those territories not served by an
MGA.
18
<PAGE>
Life, Accident and Health Products
AAG offers a variety of life, accident and health products through
Loyal, GAPR and GALIC's life division. This group produced
approximately $100 million of premiums in 1998. At year end 1998, it
had assets of over $550 million. It also had more than 500,000
policies and $7.1 billion of life insurance in force.
Loyal offers a variety of life and supplemental health insurance
products through payroll deduction plans and credit unions. The
principal products sold by Loyal include cancer, universal life,
traditional whole life, hospital indemnity, and short-term disability
insurance. Loyal's products are marketed with the endorsement or
consent of the employer or the credit union management.
GAPR sells in-home service life and supplemental health products
through a network of company-employed agents. Ordinary life, cancer,
credit and group life products are sold through independent agents.
In December 1997, GALIC's life division began offering certain
term, universal and whole life insurance products through national
marketing organizations.
Sale of Funeral Services Division
In September 1998, AAG sold its Funeral Services division for
approximately $165 million in cash. The Funeral Services division
provided life insurance and annuities to fund pre-arranged funerals,
as well as administrative services for pre-arranged funeral trusts.
This division included American Memorial Life Insurance Company
(acquired in 1995) and Arkansas National Life Insurance Company
(acquired in 1998).
Independent Ratings
AAG's principal insurance subsidiaries are rated by Standard and
Poor's, A.M. Best and Duff & Phelps. Such ratings are generally based
on items of concern to policyholders and agents and are not directed
toward the protection of investors.
Standard
& Poor's A.M. Best Duff & Phelps
GALIC A+ (Strong) A (Excellent) AA- (Very high)
AILIC A+ (Strong) A (Excellent) AA- (Very high)
Loyal A (Strong) A (Excellent) AA- (Very high)
GAPR Not rated A (Excellent) Not rated
AAG believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often
use a company's rating as an initial screening device in considering
annuity products. AAG believes that a rating in the "A" category by
at least one rating agency is necessary for GALIC to successfully
market tax-deferred annuities to public education employees and other
not-for-profit groups.
Although AAG believes that its insurance companies' ratings are
very stable, those companies' operations could be materially adversely
affected by a downgrade in ratings.
19
<PAGE>
Competition
AAG's insurance companies operate in highly competitive markets.
They compete with other insurers and financial institutions based on
many factors, including: (i) ratings; (ii) financial strength; (iii)
reputation; (iv) service to policyholders and agents; (v) product
design (including interest rates credited and premium rates charged);
and (vi) commissions. Since policies are marketed and distributed
primarily through independent agents (except at GAPR), the insurance
companies must also compete for agents. AAG believes that
consistently targeting the same market and emphasizing service to
agents and policyholders provides a competitive advantage.
No single insurer dominates the annuity marketplace. Competitors
include (i) individual insurers and insurance groups, (ii) mutual
funds and (iii) other financial institutions of varying sizes. In a
broader sense, AAG's insurance companies compete for retirement
savings with a variety of financial institutions offering a full range
of financial services. Financial institutions have demonstrated a
growing interest in marketing investment and savings products other
than traditional deposit accounts. In addition, recent judicial and
regulatory decisions have expanded powers of financial institutions in
this regard. It is too early to predict what impact, if any, these
developments will have on the insurance companies.
Foreign Operations
In 1998, AAG opened an office in Bangalore, India. Employees
located at this office perform computer programming and certain back
office functions for AAG's insurance operations. Management believes
there are sufficient resources available at domestic locations should
there be any interruption in the operations at this office and as a
result no materially adverse impact would result from any such
interruption.
Other Companies
Through subsidiaries, AFC is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and tennis
facility) in the Greater Cincinnati area; commercial real estate
operations in Cincinnati (office buildings and The Cincinnatian
Hotel), New Orleans (Le Pavillon Hotel), Cape Cod (Chatham Bars Inn),
Austin (Driskill Hotel) and apartments in Austin, Houston, Lafayette-
Louisiana, Louisville, Milwaukee, Pittsburgh, St. Paul and Tampa Bay.
These operations employ approximately 700 full-time employees.
<PAGE>
Investment Portfolio
General
A summary of AFC's December 31, 1998, investment portfolio by
business segment follows (excluding investment in equity securities of
investee corporations) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and short-term investments $ 142 $ 133 $15 $ 290 $ 290
Fixed maturities 4,271 6,023 29 10,323 10,323
Other stocks, options and
warrants 342 83 5 430 430
Policy loans - 220 - 220 220(a)
Real estate and other investments 126 119 23 268 268(a)
$4,881 $6,578 $72 $11,531 $11,531
(a) Carrying value used since market values are not readily available.
20
<PAGE>
The following tables present the percentage distribution and yields
of AFC's investment portfolio (excluding investment in equity
securities of investee corporations) as reflected in its financial
statements.
1998 1997 1996 1995 1994
Cash and Short-term Investments 2.5% 1.9% 3.5% 4.0% 2.2%
Fixed Maturities:
U.S. Government and Agencies 4.4 5.0 4.1 3.7 4.0
State and Municipal 1.2 1.3 1.0 .7 .8
Public Utilities 6.0 6.8 8.2 9.8 9.1
Mortgage-Backed Securities 20.8 21.4 22.3 20.9 21.8
Corporate and Other 53.2 52.5 51.7 50.0 53.4
Redeemable Preferred Stocks .5 .6 .5 1.0 1.4
86.1 87.6 87.8 86.1 90.5
Net Unrealized Gains (Losses) on
fixed maturities held
Available for Sale 3.5 2.5 1.1 2.7 (1.0)
89.6 90.1 88.9 88.8 89.5
Other Stocks, Options and Warrants 3.7 3.7 2.9 2.3 2.7
Policy Loans 1.9 2.0 2.1 2.2 2.5
Real Estate and Other Investments 2.3 2.3 2.6 2.7 3.1
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.8% 7.8% 7.9% 7.9% 8.1%
Including realized gains and losses 8.0% 7.9% 7.7% 8.8% 8.1%
Yield on Stocks:
Excluding realized gains and losses 5.4% 5.6% 5.8% 3.9% 5.1%
Including realized gains and losses (5.3%) 30.2% 15.1% 8.4% 35.4%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.8% 7.8% 7.9% 8.1%
Including realized gains and losses 7.8% 8.2% 7.8% 8.8% 8.8%
(*)Excludes "Real Estate and Other Investments".
<PAGE>
Fixed Maturity Investments
Unlike many insurance groups which have portfolios that are
invested heavily in tax-exempt bonds, AFC's bond portfolio is invested
primarily in taxable bonds. The NAIC assigns quality ratings which
range from Class 1 (highest quality) to Class 6 (lowest quality). The
following table shows AFC's bonds and redeemable preferred stocks, by
NAIC designation (and comparable Standard & Poor's Corporation rating)
as of December 31, 1998 (dollars in millions).
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $6,681 $ 7,000 68%
2 BBB 2,401 2,484 24
Total investment grade 9,082 9,484 92
3 BB 425 434 4
4 B 320 315 3
5 CCC, CC, C 92 81 1
6 D 1 9 *
Total noninvestment grade 838 839 8
Total $9,920 $10,323 100%
_______________
(*)Less than 1%
21
<PAGE>
Risks inherent in connection with fixed income securities include
loss upon default and market price volatility. Factors which can
affect the market price of securities include: creditworthiness,
changes in interest rates, the number of market makers and investors
and defaults by major issuers of securities.
AFC's primary investment objective for fixed maturities is to earn
interest and dividend income rather than to realize capital gains.
AFC invests in bonds and redeemable preferred stocks that have
primarily short-term and intermediate-term maturities. This practice
allows flexibility in reacting to fluctuations of interest rates.
Equity Investments
AFC's equity investment practice permits concentration of attention
on a relatively limited number of companies. Some of the equity
investments, because of their size, may not be as readily marketable
as the typical small investment position. Alternatively, a large
equity position may be attractive to persons seeking to control or
influence the policies of a company and AFC's concentration in a
relatively small number of companies may permit it to identify
investments with above average potential to increase in value.
Chiquita At December 31, 1998, AFC owned 24 million shares of
Chiquita common stock representing 37% of its outstanding shares. The
carrying value and market value of AFC's investment in Chiquita were
approximately $192 million and $229 million, respectively, at December
31, 1998. Chiquita is a leading international marketer, producer and
distributor of quality fresh fruits and vegetables and processed
foods. In addition to bananas, these products include a wide variety
of other fresh fruits and vegetables; fruit and vegetable juices and
beverages; processed bananas and other processed fruits and
vegetables; private-label and branded canned vegetables; fresh cut and
ready-to-eat salads; and edible oil-based consumer products.
Citicasters In 1996, AFC sold its investment in Citicasters to
Jacor Communications for approximately $220 million in cash plus
warrants to purchase Jacor common stock. Citicasters owned radio and
television stations in major markets throughout the country.
Other Stocks AFC's $243 million investment in Provident Financial
Group, Inc., a Cincinnati-based commercial banking and financial
services company, comprised approximately three-fifths of the equity
investments included in "Other stocks" in AFC's Balance Sheet at
December 31, 1998.
Regulation
AFC's insurance company subsidiaries are subject to regulation in
the jurisdictions where they do business. In general, the insurance
laws of the various states establish regulatory agencies with broad
administrative powers governing, among other things, premium rates,
solvency standards, licensing of insurers, agents and brokers, trade
practices, forms of policies, maintenance of specified reserves and
capital for the protection of policyholders, deposits of securities
for the benefit of policyholders, investment activities and
<PAGE>
relationships between insurance subsidiaries and their parents and
affiliates. Material transactions between insurance subsidiaries and
their parents and affiliates generally must be disclosed and prior
approval of the applicable insurance regulatory authorities generally
is required for any such transaction which may be deemed to be
material or extraordinary. In addition, while differing from state to
state, these regulations typically restrict the maximum amount of
dividends that may be paid by an insurer to its shareholders in any
twelve-month period without advance regulatory approval. Such
limitations are generally based on net earnings or statutory surplus.
Under applicable restrictions, the maximum amount of dividends
available to AFC in 1999 from its insurance subsidiaries without
seeking regulatory clearance is approximately $281 million.
22
<PAGE>
Changes in state insurance laws and regulations have the potential
to materially affect the revenues and expenses of the insurance
operations. For example, between July 1993 and January 1995, the
California Commissioner ordered reductions in workers' compensation
insurance premium rates totaling more than 30% and subsequently
replaced the workers' compensation insurance minimum rate law with an
"open rating" policy. The Company is unable to predict whether or
when other state insurance laws or regulations may be adopted or
enacted or what the impact of such developments would be on the future
operations and revenues of its insurance businesses.
Most states have created insurance guarantee associations to
provide for the payment of claims of insurance companies that become
insolvent. Annual assessments for AFC's insurance companies have not
been material. In addition, many states have created "assigned risk"
plans or similar arrangements to provide state mandated minimum levels
of automobile liability coverage to drivers whose driving records or
other relevant characteristics make it difficult for them to obtain
insurance otherwise. Automobile insurers in those states are required
to provide such coverage to a proportionate number of those drivers
applying as assigned risks. Premium rates for assigned risk business
are established by the regulators of the particular state plan and are
frequently inadequate in relation to the risks insured, resulting in
underwriting losses. Assigned risks accounted for approximately one
percent of AFC's net written premiums in 1998.
The NAIC is an organization which is comprised of the chief
insurance regulator for each of the 50 states and the District of
Columbia. In 1990, the NAIC began an accreditation program to ensure
that states have adequate procedures in place for effective insurance
regulation, especially with respect to financial solvency. The
accreditation program requires that a state meet specific minimum
standards in over 15 regulatory areas to be considered for
accreditation. The accreditation program is an ongoing process and
once accredited, a state must enact any new or modified standards
approved by the NAIC within two years following adoption. As of
December 31, 1998, the District of Columbia and 48 states were
accredited including states which regulate AFC's largest insurance
subsidiaries.
The NAIC model law for Risk Based Capital applies to both life and
property and casualty companies. The risk-based capital formulas
determine the amount of capital that an insurance company needs to
ensure that it has an acceptably low expectation of becoming
financially impaired. The model law provides for increasing levels of
regulatory intervention as the ratio of an insurer's total adjusted
capital and surplus decreases relative to its risk-based capital,
culminating with mandatory control of the operations of the insurer by
the domiciliary insurance department at the so-called "mandatory
control level". At December 31, 1998, the capital ratios of all AFC
insurance companies substantially exceeded the risk-based capital
requirements.
<PAGE>
ITEM 2
Properties
Subsidiaries of AFC own several buildings in downtown Cincinnati.
AFC and its affiliates occupy about 70% of the aggregate 660,000
square feet of commercial and office space.
AFC's insurance subsidiaries lease the majority of their office and
storage facilities in numerous cities throughout the United States,
including Great American's and AAG's home offices in Cincinnati. An
AAG subsidiary owns an office building in Mobile, Alabama which is
being marketed for sale or lease; one-fifth of its 82,000 square feet
is company occupied.
AFC subsidiaries own transferable rights to develop approximately
1.0 million square feet of floor space in the Grand Central Terminal
area in New York City. The development rights were derived from
ownership of the land upon which the terminal is constructed.
23
<PAGE>
ITEM 3
Legal Proceedings
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
AFC and its subsidiaries are involved in various litigation, most
of which arose in the ordinary course of business, including
litigation alleging bad faith in dealing with policyholders and
challenging certain business practices of insurance subsidiaries.
Except for the following, management believes that none of the
litigation meets the threshold for disclosure under this Item.
In February 1994, the USX Corporation ("USX") paid nearly
$600 million in satisfaction of antitrust judgments entered against
its subsidiary, The Bessemer & Lake Erie Railroad ("B&LE"). In May
1994, USX/B&LE filed two lawsuits, one in state and the other in
federal court, against American Premier as the reorganized successor
of The Penn Central Corporation seeking to recover this amount under
theories of indemnity and contribution law. In disclosing the
existence of these lawsuits, American Premier stated that it had
sufficient defenses and did not expect to suffer any material loss
from the litigation.
In May 1998, the largest and last of these lawsuits was dismissed
in state court; a companion federal lawsuit had been dismissed earlier
in 1998. Both of the lawsuits were dismissed on American Premier's
Motion for Summary Judgment filed in state and federal court.
The state court action is now on appeal to the Eighth Appellate
District of Ohio in Cleveland, Ohio. The federal court action is now
on appeal to the US Court of Appeals for the Sixth Circuit in
Cincinnati, Ohio. American Premier and its outside counsel continue
to believe that American Premier will not suffer any material loss
from either of these cases.
American Premier is a party or named as a potentially responsible
party in a number of proceedings and claims by regulatory agencies and
private parties under various environmental protection laws, including
the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), seeking to impose responsibility on American Premier
for hazardous waste remediation costs at certain railroad sites
formerly owned by Penn Central Transportation Company ("PCTC") and at
certain other sites where hazardous waste allegedly generated by
PCTC's railroad operations is present. It is difficult to estimate
American Premier's liability for remediation costs at these sites for
a number of reasons, including the number and financial resources of
other potentially responsible parties involved at a given site, the
varying availability of evidence by which to allocate responsibility
among such parties, the wide range of costs for possible remediation
alternatives, changing technology and the period of time over which
these matters develop. Nevertheless, American Premier believes that
its previously established loss accruals for potential pre-
reorganization environmental liabilities at such sites are adequate to
<PAGE>
cover the probable amount of such liabilities, based on American
Premier's estimates of remediation costs and related expenses at such
sites and its estimates of the portions of such costs that will be
borne by other parties. Such estimates are based on information
currently available to American Premier and are subject to future
change as additional information becomes available. American Premier
intends to seek reimbursement from certain insurers for portions of
whatever remediation costs it incurs.
24
<PAGE>
In terms of potential liability to American Premier, the company
believes that the most significant such site is the railyard at Paoli,
Pennsylvania ("Paoli Yard") which PCTC transferred to Consolidated
Rail Corporation ("Conrail") in 1976. A Record of Decision issued by
the U.S. Environmental Protection Agency in 1992 presented a final
selected remedial action for clean-up of polychlorinated biphenyls
("PCB's") at Paoli Yard having an estimated cost of approximately $28
million. American Premier has accrued its portion of such estimated
clean-up costs in its financial statements (in addition to other
expenses) but has not accrued the entire amount because it believes it
is probable that other parties, including Conrail, will be responsible
for substantial percentages of the clean-up costs by virtue of their
operation of electrified railroad cars at Paoli Yard that discharged
PCB's at higher levels than discharged by cars operated by PCTC.
In management's opinion, the outcome of the foregoing environmental
claims and contingencies will not, individually or in the aggregate,
have a material adverse effect on the financial condition of American
Premier. In making this assessment, management has taken into account
previously established loss accruals in its financial statements and
probable recoveries from third parties.
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable - Registrant's Common Stock is owned by American
Financial Group, Inc. See the Consolidated Financial Statements for
information regarding dividends.
25
<PAGE>
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods
indicated (dollars in millions, except per share data).
1998 1997 1996 1995 1994
Earnings Statement Data:
Total Revenues $4,059 $4,053 $4,114 $3,628 $2,104
Earnings Before Income Taxes
and Extraordinary Items 211 334 340 252 44
Earnings Before Extraordinary
Items 130 208 250 195 19
Extraordinary Items (1) (7) (28) 2 (17)
Net Earnings 129 201 222 197 2
Ratio of Earnings to
Fixed Charges (a) 3.44 4.20 4.99 3.10 1.69
Ratio of Earnings to
Fixed Charges and
Preferred Dividends (a) 3.15 3.52 3.96 2.60 1.40
Balance Sheet Data:
Total Assets $15,848 $15,738 $14,999 $14,851 $10,593
Long-term Debt:
Holding Companies 315 287 340 648 849
Subsidiaries 177 194 178 234 258
Minority Interest 524 510 307 327 106
Capital Subject to
Mandatory Redemption - - - - 3
Other Capital 1,531 1,393 1,277 1,248 396
(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.
26
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
GENERAL
Following is a discussion and analysis of the financial statements
and other statistical data that management believes will enhance the
understanding of 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. Because AFC and American Premier
have been under the common control of AFG since merger transactions
completed in April 1995 (the "Mergers"), 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
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, 1998.
Including amounts due AFG, the ratio was 28% at the end of 1998.
AFC's ratio of earnings to fixed charges, excluding and including
preferred dividends, on a total enterprise basis for the year ended
December 31, 1998, was 3.44 and 3.15, respectively.
The National Association of Insurance Commissioners' model law for
risk based capital ("RBC") applies to both life and property and
casualty companies. RBC formulas determine the amount of capital that
an insurance company needs to ensure that it has an acceptable
expectation of not becoming financially impaired. At December 31,
1998, the capital ratios of all AFC insurance companies substantially
exceeded the RBC requirements (the lowest capital ratio of any AFC
subsidiary was 2.1 times its authorized control level RBC; weighted
average of all AFC subsidiaries was 5.0 times).
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, shareholder dividends and taxes. Funds to
meet these obligations come primarily from dividend and tax payments
from their subsidiaries.
<PAGE>
Management believes these parent holding companies have sufficient
resources to meet their liquidity requirements through operations in
the short-term and long-term future. If funds generated from
operations, including dividends and tax payments from subsidiaries,
are insufficient to meet fixed charges in any period, AFC would be
required to generate cash through borrowings, sales of securities or
other assets, or similar transactions.
In December 1997, AFC entered into a reciprocal Master Credit
Agreement with the various AFG holding companies under which these
companies make funds available to each other for general corporate
purposes.
27
<PAGE>
The senior debentures of AFC and AAG are rated investment grade by
three nationally recognized rating agencies; the subordinated
debentures of APU and AAG are rated investment grade by two of the
agencies.
A new five-year, $300 million bank credit line was established by
AFC in February 1998 replacing two subsidiary holding company lines.
The new credit line provides ample liquidity and can be used to obtain
funds for operating subsidiaries or, if necessary, for the parent
companies. At December 31, 1998, there was $80 million borrowed under
the line.
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 preferred stock of
subsidiaries and for general corporate purposes, including a capital
contribution to a subsidiary.
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies in the
past. However, the reliance on such dividend payments has been
lessened by the combination of (i) strong capital at AFC's insurance
subsidiaries (and the related decreased likelihood of a need for
investment in those companies), (ii) the reductions of debt at the
holding companies (and the related decrease in ongoing cash needs for
interest and principal payments), (iii) AFC's ability to obtain
financing in capital markets, as well as (iv) the sales of noncore
investments.
For statutory accounting purposes, equity securities are generally
carried at market value. At December 31, 1998, AFC's insurance
companies owned publicly traded equity securities with a market value
of $1.4 billion, including equity securities of AFC affiliates
(including subsidiaries) of $1.0 billion. Since significant amounts
of these are concentrated in a relatively small number of companies,
decreases in the market prices could adversely affect the insurance
group's capital, potentially impacting the amount of dividends
available or necessitating a capital contribution. Conversely,
increases in the market prices could have a favorable impact on the
group's dividend-paying capability.
Under tax allocation agreements with AFC, its 80%-owned U.S.
subsidiaries generally compute tax provisions as if filing separate
returns based on book taxable income computed in accordance with
generally accepted accounting principles. The resulting provision (or
credit) is currently payable to (or receivable from) AFC.
Uncertainties Two lawsuits were filed in 1994 against American
Premier by USX Corporation ("USX") and a former USX subsidiary. The
lawsuits seek contribution from American Premier for all or a portion
of a $600 million final antitrust judgment entered against a USX
subsidiary in 1994. The lawsuits argue that USX's liability for that
judgment is attributable to the alleged activities of American
Premier's predecessor in an unlawful antitrust conspiracy among
certain railroad companies. In May 1998, the largest and last of the
lawsuits was dismissed in state court. All of USX's claims against
<PAGE>
American Premier have now been dismissed with prejudice, and, although
USX has appeals pending, American Premier and its outside legal
counsel continue to believe that American Premier will not suffer a
material loss from this litigation.
Great American's liability for unpaid losses and loss adjustment
expenses includes amounts for various liability coverages related to
environmental, hazardous product and other mass tort claims. At
December 31, 1998, Great American had recorded $866 million (before
reinsurance recoverables of $241 million) for such claims on policies
written many years ago where, in most cases, coverage was never
intended. Due to inconsistent court decisions on many coverage issues
and the difficulty in determining standards acceptable for cleaning up
pollution sites, significant uncertainties exist which are not likely
to be resolved in the near future.
AFC's subsidiaries are parties in a number of proceedings relating
to former operations. While the results of all such uncertainties
cannot be predicted, based upon its knowledge of the facts,
circumstances and applicable laws, management believes that sufficient
reserves have been provided. See Note M to the financial statements.
28
<PAGE>
Year 2000 Status AFC's Year 2000 Project is a corporate-wide
program designed to ensure that its computer systems and other
equipment using date-sensitive computer chips will function properly
in the year 2000. The Project also encompasses communicating with
agents, vendors, financial institutions and others with which the
companies conduct business to determine their Year 2000 readiness and
resulting effects on AFC. AFC's Year 2000 Project Office monitors and
coordinates the work being performed by the various business units and
reports monthly to the Audit Committee of the Board of Directors and
more frequently to senior management.
To address the Year 2000 issue, AFC's operations have been divided
into separate systems groups. During 1998, these groups were in the
process of either (i) modifying their software programs or (ii)
replacing programs with new software that is Year 2000 compliant. A
majority of the groups have met AFC's goal of having program
modifications and new software installations substantially completed
by the end of 1998, with testing continuing in and through 1999.
About 40% of the groups are being "closely watched" because there is
some degree of risk that critical dates in the project schedule may be
missed with a potential for some disruption of normal business
operations. AFC's goal is to have program modifications and new
installations for these groups completed during mid-1999. One group,
which has significantly missed internal project deadlines, now has
been reorganized and staffing levels were increased. This group is
expected to be completed during the third quarter of 1999.
Contingency plans have been developed for certain systems deemed
most critical to operations. These plans provide a documented order
of actions necessary to keep the business functions operating for
these systems. Such plans typically include procedures and workflow
processes for developing and operating contingent databases.
Contingency planning for other systems deemed critical to operations
and reasonably likely not to be modified on schedule began in the
fourth quarter of 1998 and will be completed by mid-1999.
Many of the systems being replaced were planned replacements which
were accelerated due to the Year 2000 considerations. In addition, a
significant portion of AFC's Year 2000 Project is being completed
using internal staff. Therefore, cost estimates for the Year 2000
Project do not represent solely incremental costs.
From the inception of the Year 2000 project in the early 1990's
through December 31, 1998, AFC estimates that it has incurred
approximately $46 million in costs related to the project, including
capitalized costs of $10 million for new systems. During 1998,
$27 million in such costs have been expensed. AFC estimates that it
will incur an additional $26 million of such costs in completing the
Project, about two-thirds of which is projected to be expensed.
Projected Year 2000 costs and completion dates are based on
management's best estimates. However, there can be no assurances that
these estimates will be achieved. Should software modifications and
new software installations not be completed on a timely basis, the
resulting disruptions could have a material adverse effect on
operations.
<PAGE>
AFC's operations could also be affected by the inability of third
parties such as agents and vendors to become Year 2000 compliant.
While assessments of independent agents and evaluations of third party
vendors are progressing slowly, efforts are being intensified to
complete these assessments in the second quarter of 1999. In
addition, AFC's property and casualty insurance subsidiaries are
reviewing the potential impact of the Year 2000 issue on insureds as
part of their underwriting process. They are also reviewing policy
forms, issuing clarifying endorsements where appropriate and examining
coverage issues for Year 2000 exposures. While it is possible that
Year 2000 claims may emerge in future periods, it is not possible to
estimate any such amounts.
Exposure to Market Risk Market risk represents the potential
economic loss arising from adverse changes in the fair value of
financial instruments. AFC's exposures to market risk relate
primarily to its investment portfolio and annuity contracts which are
exposed to interest rate risk and, to a lesser extent, equity price
risk. AFC's long-term debt is also exposed to interest rate risk.
AFC's investments in derivatives were not significant at December 31,
1998.
29
<PAGE>
Fixed Maturity Portfolio The fair value of AFC's fixed maturity
portfolio ($10.3 billion at December 31, 1998) is directly impacted by
changes in market interest rates. AFC's fixed maturity portfolio is
comprised of substantially all fixed rate investments with primarily
short-term and intermediate-term maturities. This practice allows
flexibility in reacting to fluctuations of interest rates. The
portfolios of AFC's property and casualty insurance and life and
annuity operations are managed with an attempt to achieve an adequate
risk-adjusted return while maintaining sufficient liquidity to meet
policyholder obligations. AFC's life and annuity operations use
various actuarial models in an attempt to align the duration of their
invested assets to the projected cash flows of policyholder
liabilities.
The following table provides information about AFC's fixed maturity
investments at December 31, 1998, that are sensitive to interest rate
risk. The table shows principal cash flows (in millions) and related
weighted-average interest rates by expected maturity dates. Callable
bonds and notes are included based on call date or maturity date
depending upon which date produces the most conservative yield.
Mortgage-backed securities ("MBSs") and sinking fund issues are
included based on maturity year adjusted for expected payment
patterns. Actual cash flows may differ from those expected.
Weighted
Principal Average
Cash Flows Interest Rate
1999 $ 848.9 7.87%
2000 942.7 8.01
2001 954.2 8.08
2002 1,086.3 7.76
2003 1,415.3 7.33
Thereafter 4,784.1 7.59
Total $10,031.5 7.68%
Equity Price Risk Equity price risk is the potential economic loss
from adverse changes in equity security prices. Although AFC's
investment in "Other stocks" is less than 4% of total investments, it
is concentrated in a relatively limited number of major positions.
While this approach allows management to more closely monitor the
companies and industries in which they operate, it does increase risk
exposure to adverse price declines in a major position.
Annuity Contracts Substantially all of AAG's fixed rate annuity
contracts permit AAG to change crediting rates (subject to minimum
interest rate guarantees of 3% to 4% per annum) enabling management to
react to changes in market interest rates and maintain an adequate
spread. Sales of variable rate annuities have not been significant.
Projected payments (in millions) of AAG's fixed annuity liabilities at
December 31, 1998, were as follows.
1999 2000 2001 2002 2003 Remaining Total
$660 $620 $560 $500 $450 $2,610 $5,400
<PAGE>
About half of AAG's fixed annuity liabilities at December 31, 1998,
were two-tier in nature in that policyholders can receive a higher
amount if they annuitize rather than surrender their policy, even if
the surrender period has expired. Current stated crediting rates on
AAG's principal fixed annuity products range from 3% on equity-indexed
annuities (before any equity participation) to over 7% on certain new
policies (including first year bonus amounts). AAG estimates that its
effective weighted-average crediting rate over the next five years
will range from 5% to 5.2%. This range reflects actuarial assumptions
as to (i) deaths, (ii) the number of policyholders who annuitize and
receive higher credited amounts and (iii) the number of policyholders
who surrender. Actual experience and changes in actuarial assumptions
may result in different effective crediting rates than those above.
30
<PAGE>
Debt and Preferred Securities The following table shows scheduled
principal payments (in millions) on fixed-rate and variable-rate long-
term debt of AFC and its subsidiaries and related weighted average
interest rates. At December 31, 1998, there were $225 million of
subsidiary trust preferred securities outstanding, none of which are
scheduled for redemption during the next five years. The weighted
average interest rate on these securities is 8.46%.
Fixed-Rate Debt Variable-Rate Debt
Weighted Weighted
Scheduled Average Scheduled Average
Principal Interest Principal Interest
Payments Rate Payments Rate
1999 $ 90.7 9.69% $ .3 5.86%
2000 49.1 9.85 .2 5.80
2001 1.2 7.13 .1 5.58
2002 1.1 6.81 85.7 5.95
2003 1.1 6.68 27.2 6.09
Thereafter 233.3 8.26 .2 5.58
Total $376.5 8.80% $113.7 5.98%
At December 31, 1998, the fair value of fixed-rate debt and
variable-rate debt was approximately $388.9 million and
$113.7 million, respectively.
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 nearly 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, 1998, the average life of AFC's
fixed maturities was just under 6 years.
Approximately 92% of the fixed maturities held by AFC were rated
"investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at December 31, 1998. Investment grade
securities generally bear lower yields and lower degrees of risk than
those that are unrated or noninvestment grade. Management believes
that the high quality investment portfolio should generate a stable
and predictable investment return.
Investments in MBSs represented approximately one-fourth of AFC's
fixed maturities at December 31, 1998. 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 MBS
portfolio. Approximately 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.
<PAGE>
Because most income of the property and casualty insurance
subsidiaries has been sheltered from income taxes through 1997,
nontaxable municipal bonds represent only a small portion (less than
1%) of the portfolio.
Prior to the Mergers, the realization of capital gains, primarily
through sales of equity securities, was an integral part of 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: 1998 - $16 million; 1997 - $57 million; 1996 -
$166 million; 1995 - $84 million and 1994 - $50 million. At December
31, 1998, the net unrealized gain (before income taxes) on AFC's fixed
maturity and equity securities was $403 million and $223 million,
respectively.
31
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1998
General Pretax earnings before extraordinary items were $211 million
in 1998, $334 million in 1997 and $340 million in 1996.
Results for 1998 include a pretax charge in the fourth quarter of
$214 million attributable to an increase in loss reserves relating
to asbestos and environmental coverages ("A&E"), $180 million in
pretax gains, primarily from the sale of substantially all of
AFC's Commercial lines division and the Funeral Services division,
and a $34 million decline in the underwriting results in AFC's
property and casualty insurance business (excluding the special
A&E charge) due primarily to increased catastrophe losses.
Results for 1997 include $91 million in pretax gains, primarily on
the sales of affiliates and other securities, and reflect declines
of $41 million in underwriting results in AFC's property and
casualty insurance business.
Results for 1996 include $203 million in pretax gains primarily on
the sales of Citicasters and Buckeye, reduced by a charge of $80
million resulting from a decision to strengthen insurance A&E
reserves.
Property and Casualty Insurance - Underwriting Following the sale of
its Commercial lines division in late 1998, AFC's property and
casualty group is engaged primarily in private passenger automobile
and specialty insurance businesses. Accordingly, AFC has realigned
its property and casualty group into two major business groups:
Personal and Specialty.
The Personal group consists of the nonstandard auto group along
with the preferred/standard private passenger auto and other personal
insurance business, formerly included in the Commercial and Personal
lines. The nonstandard automobile insurance companies insure risks
not typically accepted for standard automobile coverage because of the
applicant's driving record, type of vehicle, age or other criteria.
The Specialty group includes a highly diversified group of business
lines (formerly, Specialty lines) plus the commercial business
previously included in the Commercial and Personal lines. Some of the
more significant areas are executive liability, inland and ocean
marine, U.S.-based operations of Japanese companies, agricultural-
related coverages, California workers' compensation, nonprofit
liability, general aviation coverages, fidelity and surety bonds, and
umbrella and excess coverages. Commercial lines businesses sold
included certain coverages in workers' compensation, commercial multi-
peril, commercial automobile, and umbrella.
<PAGE>
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.
Underwriting profitability is measured by the combined ratio which
is a sum of the ratios of underwriting losses, loss adjustment
expenses, underwriting expenses and policyholder dividends to
premiums. When the combined ratio is under 100%, underwriting results
are generally considered profitable; when the ratio is over 100%,
underwriting results are generally considered unprofitable. The
combined ratio does not reflect investment income, other income or
federal income taxes.
For certain lines of business and products where the credibility of
the range of loss projections is less certain (primarily the various
specialty businesses listed above), management believes that it is
prudent and appropriate to use conservative assumptions until such
time as the data, experience and projections have more credibility, as
evidenced by data volume, consistency and maturity of the data. While
this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
32
<PAGE>
While AFC desires and seeks to earn an underwriting profit on all
of its business, it is not always possible to do so. As a result, AFC
attempts to expand in the most profitable areas and control growth or
even reduce its involvement in the least profitable ones.
Excluding the special $214 million A&E charge in the fourth quarter
of 1998, underwriting results of AFC's insurance operations
outperformed the industry average for the thirteenth 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 and nonstandard auto businesses.
Net written premiums and combined ratios for AFC's property and
casualty insurance subsidiaries were as follows (dollars in millions):
1998 1997 1996
Net Written Premiums (GAAP)
Personal $1,279 $1,345 $1,384
Specialty 1,312(*) 1,468 1,367
Other Lines 18 45 37
$2,609 $2,858 $2,788
Combined Ratios (GAAP)
Personal 97.3% 98.5% 103.9%
Specialty 105.0 100.0 88.4
Aggregate (including A&E and other lines) 110.7% 101.4% 102.9%
(*) Before a reduction of $138 million for the unearned premium
transfer related to the sale of the Commercial lines division.
Special A&E Charge Operating results for 1998 and 1996 were
adversely impacted by increases in A&E reserves (exposures for which
AFC may be liable under general liability policies written years ago)
and higher catastrophe losses. A standard insurance measure used in
testing the reasonableness of A&E reserves has been the "survival
ratio" (reserves divided by average annual paid losses for the
preceding three years). Due in part to the greater uncertainties
inherent in estimating A&E claims, management has evaluated its
survival ratio in relation to those published for the industry. Based
primarily on industry survival ratios published in mid-1996, AFC
increased A&E reserves of its discontinued insurance lines by $120
million in 1996 by recording a third quarter, noncash pretax charge of
$80 million and reallocating $40 million, or approximately 2%, of its
Specialty group reserves (approximately $2.1 billion at December 31,
1996).
Under the agreement covering the sale of its Commercial lines
division in 1998, AFC retained liabilities for certain A&E exposures.
Prompted by this retention and as part of the continuing process of
monitoring reserves, AFC began a thorough study of its A&E exposures.
Based on this study and observations of industry trends in this
regard, AFC decided that the survival ratio may not be the best basis
for measuring ultimate A&E exposures. AFC's study was reviewed by
independent actuaries who used state of the art actuarial techniques
that have wide acceptance in the industry. The methods used involved
sampling and statistical modeling incorporating external data bases
that supplement the internal information. AFC recorded a fourth
<PAGE>
quarter charge of $214 million increasing A&E reserves at December 31,
1998, to approximately $866 million (before deducting reinsurance
recoverables of $241 million), an amount which, in the opinion of
management, makes a reasonable provision for AFC's ultimate liability
for A&E claims.
Personal The Personal group's net written premiums decreased
$65.9 million (5%) during 1998 due primarily to stronger price
competition in the personal automobile market. The combined ratio
improved in 1998 due to both lower loss experience and a 6% reduction
in underwriting expenses.
The Personal group's net written premiums decreased $39.6 million
(3%) during 1997 due primarily to a reinsurance agreement, effective
January 1, 1997, under which 80% of all AFC's homeowners' business was
reinsured. Excluding the impact of the reinsurance agreement,
premiums increased 4%. Volume increases in the California nonstandard
auto business resulting from enactment of legislation which
33
<PAGE>
requires drivers to provide proof of insurance in order to obtain a
valid permit contributed to a growth in personal automobile business.
Rate increases during 1995 and early 1996, primarily in the
nonstandard auto group, contributed to the improvement in the combined
ratio in 1997.
Specialty The Specialty group's net written premiums decreased
$156 million (11%) during 1998 due primarily to the impact of a
reinsurance agreement whereby approximately 30% of AFC's California
workers' compensation premiums were ceded and the sale of the
Commercial lines division. Excluding these operations, the net
written premiums of the other specialty businesses were essentially
the same as a year ago. Underwriting results worsened from the
comparable period in 1997 due to losses from the midwestern storms in
the second quarter of 1998 compared to milder weather conditions
during 1997 and unusually good results in 1997 in certain other lines.
Net written premiums increased $101.8 million (7%) in 1997 due
primarily to premiums recorded by a newly acquired aviation division
and the return of premiums in 1996 related to the withdrawal from a
voluntary pool. The Specialty group had a combined ratio of 100% in
1997 despite a significant decline in the results of AFC's California
workers' compensation business relating to (i) deteriorating
underwriting margins on business written in 1996 and 1997, (ii)
reserve reductions in 1996 primarily for business written prior to
1995 in response to a fundamental change in the California workers'
compensation market and actuarial evaluations and (iii) several
current year commercial casualty losses as well as adverse development
in certain prior year claims. The Specialty group's combined ratio
was unusually low in 1996 due primarily to the reallocation of
$40 million in reserves to A&E reserves (a combined ratio impact of
3.0 percentage points) and the 1996 reductions in California workers'
compensation reserves mentioned above.
Life, Accident and Health Premiums and Benefits The increase in life,
accident and health premiums and benefits in 1998 reflects primarily
AAG's acquisition of Great American Life Assurance Company of Puerto
Rico, Inc. in December 1997. Life, accident and health premiums and
benefits increased in 1997 due primarily to an increase in pre-need
life insurance sales by AAG's Funeral Services division which was sold
in 1998.
Investment Income Changes in investment income reflect fluctuations
in market rates and changes in average invested assets.
1998 compared to 1997 Investment income increased $16.9 million
(2%) from 1997 due primarily to an increase in the average amount of
investments held partially offset by decreasing market interest rates.
1997 compared to 1996 Investment income increased $23.4 million
(3%) from 1996 due primarily to an increase in the average amount of
investments held partially offset by decreasing market interest rates.
Investee Corporation Equity in net losses of investee corporation
represents AFC's proportionate share of the results of Chiquita Brands
International. Equity in net losses excludes AFC's share of amounts
included in extraordinary items; the amount for 1996 includes
$1.5 million in earnings from Citicasters which was sold in 1996.
<PAGE>
AFG recorded equity in net losses of Chiquita of $13.2 million,
$5.6 million and $18.4 million in 1998, 1997 and 1996, respectively.
Chiquita's loss attributable to common shareholders (before
extraordinary items) was $35.5 million, $16.6 million and
$39.7 million during these same periods.
34
<PAGE>
Chiquita's results for 1998 include pretax writedowns and costs of
$74 million resulting from widespread flooding in Honduras and
Guatemala caused by Hurricane Mitch. Excluding these unusual items,
Chiquita's operating income improved $52 million in 1998 compared to
1997 due primarily to lower delivered product costs for bananas on
higher worldwide volume, which more than offset the adverse effect of
lower banana pricing.
Chiquita's results for 1997 were adversely affected by a stronger
dollar in relation to major European currencies (mitigated in part by
the company's foreign currency hedging program) and by increased
banana production costs resulting primarily from widespread flooding
in 1996. These factors more than offset the benefit of higher local
currency banana pricing in Europe during the second half of the year.
Chiquita's results for 1996 include pretax writedowns and costs of
$70 million resulting from (i) industry-wide flooding in Costa Rica,
Guatemala and Honduras, (ii) certain strategic undertakings designed
to achieve further long-term reductions in the delivered product cost
of Chiquita bananas and (iii) certain claims relating to prior
European Union quota restructuring actions.
Gains on Sales of Investees The gains on sales of investees in 1998
and 1997 represent pretax gains to AFC as a result of Chiquita's
public issuance of shares of its common stock. The gain on sale of
investee in 1996 represents a pretax gain, before $6.5 million of
minority interest, on the sale of Citicasters common stock.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in
1998 include (i) a pretax gain of $152.6 million on the sale of the
Commercial lines division, (ii) a pretax gain of $21.6 million on
AAG's sale of its Funeral Services division and (iii) a charge of
$15.5 million relating to operations expected to be sold or otherwise
disposed of. The gains on sales of subsidiaries in 1997 include (i) a
pretax gain of $49.9 million on the sale of MDI and (ii) a charge of
$17 million relating to operations expected to be sold or otherwise
disposed of. The gains on sales of subsidiaries in 1996 include a
pretax gain of $33.9 million on the sale of Buckeye Management Company
and the settlement of litigation related to a subsidiary sold in 1993.
Other Income
1998 compared to 1997 Other income decreased $15.2 million (10%)
in 1998 due primarily to income of $46.3 million in 1997 from the sale
of development rights in New York City (including $32.5 million on
rights sold to AFG) and the absence of revenues from a noninsurance
subsidiary which was sold in the fourth quarter of 1997, partially
offset by income in 1998 from the sale of operating real estate assets
and lease residuals.
1997 compared to 1996 Other income increased $18.0 million (13%)
in 1997 compared to 1996 due primarily to the above mentioned sale of
development rights, partially offset by the absence of revenues from a
noninsurance subsidiary which was sold in the first quarter of 1997.
<PAGE>
Annuity Benefits For GAAP financial reporting purposes, annuity
receipts are accounted for as interest-bearing deposits ("annuity
benefits accumulated") rather than as revenues. Under these
contracts, policyholders' funds are credited with interest on a tax-
deferred basis until withdrawn by the policyholder. Annuity benefits
reflect amounts accrued on annuity policyholders' funds accumulated.
The rate at which AAG credits interest on most of its annuity
policyholders' funds is subject to change based on management's
judgment of market conditions. As a result, management has been able
to react to changes in market interest rates and maintain a desired
interest rate spread. While AAG believes the recent interest rate and
stock market environment over the last several years has contributed
to an increase in annuitizations and surrenders, the company's
persistency rate remains approximately 88%. However, a continuation
of the current interest rate environment could adversely affect this
rate.
35
<PAGE>
Fixed annuity receipts totaled approximately $480 million in 1998,
$490 million in 1997 and $570 million in 1996. Annuity receipts in
1997 reflect the decrease of business written by a single agency from
$99 million in 1996 to $23 million in 1997. AAG is no longer writing
business through this agency. AAG believes that the success of the
stock market and the recent interest rate environment have also
resulted in decreased sales and persistency of traditional fixed
annuities. Sales of annuity products linked to the performance of the
stock market (equity-indexed and variable annuities) helped offset
this decrease.
Annuity benefits decreased $17.2 million (6%) from 1997 due
primarily to decreases in crediting rates and changes in actuarial
assumptions. Annuity benefits increased $7 million (3%) in 1997 due
primarily to an increase in average annuity benefits accumulated
partially offset by decreases in crediting rates.
Interest on Borrowed Money Changes in interest expense result from
fluctuations in market rates as well as changes in borrowings. AFC
has generally financed its borrowings on a long-term basis which has
resulted in higher current costs.
1998 compared to 1997 Interest expense decreased $14.5 million
(17%) from 1997 due primarily to a decrease in borrowings from AFG.
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.
Minority Interest Expense Minority interest expense for 1996
includes $6.5 million related to the sale of Citicasters shares
held by AFEI.
Other Operating and General Expenses
1998 compared to 1997 Other operating and general expenses
increased $16.9 million (5%) in 1998 due primarily to inclusion of the
operations of Great American Life Assurance Company of Puerto Rico
following its acquisition in late 1997 which more than offset the
absence of expenses from a noninsurance subsidiary which was sold in
the fourth quarter of 1997.
1997 compared to 1996 Operating and general expenses in 1997
include third quarter charges of $5.5 million relating to an
arbitration settlement and $4.0 million relating to relocating a
subsidiary's operations to Cincinnati. These charges were more than
offset by a reduction caused by the absence of expenses from a
noninsurance subsidiary which was sold in the first quarter of 1997.
Income Taxes See Note K to the Financial Statements for an analysis
of items affecting AFC's effective tax rate.
<PAGE>
Recent Accounting Standards The following accounting standards have
been implemented by AFC in 1997 or 1998 or will be implemented in 1999
or 2000. The implementation of these standards is discussed under
various subheadings of Note A to the Financial Statements (segment
information is discussed in Note C); effects of each are shown in the
relevant Notes. Implementation of Statement of Position ("SOP") 98-5
in the first quarter of 1999 and Statement of Financial Account
Standard ("SFAS") No. 133 in the first quarter of 2000 is not expected
to have a significant effect on AFC.
Accounting
Standard Subject of Standard (Year Implemented) Reference
SFAS #130 Comprehensive Income (1998) "Comprehensive Income"
SFAS #131 Segment Information (1998) "Segment Information"
SFAS #133 Derivatives (2000) "Derivatives"
SOP 98-5 Start-up Costs (1999) "Start-up Costs"
Other standards issued in recent years did not apply to AFC or had
only negligible effects on AFC.
36
<PAGE>
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A is included in Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1998 and 1997 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note N to the
Consolidated Financial Statements.
Please refer to "Forward Looking Statements" following the Index in
front of this Form 10-K.
<PAGE>
PART III
The information required by the following Items will be included in
AFC's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange
Commission within 120 days after the end of Registrant's fiscal year
and is incorporated herein by reference.
ITEM 10 Directors and Executive Officers of the
Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial
Owners and Management
ITEM 13 Certain Relationships and Related Transactions
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Corporation
We have audited the accompanying consolidated balance sheet of
American Financial Corporation and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
earnings, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of American Financial Corporation and subsidiaries
at December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 19, 1999
F-1
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
1998 1997
Assets:
Cash and short-term investments $ 289,944 $ 231,227
Investments:
Fixed maturities:
Available for sale - at market
(amortized cost - $9,920,407 and $7,225,736) 10,323,407 7,532,836
Held to maturity - at amortized cost
(market - $3,417,900) - 3,326,996
Other stocks - principally at market
(cost - $207,345 and $153,322) 430,345 446,222
Investment in investee corporation 192,138 200,714
Policy loans 220,496 240,955
Real estate and other investments 268,171 280,235
Total investments 11,434,557 12,027,958
Recoverables from reinsurers and prepaid
reinsurance premiums 1,973,895 998,743
Agents' balances and premiums receivable 618,198 691,005
Deferred acquisition costs 464,047 521,898
Other receivables 318,154 261,454
Assets held in separate accounts 120,049 300,491
Prepaid expenses, deferred charges and other assets 343,554 405,798
Cost in excess of net assets acquired 285,469 299,408
$15,847,867 $15,737,982
<PAGE>
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,773,377 $ 4,225,336
Unearned premiums 1,232,848 1,328,910
Annuity benefits accumulated 5,449,633 5,528,111
Life, accident and health reserves 341,595 709,899
Payable to American Financial Group, Inc. 270,500 352,766
Other long-term debt:
Holding companies 315,536 286,661
Subsidiaries 176,896 194,084
Liabilities related to separate accounts 120,049 300,491
Accounts payable, accrued expenses and other
liabilities 1,112,442 908,622
Total liabilities 13,792,876 13,834,880
Minority interest 524,335 509,619
Shareholders' Equity:
Preferred Stock (liquidation value $72,154) 72,154 72,154
Common Stock, no par value
- 20,000,000 shares authorized
- 10,593,000 shares outstanding 9,625 9,625
Capital surplus 943,359 936,154
Retained earnings 157,218 34,350
Net unrealized gain on marketable securities,
net of deferred income taxes 348,300 341,200
Total shareholders' equity 1,530,656 1,393,483
$15,847,867 $15,737,982
See notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
Year ended December 31,
1998 1997 1996
Income:
Property and casualty insurance premiums $2,698,738 $2,824,381 $2,844,512
Life, accident and health premiums 170,365 121,506 103,552
Investment income 885,591 868,689 845,330
Equity in net losses of investees (13,198) (5,564) (16,955)
Realized gains (losses) on sales of:
Securities 6,275 46,006 (3,470)
Investees 9,420 11,428 169,138
Subsidiaries 158,673 33,602 36,837
Other investments 5,293 - -
Other income 137,674 152,854 134,904
4,058,831 4,052,902 4,113,848
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,001,783 2,075,616 2,051,421
Special asbestos and environmental
charge 213,500 - 80,000
Commissions and other underwriting
expenses 772,917 790,324 793,800
Annuity benefits 261,666 278,829 271,821
Life, accident and health benefits 131,652 110,082 92,315
Interest charges on borrowed money 72,625 87,155 86,148
Minority interest expense 45,279 45,477 54,748
Other operating and general expenses 348,588 331,655 344,052
3,848,010 3,719,138 3,774,305
Earnings before income taxes and
extraordinary items 210,821 333,764 339,543
Provision for income taxes 81,418 125,227 89,658
Earnings before extraordinary items 129,403 208,537 249,885
Extraordinary items - loss on
prepayment of debt (763) (7,147) (27,889)
Net Earnings $ 128,640 $ 201,390 $ 221,996
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars In Thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized
Preferred and Capital Retained Gain on Comprehensive
Stock Surplus Earnings Securities Income
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $168,484 $473,991 $365,126 $240,500
Net earnings - - 221,996 - $221,996
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 unrealized - - - (57,100) (57,100)
Other - 1,102 - - -
Balance at December 31, 1996 162,760 929,371 1,364 183,400 $164,896
Net earnings - - 201,390 - 201,390
Dividends on Preferred Stock - - (15,071) - -
Purchases and redemptions (162,760) - (153,333) - -
Issuance of Preferred Stock 72,154 - - - -
Capital contribution from parent - 16,707 - - -
Change in unrealized - - - 157,800 157,800
Other - (299) - - -
Balance at December 31, 1997 72,154 945,779 34,350 341,200 $359,190
Net earnings - - 128,640 - 128,640
Dividends on Preferred Stock - - (5,772) - -
Capital contribution from parent - 6,963 - - -
Change in unrealized - - - 7,100 7,100
Other - 242 - - -
Balance at December 31, 1998 $ 72,154 $952,984 $157,218 $348,300 $135,740
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Operating Activities:
Net earnings $128,640 $ 201,390 $ 221,996
Adjustments:
Extraordinary items 763 7,147 27,889
Special asbestos and environmental charge 213,500 - 80,000
Depreciation and amortization 106,280 76,434 79,425
Annuity benefits 261,666 278,829 271,821
Equity in net losses of investee corporations 13,198 5,564 16,955
Changes in reserves on assets 14,020 7,610 5,656
Realized gains on investing activities (205,659) (135,657) (198,676)
Deferred annuity and life policy acquisition costs (117,202) (72,634) (68,511)
Decrease (increase) in reinsurance and other
receivables (342,394) (189,643) 95,553
Decrease (increase) in other assets (9,433) 24,325 92,176
Increase (decrease) in insurance claims and
reserves 176,552 206,900 (70,829)
Increase (decrease) in other liabilities 154,353 (29,935) (211,697)
Increase in minority interest 10,175 36,440 52,333
Dividends from investees 4,799 4,799 4,799
Other, net (14,651) (25,711) (3,989)
394,607 395,858 394,901
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,155,192) (2,555,060) (2,128,015)
Equity securities (78,604) (37,107) (10,528)
Subsidiaries (30,325) (93,839) -
Real estate, property and equipment (66,819) (64,917) (38,035)
Maturities and redemptions of fixed maturity
investments 1,248,626 897,786 615,849
Sales of:
Fixed maturity investments 795,520 1,407,598 881,114
Equity securities 28,850 104,960 53,195
Investees and subsidiaries 164,589 32,500 284,277
Real estate, property and equipment 53,962 23,289 7,981
Cash and short-term investments of acquired
(former) subsidiaries (21,141) 2,714 (4,589)
Decrease (increase) in other investments (15,135) (12,892) 594
(75,669) (294,968) (338,157)
<PAGE>
Financing Activities:
Fixed annuity receipts 480,572 493,708 573,741
Annuity surrenders, benefits and withdrawals (690,388) (607,174) (517,881)
Additional long-term borrowings 262,537 184,150 288,775
Reductions of long-term debt (251,837) (230,688) (582,288)
Borrowings from AFG 6,000 201,000 152,471
Repayments of borrowings from AFG (80,000) (224,500) (61,000)
Issuances of Preferred Stock - - 16,800
Repurchases of Preferred Stock - (243,939) (36,912)
Issuances of trust preferred securities - 149,353 72,412
Capital contribution 18,667 18,667 18,666
Cash dividends paid (5,772) (15,071) (24,898)
(260,221) (274,494) (100,114)
Net Increase (Decrease) in Cash and Short-term
Investments 58,717 (173,604) (43,370)
Cash and short-term investments at beginning of
period 231,227 404,831 448,201
Cash and short-term investments at end of period $289,944 $ 231,227 $ 404,831
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies I. Minority Interest
B. Acquisitions and Sales of Subsidiaries J. Shareholders' Equity
and Investees K. Income Taxes
C. Segments of Operations L. Extraordinary Items
D. Investments M. Commitments and Contingencies
E. Investment in Investee Corporations N. Quarterly Operating Results
F. Cost in Excess of Net Assets Acquired O. Insurance
G. Payable to American Financial Group P. Additional Information
H. Other Long-Term Debt Q. Subsequent Event
Please refer to "Forward Looking Statements" following the Index in front
of this Form 10-K.
A. Accounting Policies
Basis of Presentation At the close of business on December 31,
1996, American Financial Group, Inc. ("AFG"), which owns 100% of
the Common Stock of American Financial Corporation ("AFC"),
contributed to AFC 81% of the common stock of its wholly-owned
subsidiary, American Premier Underwriters, Inc. ("American
Premier" or "APU"). Since AFC and American Premier were under
AFG's common control, the acquisition of American Premier has been
recorded by AFC at AFG's historical cost in a manner similar to a
pooling of interests.
The consolidated financial statements include the accounts of AFC
and its subsidiaries. Certain reclassifications have been made to
prior years to conform to the current year's presentation. All
significant intercompany balances and transactions have been
eliminated. With the exception of the acquisition of American
Premier, all acquisitions have been treated as purchases. The
results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Changes in
circumstances could cause actual results to differ materially from
those estimates.
<PAGE>
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. At December 31, 1998, AFC reclassified "held to maturity"
securities with an amortized cost of $2.6 billion to "available
for sale" to give management greater flexibility to react to
changing market conditions. This reclassification resulted in an
increase of $98.8 million in the carrying value of fixed maturity
investments and (after effects of income taxes, minority interest,
and adjustments related to deferred policy acquisition costs) an
increase of $48.8 million in shareholders' equity. The transfer
had no effect on net earnings.
Short-term investments are carried at cost; loans receivable are
carried primarily at the aggregate unpaid balance. Premiums and
discounts on mortgage-backed securities are amortized over their
expected average lives using the interest method.
F-6
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Investment in Investee Corporation Investments in securities of
20%- to 50%-owned companies are generally carried at cost,
adjusted for 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.
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 reinsured 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.
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.
<PAGE>
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period on the direct business written; (b) estimates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. These liabilities are subject to
the impact of changes in claim amounts and frequency and other
factors. In spite of the variability inherent in such estimates,
management believes that the liabilities for unpaid losses and
loss adjustment expenses are adequate. Changes in estimates of
the liabilities for losses and loss adjustment expenses are
reflected in the Statement of Earnings in the period in which
determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are recorded as increases or decreases in "annuity
benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to other
income.
F-7
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Life, Accident and Health Reserves Liabilities for future
policy benefits under traditional life, accident and health
policies are computed using the net level premium method.
Computations are based on anticipated investment yield, mortality,
morbidity and surrenders and include provisions for unfavorable
deviations. Reserves are modified as necessary to reflect actual
experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Separate account assets and related liabilities represent variable
annuity deposits and, in 1997, include deposits maintained by
several banks under a tax-deferred annuity program previously
offered by American Annuity Group, Inc.'s ("AAG's") Funeral
Services division, which was sold in 1998 (see Note B).
Premium Recognition Property and casualty premiums are earned
over the terms of the policies on a pro rata basis. Unearned
premiums represent that portion of premiums written which is
applicable to the unexpired terms of policies in force. On
reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from policyholders.
For interest-sensitive life and universal life products, premiums
are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against
the policyholder account for mortality coverage and contract
expenses.
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which the
related premium is earned. Changes in estimates are included in
income in the period determined. Policyholder dividends do not
become legal liabilities unless and until declared by the boards
of directors of the insurance companies.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFC
subsidiaries, including preferred securities issued by trust
subsidiaries of AAG, and AFG's direct ownership interest in
American Premier and American Financial Enterprises, Inc.
("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.
<PAGE>
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.
Income Taxes AFC files consolidated federal income tax returns
which include all 80%-owned U.S. subsidiaries, except for certain
life insurance subsidiaries and their subsidiaries. Deferred
income taxes are calculated using the liability method. Under
this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and
tax bases and are measured using enacted tax rates. Deferred tax
assets are recognized if it is more likely than not that a benefit
will be realized.
F-8
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Benefit Plans AFC provides retirement benefits to qualified
employees of participating companies through contributory and
noncontributory defined contribution plans contained in AFG's
Retirement and Savings Plan. Under the retirement portion of the
plan, company contributions (approximately [6%] of covered
compensation in 1998) are invested primarily in securities of AFG
and affiliates. Under the savings portion of the plan, AFC
matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in the
year for which they are declared.
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.
Start-up Costs Certain costs associated with introducing new
products and distribution channels are deferred by AAG and are
amortized on a straight-line basis over 5 years. Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," was issued during the second quarter of 1998 and is
effective for fiscal years beginning after December 15, 1998. The
SOP requires that (i) costs of start-up activities be expensed as
incurred and (ii) unamortized balances of previously deferred
costs be expensed no later than the first quarter of 1999 and
reported as the cumulative effect of a change in accounting
principle. AAG had approximately $7 million in capitalized start-
up costs at December 31, 1998.
Derivatives The Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," during the second quarter of 1998. SFAS No. 133 is
effective for fiscal periods (both years and quarters) beginning
after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including
derivative instruments that are embedded in other contracts, and
for hedging activities. SFAS No. 133 requires the recognition of
all derivatives (both assets and liabilities) in the statement of
financial position at fair value. Changes in fair value of
derivative instruments are included in current income or as a
component of comprehensive income (outside current income)
depending on the type of derivative. Implementation of SFAS No.
133 is not expected to have a material effect on AFC's financial
position or results of operations.
<PAGE>
Comprehensive Income Effective January 1, 1998, AFC implemented
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 uses
the term "comprehensive income" to describe the total of net
earnings plus other comprehensive income. For AFC, other
comprehensive income represents the change in net unrealized gain
on marketable securities net of deferred taxes. Implementation of
this statement had no impact on net earnings or shareholders'
equity. Appropriate data for prior periods has been added to
conform to the current presentation.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and property
and equipment. "Financing activities" include obtaining resources
from owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating".
Short-term investments having original maturities of three months
or less when purchased are considered to be cash equivalents for
purposes of the financial statements.
Fair Value of Financial Instruments Methods and assumptions used
in estimating fair values are described in Note P 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.
F-9
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. Acquisitions and Sales of Subsidiaries and Investees
Commercial Lines Division In December 1998, AFC completed the
sale of substantially all of its commercial lines division to Ohio
Casualty Corporation for $300 million plus warrants to purchase
3 million shares of Ohio Casualty common stock. AFC retained
$300 million in securities it would otherwise have transferred to
Ohio Casualty in connection with the reinsurance of business
assumed by Ohio Casualty. For accounting purposes, the insurance
liabilities ceded to Ohio Casualty and the deferred a gain of
$103 million on the insurance ceded to Ohio Casualty and
recognized sale of the other net assets are required to be
accounted for separately. AFC a pretax gain of $153 million on
the sale of the other net assets. The deferred gain is being
recognized over the estimated remaining settlement period
(weighted average of 4.25 years) of the claims ceded. AFC may
receive up to an additional $40 million in the year 2000 based
upon the retention and growth of the insurance businesses acquired
by Ohio Casualty. The commercial lines sold generated net written
premiums of approximately $250 million in 1998 (11 months),
$315 million in 1997 and $314 million in 1996.
Funeral Services division In September 1998, AAG sold its Funeral
Services division for approximately $165 million in cash. The
division held assets of approximately $1 billion at the sale date.
AFC realized a third quarter pretax gain of $21.6 million, before
$2.7 million of minority interest, on this sale.
Chiquita During 1997 and 1998, Chiquita issued shares of its
common stock in acquisitions of operating businesses. AFC
recorded pretax gains of $11.4 million in the fourth quarter of
1997, $7.7 million in the first quarter of 1998 and $1.7 million
in the second quarter of 1998 representing the excess of AFC's
equity in Chiquita following the issuances of its common stock
over AFC's previously recorded carrying value.
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.
Peritus experienced difficulties in 1998, wrote off substantial
amounts of its assets, and reported significant losses throughout
the year. As a result, AFC recognized a pretax realized loss of
$26.9 million and reduced its carrying value of Peritus shares to
a nominal value at December 31, 1998.
Citicasters In 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.
<PAGE>
Buckeye In 1996, AFC 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.
F-10
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. Segments of Operations Following the sale of substantially all of
its Commercial lines division, AFC's property and casualty group
is engaged primarily in private passenger automobile and specialty
insurance businesses. The Personal group consists of the
nonstandard auto group along with the preferred/standard private
passenger auto and other personal insurance business, formerly
included in the Commercial and Personal lines. The Specialty
group now includes a highly diversified group of specialty
business units (formerly, Specialty lines) plus the commercial
business previously included in the Commercial and Personal lines.
AFC's annuity and life business markets primarily retirement
products as well as life and supplemental health insurance. AFC's
businesses operate throughout the United States. In addition, AFC
has owned significant portions of the voting equity securities of
certain companies (investee corporation - see Note E).
Effective January 1, 1998, AFC implemented SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires segment information to be
reported based on how management internally evaluates the
operating performance of its business units. Implementation of
this standard had no impact on AFC's financial position or results
of operations.
F-11
<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.
Operating profit (loss) represents total revenues less operating
expenses.
1998 1997 1996
Assets
Property and casualty insurance (a) $ 8,278,898 $ 7,517,856 $ 7,116,088
Annuities and life 7,174,544 7,693,463 7,009,127
Other 202,287 325,949 674,297
15,655,729 15,537,268 14,799,512
Investment in investees 192,138 200,714 199,651
$15,847,867 $15,737,982 $14,999,163
Revenues (b)
Property and casualty insurance:
Premiums earned:
Personal $ 1,289,689 $ 1,356,642 $ 1,447,751
Specialty 1,371,509 1,429,143 1,355,906
Other lines 37,540 38,596 40,855
2,698,738 2,824,381 2,844,512
Investment and other income 643,106 448,849 500,897
3,341,844 3,273,230 3,345,409
Annuities and life (c) 729,854 638,348 585,079
Other 331 146,888 200,315
4,072,029 4,058,466 4,130,803
Equity in net losses of investees (13,198) (5,564) (16,955)
$ 4,058,831 $ 4,052,902 $ 4,113,848
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal $ 34,029 $ 21,235 ($ 55,989)
Specialty (67,131) (324) 155,405
Other lines (d) (256,360) (62,470) (180,125)
(289,462) (41,559) (80,709)
Investment and other income 505,801 311,169 359,002
216,339 269,610 278,293
Annuities and life 128,074 93,794 77,119
Other (e) (120,394) (24,076) 1,086
224,019 339,328 356,498
Equity in net losses of investees (13,198) (5,564) (16,955)
$ 210,821 $ 333,764 $ 339,543
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as
other income earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and other
environmental matters ("A&E").
(e) Includes holding company expenses.
F-12
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investments Fixed maturities and other stocks at December 31,
consisted of the following (in millions):
<TABLE>
<CAPTION>
1998
Available for Sale Held to Maturity
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
United States Government
and government agencies
and authorities $ 507.5 $ 537.6 $ 30.2 ($ .1) $ - $ - $ - $ -
States, municipalities and
political subdivisions 137.0 144.8 7.8 - - - - -
Foreign government 67.3 71.0 3.8 (.1) - - - -
Public utilities 688.0 717.8 29.9 (.1) - - - -
Mortgage-backed securities 2,399.9 2,493.2 102.0 (8.7) - - - -
All other corporate 6,061.4 6,297.0 265.9 (30.3) - - - -
Redeemable preferred stocks 59.3 62.0 3.5 (.8) - - - -
$9,920.4 $10,323.4 $443.1 ($40.1) $ - $ - $ - $ -
Other stocks $ 207.3 $ 430.3 $230.7 ($ 7.7)
</TABLE>
<TABLE>
<CAPTION>
1997
Available for Sale Held to Maturity
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
United States Government
and government agencies
and authorities $ 600.8 $ 618.6 $ 18.1 ($ .3) $ - $ - $ - $ -
States, municipalities and
political subdivisions 86.7 89.3 2.6 - 72.0 73.6 1.8 (.2)
Foreign government 55.9 57.9 2.1 (.1) 8.3 8.9 .6 -
Public utilities 359.3 374.7 15.7 (.3) 459.7 466.7 8.3 (1.3)
Mortgage-backed securities 1,715.7 1,779.4 65.5 (1.8) 868.9 899.4 30.6 (.1)
All other corporate 4,336.9 4,536.9 200.0 - 1,918.1 1,969.3 52.7 (1.5)
Redeemable preferred stocks 70.4 76.0 5.9 (.3) - - - -
$7,225.7 $ 7,532.8 $309.9 ($ 2.8) $3,327.0 $ 3,417.9 $ 94.0 ($ 3.1)
Other stocks $ 153.3 $ 446.2 $293.7 ($ .8)
</TABLE>
<PAGE>
The table below sets forth the scheduled maturities of fixed
maturities based on market value as of December 31, 1998. Data
based on amortized cost is generally the same. Mortgage-backed
securities had an average life of approximately 4.6 years at
December 31, 1998.
Maturity
One year or less 6%
After one year through five years 25
After five years through ten years 30
After ten years 15
76
Mortgage-backed securities 24
100%
F-13
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 "Other stocks" at December 31, 1998 and 1997, are
$243 million and $313 million, respectively, of securities of
Provident Financial Group, Inc. which exceeded 10% of
Shareholders' Equity.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments
are summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1998
Realized(*) $ 25,841 ($ 19,566) ($ 2,196) $ 4,079
Change in Unrealized 4,982 (69,900) 22,721 (42,197)
1997
Realized 11,542 34,464 (16,102) 29,904
Change in Unrealized 222,188 107,600 (115,426) 214,362
1996
Realized (16,545) 13,075 8,199 4,729
Change in Unrealized (271,803) 70,000 70,631 (131,172)
(*) Includes $6.8 million in realized gains on fixed maturities
transferred to Ohio Casualty in connection with the sale of the
Commercial lines division (see Note B).
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
1998
Held to Maturity (*) $ .8 $ 584.8 $ 45.3 $12.1 ($ .5)
Available for Sale 2,154.4 663.8 750.2 24.9 (17.5)
Total $2,155.2 $1,248.6 $ 795.5 $37.0 ($18.0)
1997
Held to Maturity $ 5.6 $ 422.3 $ 8.0 $ .5 ($ 1.0)
Available for Sale 2,549.5 475.5 1,399.6 37.7 (25.7)
Total $2,555.1 $ 897.8 $1,407.6 $38.2 ($26.7)
1996
Held to Maturity $ 202.2 $ 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)
(*)Prior to reclassification to available for sale at December 31, 1998.
Securities classified as "held to maturity" having amortized cost
of $41.8 million, $8.2 million and $9.5 million were sold for
gains (losses) of $603,000, ($170,000) and ($159,000) in 1998,
1997 and 1996, respectively, due to significant deterioration in
the issuers' creditworthiness.
F-14
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Investee Corporation Investment in investee
corporation reflects AFC's ownership of 24 million shares (37%) of
Chiquita common stock. The market value of this investment was
$229 million and $391 million at December 31, 1998 and 1997,
respectively. Chiquita is a leading international marketer,
producer and distributor of quality fresh fruits and vegetables
and processed foods. Equity in net losses excludes AFC's share of
amounts included in extraordinary items; the amount for 1996
includes $1.5 million in earnings from Citicasters which was sold
in 1996.
Summarized financial information for Chiquita at December 31, is
shown below (in millions).
1998 1997 1996
Current Assets $ 840 $ 783
Noncurrent Assets 1,669 1,618
Current Liabilities 531 483
Noncurrent Liabilities 1,184 1,138
Shareholders' Equity 794 780
Net Sales $2,720 $2,434 $2,435
Operating Income 79 100 84
Loss Before Extraordinary Items (18) - (28)
Extraordinary Loss from Debt Refinancings - - (23)
Net Loss (18) - (51)
Net Loss Attributable to Common Shares (36) (17) (63)
Operating income for 1998 includes $74 million of fourth quarter
write-downs and costs resulting from widespread flooding in
Honduras and Guatemala caused by Hurricane Mitch.
F. Cost in Excess of Net Assets Acquired At December 31, 1998 and
1997, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately
$143 million and $133 million, respectively. Amortization expense
was $12.2 million in 1998, $11.6 million in 1997 and $10.8 million
in 1996.
G. 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.
<PAGE>
In December 1997, AFG's credit agreements with AFC and APU were
replaced with a ten-year reciprocal Master Credit Agreement among
AFG and several 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.
F-15
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Other Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1998 1997
Holding Companies:
AFC notes payable under bank line $ 80,000 $ 45,000
AFC 9-3/4% Debentures due April 2004, less discount
of $618 and $737 (imputed rate - 9.8%) 78,560 79,792
American Premier Underwriters, Inc. ("APU")
9-3/4% Subordinated Notes due August 1999,
including premium of $487 and $1,224
(imputed rate - 8.8%) 89,467 92,127
APU 10-5/8% Subordinated Notes due April 2000,
including premium of $883 and $1,559
(imputed rate - 8.8%) 41,518 43,889
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $1,471 and $1,584
(imputed rate - 9.6%) 17,473 17,586
Other 8,518 8,267
$315,536 $286,661
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $ -
AAG notes payable under bank line 27,000 107,000
AAG 11-1/8% Senior Subordinated Notes - 24,080
Notes payable secured by real estate 37,602 49,525
Other 12,294 13,479
$176,896 $194,084
At December 31, 1998, sinking fund and other scheduled principal
payments on debt for the subsequent five years were as follows (in
thousands):
Holding
Companies Subsidiaries Total
1999 $88,980 $ 1,986 $90,966
2000 40,635 8,685 49,320
2001 - 1,382 1,382
2002 85,608 1,268 86,876
2003 - 28,294 28,294
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures previously
purchased are applied to the earliest scheduled retirements.
<PAGE>
In February 1998, AFC entered into an unsecured credit agreement
with a group of banks under which AFC can borrow up to
$300 million through December 2002. Borrowings bear interest at
floating rates based on prime or Eurodollar rates. At December
31, 1998 and 1997, the weighted average interest rate on amounts
borrowed under this bank credit line and a previous one was 5.68%
and 6.81%, respectively.
In January 1998, AAG replaced its existing bank lines with a
$200 million unsecured credit agreement. Loans under the credit
agreement mature from 2000 to 2003 and bear interest at floating
rates based on prime or Eurodollar rates. At December 31, 1998
and 1997, the weighted average interest rate on amounts borrowed
under AAG's bank credit line was 6.09% and 6.80%, respectively.
F-16
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In February 1998, AAG borrowed under the credit line and retired
its 11-1/8% Notes. In June 1998, AAG issued $100 million principal
amount of 6-7/8% Senior Notes due 2008 and used the net proceeds
to reduce outstanding indebtedness under the credit line.
Significant retirements of long-term debt since January 1, 1997,
have been as follows (in millions):
Year Principal Cost
AFC Debentures 1997 $85.0 $96.7
1998 1.4 1.4
APU Notes 1997 11.3 12.5
1998 3.6 3.8
AAG Notes 1997 40.8 42.5
1998 24.1 24.8
Cash interest payments of $73 million, $98 million and $83 million
were made on long-term debt in 1998, 1997 and 1996, respectively.
I. Minority Interest Minority interest in AFC's balance sheet is
comprised of the following (in thousands):
1998 1997
Interest of AFG (parent) and noncontrolling
shareholders in subsidiaries' common
stock $299,335 $284,619
Preferred securities issued by
subsidiary trusts 225,000 225,000
$524,335 $509,619
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 AAG 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and
after 9/28/2001
AAG effectively provides unconditional guarantees of its trusts'
obligations.
<PAGE>
Minority Interest Expense Minority interest expense is comprised
of (in thousands):
1998 1997 1996
Interest of AFG (parent) and
noncontrolling shareholders in
earnings of subsidiaries $26,248 $29,978 $53,717
Accrued distributions on trust issued
preferred securities 19,031 15,499 1,031
$45,279 $45,477 $54,748
F-17
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Shareholders' Equity At December 31, 1998 and 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.
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, 1998 and 1997, the
outstanding voting 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, 1998 and 1997.
In December 1997, AFC retired all shares of its Series F and G
Preferred Stock in exchange for approximately $244 million in cash
and 2,886,161 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 1996, AFC redeemed 1.6 million shares of its Series F Preferred
Stock for $31.9 million and purchased 250,000 shares of Series F
from its retirement plan for $5.0 million. In 1996, AFC issued
1.6 million shares of its Series G Preferred Stock to its
retirement plan for $16.8 million.
<PAGE>
Unrealized Gain on Marketable Securities The change in net
unrealized gain on marketable securities included the following
(in millions):
Tax Minority
Pretax Effects Interest Net
1998
Unrealized holding gains (losses) on
securities arising during the period ($50.5) $19.0 $1.2 ($30.3)
Unrealized gain on securities transferred
from held to maturity 87.0 (30.4) (7.8) 48.8
Less reclassification adjustment for
realized gains included in net
income and unrealized gains of
subsidiaries sold (20.4) 7.1 1.9 (11.4)
Change in net unrealized gain on
marketable securities $16.1 ($4.3) ($4.7) $7.1
1997
Unrealized holding gains (losses) on
securities arising during the period $320.2 ($112.2) ($20.7) $187.3
Less reclassification adjustment for
realized gains included in net income (51.5) 18.0 4.0 (29.5)
Change in net unrealized gain on
marketable securities $268.7 ($ 94.2) ($16.7) $157.8
1996
Unrealized holding gains (losses) on
securities arising during the period ($ 94.3) $ 21.5 $11.5 ($61.3)
Less reclassification adjustment for
realized gains included in net income 4.7 (1.7) 1.2 4.2
Change in net unrealized gain on
marketable securities ($ 89.6) $ 19.8 $12.7 ($ 57.1)
F-18
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. Income Taxes The following is a reconciliation of income taxes at
the statutory rate of 35% and income taxes as shown in the
Statement of Earnings (in thousands):
1998 1997 1996
Earnings before income taxes
and extraordinary items $210,821 $333,764 $339,543
Extraordinary items before income taxes (1,258) (11,201) (34,892)
Adjusted earnings before income taxes $209,563 $322,563 $304,651
Income taxes at statutory rate $ 73,347 112,897 $106,628
Effect of:
Minority interest 9,055 10,168 18,507
Losses utilized (6,572) (3,164) (43,789)
Amortization of intangibles 4,566 3,362 3,065
Dividends received deduction (2,189) (2,002) (7,450)
Other 2,716 (88) 5,694
Total provision 80,923 121,173 82,655
Amounts applicable to extraordinary items 495 4,054 7,003
Provision for income taxes as shown
on the Statement of Earnings $ 81,418 $125,227 $ 89,658
Adjusted earnings before income taxes consisted of the following
(in thousands):
1998 1997 1996
Subject to tax in:
United States $202,094 $331,855 $318,919
Foreign jurisdictions 7,469 (9,292) (14,268)
$209,563 $322,563 $304,651
The total income tax provision consists of (in thousands):
1998 1997 1996
Current taxes (credits):
Federal $ 61,501 $ 27,875 $22,450
Foreign 94 - (1,735)
State 652 (2,544) 6,369
Deferred taxes:
Federal 18,254 96,301 55,250
Foreign 422 (459) 321
$ 80,923 $121,173 $82,655
<PAGE>
For income tax purposes, certain members of the AFC consolidated
tax group had the following carryforwards available at December
31, 1998 (in millions):
Expiring Amount
{ 1999 - 2003 $70
Operating Loss{ 2004 - 2008 56
Capital Loss 1999 68
Other - Tax Credits 15
F-19
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income tax assets and liabilities reflect temporary
differences between the carrying amounts of assets and liabilities
recognized for financial reporting purposes and the amounts
recognized for tax purposes. The significant components of
deferred tax assets and liabilities included in the Balance Sheet
at December 31, were as follows (in millions):
1998 1997
Deferred tax assets:
Net operating loss carryforwards $ 44.3 $ 66.6
Capital loss carryforwards 23.7 32.0
Insurance claims and reserves 291.2 287.5
Other, net 110.0 148.8
469.2 534.9
Valuation allowance for deferred
tax assets (88.6) (97.9)
380.6 437.0
Deferred tax liabilities:
Deferred acquisition costs (121.3) (127.4)
Investment securities (267.9) (268.2)
(389.2) (395.6)
Net deferred tax asset (liability) ($ 8.6) $ 41.4
The gross deferred tax asset has been reduced by a valuation
allowance based on an analysis of the likelihood of realization.
Factors considered in assessing the need for a valuation allowance
include: (i) recent tax returns, which show neither a history of
large amounts of taxable income nor cumulative losses in recent
years, (ii) opportunities to generate taxable income from sales of
appreciated assets, and (iii) the likelihood of generating larger
amounts of taxable income in the future. The likelihood of
realizing this asset will be reviewed periodically; any
adjustments required to the valuation allowance will be made in
the period in which the developments on which they are based
become known. The aggregate valuation allowance decreased by
$9.3 million in 1998 due primarily to the utilization of net
operating loss carryforwards previously reserved.
Cash payments for income taxes, net of refunds, were
$41.4 million, $43.7 million and $40.2 million for 1998, 1997 and
1996, respectively.
<PAGE>
L. Extraordinary Items Extraordinary items represent AFC's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
1998 1997 1996
Holding Companies:
AFC (parent) ($ 77) ($5,395) ($ 9,672)
APU (parent) (37) (502) (2,636)
Subsidiaries:
AAG (649) (1,250) (7,159)
Other - - 57
Investee:
Chiquita - - (8,479)
($763) ($7,147) ($27,889)
F-20
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Commitments and Contingencies Loss accruals (included in other
liabilities) have been recorded for various environmental and
occupational injury and disease claims and other contingencies
arising out of the railroad operations disposed of by American
Premier's predecessor, Penn Central Transportation Company
("PCTC"), prior to its bankruptcy reorganization in 1978. Under
purchase accounting in connection with the Mergers, any such
excess liability will be charged to earnings in AFC's financial
statements.
American Premier's liability for environmental claims of
$32.4 million at December 31, 1998, consists of a number of
proceedings and claims seeking to impose responsibility for
hazardous waste remediation costs at certain railroad sites
formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad related
operations. It is difficult to estimate remediation costs for a
number of reasons, including the number and financial resources of
other potentially responsible parties, the range of costs for
remediation alternatives, changing technology and the time period
over which these matters develop. American Premier's liability is
based on information currently available and is subject to change
as additional information becomes available.
American Premier's liability for occupational injury and disease
claims of $48.1 million at December 31, 1998, includes pending and
expected claims by former employees of PCTC for injury or disease
allegedly caused by exposure to excessive noise, asbestos or other
substances in the workplace. Anticipated recoveries of
$29.5 million on these liabilities are included in other assets.
Recorded amounts are based on the accumulation of estimates of
reported and unreported claims and related expenses and estimates
of probable recoveries from insurance carriers.
AFC has accrued approximately $10.6 million at December 31, 1998,
for environmental costs and certain other matters associated with
the sales of former operations.
In management's opinion, the outcome of the items discussed under
"Uncertainties" in Management's Discussion and Analysis and the
above claims and contingencies will not, individually or in the
aggregate, have a material adverse effect on AFC's financial
condition or results of operations.
F-21
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. 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, 1998 (in
millions).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1998
Revenues $1,016.7 $1,038.1 $1,032.4 $971.6 $4,058.8
Earnings (loss) before
extraordinary items 66.4 39.6 58.0 (34.6) 129.4
Extraordinary items (.7) (.1) - - (.8)
Net earnings (loss) 65.7 39.5 58.0 (34.6) 128.6
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
In the second quarter of 1998, AFC recorded approximately
$41 million of losses due to severe storms in the midwestern part
of the country. In the fourth quarter of 1998, AFC increased A&E
reserves by recording a non-cash, pretax charge of $214 million.
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.
<PAGE>
AFC has realized substantial gains on sales of subsidiaries and
investees in recent years. See Note B for a more detailed
description of these and other transactions. Sales of
subsidiaries also includes pretax charges of $10.5 million and
$5.0 million in the third and fourth quarters of 1998,
respectively, and $17.0 million in the fourth quarter of 1997
relating to operations expected to be disposed of. Realized gains
on sales of securities, affiliates and other investments amounted
to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1998 $22.0 $8.9 $25.4 $123.4 $179.7
1997 2.5 4.2 29.7 54.6 91.0
F-22
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. Insurance Securities owned by insurance subsidiaries having a
carrying value of approximately $900 million at December 31, 1998,
were on deposit as required by regulatory authorities.
Insurance Reserves The liability for losses and loss adjustment
expenses for certain long-term scheduled payments under workers'
compensation, auto liability and other liability insurance has
been discounted at rates ranging from 3.5% to 8%. As a result, the
total liability for losses and loss adjustment expenses at
December 31, 1998, has been reduced by $41 million.
The following table provides an analysis of changes in the
liability for losses and loss adjustment expenses, net of
reinsurance (and grossed up), over the past three years on a GAAP
basis (in millions):
1998 1997 1996
Balance at beginning of period $3,489 $3,404 $3,393
Provision for losses and LAE
occurring in the current year 2,059 2,045 2,179
Net increase (decrease) in provision
for claims of prior years 156 31 (48)
2,215 2,076 2,131
Payments for losses and LAE of:
Current year (885) (840) (999)
Prior years (1,110) (1,151) (1,121)
(1,995) (1,991) (2,120)
Reserves transferred to Ohio Casualty (481) - -
Reclassification of allowance for
uncollectable reinsurance 77 - -
Balance at end of period $3,305 $3,489 $3,404
Add back reinsurance recoverables,
net of allowable in 1998 1,468 736 720
Gross unpaid losses and LAE
included in the Balance Sheet $4,773 $4,225 $4,124
Reinsurance Recoverable Balance sheet amounts for reinsurance
recoverable and prepaid reinsurance premiums at December 31, 1998,
include amounts recoverable related to (i) the transfer of the
Commercial lines business to Ohio Casualty under a reinsurance
contract ($644 million), (ii) additional A&E reserves recorded
($121 million) and (iii) the ceding of 30% of California workers'
compensation business ($38 million).
<PAGE>
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by AFC's
insurance companies.
1998 1997 1996
Insurance group investment income:
Fixed maturities $849.6 $830.6 $817.8
Equity securities 9.1 6.4 8.2
Other 12.1 10.6 13.5
870.8 847.6 839.5
Insurance group investment expenses (*) (42.6) (37.3) (38.5)
$828.2 $810.3 $801.0
(*)Included primarily in "Other operating and general expenses"
in the Statement of Earnings.
F-23
<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
1998 1997 1996 1998 1997
Property and casualty companies $261 $159 $276 $1,840 $1,916
Life insurance companies 41 74 67 365 324
Reinsurance In the normal course of business, 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.
1998 1997 1996
Reinsurance ceded $788 $614 $518
Reinsurance assumed - including
involuntary pools and associations 37 89 58
Reinsurance recoveries 651 296 306
P. Additional Information Total rental expense for various leases of
office space, data processing equipment and railroad rolling stock
was $41 million, $36 million and $34 million for 1998, 1997 and
1996, respectively. Sublease rental income related to these
leases totaled $5.4 million in 1998, $5.4 million in 1997 and
$6.1 million in 1996.
Future minimum rentals, related principally to office space and
railroad rolling stock, required under operating leases having
initial or remaining noncancelable lease terms in excess of one
year at December 31, 1998, were as follows: 1999 - $40 million;
2000 - $35 million; 2001 - $31 million; 2002 - $25 million;
2003 - $19 million; and $19 million thereafter. At
December 31, 1998, minimum sublease rentals to be received through
the expiration of the leases aggregated $9 million.
Other operating and general expenses included charges for possible
losses on agents' balances, reinsurance recoverables, other
receivables and other assets in the following amounts: 1998 -
$14.0 million; 1997 - $7.6 million; and 1996 - $0. The aggregate
allowance for such losses amounted to approximately $149 million
and $131 million at December 31, 1998 and 1997, respectively.
F-24
<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.
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $10,323 $10,323 $10,860 $10,951
Other stocks 430 430 446 446
Investment in investee
corporation 192 229 201 391
Liabilities:
Annuity benefits
accumulated $ 5,450 $ 5,307 $ 5,528 $ 5,319
Long-term debt:
Holding companies 315 326 287 301
Subsidiaries 177 176 194 195
Trust preferred securities 225 231 225 230
AFC Preferred Stock 72 80 72 74
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 a
credit and market risk nature. These transactions include
commitments to fund loans, loan guarantees and commitments to
purchase and sell securities or loans. At December 31, 1998, AFC
and its subsidiaries had commitments to fund credit facilities and
contribute limited partnership capital totaling up to $80 million.
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by 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 1999 from its insurance
subsidiaries without seeking regulatory clearance is approximately
$281 million. Total "restrictions" on intercompany transfers from
AFC's subsidiaries cannot be quantified due to the discretionary
nature of the restrictions.
<PAGE>
Benefit Plans AFC expensed approximately $22 million in 1998,
$21 million in 1997 and $17 million in 1996 for contributions to
its retirement and employee savings plans.
Transactions With Affiliates In December 1997, AFC recognized a
gain of $32.5 million on the sale of development rights to AFG at
their appraised value.
AAG has a line of credit with a company owned in part by AFC
Holding and a brother of AFC's Chairman. Under the agreement,
this company may borrow up to $8 million at 13% with interest
deferred and added to principal. At December 31, 1998,
$6.1 million was due under the credit line.
F-25
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In a 1997 transaction, AAG purchased for $4.9 million a minority
ownership position in a company engaged in the production of
ethanol and AFC's Chairman purchased the remaining ownership.
During 1998, this company borrowed $4.0 million from AAG under a
subordinated note bearing interest at 14% and paid a $6.3 million
capital distribution, including $3.1 million to AAG. AAG's equity
investment in this company at December 31, 1998 was $1.8 million.
In addition, AAG and Great American have each extended a
$5 million line of credit to this company; no amounts have been
borrowed under the credit lines.
Q. Subsequent Event (Unaudited) In January 1999, AFC agreed to
acquire Worldwide Insurance Company (formerly Providian Auto and
Home Insurance Company) from AEGON Insurance Group for
approximately $160 million. Worldwide is a provider of direct
response private passenger automobile insurance and generated net
written premiums in 1998 of approximately $121 million.
Completion of the transaction is expected to occur in the first
half of 1999.
F-26
<PAGE>
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note N
to the Consolidated Financial Statements.
B. Schedules filed herewith for 1998, 1997 and 1996:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable,
not required, or the information required thereby is set
forth in the Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
December 31,
1998 1997
Assets:
Cash and short-term investments $ 4,767 $ 10,793
Investment in securities 3,129 908
Receivables from affiliates 72,772 577,661
Investment in subsidiaries 2,769,112 1,960,328
Investment in investee corporation 22,364 22,680
Other assets 8,623 9,550
$2,880,767 $2,581,920
Liabilities and Shareholders' Equity:
Accounts payable, accrued expenses and other
liabilities $ 122,564 $ 95,513
Payables to affiliates 1,060,469 1,004,865
Long-term debt 167,078 88,059
Shareholders' equity 1,530,656 1,393,483
$2,880,767 $2,581,920
<PAGE>
Condensed Statement of Earnings
Year Ended December 31,
1998 1997 1996
Income:
Dividends from:
Subsidiaries $ 50,061 $ 1,247 $861,178
Investees 177 177 177
50,238 1,424 861,355
Equity in undistributed earnings of
subsidiaries and investees 237,599 358,816 (470,879)
Realized gains (losses) on sales of:
Securities 11 (2,618) 963
Investees 347 421 33,950
Subsidiaries - 731 -
Investment and other income 10,978 55,404 46,980
299,173 414,178 472,369
Costs and Expenses:
Interest charges on intercompany borrowings 36,479 28,772 81,623
Interest charges on other borrowings 14,542 15,250 21,796
Other operating and general expenses 37,331 36,392 29,407
88,352 80,414 132,826
Earnings before income taxes and
extraordinary items 210,821 333,764 339,543
Provision for income taxes 81,418 125,227 89,658
Earnings before extraordinary items 129,403 208,537 249,885
Extraordinary items - loss on prepayment
of debt (763) (7,147) (27,889)
Net Earnings $128,640 $201,390 $221,996
S-2
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
Year Ended December 31,
1998 1997 1996
Operating Activities:
Net earnings $128,640 $201,390 $221,996
Adjustments:
Extraordinary items 763 7,147 27,889
Equity in earnings of subsidiaries (180,328) (224,949) (291,270)
Equity in net losses of investees 486 212 379
Depreciation and amortization 647 1,086 505
Realized losses (gains) on sales
of subsidiaries and investments (358) 2,262 (34,913)
Change in receivables from and payables
to affiliates (8,155) 69,603 (10,497)
Increase in payables 15,596 57,017 12,790
Dividends from subsidiaries and investees 21,359 1,424 105,485
Other 939 841 7,522
(20,411) 116,033 39,886
Investing Activities:
Purchases of subsidiaries and other
investments - (122,969) (43,491)
Sales of subsidiaries and other investments - 143,728 104,967
Other, net (172) 250 265
(172) 21,009 61,741
Financing Activities:
Additional long-term borrowings 112,488 150 75
Reductions of long-term debt (79,418) (94,049) (177,899)
Borrowings from affiliates 46,213 315,000 407,500
Repayments of borrowings from affiliates (77,621) (153,500) (263,564)
Issuances of Preferred Stock - - 16,800
Repurchases of Preferred Stock - (243,939) (36,912)
Capital contributions from parent 18,667 18,667 18,666
Cash dividends paid (5,772) (15,071) (24,898)
14,557 (172,742) (60,232)
Net Increase (Decrease) in Cash and
Short-term Investments (6,026) (35,700) 41,395
Cash and short-term investments at
beginning of period 10,793 46,493 5,098
Cash and short-term investments at end
of period $ 4,767 $ 10,793 $ 46,493
S-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1998
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
(a)
RESERVES FOR
DEFERRED UNPAID CLAIMS (b)
AFFILIATION POLICY AND CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1998 $217 $4,773 $41 $1,233 $2,699
1997 $260 $4,225 $60 $1,329 $2,824
1996 $2,845
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
CLAIMS AND CLAIM
AMORTIZATION
EXPENSES INCURRED AMORTIZATION PAID
RELATED TO OF DEFERRED CLAIMS
NET POLICY AND CLAIM
INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
INCOME YEARS YEARS COSTS EXPENSES WRITTEN
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1998 $324 $2,059 $156 $589 $1,995 $2,609(d)
1997 $316 $2,045 $31 $620 $1,991 $2,858
1996 $335 $2,179 ($48) $628 $2,120 $2,788
(a) Grossed up for reinsurance recoverables of $1,468 and $736 at
December 31, 1998 and 1997, respectively.
(b) Discounted at rates ranging from 3.5% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $314 and $189 at
December 31, 1998 and 1997, respectively.
(d) Before a reduction of $138 million for unearned premium transfer
related to the sale of the Commercial lines division.
S-4
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Financial Corporation has duly caused
this Report to be signed on its behalf by the undersigned, duly
authorized.
American Financial Corporation
Signed: March 29, 1999 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 29, 1999
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director* March 29, 1999
Theodore H. Emmerich
s/JAMES E. EVANS Director March 29, 1999
James E. Evans
s/S. CRAIG LINDNER Director March 29, 1999
S. Craig Lindner
s/WILLIAM R. MARTIN Director* March 29, 1999
William R. Martin
s/FRED J. RUNK Senior Vice President and March 29, 1999
Fred J. Runk Treasurer (principal
financial and accounting
officer)
* Member of the Audit Committee
<PAGE>
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3(a) Amended Articles of
Incorporation, filed as Exhibit 3(a)
to AFC's Form 10-K for 1997. (*)
3(b) Amended Code of Regulations, filed as
Exhibit 3(b) to AFC's Form 10-K
for 1997. (*)
4 Instruments defining the rights of The rights of holders of
of security holders. Registrant's Preferred
Stock are defined in the
Articles of Incorporation.
Registrant has no
outstanding debt issues
exceeding 10% of the
assets of Registrant and
consolidated subsidiaries.
Management Contracts:
10(a) Nonqualified Auxiliary RASP, as amended. _____
10(b) 1998 Bonus Plan. _____
12 Computation of ratios of earnings
to fixed charges. _____
21 Subsidiaries of the Registrant. _____
27 Financial data schedule. (**)
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the
Securities and Exchange Commission.
E-1
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Pretax income $209,563 $322,563 $304,651 $253,449 $ 26,376
Minority interest in subsidiaries
having fixed charges (*) 45,120 45,098 52,838 27,076 8,565
Less undistributed equity in (earnings)
losses of investees 17,997 10,363 31,353 (1,559) 49,010
Fixed charges:
Interest expense 73,868 88,402 88,144 124,633 114,803
Debt discount (premium) and expense (631) (701) (1,174) (1,023) 1,240
One-third of rentals 11,883 10,152 9,279 9,471 5,119
EARNINGS $357,800 $475,877 $485,091 $412,047 $205,113
Fixed charges:
Interest expense $ 73,868 $ 88,402 $ 88,144 $124,633 $114,803
Debt discount (premium) and expense (631) (701) (1,174) (1,023) 1,240
One-third of rentals 11,883 10,152 9,279 9,471 5,119
Accrued distribution of subsidiary
trust preferred subsidiaries 19,031 15,499 1,031 - -
FIXED CHARGES $104,151 $113,352 $ 97,280 $133,081 $121,162
Fixed charges and preferred dividends:
Fixed charges - per above $104,151 $113,352 $ 97,280 $133,081 $121,162
Preferred dividends 9,403 21,967 25,190 25,376 25,709
FIXED CHARGES AND PREFERRED
DIVIDENDS $113,554 $135,319 $122,470 $158,457 $146,871
Ratio of Earnings to Fixed Charges 3.44 4.20 4.99 3.10 1.69
Earnings in Excess of Fixed Charges $253,649 $362,525 $387,811 $278,966 $ 83,951
Ratio of Earnings to Fixed Charges
and Preferred Dividends 3.15 3.52 3.96 2.60 1.40
Earnings in Excess of Fixed Charges
and Preferred Dividends $244,246 $340,558 $362,621 $253,590 $ 58,242
</TABLE>
(*)Amounts include accrued distributions on trust preferred
securities.
E-2
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1998.
All corporations are subsidiaries of AFC and, if indented,
subsidiaries of the company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
American Premier Underwriters, Inc. Pennsylvania 81
Pennsylvania Company Delaware 100
Atlanta Casualty Company Illinois 100
Infinity Insurance Company Indiana 100
Leader Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 82
AAG Holding Company, Inc. Ohio 100
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
Great American Life Insurance Company Ohio 100
Loyal American Life Insurance Company Ohio 100
Prairie National Life Insurance Company South Dakota 100
American Empire Surplus Lines Insurance Company Delaware 100
American National Fire Insurance Company New York 100
Brothers Property Corporation Ohio 80
Mid-Continent Casualty Company Oklahoma 100
National Interstate Corporation Ohio 52
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
E-3
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
AS OF JANUARY 1, 1998
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
As of January 1, 1998
Page
ARTICLE 1. ESTABLISHMENT AND PURPOSE 1
ARTICLE 2. DEFINITIONS 1
2.1 "Account" 1
2.2 "Administrator" 1
2.3 "AFG" 1
2.4 "AFG RASP" 1
2.5 "Agreement" 1
2.6 "American Financial Group" 1
2.7 "Code" 2
2.8 "Employee" 2
2.9 "Employer" 2
2.10 "ERISA" 2
2.11 "Expiration Date" 2
2.12 "Hour of Service" 2
2.13 "One Year Period of Severance" 2
2.14 "Participant" 2
2.15 "Plan Year" 2
2.16 "RASP" 2
2.17 "Retirement Contribution" 2
2.18 "Retirement Contributions Account" 2
2.19 "Year of Service" 2
ARTICLE 3. PARTICIPATION 2
3.1 Eligibility 2
3.2 Participation in the Plan 3
3.3 Vesting 3
ARTICLE 4. COMPENSATION ALLOCATED 4
4.1 AFG Auxiliary RASP Account 4
4.2 Amount of Allocation 4
4.3 Term of Deferral 5
4.4 Investment Return 5
4.5 Statement of Account 5
ARTICLE 5. PAYMENT OF ACCOUNT 6
5.1 Payment After the Expiration Date, Death,
Retirement or Disability. 6
5.2 Hardship Distribution 7
5.3 Beneficiary Designation and Payment 7
ARTICLE 6. GENERAL PROVISIONS 8
6.1 Employee's Rights Unsecured 8
6.2 Non-Assignability 8
<PAGE>
6.3 Administration 8
6.4 Amendment and Termination 8
6.5 Construction 8
6.6 Limitations 8
6.7 Subsidiaries 8
APPENDIX I
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP PLAN
AMENDED AND RESTATED
As of January 1, 1998
ARTICLE 1. ESTABLISHMENT AND PURPOSE
The American Financial Group, Inc. Auxiliary RASP
Plan ("Plan") was established as of January 1,
1997. It is amended and restated as of January 1,
1998. The purpose of the Plan is to enable
eligible Employees of American Financial Group,
Inc. ("AFG"), and certain of its subsidiaries and
affiliates (collectively "Employers" and
singularly "Employer"), who are eligible to
participate in the Retirement Contribution portion
of the American Financial Group Retirement and
Savings Plan (the "RASP") or any other defined
contribution plan sponsored by an AFG subsidiary
to have an additional benefit to the RASP or such
other plan.
The Plan is being established by AFG and the other
Employers for the benefit of their respective
eligible Employees who are not eligible for
another nonqualified Plan of AFG or any other
Employer. With respect to Employees not directly
employed by AFG, such Employers shall annually
forward the amount necessary to fund the
contributions for the Account of each eligible
Employee as determined pursuant to Section 4.2 and
thereafter the Account (the investment return as
determined pursuant to Section 4.4) of each
Employee is the obligation of AFG.
ARTICLE 2. DEFINITIONS
2.1 "Account" means the account established by
the Administrator pursuant to Section 3.1.
2.2 "Administrator" means the person or committee
appointed by the President of AFG responsible for
the administration of the Plan.
2.3 "AFG" means American Financial Group.
2.4 "AFG RASP" means the American Financial Group
Retirement and Savings Plan.
2.5 "Agreement" means the written election of a
Participant to participate in the Plan in the form
attached hereto as Appendix I.
<PAGE>
-2-
2.6 "American Financial Group" means American
Financial Group, Inc., its successors and assigns.
2.7 "Code" means the Internal Revenue Code of
1986, as amended.
2.8 "Employee" means all common law employees of
an Employer as further described in the AFG RASP.
2.9 "Employer" means AFG and certain of its
subsidiaries and affiliates who have adopted the
Plan.
2.10 "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
2.11 "Expiration Date" means the date in which a
Participant incurs five consecutive One Year
Periods of Severance.
2.12 "Hour of Service" means each hour an Employee
is entitled to payment by an Employer as further
described in the AFG RASP.
2.13 "One Year Period of Severance" means any 12-
month period during which a Participant does not
complete a month of service pursuant to the terms
of the RASP.
2.14 "Participant" means an Employee who becomes
eligible pursuant to Article 3.
2.15 "Plan Year" means the twelve month period
beginning each January 1 and ending December 31 on
which the records of the Plan are kept.
2.16 "RASP" means the AFG RASP.
2.17 "Retirement Contribution" means the employer
retirement contribution made by an Employer
pursuant to the terms of the AFG RASP.
2.18 "Retirement Contributions Account" means the
Retirement Contributions Account as defined in the
RASP.
2.19 "Year of Service" means each 12-month period
beginning on the Employee's employment
commencement date during which a Participant
completes at least one Hour of Service per month,
as determined pursuant to the RASP.
<PAGE>
-3-
ARTICLE 3. PARTICIPATION
3.1 Eligibility. The Employees who are eligible
to become a Participant in the Plan are those
officers and other key employees of an Employer
who are authorized by the Board of Directors of
AFG to participate in the Plan or have been
specifically authorized to participate in the Plan
by an employment agreement between an Employer and
a person employed by an Employer.
3.2 Participation in the Plan. Effective January 1, 1998,
a Participant shall automatically become
a Participant in the Plan upon the authorization
described in Section 3.1.
3.3 Vesting.
(a) A Participant's interest in his Account shall
become vested and nonforfeitable to the
extent of the following percentages based
upon full Years of Service with an Employer:
Percentage Percentage
Year of Service Vested Forfeited
Fewer than five years 0% 100%
At least five years 100% 0%
An Employee forfeits all non-vested rights to an
Account after the Plan Year after five consecutive
One Year Periods of Severance have occurred.
(b) For purposes of vesting, a Year of Service means
each consecutive 12-month period beginning on the
Employee's employment commencement date and
anniversaries thereof. A month of service means
a calendar month during any part of which an
Employee completes an Hour of Service. Vesting
shall be calculated in the same manner as
calculated in the RASP. In addition, each Employee
participating in the Plan shall be credited, for
Service purposes, for his employment with any
subsidiary or affiliate of AFG.
(c) A former Participant shall become a
Participant immediately upon the former
Participant's return to the employ of an
Employer if such former Participant had a
nonforfeitable right to such Participant's
Account. A former Participant who did not have
a nonforfeitable right to his Account at the
time of termination shall be considered a new
Employee, for vesting purposes, if the number
of consecutive One Year Periods of Severance
equal or exceed the greater of (1) five
<PAGE>
-4-
or (2) the aggregate number of Years of
Service before such Period of Severance. If
such former Participant's Years of Service
prior to termination exceeds the number of
consecutive One Year Periods of Severance
after such termination, or if the number of
consecutive One Year Periods of Severance is
less than five, such Participant shall have
all Years of Service counted.
(d) Participation in the Plan will continue until
an Employee terminates his employment as
provided for in Section 4.3 or for as long as
he has an interest in the Plan that has not
been distributed to him or for his benefit.
ARTICLE 4. COMPENSATION ALLOCATED
4.1 AFG Auxiliary RASP Account. An Account will be
established for each Employee who elects to
participate in the Plan. The Account will be
maintained by the Administrator. All allocations
on behalf of an Employee shall be deferred and all
increases or decreases in the Account due to
investment return of the Retirement Contribution
in the AFG RASP (see Section 4.4), all distributions
to the Employee or beneficiary or estate, and any
other interest earned on the balance thereof, shall
be reflected in the Account.
4.2 Amount of Allocation.
(a) Prior to January 1, 1998, the amount
allocated to an Employee's Account shall be
deferred and shall be the same percentage of
an Employee's gross income (as defined in
Section 61(a) of the Code) paid by any
Employer as would have been allocated to an
Employee's Retirement Contributions Account
in the AFG RASP (or any other defined
contribution plan sponsored by an AFG
subsidiary) up to a maximum of $30,000, which
amount shall be increased (but not decreased)
with respect to adjustments allowed by
Section 415 of the Code.
Provided, however, that the initial amount of
compensation allocated and deferred shall
include an amount equivalent to the amount
that would have been allocated in an
Employee's Retirement Contributions Account or
predecessor defined contribution plan account
for the Plan Year prior to participation in
this Plan but for limitations and rules existing
in the Code as of the date hereof.
<PAGE>
-5-
(b) After December 31, 1997, the amount allocated
to an Employee's Account shall be deferred
and shall be the same percentage of an
Employee's gross income (as defined in
Section 61(a) of the Code) that would have
been paid by an Employer under the allocation
formula in the AFG RASP in excess of the
amount of the contribution actually allocated
to the Employee's Retirement Contributions
Account in the AFG RASP (or any other defined
contribution plan sponsored by an AFG
subsidiary) provided there was no
Compensation Limit, as defined in the RASP,
imposed by the Code. The maximum amount of
this contribution when added to the
contribution allocated to the Employee's
Retirement Contributions Account shall be
$30,000, which amount shall be increased (but
not decreased) with respect to adjustments
allowed by Section 415 of the Code.
(c) Allocations under this Plan for any Plan Year
shall be deemed to be credited to an
Employee's Account as of December 31 of such
Plan Year.
(d) A Participant's Accounts shall also include
amounts previously credited under the AFC
Auxiliary ESORP, if any.
4.3 Term of Deferral. The Agreement shall provide that
all amounts posted to the Account may be paid upon
the earlier of (1) retirement or termination of
employment at age 60 or over, (2) death, (3) Total
Disability or (4) the Expiration Date. Commencing
in the first quarter of the year following an
Expiration Date, payments from the Account shall be
made in accordance with the provisions specified in
Section 5.1(a) hereof.
4.4 Investment Return. The Participant's Account shall
be credited (or charged) with interest at the same
rate as earned on the Retirement Contributions
Accounts under the RASP (investment income plus or
minus "investment performance" under the Retirement
Contributions account of the RASP) as of each
December 31 prior to the Expiration Date or more
frequently as determined by the Administrator. Such
determination shall be final, binding and conclusive
on all parties.
4.5 Statement of Account. A statement of Account
will be sent to each Participant annually or more
frequently as determined by the Administrator.
<PAGE>
-6-
ARTICLE 5. PAYMENT OF ACCOUNT
5.1 Payment After the Expiration Date, Death,
Retirement or Disability.
(a) Within 90 days following the end of the year in which
the Expiration Date occurs, termination of employment
after age 60, death or disability, the Participant,
or in the event of death, the Beneficiary, may choose
payment or distribution of the Account under one of
the following payment options:
(1) The Account may be applied to the purchase
of an immediate or deferred life annuity
contract, on the sole life of the Participant,
or jointly on the lives of the Participant
and a beneficiary named by the Participant.
The annuity contract shall be purchased from
an insurance company to be determined at the
sole discretion of AFG provided that such
insurance company shall have a current
rating of A (Excellent) or better from
Bests' Insurance Reports.
(2) The Account may be paid out as if the
Participant purchased an immediate or
deferred life annuity contract, on the sole
life of the Participant, or jointly on the
lives of the Participant and the beneficiary
named by the Participant. Such payment of
the Account shall be as if AFG purchased an
annuity contract from an insurance company
to be determined at the sole discretion of AFG
provided that such insurance company shall have
a rating of A (Excellent) or better from Bests'
Insurance Reports and using as the interest
rate assumption, the same interest rate as such
insurance company would provide.
(3) The Account may be paid in a lump sum in cash.
The Employer may take into consideration, but
is not bound by, the Employee's preference as
to the payment options.
The annuity contract provided for in
paragraph 5.l(a)(l) shall provide for, and
payments provided for in paragraph 5.l(a)(2)
shall be made, in equal installments over the
expected life span of Participant which shall
be determined by standard actuarial tables
then in existence.
(b) Within 30 days of AFG's choice of payment
option, AFG will purchase such annuity, begin to
make payments or make the lump sum payment.
<PAGE>
-7-
(c) Notwithstanding the payment option chosen by AFG,
after the commencement of payments from the Account,
the Administrator, at his sole discretion, may
accelerate payment of any amount remaining in the
Account to the extent that the amounts being paid
are not sufficiently large to warrant the
administrative expense then being incurred to
administer such payments.
(d) Any applicable federal, state and local taxes
will be withheld from the gross amounts paid.
Neither the Participant nor any designated
beneficiary shall have any right, directly or
indirectly, to alienate, assign, pledge or in
any way encumber any amount that is payable
from the Account.
(e) Notwithstanding the above, the Participant, or in
the event of death, the Beneficiary, may choose to
defer payment or distribution of the Account to a
time not later than the first calendar quarter of
the year following the year in which the Participant
attains age 65, or in the event of death, would have
attained age 65.
5.2 Hardship Distribution. Distribution of payments from a
Participant's Account prior to the Expiration Date shall
be made only if the Administrator, after consideration of
an application by the Participant, determines that the
Participant has sustained financial hardship caused by
events beyond the Participant's control. In such event,
the Administrator may, at his sole discretion, direct
that all or a portion of the Account be paid to the
Participant in such manner, and at such times as determined
by the Administrator.
5.3 Beneficiary Designation and Payment.
(a) The Participant shall have the right to
designate a beneficiary hereunder and to
change any beneficiary previously designated.
Such designation shall be made by the
Participant delivering to the Administrator a
writing setting forth the name and address of
the person or persons so designated with a
statement by the Participant of the intention
that the person or persons so designated be
the beneficiary or beneficiaries hereunder.
The last-dated and filed beneficiary
designation shall cancel all earlier filed
designations. (Appendix I provides the
acceptable form of beneficiary designation.)
(b) In the event of the Participant's death before
or after the commencement of payments from the
Account, then the amount otherwise payable to
the Participant shall be paid to the designated
<PAGE>
-8-
beneficiary or, if none, to the estate, which
beneficiary or estate shall have all the rights
conferred by Section 5.1 above.
ARTICLE 6. GENERAL PROVISIONS
6.1 Employee's Rights Unsecured. The right of any Employee
to receive payments under the provisions of the Plan
shall be an unsecured claim against the general assets
of the Employers. It is not required or intended that
the amounts credited to the Employee's Account be
segregated on the books of AFG or be held by the
Employers in trust for the Employee. All credits to the
Account are for bookkeeping purposes only.
6.2 Non-Assignability. The right to receive payments
hereunder shall not be transferable or assignable by an
Employee, except by will or by the laws of descent and
distribution. Any other attempted assignment or
alienation of payments hereunder shall be void and of no
force or effect.
6.3 Administration. The Administrator shall have the
authority to adopt rules, regulations and interpret,
construe and implement the provisions of the Plan
according to the laws of the State of Ohio, to the
extent not preempted by ERISA.
6.4 Amendment and Termination. The Plan may at any time
or from time to time be amended or terminated by AFG.
No amendment, modification or termination shall
adversely affect the Employee's accrued rights under
the Plan. Any such amendment, modification or
termination shall be in a writing signed by an officer
of AFG and approved by the Board of Directors of AFG.
6.5 Construction. The masculine gender, where appearing
in this Plan, shall be deemed to also include the
feminine and neuter genders. The singular shall also
include the plural, and the plural, the singular, where
appropriate.
6.6 Limitations. The Plan does not constitute a contract
of employment, and participation in the Plan will not
give any Employee the right to be retained in the employ
of an Employer or any right or claim to any benefit
under the terms of the Plan, unless such right or
claim has specifically accrued pursuant to the
provisions of his Agreement with the Employer. This
Plan does not confer the right for an Employee to
receive a bonus.
6.7 Subsidiaries. Each subsidiary of AFG who employs an
Employee shall be obligated to make payments to AFG to
fund each eligible Employee's
<PAGE>
-9-
Account. The amount paid to AFG shall be in the
proportion that such subsidiary's compensation paid to
an Employee bears to an Employee's gross income
determined under Section 4.2(a).
AMERICAN FINANCIAL GROUP, INC.
BY: __________________________________
Its: __________________________________
<PAGE>
APPENDIX I
AMERICAN FINANCIAL GROUP, INC.
AUXILIARY RASP
DESIGNATION OF BENEFICIARY
___________________________
TO: The Board of Directors
American Financial Group, Inc.
I hereby direct that upon my death all or any payments to be
made or remaining to be paid in accordance with rights granted to
me under the Auxiliary RASP Plan shall be paid as follows:
(A) Primary Beneficiary
Name or Names of Persons or ______________________________
Trust: ______________________________
Address: ______________________________
______________________________
Date of Birth or of Trust: ______________________________
Name of Trustee if applicable: ______________________________
Telephone Number: ______________________________
Social Security Number or
T.I.N.: ______________________________
(B) Alternative Beneficiary (in the event of the death or
non-existence of the Primary Beneficiary listed above):
Name: ______________________________
Address: ______________________________
______________________________
Date of Birth or of Trust: ______________________________
Name of Trustee if applicable: ______________________________
Telephone Number: ______________________________
Social Security Number or
T.I.N.: ______________________________
The undersigned hereby reserves the right to change the
beneficiary or beneficiaries designated herein at any time by
filing in writing a new Designation of Beneficiary form with the
Plan Administrator.
WITNESS:
________________________ _____________________________________
EMPLOYEE:
Date: _______________________________
ACKNOWLEDGMENT
AMERICAN FINANCIAL GROUP, INC.
Date: __________________ By: _________________________________
AMERICAN FINANCIAL GROUP, INC.
1998 ANNUAL BONUS PLAN
Adopted on April 9, 1998
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
1998 ANNUAL BONUS PLAN
1. PURPOSE
The purpose of the Annual Bonus Plan (the "Plan") is to
further the profitability of American Financial Group, Inc.
(the "Company") to the benefit of the shareholders of the
Company by providing incentive to the Plan participants.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan
shall be administered by the Compensation Committee or a
successor committee or subcommittee (the "Committee") of the
Board of Directors of the Company (the "Board") composed
solely of two or more "outside directors" as defined
pursuant to Section 162(m) of the Internal Revenue Code. No
member of the Committee while serving as such shall be
eligible to be granted a bonus under the Plan. Subject to
the provisions of the Plan (and to the approval of the Board
where specified in the Plan), the Committee shall have
exclusive power to determine the conditions (including
performance requirements) to which the payment of the
bonuses may be subject and to certify that performance goals
are attained. Subject to the provisions of the Plan, the
Committee shall have the authority to interpret the Plan and
establish, adopt or revise such rules and regulations and to
make all determinations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan.
The Committee's interpretation of the Plan and all of its
actions and decisions with respect to the Plan shall be
final, binding and conclusive on all parties.
3. PLAN TERM AND BONUS YEARS
The term of the Plan is one year, commencing January 1,
1998, which term shall be renewed from year to year unless
and until the Plan shall be terminated or suspended as
provided in Section 9. As used in the Plan the term "Bonus
Year" shall mean a calendar year.
4. PARTICIPATION
Subject to the approval of the Committee and the Board
of Directors (based on the recommendation of the Committee),
management of the Company shall suggest those persons who
are deemed to be key employees of the Company for
participation in the Plan (the "Participants").
2
<PAGE>
5. ESTABLISHMENT OF INDIVIDUAL BONUS TARGETS AND
PERFORMANCE CRITERIA
The Committee shall establish the individual target
amount of bonus (the "Bonus Target") that may be awarded to
each Participant and recommend that the Board adopt such
action. In no event shall the establishment of any
Participant's Bonus Target give a Participant any right to
be paid all or any part of such amount unless and until a
bonus is actually awarded pursuant to Section 6.
The Committee shall establish the performance criteria,
both subjective and objective, (the "Performance Criteria")
that will apply to the determination of each Participant's
bonus for that Bonus Year and recommend that the Board adopt
such action. The individuals, their Bonus Targets and
Performance Criteria set forth on Schedules I and II have
been recommended by the Committee and approved by the Board.
6. DETERMINATION OF BONUSES AND TIME OF PAYMENT
As soon as practicable after the end of 1998, the
Committee shall certify whether or not the performance
criteria of each Participant has been attained and shall
recommend to the Board, and the Board shall determine, the
amount of the bonus, if any, to be awarded to each
Participant for 1998 according to the terms of this Plan.
Such bonus determinations shall be based on achievement of
the Performance Criteria for 1998.
Once the bonus is so determined for a Participant, it
shall be paid seventy-five percent in cash and twenty-five
percent in Company Common Stock to the Participant (less any
applicable withholding and employment taxes) as soon as
practicable. The number of shares of Company Common Stock
to be issued to a Participant shall be determined by
dividing twenty-five percent of the bonus payable (before
applicable taxes and deductions) by the average of the per
share Fair Market Value of the Common Stock for the last
twenty trading days of 1998; the resulting number shall then
be rounded to the nearest hundred. Any shares of Company
Common Stock issued pursuant to this Plan will be
"restricted."
"Fair Market Value" means the last sale price reported
on any stock exchange or over-the-counter trading system on
which Company Common Stock is trading on the last trading
day prior to a specified date or, if no last sales price is
reported, the average of the closing bid and asked prices
for a share of Common Stock on a specified date. If no sale
has been made on any date, then prices on the last preceding
day on which any such sale shall have been made shall be
used in determining Fair Market Value under either method
prescribed in the previous sentence.
3
<PAGE>
7. TERMINATION OF EMPLOYMENT
If a Participant's employment with the Company or a
subsidiary, as the case may be, is terminated for any reason
other than discharge for cause, he may be entitled to such
bonus, if any, as the Committee, in its sole discretion, may
determine.
In the event of a Participant's discharge for cause
from the employ of the Company or a Subsidiary, as the case
may be, he shall not be entitled to any amount of bonus
unless the Committee, in its sole discretion, determines
otherwise.
8. MISCELLANEOUS
A. Government and Other Regulations. The
obligation of the Company to make payment of bonuses
shall be subject to all applicable laws, rules and
regulations and to such approvals by governmental
agencies as may be required.
B. Tax Withholding. The Company or a
Subsidiary, as appropriate, shall have the right to
deduct from all bonuses paid in cash any federal, state
or local taxes required by law to be withheld with
respect to such cash payments.
C. Claim to Bonuses and Employment Rights. The
designation of persons to participate in the Plan shall
be wholly at the discretion of the Board. Neither this
Plan nor any action taken hereunder shall be construed
as giving any Participant any right to be retained in
the employ of the Company or a Subsidiary.
D. Beneficiaries. Any bonuses awarded under
this Plan to a Participant who dies prior to payment
shall be paid to the beneficiary designated by the
Participant on a form filed with the Company. If no
such beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's
legal representative. A beneficiary designation may be
changed or revoked by a Participant at any time
provided the change or revocation is filed with the
Company.
E. Nontransferability. A person's rights and
interests under the Plan may not be assigned, pledged
or transferred except, in the event of a Participant's
death, to his designated beneficiary as provided in the
Plan or, in the absence of such designation, by will or
the laws of descent and distribution.
F. Indemnification. Each person who is or shall
have been a member of the Committee or of the Board
shall be indemnified and held harmless by the Company
(to the extent permitted by the Articles of
4
<PAGE>
Incorporation and Code of Regulations of the Company
and applicable law) against and from any loss, cost,
liability or expense that may be imposed upon or
reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to
which he may be a party or in which they may be
involved by reason of any action taken or failure to
act under the Plan and against and from any and all
amounts paid by him in settlement thereof, with the
Company's approval, or paid by him, in satisfaction of
judgment in any such action, suit or proceeding against
him. He shall give the Company an opportunity, at its
own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf.
The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to
which such person may be entitled under the Company's
Articles of Incorporation or Code of Regulations, as a
matter of law or otherwise or of any power that the
Company may have to indemnify him or hold him harmless.
G. Reliance on Reports. Each member of the
Committee and each member of the Board shall be fully
justified in relying or acting in good faith upon any
report made by the independent certified public
accountants of the Company or of its Subsidiaries or
upon any other information furnished in connection with
the Plan by any officer or director of the Company or
any of its Subsidiaries. In no event shall any person
who is or shall have been a member of the Committee or
of the Board be liable for any determination made or
other action taken or any omission to act in reliance
upon any such report or information or for any action
taken, including the furnishing of information, or
failure to act, if in good faith.
H. Expenses. The expenses of administering the
Plan shall be borne by the Company and its Subsidiaries
in such proportions as shall be agreed upon by them
from time to time.
I. Pronouns. Masculine pronouns and other words
of masculine gender shall refer to both men and women.
J. Titles and Headings. The titles and headings
of the sections in the Plan are for convenience of
reference only, and, in the event of any conflict
between any such title or heading and the text of the
Plan, such text shall control.
9. AMENDMENT AND TERMINATION
The Board may at any time terminate the Plan. The
Board may at any time, or from time to time, amend or
suspend and, if suspended, reinstate the Plan in whole or in
part. Notwithstanding the foregoing, the Plan shall
continue
5
<PAGE>
in effect to the extent necessary to settle all matters
relating to the payment of bonuses awarded prior to any such
termination or suspension.
<PAGE>
Schedule I
Annual Bonus Plan
for 1998
Participants and
Bonus Targets
Total Company
Bonus EPS Performance
Name Position Target Component Component
Carl H. Lindner Chairman of the Board
& Chief Executive Officer
Carl H. Lindner III Co-President
Keith E. Lindner Co-President
S. Craig Lindner Co-President
James E. Evans Sr. Vice President
& General Counsel
Thomas E. Mischell Sr. Vice President - Taxes
Fred J. Runk Sr. Vice President
& Treasurer
<PAGE>
Schedule II
Annual Bonus Plan
1998 Performance Criteria for Participants
The overall bonus for 1998 for each Participant will be the
sum of such Participant's bonuses for the following two
Performance Criteria components:
Weighting of Dollar Amount of Bonus Target
(Assuming Schedule I indicates $925,000 Bonus Target)
Earnings Per Share ("EPS")- 50% $462,500
Company Performance - 50% $462,500
A. EPS Component.
Each participant's bonus will range from 0% to 150% of
the dollar amount of the Bonus Target allocated to the
EPS Component, based on the following levels of
reported earnings per common share achieved by the
Company and its consolidated subsidiaries for 1998:
Percentage of Bonus Target to be paid
Operating EPS for EPS Component
$2.19 or less 0
2.92 100%
more than 2.92 more than 100% up to 175%
Where the Operating EPS is above $2.19 and below $2.92,
the Committee, in its discretion, shall determine the
percentage of bonus below 100% and the percentage of
bonus above 100% of EPS is above $2.92.
The Operating EPS to be considered is diluted EPS from
the Company's insurance operations and not including
investee results, realized gains and losses in the
investment portfolio and unusual or non-recurring
items. Additionally, the Committee shall have the
power and authority, in its discretion, to adjust
reported EPS upward or downward for purposes of the
Plan to the extent the Committee deems equitable in the
event of occurrences which might unfairly affect the
computation of EPS for purposes of the Plan.
<PAGE>
B. Company Performance Component
Each participant's bonus could range up to 175% of the
dollar amount of the Bonus Target allocated to the
Company Performance Component and will be determined by
the Board, upon the Compensation Committee's
recommendation, based on the Compensation Committee's
subjective rating of the Company's relative overall
performance for 1998. Such rating shall include a
consideration of all factors deemed relevant, including
financial (and non-financial) and strategic factors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation Form 10-K for December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $289,944
<SECURITIES> 10,945,890<F1>
<RECEIVABLES> 618,198
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,847,867
<CURRENT-LIABILITIES> 0
<BONDS> 492,432
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,448,877
<TOTAL-LIABILITY-AND-EQUITY> 15,847,867
<SALES> 0
<TOTAL-REVENUES> 4,058,831
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 348,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,625
<INCOME-PRETAX> 210,821
<INCOME-TAX> 81,418
<INCOME-CONTINUING> 129,403
<DISCONTINUED> 0
<EXTRAORDINARY> (763)
<CHANGES> 0
<NET-INCOME> 128,640
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $192 million.
<F2>Not applicable since all common shares are owned by American Financial
Group, Inc.
</FN>
</TABLE>
