<PAGE>
SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check
the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-
12
AMERICAN FINANCIAL CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
Title of each class of securities to which transaction applies:
Aggregate number of securities to which transaction applies:
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined)
Proposed maximum aggregate value of transaction:
<PAGE>
[ ] Fee paid previously with preliminary materials. [ ] Check box if any part of
the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identity the
filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date of
its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
Notice of Annual Meeting of Shareholders
and Proxy Statement
To be Held on May 9, 2000
Dear Shareholder:
We invite you to attend our Annual Meeting of Shareholders on Tuesday, May
9, 2000, in Cincinnati, Ohio. At the meeting, you will hear a report on our
operations and have an opportunity to meet your Company's directors and
executives.
This booklet includes the formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how your Board of Directors operates and
provides information about the director candidates.
We want your shares to be represented at the meeting and we urge you to
promptly either use our new telephone voting system, or complete, sign, date and
return your proxy form.
Sincerely,
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Cincinnati, Ohio
March 31, 2000
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OF AMERICAN FINANCIAL CORPORATION
Date: Tuesday, May 9, 2000
Time: 10:30 a.m. Eastern Daylight Savings Time
Place: The Cincinnatian Hotel
Second Floor - Filson Room
601 Vine Street
Cincinnati, Ohio
Purpose: Election of Directors
Conduct other business if
properly raised
Record Date: February 29, 2000 - Only
shareholders of record at the close
of business on that date are
entitled to receive notice of and
to vote at the meeting.
Mailing Date: The approximate mailing date of
this proxy statement and
accompanying proxy form is
March 31, 2000.
AFG Meeting: The meeting will be held concurrently with the
meeting of shareholders of American Financial Group, Inc.
("AFG"), the Company's parent company.
<PAGE>
Your vote is important. Whether or not you plan to attend the meeting,
shareholders may vote their shares (i) using the telephone voting system
described herein via a toll-free telephone number available for use in the U.S.
and Canada, or (ii) by mailing a signed proxy form, which is the bottom portion
of the enclosed perforated form. If you do attend the meeting, you may either
vote by proxy or revoke your proxy and vote in person. You may also revoke your
proxy at any time before the vote is taken at the meeting by written revocation,
using the telephone voting system, or by submitting a later-dated proxy form.
<PAGE>
Table Of Contents
Page
GENERAL INFORMATION 1
ELECTION OF DIRECTORS 2
PRINCIPAL SHAREHOLDERS 2
MANAGEMENT 3
COMPENSATION 6
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS 12
INDEPENDENT AUDITORS 12
NOMINATIONS AND SHAREHOLDER PROPOSALS 12
REQUESTS FOR FORM 10-K 13
CERTAIN FINANCIAL INFORMATION F-1
<PAGE>
GENERAL INFORMATION
Record Date; Shares Outstanding
As of February 29, 2000, the record date for determining shareholders
entitled to notice of and to vote at the meeting, the Company had outstanding
two classes of voting securities, its common stock, no par value and its Series
J Preferred Stock. At the Record Date, 10,593,000 shares of Common Stock were
outstanding, all of which were held by AFG, and 2,886,161 shares of Preferred
Stock were outstanding. Each share of outstanding common stock and preferred
stock is entitled to one vote on each matter to be presented at the Meeting.
Abstentions and broker non-votes will have no effect on any item voted on at the
Meeting.
Cumulative Voting
Shareholders have cumulative voting rights in the election of directors
and one vote per share on all other matters. Cumulative voting allows a
shareholder to multiply the number of shares owned on the record date by the
number of directors to be elected and to cast the total for one nominee or
distribute the votes among the nominees as the shareholder desires. Nominees who
receive the greatest number of votes will be elected. In order to invoke
cumulative voting, notice of cumulative voting must be given in writing to an
executive officer of the Company not less than 48 hours before the time fixed
for the holding of the meeting.
Proxies
Registered shareholders may vote by using a toll-free telephone number, by
completing a proxy form and mailing it to the proxy tabulator, or by attending
the meeting and voting in person. The telephone voting facilities will open on
April 3, 2000, and close at 9:00 a.m. Eastern Daylight Savings Time on the
meeting date. The telephone voting facilities are open Monday through Friday
from 8:00 a.m. until 10:30 p.m. and on Saturdays from 8:00 a.m. until 4:30 p.m.
Eastern Daylight Savings Time. The telephone voting procedures are designed to
authenticate shareholders by use of a proxy control number and personal
identification number ("PIN") to allow shareholders to confirm that their
instructions have been properly recorded.
<PAGE>
Shareholders whose shares are held in the name of a broker, bank or other
nominee should refer to their proxy card or the information forwarded by such
broker, bank or other nominee to see what voting options are available to them.
To vote by telephone, shareholders should call 1-877-298- 0570, toll-free,
using any touch-tone telephone and have their proxy form ready. Shareholders
will be asked to enter the proxy control number and PIN, then follow simple
recorded instructions. To vote by mail, shareholders should complete and sign
the bottom portion of the proxy form and return only that portion to the proxy
tabulator in the reply envelope provided.
Solicitation of proxies through the mail, in person and otherwise, is
being made by management at the direction of the Company's Board of Directors,
without additional compensation. The cost will be borne by the Company. In
addition, the Company will request brokers and other custodians, nominees and
fiduciaries to forward proxy soliciting material to the beneficial owners of
shares held of record by such persons, and AFC will reimburse them for their
expenses.
The execution of a proxy or vote by phone does not affect the right to
vote in person at the meeting, and a proxy or vote by phone may be revoked by
the person giving it prior to the exercise of the powers conferred by it. A
shareholder may revoke a prior vote by communicating in writing to the Secretary
of AFC at the Company's principal offices or by properly executing and
delivering a proxy bearing a later date (or recording a later telephone vote).
In addition, persons attending the meeting in person may withdraw their proxies.
If a choice is specified on a properly executed proxy form, the shares
will be voted accordingly. If a proxy form is signed without a preference
indicated, those shares will be voted "FOR" the election of the eight nominees
proposed by the Board of Directors. The authority solicited by this Proxy
Statement includes discretionary authority to cumulate votes in the election of
directors. If any other matters properly come before the meeting or any
adjournment thereof, each properly executed proxy form will be voted in the
discretion of the proxies named therein.
-2-
<PAGE>
Adjournment and Other Matters
Approval of a motion for adjournment or other matters brought before the
meeting requires the affirmative vote of a majority of the shares voting at the
meeting. Management knows of no other matters to be presented at the meeting
other than those stated in this document.
PROPOSAL ELECTION OF DIRECTORS
The Board of Directors has nominated eight directors to hold office until
the next annual meeting of Shareholders and until their successors are elected
and qualified. If any of the nominees should become unable to serve as a
director, the proxies will be voted for any substitute nominee designated by the
Board of Directors but, in any event, no proxy may be voted for more than eight
nominees. The eight nominees who receive the greatest number of votes will be
elected.
The nominees for election to the Board of Directors are:
Carl H. Lindner Keith E. Lindner
S. Craig Lindner Carl H. Lindner III
Theodore H. Emmerich Thomas M. Hunt
James E. Evans William R. Martin
All of these nominees were elected directors at the last annual meeting of
shareholders of the Company held on May 19, 1999. See "Management" and
"Compensation" below for information concerning the background, securities
holdings, remuneration and other matters relating to the nominees.
The Board of Directors recommends that shareholders vote FOR the election
of these eight nominees as directors.
PRINCIPAL SHAREHOLDERS
The following shareholders are the only persons known by the Company to own
beneficially 5% or more of its outstanding voting securities as of February 29,
2000:
-3-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of
of Beneficial Owner of Voting Securities
Beneficial
Ownership
- ----------------------------------- -------------------- -----------------
<S> <C> <C>
American Financial Group, Inc. (a) 10,593,000 shares 78.6%
One East Fourth Street of Common Stock
Cincinnati, Ohio 45202
</TABLE>
(a) Carl H. Lindner, S. Craig Lindner, Carl H. Lindner III,
Keith E. Lindner and trusts for their benefit (collectively,
the "Lindner Family") were the beneficial owners of
approximately 48% of the voting stock of AFG at February 29,
2000. AFG and the Lindner Family may be deemed to be
controlling persons of the Company.
MANAGEMENT
The directors, nominees and executive officers of the Company are:
<TABLE>
<CAPTION>
Director or
Age* Position Executive Since
---- ---------------------------------- ---------------
<S> <C> <C> <C>
Carl H. Lindner 80 Chairman of the Board and Chief 1959
Executive Officer
S. Craig Lindner 44 Co-President and a Director 1979
Keith E. Lindner 40 Co-President and a Director 1981
Carl H. Lindner III 46 Co-President and a Director 1980
Theodore H. Emmerich 73 Director 1988
James E. Evans 54 Senior Vice President and General
Counsel and a Director 1976
Thomas M. Hunt 76 Director 1982
William R. Martin 70 Director 1994
Philip Fasano 41 Senior Vice President - Chief
Information Officer 1999
Keith A. Jensen 48 Senior Vice President 1999
Thomas E. Mischell 52 Senior Vice President - Taxes 1985
Fred J. Runk 57 Senior Vice President and 1978
Treasurer
*As of February 29, 2000
</TABLE>
-3-
<PAGE>
Carl H. Lindner (Chairman of the Executive Committee) Mr. Lindner is the
Chairman of the Board and Chief Executive Officer of the Company. During the
past five years, Mr. Lindner has also been Chairman of the Board and Chief
Executive Officer of AFG. He is Chairman of the Board of Directors of American
Annuity Group, Inc. and Chiquita Brands International, Inc. Mr. Lindner is the
father of Carl H. Lindner III, S. Craig Lindner and Keith E. Lindner.
S. Craig Lindner (Member of the Executive Committee) Since March 1996, Mr.
Lindner has served as Co-President and a director of the Company. For over five
years, Mr. Lindner has been President of American Annuity Group, an 83%-owned
subsidiary of AFC that markets tax-deferred annuities principally to employees
of educational institutions and offers life and health insurance products. Mr.
Lindner is also President of American Money Management Corporation, a subsidiary
which provides investment services for the Company and its affiliated companies.
Mr. Lindner is also a director of American Annuity Group and AFG.
Keith E. Lindner (Member of the Executive Committee) Since March 1996, Mr.
Lindner has served as Co-President and a director of the Company. In March 1997,
Mr. Lindner was named Vice Chairman of the Board of Directors of Chiquita Brands
International, a worldwide marketer and producer of bananas and other food
products in which the Company has a 36% ownership interest. For more than five
years prior to that time, Mr. Lindner had been President and Chief Operating
Officer and a director of Chiquita. Mr. Lindner is also a director of AFG.
Carl H. Lindner III (Member of the Executive Committee) Mr. Lindner was
President of the Company from February 1992 until he became Co-President in
March 1996. For approximately ten years, Mr. Lindner has been principally
responsible for the Company's property and casualty insurance operations. Mr.
Lindner is also a director of AFG.
Theodore H. Emmerich (Chairman of the Audit Committee; Member of the
Compensation Committee) Prior to his retirement in 1986, Mr. Emmerich was
managing partner of the Cincinnati office of the independent accounting firm of
Ernst & Whinney. He is also a director of AFG, Carillon Fund, Inc., Carillon
Investment Trust, Gradison Custodial Trust, Gradison-McDonald Municipal
Custodial Trust, Gradison-McDonald Cash Reserve Trust and Summit Investment
Trust.
James E. Evans Since April 1995, Mr. Evans has served as Senior Vice
President and General Counsel of the Company. For more than five years, he was
Vice President and General Counsel of the Company. Mr. Evans is also a director
of AFG. -4-
<PAGE>
Thomas M. Hunt (Member of the Compensation and Audit Committees) During
the past five years, Mr. Hunt has been Chairman of the Board of Hunt Petroleum
Corporation, an oil and gas production company. He is also a director of AFG.
William R. Martin (Chairman of the Compensation Committee; Member of the
Audit Committee) During the past five years, Mr. Martin has been Chairman of the
Board of MB Computing, Inc., a computer software and services company. Mr.
Martin is also a director of American Annuity Group and AFG.
Philip Fasano was named Senior Vice President and Chief Information
Officer of the Company in July 1999. Prior thereto, he was the Executive Vice
President and Chief Information Officer with Deutsche Financial Services, a
division of Deutsche Bank International since June 1996. For more than five
years previously, he was a managing director with Bankers Trust Co.
Keith A. Jensen was named a Senior Vice President of the Company in
February 1999. Since February 1997, he has also been Senior Vice President of
American Annuity Group. For more than five years prior thereto he was a partner
with Deloitte & Touche LLP, an independent accounting firm.
Thomas E. Mischell is Senior Vice President - Taxes of the Company. He had
served as a Vice President of the Company for over five years previously.
Fred J. Runk is Senior Vice President and Treasurer of the Company. He had
served as Vice President and Treasurer of the Company for more than five years
previously.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires AFC's executive officers,
directors and persons who own more than ten percent of AFC's voting stock to
file reports of ownership with the Securities and Exchange Commission and to
furnish the Company with copies of these reports. The Company believes that all
filing requirements were met during 1999.
-5-
<PAGE>
Securities Ownership
The following table sets forth information, as of February 29, 2000,
concerning the beneficial ownership of equity securities of the Company and its
parent and subsidiaries by each director, nominee for director, the executive
officers named in the Summary Compensation Table (see "Compensation" below) and
by all directors and executive officers as a group. Such information is based on
data furnished by the persons named. Except as set forth in the following table,
no director or executive officer beneficially owned 1% or more of any class of
equity security of the Company, its parent or any of its subsidiaries
outstanding at February 29, 2000.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (a)
---------------------------------------------
Name of Shares of Common Shares of Preferred
Beneficial Owner Stock Held Stock Held
- -------------------- ---------------------- --------------------
<S> <C> <C>
Carl H. Lindner 10,593,000 (b) ---
Carl H. Lindner III 10,593,000 (b) ---
S. Craig Lindner 10,593,000 (b) ---
Keith E. Lindner 10,593,000 (b) ---
Theodore H. Emmerich --- ---
James E. Evans --- ---
Thomas M. Hunt --- ---
William R. Martin --- 40,126 (c)
- --------------
All directors and 10,593,000 (b) 60,590 (d)
executive officers as
a group (12 persons)
</TABLE>
-6-
<PAGE>
(a) Does not include the following ownership interests in American Annuity
Group common stock: Messrs. Emmerich, Evans, Hunt, S.C. Lindner and Martin,
and all directors and executive officers as a group beneficially own 1,561;
17,138; 382; 98,098; 19,070 and 268,986 shares, respectively. Also excludes
the following ownership of Chiquita common stock: Messrs. Emmerich, C.H.
Lindner and K.E. Lindner, and all directors and executive officers as a
group beneficially own 1,000; 2,127,426; 16,698 and 2,371,472 shares,
respectively. This table also excludes the beneficial ownership of shares
of common stock of AFG, the Company's parent, as follows: Carl H. Lindner -
2,511,684 (4.4%); Carl H. Lindner III - 6,028,526 (10.5%); S. Craig Lindner
- 6,028,526 (10.5%); Keith E. Lindner - 6,028,526 (10.5%); Mr. Emmerich -
22,550, Mr. Evans - 279,988; Mr. Hunt - 22,417; Mr. Martin - 46,728; and
all directors and executive officers as a group - 21,495,617 (36.4%).
(b) Represents shares held by AFG. The Lindner Family may be deemed to be the
beneficial owners of these shares, which represent 100% of AFC common stock
outstanding.
(c) Represents 1.4% of the preferred stock outstanding.
(d) Represents 2.1% of the preferred stock outstanding.
-7-
<PAGE>
COMPENSATION
The following table summarizes the aggregate cash compensation for 1999,
1998 and 1997 of the Company's Chairman of the Board and Chief Executive Officer
and its four other most highly compensated executive officers during 1999 (the
"Named Executive Officers") as reported in the proxy statement for AFG's 2000
annual meeting. Such compensation includes amounts paid by AFC and AFG as well
as its subsidiaries and certain affiliates during the years indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------ ------------
Securities
Other Underlying
Annual Options
Name Compensa- Granted All Other
And Salary Bonus tion (# of Compensation
Principal Position Year (a) (b) (c) Shares) (d)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner 1999 $968,000 $600,000 $65,000 --- $70,000
Chairman of the 1998 968,000 697,000 190,000 --- 73,000
Board and Chief 1997 957,000 370,000 107,000 --- 75,000
Executive Officer
Keith E. Lindner 1999 968,000 600,000 56,000 50,000 44,000
Co-President 1998 968,000 697,000 22,000 40,000 47,000
1997 957,000 370,000 14,000 50,000 31,000
Carl H. Lindner III 1999 968,000 600,000 106,000 50,000 34,000
Co-President 1998 968,000 697,000 128,000 40,000 34,000
1997 957,000 370,000 117,000 50,000 34,000
S. Craig Lindner 1999 968,000 600,000 75,000 50,000 33,000
Co-President 1998 968,000 697,000 184,000 40,000 33,000
1997 957,000 370,000 132,000 50,000 34,000
James E. Evans 1999 968,000 580,000 2,000 45,000 36,000
Senior Vice 1998 968,000 670,000 4,000 35,000 787,000
President and 1997 957,000 350,000 2,000 30,000 37,000
General Counsel
</TABLE>
(a) This column includes salary paid by Chiquita to Carl H. Lindner of $50,000
in 1999, $100,000 in 1998, and $200,000 in 1997, and to Keith E. Lindner of
$50,000 in 1999, $100,000 in 1998, and $381,000 in 1997.
(b) Bonuses are for the year shown, regardless of when paid. Approximately
one-fourth of the bonuses for each individual were paid in shares of AFG
common stock.
-8-
<PAGE>
(c) This column includes amounts for personal homeowners and automobile
insurance coverage, and the use of corporate aircraft and automobile
service as follows.
Aircraft &
Name Year Insurance Automobile
Carl H. Lindner 1999 $21,000 $ 44,000
1998 16,000 174,000
1997 19,000 88,000
Keith E. Lindner 1999 42,000 14,000
1998 11,000 11,000
1997 6,000 8,000
Carl H. Lindner III 1999 29,000 77,000
1998 28,000 100,000
1997 23,000 94,000
S. Craig Lindner 1999 32,000 43,000
1998 43,000 141,000
1997 26,000 106,000
James E. Evans 1999 -- 2,000
1998 -- 4,000
1997 -- 2,000
(d) Represents options to purchase shares of AFG common stock.
(e) Includes Company or subsidiary contributions or allocations under the (i)
defined contribution retirement plans and (ii) employee savings plan in
which the following Named Executive Officers participate (and related
accruals for their benefit under the Company's benefit equalization plan
which generally makes up certain reductions caused by Internal Revenue Code
limitations in the Company's contributions to certain of the Company's
retirement plans) and Company paid group life insurance as set forth below.
For Mr. Evans only, this column also includes a special 1998 cash bonus of
$750,000.
-9-
<PAGE>
<TABLE>
<CAPTION>
AFG Retire-
Auxiliary ment Savings Directors' Term
Name Year RASP Plan Plan Fees Life
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner 1999 $20,400 $9,600 $2,000 $15,000 $23,000
1998 20,400 9,600 -- 15,000 28,000
1997 30,000 -- 2,000 15,000 28,000
Keith E. Lindner 1999 20,400 9,600 12,000 -- 2,000
1998 20,400 9,600 16,000 -- 1,000
1997 30,000 -- -- -- 1,000
Carl H. Lindner III 1999 20,400 9,600 2,000 -- 2,000
1998 20,400 9,600 2,000 -- 2,000
1997 30,000 -- 2,000 -- 2,000
S. Craig Lindner 1999 20,400 9,600 2,000 -- 1,000
1998 20,400 9,600 2,000 -- 1,000
1997 30,000 -- 2,000 -- 2,000
James E. Evans 1999 20,400 9,600 2,000 -- 4,000
1998 20,400 9,600 2,000 -- 5,000
1997 30,000 -- 2,000 -- 5,000
</TABLE>
Stock Options
The tables set forth below disclose AFG stock options granted to, or
exercised by, the Named Executive Officers during 1999, and the number and value
of unexercised options held by them at December 31, 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1999
Individual Grants
------------------------------------- Potential Realizable
Number of Percent Exercise Value at Assumed
Securities of Price Annual Rates of Stock
Underlying Total per Price
Options Options Share Appreciation for
Grant- (fair Option
ed to market Term (b)
Granted (a) Employ- value Expira- ---------------------
Name (# of ees in at date tion 5% 10%
shares) 1999 of Date
grant)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carl H. Lindner - - - - - - -
Keith E. Lindner AFG 50,000 5.3% $35.69 2/26/09 $1,122,262 $2,844,033
S. Craig Lindner AFG 50,000 5.3% $35.69 2/26/09 $1,122,262 $2,844,033
Carl H. Lindner III AFG 50,000 5.3% $35.69 2/26/09 $1,122,262 $2,844,033
James E. Evans AFG 45,000 4.8% $35.69 2/26/09 $1,010,036 $2,559,630
</TABLE>
<TABLE>
<CAPTION>
Stock Appreciation for All AFG
<S> <C> <C>
Shareholders - 57,071,421 shares (c) $1,812,873,688 $3,777,842,713
</TABLE>
-10-
<PAGE>
(a) The options were granted under AFG's Stock Option Plan and cover AFG common
stock. They vest (become exercisable) to the extent of 20% per year,
beginning one year from the respective dates of grant, and become fully
exercisable in the event of death or disability or in the event of
involuntary termination of employment without cause within one year after a
change of control of the Company.
(b) Represents the hypothetical future values that would be realizable if all
of the options were exercised immediately prior to their expiration in 2009
and assuming that the market price of AFG's common stock had appreciated in
value through the year 2009 at the annual rate of 5% (to $58.14 per share)
or 10% (to $92.57 per share). Such hypothetical future values have not been
discounted to their respective present values, which are lower.
(c) On December 31, 1999, the closing price of AFG common stock on the New York
Stock Exchange was $26.375. The gain shown for All Shareholders is based on
the difference between that price and the share price shown for the above
options at the option expiration dates (to $58.14 and $92.57 per share).
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
Number of
Securities Value of Unexercised
Shares Underlying In-the-Money Options
Acquired Unexercised at Year End (a)
on Options
Exercise at Year End ------------------------
(# of Value Unexer- Exer- Unexer-
Name Company Shares) Realized Exercisable cisable cisable cisable
<S> <C> <C> <C> <C> <C> <C> <C>
Carl H. Lindner AFG 51,818 $534,555 - - - -
Carl H. Lindner III AFG 1,091 $11,246 421,454 112,000 $944,527 $-0-
S. Craig Lindner AFG 1,091 $10,246 343,817 189,637 $764,487 $186,717
Keith E. Lindner AFG 1,091 $10,977 341,454 192,000 $753,857 $192,400
James E. Evans AFG - - 140,000 121,000 $ -0- $-0-
</TABLE>
(a) The value of unexercised in-the-money options is calculated based on the
New York Stock Exchange closing market price of AFG's common stock on
December 31, 1999. This price was $26.375 per share.
-11-
<PAGE>
Compensation Committee Report
The Compensation Committee of the Board of Directors consists of three
directors, none of whom is an employee of the Company, AFG or any of its
subsidiaries. This Committee also acts as the Compensation Committee for AFG.
The Committee's functions include reviewing and making recommendations to the
Board of Directors with respect to the compensation of the Company's senior
executive officers, as defined from time to time by the Board. The term "senior
executive officers" currently includes the Chairman of the Board and Chief
Executive Officer (the "CEO"), the Co-Presidents and each other executive
officer whose annual base salary exceeds $500,000. The Compensation Committee
has the exclusive authority to grant stock options under the Company's Stock
Option Plan to employees of the Company and its subsidiaries, including senior
executive officers.
Compensation of Executive Officers. The Company's compensation policy for
all executive officers of the Company has three principal components: annual
base salary, annual incentive bonuses and stock option grants. Before decisions
were made regarding 1999 compensation for senior executives, the Committee had
discussions with senior executives to solicit their thoughts regarding
compensation. Based in part on such discussions as well as the Committee's
review of the Company's financial results for the preceding year, the Committee
deliberated, formed its recommendations, and presented its determinations
regarding salary and bonus to the full Board for its review and approval. The
compensation decisions discussed in this report conformed with recommendations
made by the Committee, the CEO and the Co- Presidents.
Annual Base Salaries. The Committee approved annual base salaries and
salary increases for senior executive officers that were appropriate, in the
Committee's subjective judgment, for their respective positions and levels of
responsibilities. The Committee approved the 1999 salaries of the CEO and the
Co- Presidents, noting that such salaries would be at the same rates in 1999 as
in 1998 and the latter part of 1997.
Annual Bonuses. As in 1996, 1997 and 1998, the Committee developed an
annual bonus plan for the CEO, the Co-Presidents and the senior executive
officers that would make a substantial portion of their total compensation
dependent on AFG's performance, including achievement of pre-established
earnings per share targets.
-12-
<PAGE>
The annual bonus plan for 1999 made 50% of each participant's annual
bonus dependent on AFG attaining certain earnings per share targets. The other
50% is based on AFG's overall performance, as subjectively determined by the
Committee with respect to each senior executive officer participating in the
annual bonus plan. A significant aspect of the 1999 annual bonus plan (as in
prior years) is that it provided that 25% of any bonuses be paid in AFG common
stock. As in the grant of stock options discussed below, the Committee believes
that payment of a substantial portion of annual bonuses in common stock align
further the interests of the Company's senior executives with those of its
shareholders. The Committee included the CEO and the Co-Presidents as
participants in the 1999 Annual Bonus Plan; the Executive Committee took action
to also have certain of the Senior Vice Presidents as participants. The
Committee recommended to the Board the earnings per share targets.
Under the 1999 annual bonus plan, the bonus target amount for the CEO and
each of the Co-Presidents was $950,000 with 0% to 175% of $475,000 (50% of
$950,000) to be paid depending on AFG achieving certain 1999 earnings per share
allocable to insurance operations (the "EPS Component") and 0% to 175% of
$475,000 to be paid based on AFG's overall performance, as subjectively
determined by the Committee (the "Company Performance Component"). The earnings
per share target which would result in the payment of 100% of the EPS Component
bonus was set by the Committee at $2.75. In recommending the 1999 annual bonus
plan to the Board for adoption, the Committee noted that no bonus should be paid
under the plan if 1999 earnings per share from insurance operations are less
than $2.06 (75% of the 1999 EPS target). AFG's 1999 earnings per share from
insurance operations were $2.50 per share, 91% of the target amount. The
Committee used a straight-line interpolation method to determine what percentage
of the EPS Component bonus should be paid. This resulted in approximately 64% of
the bonus target amount attributable to the EPS Component ($303,000) being paid
to the CEO and Co-Presidents.
-13-
<PAGE>
The Committee then evaluated AFG's performance during 1999. The Committee
considered a number of factors in discussions of such performance with senior
executives, with no relative weight being given to any specific factor. In
determining that each of the CEO and the Co-Presidents should receive
approximately $300,000 (approximately 62.5% of the target amount under the
Company Performance Component), the Committee concluded that a number of 1999
developments enhanced the value and operations of AFG. These included the
upgrade by a major rating agency of AFG's debt rating and financial strength
rating, the successful and timely completion of a debt offering and the use of
its proceeds primarily to pay off higher cost debt, AFG's information
technologies initiative and overhaul and rolling out of its e- business effort,
the commutation of a reinsurance agreement to AFG's benefit, and the maintenance
of AFG's debt-to-capital ratio in a range desirable for investment grade
companies. Somewhat offsetting these positive developments, the Committee noted
that the price of the AFG's common stock declined markedly in 1999, noting that
AFG's stock price decline was generally in line with the common stock price
declines of many other insurance holding companies. The Board adopted all of the
Committee's recommendations with respect to the determination of amounts paid
under the annual bonus plan for 1999. Under the 1999 Plan, 25% of the bonus
payment was paid in common stock.
The annual base salary and bonuses received by the CEO and the
Co-Presidents from AFG and its affiliates are virtually identical because the
Committee views them as working as a management team whose skills and areas of
expertise complement each other.
Stock Option Grants. Stock options represent an important part of AFG's
performance-based compensation system. The Committee believes that Company
shareholders' interests are well served by aligning AFG's senior executives'
interests with those of its shareholders through the grant of stock options in
addition to paying a portion of any annual bonus in common stock. Options under
AFG's Stock Option Plan are granted at exercise prices equal to the fair market
value of common stock on the date of grant and vest at the rate of 20% per year.
The Committee believes that these features provide an optionee with substantial
incentive to maximize AFG's long-term success. Options for 55,000 shares were
granted to the Co-Presidents and additional options
-14-
<PAGE>
were granted to the other senior executives of AFG in 2000. In considering
option grants to the Co-Presidents, the Committee noted that each Co-President
received 5.8% of the total options granted thus far in 2000. No options were
granted to the CEO in 2000.
Members of the
Compensation Committee: William R. Martin, Chairman
Theodore H. Emmerich
Thomas M. Hunt
Certain Transactions
The Company and its subsidiaries have had and expect to continue to have
transactions with AFG's directors, officers, principal shareholders, their
affiliates and members of their families. The Company believes that the
financial terms of these transactions are comparable to those that would apply
to unrelated parties and are fair to AFC.
Members of the Lindner Family are the principal owners of Provident
Financial Group, Inc. ("Provident"). AFC provides security guard and
surveillance services at the main office of Provident for which Provident paid
$100,000 in 1999. Provident leases its main banking and corporate office from
AFG for which Provident paid rent of $2,538,000 in 1999. A subsidiary of
Provident leases equipment to subsidiaries of AFG for which Provident was paid
an aggregate of $655,000 during 1999. A subsidiary of AFG provided
payroll-processing services to Provident in 1999 for which Provident paid
$70,000.
Coupons redeemable for ice cream, and certificates redeemable for tickets
to a home Cincinnati Reds Major League Baseball game, were given as gifts to
employees at the 1999 Company Christmas party. During 1999, AFG paid $127,000 to
United Dairy Farmers, Inc. for the ice cream coupons and grocery items. UDF is
owned by one of Carl H. Lindner's brothers and his family. If all of the
baseball certificates are redeemed for the highest priced seat during the 2000
Cincinnati Reds season, AFG will pay the Reds approximately $380,000. Carl H.
Lindner is the Chief Executive Officer of the Reds. In addition, a subsidiary of
AFG, and a company owned by Carl H. Lindner, Carl H. Lindner III, Keith E.
Lindner and S. Craig Lindner, both own shares in the Reds.
During 1999, AFG and its subsidiaries chartered an aircraft from an entity
owned by one of Carl H. Lindner's brothers. The total charges for such aircraft
usage were $402,000.
-15-
<PAGE>
In July 1997, Carl H. Lindner and a subsidiary of AFG purchased 51% and
49%, respectively, of common stock of a newly incorporated entity formed to
acquire the assets of a company engaged in the production of ethanol. The AFG
subsidiary invested $4.9 million and Mr. Lindner invested $5.1 million; the
asset purchase was completed in December 1997. Certain AFG subsidiaries have
entered into a credit facility under which the ethanol producer may borrow up to
$10 million at a rate of prime plus 3% per annum. There were no borrowings
outstanding under this facility in 1999. In September 1998, the ethanol producer
borrowed $4 million from an AFG subsidiary under a subordinated note bearing
interest at the rate of 14%. During 1999, the ethanol producer paid interest of
$568,000 under the subordinated note.
During 1999, the law firm of Keating, Muething & Klekamp, P.L.L. provided
legal services to AFG AFC, and subsidiaries, for which it was paid $769,000.
This law firm leases its offices from an AFG subsidiary, for which the AFG
subsidiary was paid rent of $1,507,000 in 1999. Paul V. Muething, a partner in
the firm, is the trustee of a trust for the benefit of members of the Lindner
Family which holds 6.8% of AFG's common stock.
An AFG subsidiary is the lender under a credit agreement with American
Heritage Holding Corporation, a Florida-based homebuilder which is 49% owned by
AFG and 11% owned by a brother of Carl H. Lindner. The homebuilder may borrow up
to $8 million at 13% per annum, with interest deferred and added to principal.
The highest outstanding balance owed to the AFG subsidiary during 1999 and the
balance at year-end was $8.3 million.
Performance Graph
No performance graph is included as the Company's Common Stock is not
publicly traded.
-16-
<PAGE>
Directors' Compensation
AFC's Board of Directors receives no annual compensation from AFC.
However, they are paid as directors of AFG, as follows:
Pursuant to AFG's Non-Employee Directors' Compensation Plan (the
"Directors' Plan"), all directors who are not officers or employees of AFG are
paid the following fees: an annual retainer of $40,000; an additional annual
retainer of $12,000 for each Board Committee on which the non-employee director
serves; and an attendance fee of $1,000 for each Board or Committee meeting
attended. Non-employee directors who become directors during the year receive a
pro rata portion of these annual retainers. The retainers and fees to be paid
under the Directors' Plan are reviewed by the Board of Directors from time to
time and are subject to change at its discretion.
In order to align further the interests of AFG's non- employee directors
with the interests of shareholders, the Directors' Plan provides that a minimum
of 50% of such directors' annual retainers are paid through the issuance of
shares of AFG common stock.
The Board of Directors has a program under which a retiring director
(other than an officer or employee of AFG or any of its subsidiaries) will, if
he has met certain eligibility requirements, receive upon his retirement (in a
lump sum or, at his election, in deferred payments) an amount equal to five
times the then current annual director's fee. For purposes of this program,
retirement means resignation as a Company director or not being nominated for
reelection by shareholders as a director. To be eligible for the retirement
benefit, a person must have served as a director for at least four years while
not an officer or employee of AFG or any of its subsidiaries. In addition, a
director will not become eligible for the retirement benefit until reaching age
55. A director who receives a retirement benefit must provide consulting
services to AFG on request for five years following retirement without further
compensation (except reimbursement for expenses). Under the program, a death
benefit equal to the retirement benefit will be paid (in lieu of any retirement
benefit under the program) to the designated beneficiary or legal representative
of any person who dies while serving as a director, whether or not eligible for
a retirement benefit at time of death. This death benefit will not be available
to a director who at any time during the two years immediately preceding death
was an officer or employee of AFG or any of its subsidiaries.
-17-
<PAGE>
In addition to providing for the grant of stock options to key employees,
the Stock Option Plan provides for automatic annual grants of options to each
non-employee director of AFG. During 1999, each non-employee director was
granted an option under the foregoing provisions of the Stock Option Plan to
purchase 1,000 shares at an exercise price of $33.72 per share on June 1, 1999,
the exercise price being the fair market value of AFG common stock on the date
of grant.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Company's Board of Directors held two meetings and took action in
writing ten times in 1999. The Company's Board of Directors has an Executive
Committee, an Audit Committee and a Compensation Committee. There is no
Nominating Committee. Executive Committee: The Executive Committee consists of
Carl H. Lindner (Chairman), Carl H. Lindner III, S. Craig Lindner and Keith E.
Lindner. The Committee's functions include analyzing the future development of
the business affairs and operations of the Company, including further expansion
of businesses in which the Company is engaged and acquisitions and dispositions
of businesses. With certain exceptions, the Executive Committee is generally
authorized to exercise the powers of the Board of Directors between meetings of
the Board of Directors. The Executive Committee consulted among themselves
informally many times throughout the year and took action in writing on sixteen
occasions in 1999. Audit Committee. The Audit Committee consists of Theodore H.
Emmerich (Chairman), William R. Martin and Thomas M. Hunt (elected in October
1999). None are officers or employees of the Company or any of its subsidiaries.
The Committee's functions include recommending to the Board of Directors the
engagement of independent accounting firms to audit the financial statements of
the Company and its subsidiaries and to provide other audit- related services
and recommending the terms of such firms' engagements; reviewing the engagement
of independent accounting firms to provide non-audit services, including the
terms of their engagements; reviewing the adequacy and implementation of the
Company's internal audit function; reviewing the policies, procedures and
principles of the management of the Company for purposes of conformity to the
standards required by the Foreign Corrupt Practices Act; establishing procedures
designed to provide and encourage timely access to the Committee by the
independent accounting firms engaged by the Company, its internal audit
department and its principal financial officers; and conducting such
investigations relating to the Company's financial affairs as the Committee or
the Board of Directors deems desirable. The
-18-
<PAGE>
Committee's functions also include supervising, reviewing and reporting to the
Board of Directors on the performance of management committees of the Company
responsible for the administration of the employee benefit plans of the Company
and its subsidiaries. The Audit Committee met four times in 1999.
Compensation Committee The Compensation Committee consists of William R.
Martin (Chairman), Theodore H. Emmerich and Thomas M. Hunt. The functions of the
Compensation Committee are discussed under "Compensation - Compensation
Committee Report." The Compensation Committee met two times and took action in
writing on six occasions in 1999.
INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP served as the Company's
independent auditors for the fiscal year ended December 31, 1999.
Representatives of that firm will attend the meeting and will be given the
opportunity to comment, if they so desire, and to respond to appropriate
questions that may be asked by shareholders. No auditor has yet been selected
for the current year because it is generally the practice of the Company not to
select independent auditors prior to the annual shareholders meeting.
NOMINATIONS AND SHAREHOLDER PROPOSALS
In accordance with the Company's Code of Regulations (the "Regulations"),
the only candidates eligible for election at a meeting of shareholders are
candidates nominated by or at the direction of the Board of Directors and
candidates nominated at the meeting by a shareholder who has complied with the
procedures set forth in the Regulations. Shareholders will be afforded a
reasonable opportunity at the meeting to nominate candidates for the office of
director. However, the Regulations require that a shareholder wishing to
nominate a director candidate must have first given the Secretary of the Company
at least five and not more than thirty days prior written notice setting forth
or accompanied by (a) the name and residence of the shareholder and of each
nominee specified in the notice, (b) a representation that the shareholder was a
holder of record of the Company's voting stock and intended to appear, in person
or by proxy, at the meeting to nominate the persons specified in the notice and
(c) the consent of each such nominee to serve as director if so elected.
-19-
<PAGE>
The Proxy Form used by AFC for the annual meeting typically grants
authority to management's proxies to vote in their discretion on any matters
that come before the meeting as to which adequate notice has not been received.
In order for a notice to be deemed adequate for the 2001 annual meeting, it must
be received by February 14, 2001. In order for a proposal to be considered for
inclusion in AFC's proxy statement for that meeting, it must be received by
January 20, 2001.
REQUESTS FOR FORM 10-K
The Company will send, upon written request, without charge, a copy of the
Company's most current Annual Report on Form 10-K to any shareholder who writes
to Fred J. Runk, Senior Vice President and Treasurer, American Financial Group,
Inc., One East Fourth Street, Cincinnati, Ohio 45202.
-20-
<PAGE>
Pages F1 though F-37 which follow are taken from AFC's Annual Report on Form
10-K for the year ended December 31, 1999. This information is being included
herein in accordance with Rule 14a- 3 promulgated under the Securities Act of
1934.
-21-
<PAGE>
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
AMERICAN FINANCIAL CORPORATION
Proxy for Annual Meeting
Registration Name and Address
The undersigned hereby appoints James C. Kennedy and Karl J. Grafe, and either
of them, attorneys and proxies, with the power of substitution to each, to vote
all shares of Common Stock of the Company that the undersigned would be entitled
to vote at the Annual Meeting of Shareholders of the Company to be held on May
9, 2000 at 10:30 A.M., and at their discretion to cumulate votes in the election
of directors (if cumulative voting is invoked by a shareholder through proper
notice to the Company), and on such other matters as may properly come before
the meeting or any adjournment thereof.
The Board of Directors recommends a vote FOR the following Proposals:
1. Proposal to Elect Directors
/ / FOR AUTHORITY to elect the / / WITHHOLD AUTHORITY to nominees listed
below (except vote for every nominee those whose names have been listed
below crossed out)
Carl H. Lindner Carl H. Lindner III S. Craig Lindner
Keith E. Lindner Theodore H. Emmerich James E. Evans
Thomas M. Hunt William R. Martin
DATE: ___________________, 2000 SIGNATURE:
-----------------------------
SIGNATURE:
-----------------------------
(if held jointly) Important:
Please sign exactly as name appears hereon
indicating, where proper, official position
or representative capacity. In case of joint
holders, all should sign.
The named proxy holders will vote the shares represented by this proxy in the
manner indicated. Unless a contrary direction is indicated,
the proxy holders will, except to the extent they exercise their discretion
to cumulate votes in the election of directors, vote such
shares "FOR" the proposals. If cumulative voting is invoked by a
shareholder through proper notice to the Company, unless a contrary
direction is indicated, this proxy will give the proxy holders authority, in
their discretion, to cumulate all votes to which the
undersigned is entitled in respect of the shares represented by this
proxy and allocate them in favor of any one or more of the nominees
for director if any situation arises which, in the opinion of the
proxy holders, makes such action necessary or desirable. If any
further matters properly come before the meeting, such shares shall be voted on
such matters in accordance with the best judgment of the
proxy holders.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
If you have any questions about voting your shares with this form,
Please call 1-800-368-3417 or 513-579-2414
<PAGE>
VOTE BY TELEPHONE
It's easy, convenient, and your vote is recorded immediately.
Call TOLL-FREE using a Touch-Tone Phone
1-877-298-0570
(Cincinnati area use 579-6707)
Follow these easy steps:
1. Review the accompanying Proxy Statement and Proxy Form and have
them near by when you call.
2. Call the Toll Free number 1-877-298-0570 or the Cincinnati area
local number 579-6707.
3. Enter the 6 digit Proxy Number located in the gray shaded area above the list
of proposals on your proxy form.
4. Enter the 6 digit PIN Number located in the same gray shaded area.
5. Follow the recorded instructions.
Telephone voting is available Monday - Friday, 8:00 a.m. to 10:30 p.m.
Eastern Time and Saturday 8:00 a.m. to 4:30 p.m. Eastern Time.
Telephone voting will close one hour before the start of the meeting.
Your Vote is Important!
1-877-298-0570
<PAGE>
Forward-Looking Statements The Private Securities Litigation Reform Act of
1995 encourages corporations to provide investors with information about the
company's anticipated performance and provides protection from liability if
future results are not the same as management's expectations. This document
contains certain forward-looking statements that are based on assumptions which
management believes are reasonable, but by their nature, inherently uncertain.
Future results could differ materially from those projected. Factors that could
cause such differences include, but are not limited to: changes in economic
conditions especially with regard to availability of and returns on capital,
regulatory actions, changes in legal environment, levels of catastrophe and
other major losses, availability of reinsurance, and competitive pressures. AFC
undertakes no obligation to update any forward- looking statements.
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 make up one of the twenty five largest
property and casualty groups in the United States based on statutory net
premiums written.
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.
<PAGE>
Selected Financial Data
The following table sets forth certain data for the periods indicated
(dollars in millions).
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Total Revenues $3,342 $4,072 $4,058 $4,131 $3,613
Operating Earnings Before Income Taxes and
Extraordinary Items 310 269 385 411 265
Earnings Before Extraordinary Items and
Accounting Change 153 130 208 250 195
Extraordinary Items (4) (1) (7) (28) 2
Cumulative Effect of Accounting Change (4) - - - -
Net Earnings 145 129 201 222 197
Ratio of Earnings to Fixed Charges (a) 4.01 3.44 4.20 4.99 3.10
Ratio of Earnings to Fixed Charges
and Preferred Dividends (a) 3.67 3.15 3.52 3.96 2.60
Balance Sheet Data:
Total Assets $16,024 $15,848 $15,738 $14,999 $14,851
Long-term Debt:
Holding Companies 113 315 287 340 648
Subsidiaries 240 177 194 178 234
Minority Interest 490 524 510 307 327
Shareholders' Equity 1,324 1,531 1,393 1,277 1,248
<FN>
(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.
</FN>
</TABLE>
F-1
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AFC's financial condition and results of operations. This discussion should be
read in conjunction with the financial statements beginning on page F-12.
LIQUIDITY AND CAPITAL RESOURCES
Ratios Following the combination of AFC and American Premier in merger
transactions completed in April 1995 (the "Mergers"), 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 8% at
December 31, 1999. Including amounts due AFG, the ratio was 27% at the end of
1999.
AFC's ratio of earnings to fixed charges, excluding and including preferred
dividends, on a total enterprise basis for the year ended December 31, 1999, was
4.01 and 3.67, 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, 1999, the capital ratios of all AFC insurance
companies substantially exceeded the RBC requirements (the lowest capital ratio
of any AFC subsidiary was 2.3 times its authorized control level RBC; weighted
average of all AFC subsidiaries was 4.8 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.
Management believes these parent holding companies have sufficient resources
to meet their liquidity requirements through operations. If funds generated from
operations, including dividends and tax payments from subsidiaries, are
insufficient to meet fixed charges in any period, these companies would be
required to generate cash through borrowings, sales of securities or other
assets, or similar transactions.
AFC has a reciprocal Master Credit Agreement with the various AFG holding
companies under which these companies make funds available to each other for
general corporate purposes.
A five-year, $300 million bank credit line was established by AFC in February
1998 replacing two subsidiary holding company lines. This 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, 1999, there was $68
million borrowed under the line.
<PAGE>
In April 1999, AFC used funds borrowed under its credit agreement with AFG to
retire outstanding holding company public debt and borrowings under its credit
line.
F-2
<PAGE>
Dividend payments from subsidiaries have been very important to the liquidity
and cash flow of the individual holding companies during certain periods in the
past. However, the reliance on such dividend payments has been lessened in
recent years by the combination of (i) reductions in the amounts and cost of
debt at the holding companies subsequent to the Mergers (and the related
decrease in ongoing cash needs for interest and principal payments), (ii) AFC's
ability to obtain financing in capital markets, as well as (iii) the sales of
certain noncore investments. Strong capital at the insurance companies also
decreases the likelihood of a need for additional investment in these companies.
For statutory accounting purposes, equity securities are generally carried at
market value. At December 31, 1999, AFC's insurance companies owned publicly
traded equity securities with a market value of $1.1 billion, including equity
securities of AFC affiliates (including subsidiaries) of $.7 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
IT Initiative From inception of the Year 2000 Project in the early 1990's,
AFC estimates that it incurred approximately $79 million in Year 2000 costs,
including capitalized costs of $20 million, to successfully ensure its systems
function properly in the year 2000 and beyond. Although a significant portion of
the costs charged to expense were related primarily to allowing systems to
continue to execute properly, the Project also included the upgrading of a
significant number of systems and enhanced the knowledge of virtually all
existing systems.
In the third quarter of 1999, AFC's newly hired Chief Information Officer
initiated an enterprise-wide study of its information technology ("IT")
resources, needs and opportunities. AFC expects that the initiative will entail
extensive effort and costs and may lead to substantial changes in the area,
which should result in significant cost savings, efficiencies and effectiveness
in the future. While the costs (most of which will be expensed) will precede any
savings to be realized, management expects benefits to greatly exceed the costs
incurred, all of which will be funded through available working capital.
<PAGE>
Litigation 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 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, 1999, Great
American had recorded $797 million (before reinsurance recoverables of $220
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.
F-3
<PAGE>
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.
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, 1999
or 1998.
Fixed Maturity Portfolio The fair value of AFC's fixed maturity portfolio is
directly impacted by changes in market interest rates. For example, as a result
of increased market rates, AFC's fixed maturity portfolio declined in value by
more than six percent in 1999. 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, 1999 and 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 date for each of the five subsequent
years and for all years thereafter. 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.
December 31, 1999 December 31, 1998
Principal Principal
Cash Flows Rate Cash Flows Rate
2000 $ 618.2 7.83% 1999 $ 848.9 7.97%
2001 622.6 8.69 2000 942.7 7.64
2002 848.4 8.14 2001 954.2 8.32
2003 1,267.6 7.65 2002 1,086.3 7.77
2004 999.2 7.73 2003 1,415.3 7.57
Thereafter 5,871.0 7.50 Thereafter 4,784.1 7.53
Total $10,227.0 7.69% $10,031.5 7.68%
Fair Value $ 9,862.2 $10,324.3
<PAGE>
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.
F-4
<PAGE>
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. Projected payments (in
millions) in each of the subsequent five years and for all years thereafter on
AAG's fixed annuity liabilities at December 31 were as follows.
Fair
First Second Third Fourth Fifth Thereafter Total Value
1999 $690 $620 $550 $490 $440 $2,730 $5,520 $5,371
1998 660 620 560 500 450 2,660 5,450 5,307
Nearly half of AAG's fixed annuity liabilities at December 31, 1999, 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 approximate 5%. This rate 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.
Debt and Preferred Securities The following table shows scheduled principal
payments (in millions) on fixed-rate long-term debt of AFC and its subsidiaries
and related weighted average interest rates for each of the subsequent five
years and for all years thereafter.
December 31, 1999 December 31, 1998
Scheduled Scheduled
Principal Principal
Payments Rate Payments Rate
2000 $ 26.9 9.96% 1999 $ 90.7 9.69%
2001 * 2000 49.1 9.85
2002 * 2001 *
2003 * 2002 *
2004 14.2 8.38 2003 *
Thereafter 135.0 7.25 Thereafter 233.3 8.26
Total $180.1 7.74% $376.5 8.80%
Fair Value $171.6 $388.9
(*) Less than $2 million.
At December 31, 1999 and 1998, respectively, AFC and its subsidiaries had
$171 million and $114 million in variable-rate debt maturing primarily in 2002
and 2003. The weighted average interest rate on AFC's variable-rate debt was
6.82% at December 31, 1999 compared to 5.98% at December 31, 1998. There were
$220 million and $225 million of subsidiary trust preferred securities
outstanding at December 31, 1999 and 1998, none of which are scheduled for
maturity or mandatory redemption during the next five years; the weighted
average interest rate on these securities at December 31, 1999 and 1998 was
8.45% and 8.46%, respectively.
<PAGE>
Investments Approximately two-thirds 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, 1999, the average life of AFC's fixed maturities was
about 6 years.
F-5
<PAGE>
Approximately 90% 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, 1999. 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, 1999. 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. Over 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.
Individual portfolio 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: 1999 -
$20 million; 1998 - $16 million; 1997 - $57 million; 1996 - $166 million and
1995 - $84 million. At December 31, 1999, AFC had a net unrealized loss on fixed
maturities of $239 million (before income taxes). The net unrealized gain on
equity securities was $181 million (before income taxes) at that same date.
F-6
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1999
General Operating earnings before income taxes were $310 million in 1999, $269
million in 1998 and $385 million in 1997. Results for 1998 include a pretax
charge of $214 million for reserve strengthening relating to asbestos and other
environmental matters ("A&E") and $159 million of pretax gains on sales of
subsidiaries.
Pretax operating earnings for 1999 were 5% lower than those of 1998
(excluding the above mentioned A&E charge and sales gains) due primarily to
decreased investment income and a fourth quarter charge of $10 million for
estimated expenses related to realignment within the operating units of the
life, health and annuity business. These were partially offset by improved
underwriting results in the property and casualty insurance operations.
Pretax operating earnings for 1998 (excluding the above mentioned A&E charge
and sales gains) were 16% lower than those of 1997 due primarily to lower gains
on sales of securities and affiliates and a decline in the underwriting results
of the property and casualty insurance operations which were impacted by higher
catastrophe losses in 1998. These declines were partially offset by higher
income on investments.
Property and Casualty Insurance - Underwriting AFC's property and casualty
operations consist of two major business groups: Personal and Specialty.
The Personal group sells nonstandard and preferred/standard private passenger
auto insurance and, to a lesser extent, homeowners' insurance. Nonstandard
automobile insurance covers 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.
Some of the more significant areas are inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, U.S.-based operations of Japanese companies, fidelity
and surety bonds, collateral protection, and umbrella and excess coverages.
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.
<PAGE>
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.
F-7
<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.
Underwriting results of AFC's insurance operations outperformed the industry
average for the fourteenth consecutive year (excluding the special $214 million
A&E charge in 1998). 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):
1999 1998 1997
Net Written Premiums (GAAP)
Personal $1,154 $1,279 $1,345
Specialty 1,111 1,312(*) 1,468
Other Lines (2) 18 45
$2,263 $2,609 $2,858
Combined Ratios (GAAP)
Personal 100.7% 97.3% 98.5%
Specialty 102.7 105.0 100.0
Aggregate (including A&E and other lines) 102.0% 110.7% 101.4%
(*) Includes $232 million for the 1998 year generated by the Commercial lines
sold.
Special A&E Charge Under the agreement covering the sale of its Commercial
lines division in 1998, 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. 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 databases that supplement the
internal information. AFC recorded a fourth quarter charge of $214 million
increasing A&E reserves at December 31, 1998, to approximately $866 million
(before deducting reinsurance recoverables of $241 million), an amount which, in
the opinion of management, makes a reasonable provision for AFC's ultimate
liability for A&E claims.
Personal The Personal group's net written premiums for 1999 include $71
million in net premiums written by Worldwide since its acquisition in April. The
10% decrease in written premiums reflects continuing strong price competition in
the private passenger automobile market. The combined ratio for 1999 increased
as loss and underwriting expenses declined at a slower rate than premiums.
In 1998, the Personal group's net written premiums decreased 5% due primarily
to stronger price competition in the personal automobile market. The combined
ratio improved in 1998 due to both lower loss experience and a 6% reduction in
underwriting expenses.
<PAGE>
Specialty The Specialty group's net written premiums for 1999 increased
slightly compared to the 1998 period, excluding premiums of the Commercial lines
division sold in December 1998. The combined ratio improved as the beneficial
effects of the Commercial lines sale more than offset less favorable
underwriting results in other specialty businesses, in particular the
multi-peril crop insurance program. The Specialty group's underwriting results
for 1999 include $28 million representing amortization of a portion of the
deferred gain related to the Commercial lines business ceded to Ohio Casualty in
1998. In addition, underwriting margins improved in the California workers'
compensation business as favorable reinsurance agreements executed during 1998
more than offset an increase in reserves during the fourth quarter of 1999. In
January 2000, AFG completed an agreement with Reliance Insurance Company which
commuted these reinsurance agreements.
F-8
<PAGE>
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 in 1997. Underwriting results worsened from the comparable period in 1997 due
to losses from the midwestern storms in the second quarter of 1998 compared to
milder weather conditions during 1997 and unusually good results in 1997 in
certain other lines.
Life, Accident and Health Premiums and Benefits Life, accident and health
premiums and benefits increased in 1999 (excluding Funeral Services division
sold in 1998) due primarily to the acquisition of United Teacher Associates in
October 1999 and increased sales by GALIC's Life division. The increase in
1998's premiums and benefits reflects primarily AAG's acquisition of Great
American Life Assurance Company of Puerto Rico, Inc. in December 1997.
Investment Income Changes in investment income reflect fluctuations in market
rates and changes in average invested assets.
1999 compared to 1998 Investment income decreased 5% from 1998 due primarily
to the transfer of investment assets in connection with the sales of the
Commercial lines division and Funeral Services division in 1998, partially
offset by the effect of the purchases of Worldwide and United Teacher Associates
in 1999.
1998 compared to 1997 Investment income increased 2% from 1997 due primarily
to an increase in the average amount of investments held partially offset by
decreasing market interest rates.
Gains on Sales of Investee The gains on sales of investee in 1998 and 1997
represent pretax gains to AFC as a result of Chiquita's public issuance of
shares of its common stock.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in 1998
include (i) a pretax gain of $152.6 million on the sale of the Commercial lines
division, (ii) a pretax gain of $21.6 million on 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 a pretax gain of $49.9 million on the sale of MDI and a charge
of $17 million relating to operations expected to be sold or otherwise disposed
of.
Other Income
1999 compared to 1998 Other income increased $7.9 million (6%) in 1999 as
increased fee income generated by certain insurance operations more than offset
a decrease in income from the sale of operating real estate and lease residuals.
1998 compared to 1997 Other income 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.
<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 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 90%.
F-9
<PAGE>
Traditional fixed annuity receipts totaled approximately $320 million in
1999, $375 million in 1998 and $410 million in 1997. AAG believes that the
success of the stock market and the recent interest rate environment have
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) more than offset this decrease.
Annuity benefits decreased $17.2 million (6%) in 1998 due primarily to
decreases in crediting rates and changes in actuarial assumptions.
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.
Interest expense decreased in both 1999 and 1998 due to lower average
indebtedness.
Other Operating and General Expenses From inception of AFC's Year 2000 Project
in the early 1990's through 1997, AFC expensed approximately $9 million in
remediation costs. During 1999 and 1998, respectively, $23 million and $27
million in such costs were expensed. Because a significant portion of the Year
2000 Project was completed using internal staff, these costs do not represent
solely incremental costs.
1999 compared to 1998 Other operating and general expenses increased $15.9
million (5%) as AAG's $10 million realignment charge and increased expenses from
start-up insurance services subsidiaries more than offset a decrease in
franchise taxes and a decrease in amortization of annuity and life acquisition
costs related to the Funeral Services division sold.
1998 compared to 1997 Other operating and general expenses increased $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.
Income Taxes See Note K to the Financial Statements for an analysis of items
affecting AFC's effective tax rate.
Investee Corporation Equity in net losses of investee corporation represents
AFC's proportionate share of the results of Chiquita Brands International.
AFC recorded pretax equity in net losses of Chiquita of $27.4 million, $13.2
million and $5.6 million in 1999, 1998 and 1997, respectively. Chiquita's loss
attributable to common shareholders was $75.5 million, $35.5 million and $16.6
million during these same periods.
<PAGE>
In 1993, the European Union ("EU") implemented a regulatory system governing
the importation of bananas into the EU. The quota regime grants preferred status
to producers and importers within the EU and its former colonies, while imposing
restrictive quotas, licenses and tariffs on bananas imported from other sources,
including Latin America, Chiquita's primary source of fruit. This quota system
has significantly decreased Chiquita's overall volume and market share in
Europe. Following the imposition of the quota regime, prices within the EU
increased and have generally remained higher than before the quota. Banana
prices in other worldwide markets, however, have declined as the displaced EU
volume entered those markets. Additionally, a stronger dollar in relation to
major European currencies (mitigated in part by Chiquita's foreign currency
hedging program) has contributed to lower earnings in the last few years.
Chiquita's operating income declined in 1999 from 1998 primarily due to weak
banana pricing, particularly in Europe as a result of the overallocation of EU
banana import licenses early in the year and weakness in demand from Eastern
Europe and Russia. In late 1999, Chiquita underwent a workforce reduction
program that streamlined certain corporate and staff functions in the U.S.,
Central America and Europe. While the program is expected to generate annual
savings of $15 to $20 million, operating income for 1999 includes a $9 million
charge for severance and other costs associated with the program.
F-10
<PAGE>
Chiquita's results for 1998 include pretax writedowns and costs of $74
million as a result of significant damage in Honduras and Guatemala caused by
Hurricane Mitch. Excluding these unusual items, operating income improved in
1998 compared to 1997 due primarily to lower delivered product costs for bananas
on higher worldwide volume, which more than offset the adverse effect of lower
banana pricing.
Chiquita's results for 1997 were adversely affected by a stronger dollar in
relation to major European currencies and by increased banana production costs
resulting from widespread flooding in 1996.
Cumulative Effect of Accounting Change In the first quarter of 1999, AAG
implemented Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires that costs of start-up activities be expensed as
incurred and that unamortized balances of previously deferred costs be expensed
and reported as the cumulative effect of a change in accounting principle.
Accordingly, AFC expensed previously capitalized start-up costs of $3.8 million
(net of minority interest and taxes) in the first quarter of 1999.
Recent Accounting Standards The following accounting standards have been
implemented by AFC in 1998 or 1999 or will be implemented in 2001. 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
Financial Accounting Standards ("SFAS") No. 133 in the first quarter of 2001 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"
SOP 98-5 Start-up Costs (1999) "Start-up Costs"
SFAS #133 Derivatives (2001) "Derivatives"
Other standards issued in recent years did not apply to AFC or had only
negligible effects on AFC.
F-11
<PAGE>
Financial Statements
Page
Report of Independent Auditors F-13
Consolidated Balance Sheet:
December 31, 1999 and 1998 F-14
Consolidated Statement of Earnings:
Years ended December 31, 1999, 1998 and 1997 F-15
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997 F-16
Consolidated Statement of Cash Flows:
Years ended December 31, 1999, 1998 and 1997 F-17
Notes to Consolidated Financial Statements F-18
"Selected Quarterly Financial Data" has been included in Note O to the
Consolidated Financial Statements.
F-12
<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, 1999 and 1998, 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, 1999.
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 9, 2000
F-13
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
1999 1998
Assets:
Cash and short-term investments $ 389,018 $ 289,944
Investments:
Fixed maturities - at market
(amortized cost - $10,101,005 and $9,920,407) 9,862,205 10,323,407
Other stocks - at market
(cost - $229,201 and $207,345) 409,701 430,345
Investment in investee corporation 159,984 192,138
Policy loans 217,171 220,496
Real estate and other investments 265,288 268,171
Total investments 10,914,349 11,434,557
Recoverables from reinsurers and prepaid
reinsurance premiums 2,105,818 1,973,895
Agents' balances and premiums receivable 656,924 618,198
Deferred acquisition costs 660,672 464,047
Other receivables 222,438 318,154
Variable annuity assets (separate accounts) 354,371 120,049
Prepaid expenses, deferred charges and other assets 384,567 343,554
Cost in excess of net assets acquired 335,652 285,469
$16,023,809 $15,847,867
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,795,449 $ 4,773,377
Unearned premiums 1,325,766 1,232,848
Annuity benefits accumulated 5,519,528 5,449,633
Life, accident and health reserves 520,644 341,595
Payable to American Financial Group, Inc. 370,965 270,500
Long-term debt:
Holding companies 112,557 315,536
Subsidiaries 239,733 176,896
Variable annuity liabilities (separate accounts) 354,371 120,049
Accounts payable, accrued expenses and other
liabilities 970,495 1,112,442
Total liabilities 14,209,508 13,792,876
Minority interest 490,194 524,335
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 960,782 943,359
Retained earnings 296,246 157,218
Unrealized gain (loss) on marketable
securities, net (14,700) 348,300
Total shareholders' equity 1,324,107 1,530,656
$16,023,809 $15,847,867
See notes to consolidated financial statements.
F-14
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S>
Income: <C> <C> <C>
Property and casualty insurance premiums $2,210,819 $2,698,738 $2,824,381
Life, accident and health premiums 123,928 170,365 121,506
Investment income 841,579 885,591 868,689
Realized gains on sales of:
Securities 20,053 6,275 46,006
Investee - 9,420 11,428
Subsidiaries - 158,673 33,602
Other investments - 5,293 -
Other income 145,600 137,674 152,854
3,341,979 4,072,029 4,058,466
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,588,651 2,215,283 2,075,616
Commissions and other underwriting expenses 665,109 772,917 790,324
Annuity benefits 262,632 261,666 278,829
Life, accident and health benefits 86,439 131,652 110,082
Interest charges on borrowed money 64,888 72,625 87,155
Other operating and general expenses 364,518 348,588 331,655
3,032,237 3,802,731 3,673,661
Operating earnings before income taxes 309,742 269,298 384,805
Provision for income taxes 101,020 92,699 132,599
Net operating earnings 208,722 176,599 252,206
Minority interest expense, net of tax (38,436) (38,618) (40,052)
Equity in net losses of investee, net of tax (17,783) (8,578) (3,617)
Earnings before extraordinary items and
accounting change 152,503 129,403 208,537
Extraordinary items - loss on prepayment of debt (3,849) (763) (7,147)
Cumulative effect of accounting change (3,854) - -
Net Earnings $ 144,800 $ 128,640 $ 201,390
</TABLE>
See notes to consolidated financial statements.
F-15
<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 (Loss)
Stock Surplus Earnings on Securities Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $162,760 $929,371 $ 1,364 $183,400 $1,276,895
Net earnings - - 201,390 - 201,390
Change in unrealized - - - 157,800 157,800
Comprehensive income 359,190
Dividends on Preferred Stock - - (15,071) - (15,071)
Purchases and Redemptions (162,760) - (153,333) - (316,093)
Issuance of Preferred Stock 72,154 - - - 72,154
Capital contribution from parent - 16,707 - - 16,707
Other - (299) - - (299)
Balance at December 31, 1997 $ 72,154 $945,779 $ 34,350 $341,200 $1,393,483
Net earnings - - 128,640 - $ 128,640
Change in unrealized - - - 7,100 7,100
Comprehensive income 135,740
Dividends on Preferred Stock - - (5,772) - (5,772)
Capital contribution from parent - 6,963 - - 6,963
Other - 242 - - 242
Balance at December 31, 1998 $ 72,154 $952,984 $157,218 $348,300 $1,530,656
Net earnings - - 144,800 - $ 144,800
Change in unrealized - - - (363,000) (363,000)
Comprehensive income (loss) (218,200)
Dividends on Preferred Stock - - (5,772) - (5,772)
Capital contribution from parent - 12,267 - - 12,267
Other - 5,156 - - 5,156
Balance at December 31, 1999 $ 72,154 $970,407 $296,246 ($ 14,700) $1,324,107
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 144,800 $ 128,640 $ 201,390
Adjustments:
Extraordinary items 3,849 763 7,147
Cumulative effect of accounting change 3,854 - -
Equity in net losses of investee 17,783 8,578 3,617
Depreciation and amortization 94,829 106,280 76,434
Annuity benefits 262,632 261,666 278,829
Changes in reserves on assets (8,285) 14,020 7,610
Realized gains on investing activities (37,889) (205,659) (135,657)
Deferred annuity and life policy acquisition
costs (119,382) (117,202) (72,634)
Increase in reinsurance and other receivables (100,824) (432,394) (189,643)
Decrease (increase) in other assets 66,302 (9,433) 24,325
Increase in insurance claims and reserves 112,721 480,052 206,900
Increase (decrease) in other liabilities (51,773) 158,973 (27,988)
Increase in minority interest 22,224 10,175 36,440
Dividends from investee 4,799 4,799 4,799
Other, net (6,341) (14,651) (25,711)
409,299 394,607 395,858
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,034,642) (2,155,192) (2,555,060)
Equity securities (80,624) (78,604) (37,107)
Subsidiaries (285,971) (30,325) (93,839)
Real estate, property and equipment (74,063) (66,819) (64,917)
Maturities and redemptions of fixed maturity
investments 1,047,169 1,248,626 897,786
Sales of:
Fixed maturity investments 1,212,208 795,520 1,407,598
Equity securities 100,076 28,850 104,960
Investees and subsidiaries - 164,589 32,500
Real estate, property and equipment 31,354 53,962 23,289
Cash and short-term investments of acquired
(former) subsidiaries, net 54,331 (21,141) 2,714
Decrease (increase) in other investments 21,439 (15,135) (12,892)
(8,723) (75,669) (294,968)
<PAGE>
Financing Activities:
Fixed annuity receipts 446,430 480,572 493,708
Annuity surrenders, benefits and withdrawals (706,840) (690,388) (607,174)
Additional long-term borrowings 269,700 262,537 184,150
Reductions of long-term debt (415,478) (251,837) (230,688)
Borrowings from AFG 266,100 6,000 201,000
Repayments of borrowings from AFG (168,800) (80,000) (224,500)
Repurchases of Preferred Stock - - (243,939)
Issuances of trust preferred securities - - 149,353
Repurchase of trust preferred securities (5,509) - -
Capital contribution 18,667 18,667 18,667
Cash dividends paid (5,772) (5,772) (15,071)
(301,502) (260,221) (274,494)
Net Increase (Decrease) in Cash and Short-term
Investments 99,074 58,717 (173,604)
Cash and short-term investments at beginning of
period 289,944 231,227 404,831
Cash and short-term investments at end of period $ 389,018 $ 289,944 $ 231,227
</TABLE>
See notes to consolidated financial statements.
F-17
<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 Corporation N. Quarterly Operating Results
F.Cost in Excess of Net Assets Acquired O. Insurance
G.Payable to American Financial Group P. Additional Information
H.Long-Term Debt
A. Accounting Policies
Basis of Presentation The consolidated financial statements include the
accounts of American Financial Corporation ("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. 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.
Investments All fixed maturity securities are considered "available for sale"
and reported at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity. Short-term investments are
carried at cost; loans receivable are carried primarily at the aggregate
unpaid balance. Premiums and discounts on mortgage- backed securities are
amortized over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment is
considered to be other than temporary, a provision for impairment is charged
to earnings and the carrying value of that investment is reduced.
Investment in Investee Corporation Investments in securities of 20%- to
50%-owned companies are generally carried at cost, adjusted for 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 periods of 20 to 40 years.
<PAGE>
Insurance As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable. To the extent that unrealized gains (losses) from
securities classified as "available for sale" would result in adjustments to
deferred acquisition costs and policyholder liabilities had those gains
(losses) actually been realized, such balance sheet amounts are adjusted, net
of deferred taxes.
F-18
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against income
ratably over the terms of the related policies. For the annuity companies,
DPAC is amortized, with interest, in relation to the present value of
expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for
unpaid claims and for expenses of investigation and adjustment of unpaid
claims are based upon (a) the accumulation of case estimates for losses
reported prior to the close of the accounting period on the direct business
written; (b) estimates received from ceding reinsurers and insurance pools
and associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for investigating
and adjusting claims and (e) the current state of the law and coverage
litigation. These liabilities are subject to the impact of changes in claim
amounts and frequency and other factors. In spite of the variability inherent
in such estimates, management believes that the liabilities for unpaid losses
and loss adjustment expenses are adequate. Changes in estimates of the
liabilities for losses and loss adjustment expenses are reflected in the
Statement of Earnings in the period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit payments are
recorded as increases or decreases in "annuity benefits accumulated" rather
than as revenue and expense. Increases in this liability for interest
credited are charged to expense and decreases for surrender charges are
credited to other income.
Life, Accident and Health Reserves Liabilities for future policy benefits
under traditional life, accident and health policies are computed using the
net level premium method. Computations are based on anticipated investment
yield, mortality, morbidity and surrenders and include provisions for
unfavorable deviations. Reserves established for accident and health claims
are modified as necessary to reflect actual experience and developing trends.
<PAGE>
Variable Annuity Assets and Liabilities Separate accounts related to
variable annuities represent deposits invested in underlying investment funds
on which AAG earns a fee. The investment funds are selected and may be
changed only by the policyholder.
Premium Recognition Property and casualty premiums are earned over the
terms of the policies on a pro rata basis. Unearned premiums represent that
portion of premiums written which is applicable to the unexpired terms of
policies in force. On reinsurance assumed from other insurance companies or
written through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations. For
traditional life, accident and health products, premiums are recognized as
revenue when legally collectible
F-19
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 American Annuity Group,
Inc. ("AAG"), and American Financial Group, Inc.'s ("AFG") interest in
American Premier Underwriters, Inc. ("American Premier" or "APU") 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.
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.
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 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.
<PAGE>
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.
F-20
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Start-up Costs Prior to 1999, AAG, an 83%-owned subsidiary, deferred certain
costs associated with introducing new products and distribution channels and
amortized them on a straight-line basis over 5 years. In 1999, AAG
implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires that (i) costs of start-up activities
be expensed as incurred and (ii) unamortized balances of previously deferred
costs be expensed and reported as the cumulative effect of a change in
accounting principle. Accordingly, AFC expensed previously capitalized
start-up costs of $3.8 million (net of minority interest and taxes) or $.06
per diluted share, effective January 1, 1999.
Derivatives The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," during the
second quarter of 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments that
are embedded in other contracts, and for hedging activities and must be
implemented no later than January 1, 2001. SFAS No. 133 requires the
recognition of all derivatives (both assets and liabilities) in the balance
sheet at fair value. Changes in fair value of derivative instruments are
included in current income or as a component of comprehensive income (outside
current income) depending on the type of derivative. Implementation of SFAS
No. 133 is not expected to have a material effect on AFC's financial position
or results of operations.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt or
equity instruments and property and equipment. "Financing activities" include
obtaining resources from owners and providing them with a return on their
investments, borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing activities. All
other activities are considered "operating". Short-term investments having
original maturities of three months or less when purchased are considered to
be cash equivalents for purposes of the financial statements.
B. Acquisitions and Sales of Subsidiaries and Investees
Worldwide Insurance Company In April 1999, AFC acquired Worldwide Insurance
Company (formerly Providian Auto and Home Insurance Company) for $157 million
in cash. Worldwide is a provider of direct response private passenger
automobile insurance.
United Teacher Associates In October 1999, AAG acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA") for $81 million in
cash, pending post-closing adjustments under which AAG may receive as much as
several million dollars. UTA provides supplemental health products and
retirement annuities, and purchases blocks of insurance policies from other
insurers.
<PAGE>
Great American Life Insurance Company of New York and Consolidated Financial
In February 1999, AAG acquired Great American Life Insurance Company of New
York, formerly Old Republic Life Insurance Company of New York, for $27
million in cash. In July 1999, AAG acquired Consolidated Financial
Corporation, an insurance agency, for $21 million in cash.
F-21
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 6 million (post split)
shares of Ohio Casualty common stock. AFC deferred a gain of $103 million on
the insurance ceded to Ohio Casualty and recognized a pretax gain of $153
million on the sale of the other net assets. The deferred gain is being
recognized over the estimated remaining settlement period (weighted average
of 4.25 years) of the claims ceded. AFC may also 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 $230 million in 1998 (11
months) and $315 million in 1997.
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 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 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.
<PAGE>
C. Segments of Operations AFC's property and casualty group is engaged
primarily in private passenger automobile and specialty insurance businesses.
The Personal group writes nonstandard and preferred/standard private
passenger auto and other personal insurance coverage. The Specialty group
includes a highly diversified group of specialty business units. Some of the
more significant areas are inland and ocean marine, California workers'
compensation, agricultural-related coverages, executive and professional
liability, U.S.-based operations of Japanese companies, fidelity and surety
bonds, collateral protection, and umbrella and excess coverages. 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 1999 and 1998, AFC derived less than 2% of its revenues
from the sale of life and supplemental health products in Puerto Rico and
less than 1% of its revenues from the sale of property and casualty insurance
in Canada, Mexico, Europe and Asia. In addition, AFC owns a significant
portion of the voting equity securities of Chiquita Brands International,
Inc. (an investee corporation - see Note E).
F-22
<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.
1999 1998 1997
Assets
Property and casualty insurance (a) $ 8,158,371 $ 8,278,898 $ 7,517,856
Annuities and life 7,523,570 7,174,544 7,693,463
Other 181,884 202,287 325,949
15,863,825 15,655,729 15,537,268
Investment in investee 159,984 192,138 200,714
$16,023,809 $15,847,867 $15,737,982
Revenues (b)
Property and casualty insurance:
Premiums earned:
Personal $ 1,163,223 $ 1,289,689 $ 1,356,642
Specialty 1,047,858 1,371,509 1,429,143
Other lines (262) 37,540 38,596
2,210,819 2,698,738 2,824,381
Investment and other income 450,829 643,106 448,849
2,661,648 3,341,844 3,273,230
Annuities and life (c) 640,036 729,854 638,348
Other 40,295 331 146,888
$ 3,341,979 $ 4,072,029 $ 4,058,466
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($ 7,685) $ 34,029 $ 21,235
Specialty (28,015) (67,131) (324)
Other lines (d) (7,241) (256,360) (62,470)
(42,941) (289,462) (41,559)
Investment and other income 299,057 518,234 320,710
256,116 228,772 279,151
Annuities and life 112,498 165,238 122,401
Other (e) (58,872) (124,712) (16,747)
$ 309,742 $ 269,298 $ 384,805
(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-23
<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>
Available for Sale
1999 1998
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 $ 549.1 $ 539.1 $ 2.4 ($ 12.4) $ 507.5 $ 537.6 $ 30.2 ($ .1)
States, municipalities and
political subdivisions 303.2 292.4 .8 (11.6) 137.0 144.8 7.8 -
Foreign government 64.4 63.3 .2 (1.3) 67.3 71.0 3.8 (.1)
Public utilities 567.8 556.6 2.4 (13.6) 700.2 728.9 29.1 (.4)
Mortgage-backed securities 2,457.6 2,420.9 28.4 (65.1) 2,399.9 2,493.2 102.0 (8.7)
All other corporate 6,088.0 5,922.3 34.3 (200.0) 6,049.2 6,285.9 266.7 (30.0)
Redeemable preferred stocks 70.9 67.6 1.1 (4.4) 59.3 62.0 3.5 (.8)
$10,101.0 $9,862.2 $ 69.6 ($308.4) $9,920.4 $10,323.4 $443.1 ($40.1)
Other stocks $ 229.2 $ 409.7 $204.4 ($ 23.9) $ 207.3 $ 430.3 $230.7 ($7.7)
</TABLE>
The table below sets forth the scheduled maturities of fixed maturities based
on market value as of December 31, 1999. Data based on amortized cost is
generally the same. Mortgage-backed securities had an average life of
approximately 6 years at December 31, 1999.
Maturity
One year or less 5%
After one year through five years 24
After five years through ten years 29
After ten years 17
75
Mortgage-backed securities 25
100%
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates, and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
F-24
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The only investment which exceeds 10% of Shareholders' Equity is an equity
investment in Provident Financial Group, Inc., having a market value of $231
million and $243 million at December 31, 1999 and 1998, respectively.
Realized gains (losses) and changes in unrealized appreciation (depreciation)
on fixed maturity and equity security investments are summarized as follows
(in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1999
Realized ($ 13,191) $ 33,244 ($ 7,019) $ 13,034
Change in Unrealized (641,800) (42,500) 239,500 (444,800)
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
(*) Includes $6.8 million in realized gains on fixed maturities transferred
to Ohio Casualty in connection with the sale of the Commercial lines
division.
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
1999
Available for Sale $2,034.6 $1,047.2 $1,212.2 $29.1 ($42.3)
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)
(*) Prior to reclassification to available for sale at December 31, 1998.
Securities classified as "held to maturity" having amortized cost of $41.8
million and $8.2 million were sold for gains (losses) of $603,000 and
($170,000) in 1998 and 1997, respectively, due to significant deterioration
in the issuers' creditworthiness.
F-25
<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 (36%) of Chiquita common stock.
The market value of this investment was $114 million and $229 million at
December 31, 1999 and 1998, respectively. Chiquita is a leading international
marketer, producer and distributor of quality fresh fruits and vegetables and
processed foods.
Summarized financial information for Chiquita at December 31, is shown below
(in millions).
1999 1998 1997
Current Assets $ 903 $ 840
Noncurrent Assets 1,693 1,669
Current Liabilities 488 531
Noncurrent Liabilities 1,403 1,184
Shareholders' Equity 705 794
Net Sales $2,556 $2,720 $2,434
Operating Income 42 79 100
Net Loss (58) (18) -
Net Loss Attributable to Common Shares (75) (36) (17)
Chiquita's 1999 results include a $9 million charge resulting from a
workforce reduction program. Operating results for 1998 include $74 million
of fourth quarter write-offs and costs resulting from widespread flooding in
Honduras and Guatemala caused by Hurricane Mitch.
F. Cost in Excess of Net Assets Acquired Amortization expense for the excess
of cost over net assets of purchased subsidiaries was $14.4 million in 1999,
$12.2 million in 1998 and $11.6 million in 1997. At December 31, 1999 and
1998, accumulated amortization amounted to approximately $157 million and
$143 million, respectively.
G. Payable to American Financial Group AFC has a reciprocal Master Credit
Agreement with various AFG holding companies under which these companies make
funds available to each other for general corporate purposes.
F-26
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Long-Term Debt Long-term debt consisted of the following at December 31,
(in thousands):
1999 1998
Holding Companies:
AFC notes payable under bank line $ 68,000 $ 80,000
AFC 9-3/4% Debentures, less discount of $618 - 78,560
American Premier Underwriters, Inc. ("APU")
9-3/4% Subordinated Notes, including premium
of $487 - 89,467
APU 10-5/8% Subordinated Notes due April 2000,
including premium of $119 and $883
(imputed rate - 8.7%) 23,786 41,518
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $940 and $1,471
(imputed rate - 9.6%) 11,661 17,473
Other 9,110 8,518
$112,557 $315,536
Subsidiaries:
AAG 6-7/8% Senior Notes due June 2008 $100,000 $100,000
AAG notes payable under bank line 97,000 27,000
Notes payable secured by real estate 31,704 37,602
Other 11,029 12,294
$239,733 $176,896
In April 1999, AFC used funds borrowed under its credit agreement with AFG to
redeem its 9-3/4% Debentures, repurchase APU Subordinated Notes and repay a
portion of its bank line.
At December 31, 1999, sinking fund and other scheduled principal payments on
debt for the subsequent five years were as follows (in thousands):
Holding
Companies Subsidiaries Total
2000 $23,667 $ 3,248 $ 26,915
2001 - 1,430 1,430
2002 74,157 38,265 112,422
2003 - 61,278 61,278
2004 - 14,231 14,231
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>
AFC and AAG each have an unsecured credit agreement with a group of banks
under which they can borrow up to $300 million and $200 million,
respectively. Borrowings bear interest at floating rates based on prime or
Eurodollar rates. Loans mature December 2002 under the AFC credit agreement
and from 2000 to 2003 under the AAG credit agreement. At December 31, 1999,
the weighted average interest rates on amounts borrowed under the AFC and AAG
bank credit lines were 6.56% and 6.76%, respectively.
Cash interest payments of $59 million, $73 million and $98 million were made
on long-term debt in 1999, 1998 and 1997, respectively.
F-27
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Minority Interest Minority interest in AFC's balance sheet is comprised
of the following (in thousands):
1999 1998
Interest of AFG (parent) and
noncontrolling shareholders
in subsidiaries' common stock $270,594 $299,335
Preferred securities issued by
subsidiary trusts 219,600 225,000
$490,194 $524,335
Trust Issued Preferred Securities Wholly-owned subsidiary trusts of AAG have
issued $225 million of preferred securities and, in turn, purchased a like
amount of AAG subordinated debt which provides interest and principal
payments to fund the respective trusts' obligations. The preferred securities
must be redeemed upon maturity or redemption of the subordinated debt. AAG
effectively provides unconditional guarantees of its trusts' obligations.
The preferred securities consisted of the following (in thousands):
<TABLE>
<CAPTION>
Date of Optional
Issuance Issue (Maturity Date) 1999 1998 Redemption Dates
<S> <C> <C> <C> <C>
November 1996 AAG 9-1/4% TOPrS (2026) $74,600 $75,000 On or after 11/7/2001
March 1997 AAG 8-7/8% Pfd (2027) 70,000 75,000 On or after 3/1/2007
May 1997 AAG 7-1/4% ROPES (2041) 75,000 75,000 Prior to 9/28/2000 and
after 9/28/2001
</TABLE>
In the first quarter of 1999, AAG repurchased $5.4 million of its preferred
securities for $5.5 million in cash.
Minority Interest Expense Minority interest expense is comprised of (in
thousands):
1999 1998 1997
Interest of AFG (parent) and
noncontrolling shareholders
in earnings of subsidiaries $26,362 $26,248 $29,978
Accrued distributions by subsidiaries
on trust issued preferred securities,
net of tax 12,074 12,370 10,074
$38,436 $38,618 $40,052
F-28
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Shareholders' Equity At December 31, 1999 and 1998, American Financial
Group beneficially owned all of the outstanding shares of AFC's Common Stock.
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, 1999 and
1998, 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 AFC's option at $25.75 per share
beginning December 2005 declining to $25.00 at December 2007 and
thereafter; 2,886,161 shares (stated value $72.2 million) outstanding at
December 31, 1999 and 1998.
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.
Unrealized Gain (Loss) on Marketable Securities, Net The change in unrealized
gain (loss) on marketable securities included the following (in millions):
Tax Minority
Pretax Effects Interest Net
1999
Unrealized holding gains (losses) on
securities arising during the period ($612.1) $212.1 $47.7 ($352.3)
Reclassification adjustment for
realized gains included in net income (20.1) 7.1 2.3 (10.7)
Change in unrealized gain (loss) on
marketable securities, net ($632.2) $219.2 $50.0 ($363.0)
1998
Unrealized holding gains (losses) on
securities arising during the period ($ 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
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 unrealized gain (loss) on
marketable securities, net $ 16.1 ($ 4.3) ($ 4.7) $ 7.1
<PAGE>
1997
Unrealized holding gains (losses) on
securities arising during the period $320.2 ($112.2) ($20.7) $187.3
Reclassification adjustment for
realized gains included in net income (51.5) 18.0 4.0 (29.5)
Change in unrealized gain (loss) on
marketable securities, net $268.7 ($ 94.2) ($16.7) $157.8
F-29
<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):
1999 1998 1997
Earnings before income taxes:
Operating $309,742 $269,298 $384,805
Minority interest expense (44,937) (45,279) (45,477)
Equity in net losses of investee (27,357) (13,198) (5,564)
Extraordinary items (6,001) (1,258) (11,201)
Accounting change (6,370) - -
Total $225,077 $209,563 $322,563
Income taxes at statutory rate $ 78,777 $ 73,347 $112,897
Effect of:
Minority interest 8,891 9,055 10,168
Losses utilized (5,250) (6,572) (3,164)
Amortization of intangibles 4,728 4,566 3,362
Dividends received deduction (2,783) (2,189) (2,002)
Other (4,086) 2,716 (88)
Total Provision 80,277 80,923 121,173
Amounts applicable to:
Minority interest expense 6,501 6,661 5,425
Equity in net losses of investee 9,574 4,620 1,947
Extraordinary items 2,152 495 4,054
Accounting change 2,516 - -
Provision for income taxes as shown
on the Statement of Earnings $101,020 $ 92,699 $132,599
Total earnings before income taxes include income (losses) subject to tax in
foreign jurisdictions of $8.1 million in 1999, $7.5 million in 1998 and
($9.3) million in 1997.
The total income tax provision consists of (in thousands):
1999 1998 1997
Current taxes (credits):
Federal ($ 7,454) $61,501 $ 27,875
Foreign 32 94 -
State 511 652 (2,544)
Deferred taxes:
Federal 88,219 18,254 96,301
Foreign (1,031) 422 (459)
$80,277 $80,923 $121,173
<PAGE>
For income tax purposes, certain members of the AFC consolidated tax group
had the following carryforwards available at December 31, 1999 (in millions):
Expiring Amount
{ 2000 - 2004 $91
Operating Loss { 2005 - 2009 2
Other - Tax Credits 19
F-30
<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):
1999 1998
Deferred tax assets:
Net operating loss carryforwards $ 32.6 $ 44.3
Capital loss carryforwards - 23.7
Insurance claims and reserves 236.5 291.2
Other, net 117.6 110.0
386.7 469.2
Valuation allowance for deferred
tax assets (48.9) (88.6)
337.8 380.6
Deferred tax liabilities:
Deferred acquisition costs (172.3) (121.3)
Investment securities (67.0) (267.9)
(239.3) (389.2)
Net deferred tax asset (liability) $ 98.5 ($ 8.6)
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 $39.7 million in 1999 due primarily to the utilization
and expiration of loss carryforwards previously reserved.
Cash payments for income taxes, net of refunds, were $10.2 million, $41.4
million and $43.7 million for 1999, 1998 and 1997, respectively.
F-31
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 taxes (in
thousands):
1999 1998 1997
Holding Companies:
AFC (parent) ($2,993) ($ 77) ($5,395)
APU (parent) (856) (37) (502)
Subsidiary:
AAG - (649) (1,250)
($3,849) ($763) ($7,147)
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 of $32.3 million for environmental claims at
December 31, 1999, consists of a number of proceedings and claims seeking to
impose responsibility for hazardous waste remediation costs at certain
railroad sites formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad related operations. It is
difficult to estimate remediation costs for a number of reasons, including
the number and financial resources of other potentially responsible parties,
the range of costs for remediation alternatives, changing technology and the
time period over which these matters develop. American Premier's liability is
based on information currently available and is subject to change as
additional information becomes available.
American Premier's liability of $39.9 million for occupational injury and
disease claims at December 31, 1999, includes pending and expected claims by
former employees of PCTC for injury or disease allegedly caused by exposure
to excessive noise, asbestos or other substances in the workplace.
Anticipated recoveries of $26 million on these liabilities are included in
other assets. Recorded amounts are based on the accumulation of estimates of
reported and unreported claims and related expenses and estimates of probable
recoveries from insurance carriers.
AFC has accrued approximately $11.2 million at December 31, 1999, for
environmental costs and certain other matters associated with the sales of
former operations.
In management's opinion, the outcome of the items discussed in this note and
under "Uncertainties" in Management's Discussion and Analysis will not,
individually or in the aggregate, have a material adverse effect on AFC's
financial condition or results of operations.
F-32
<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, 1999 (in
millions).
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1999
<S> <C> <C> <C> <C> <C>
Revenues $800.8 $831.2 $869.5 $840.5 $3,342.0
Earnings before extraordinary items
and accounting change 58.2 46.3 30.9 17.1 152.5
Extraordinary items - gain (loss) on
prepayment of debt - (3.9) - - (3.9)
Cumulative effect of accounting change (3.8) - - - (3.8)
Net earnings 54.4 42.4 30.9 17.1 144.8
1998
Revenues $1,002.7 $1,020.1 $1,038.0 $1,011.2 $4,072.0
Earnings (loss) before
extraordinary items 66.4 39.6 58.0 (34.6) 129.4
Extraordinary items - loss on
prepayment of debt (.7) (.1) - - (.8)
Net earnings (loss) 65.7 39.5 58.0 (34.6) 128.6
</TABLE>
The 1999 fourth quarter results include a charge of $10 million for expenses
related to realignment within the operating units of the life and annuity
business.
In the second quarter of 1998, AFC recorded approximately $41 million of
losses due to severe storms in the midwestern part of the country. Included
in "Loss and loss adjustment expenses" for 1998 is a fourth quarter noncash,
pretax charge of $214 million for A&E exposures. Under the agreement covering
the sale of the 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 comprehensive review
of its A&E exposures. AFC increased its A&E reserve to an amount consistent
with the conclusions of the review.
<PAGE>
AFC has realized substantial gains (losses) on sales of subsidiaries and
investees in recent years (see Note B). Sales of subsidiaries also includes
pretax charges of $10.5 million and $5.0 million in the third and fourth
quarters of 1998, respectively, relating to operations expected to be
disposed of. Realized gains (losses) on sales of securities, affiliates and
other investments amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
1999 $ 4.4 $7.3 ($ 5.7) $ 14.1 $ 20.1
1998 22.0 8.9 25.4 123.4 179.7
F-33
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. Insurance Securities owned by insurance subsidiaries having a carrying
value of about $900 million at December 31, 1999, 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 about 8%, an
approximation of long-term investment yields. As a result, the total
liability for losses and loss adjustment expenses at December 31, 1999, has
been reduced by $30 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):
1999 1998 1997
Balance at beginning of period $3,305 $3,489 $3,404
Provision for losses and LAE occurring
in the current year 1,691 2,059 2,045
Net increase (decrease) in provision for
claims of prior years (102) 156 31
1,589 2,215 2,076
Payments for losses and LAE of:
Current year (780) (885) (840)
Prior years (958) (1,110) (1,151)
(1,738) (1,995) (1,991)
Reserves of businesses acquired or sold, net 57 (481) -
Reclassification of allowance for
uncollectible reinsurance 11 77 -
Balance at end of period $3,224 $3,305 $3,489
Add back reinsurance recoverables, net
of allowance in 1999 and 1998 1,571 1,468 736
Gross unpaid losses and LAE included
in the Balance Sheet $4,795 $4,773 $4,225
<PAGE>
Net Investment Income The following table shows (in millions) investment
income earned and investment expenses incurred by AFC's insurance companies.
1999 1998 1997
Insurance group investment income:
Fixed maturities $806.1 $849.6 $830.6
Equity securities 12.2 9.1 6.4
Other 7.7 12.1 10.6
826.0 870.8 847.6
Insurance group investment expenses (*) (40.6) (42.6) (37.3)
$785.4 $828.2 $810.3
(*) Included primarily in "Other operating and general expenses" in the
Statement of Earnings.
F-34
<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
1999 1998 1997 1999 1998
Property and casualty companies $170 $261 $159 $1,664 $1,840
Life insurance companies 37 41 74 421 365
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
written and earned premiums in connection with reinsurance ceded, (ii)
written and earned premiums included in income for reinsurance assumed and
(iii) reinsurance recoveries deducted from losses and loss adjustment
expenses.
1999 1998 1997
Direct premiums written $3,113 $3,221 $3,383
Reinsurance assumed 48 38 89
Reinsurance ceded (898) (788)(*) (614)
Net written premiums $2,263 $2,471 $2,858
Direct premiums earned $3,056 $3,320 $3,316
Reinsurance assumed 45 42 90
Reinsurance ceded (890) (663) (582)
Net earned premiums $2,211 $2,699 $2,824
Reinsurance recoveries $ 811 $ 651 $ 296
(*) Includes $138 million for the unearned premium transfer related
to the sale of the Commercial lines division.
P. Additional Information Total rental expense for various leases of office
space, data processing equipment and railroad rolling stock was $39 million,
$41 million and $36 million for 1999, 1998 and 1997, respectively. Sublease
rental income related to these leases totaled $2.6 million in 1999, $5.4
million in 1998 and $5.4 million in 1997.
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, 1999, were as
follows: 2000 - $39 million; 2001 - $33 million; 2002 - $25 million; 2003 -
$19 million; 2004 - $8 million; and $10 million thereafter. At December 31,
1999, minimum sublease rentals to be received through the expiration of the
leases aggregated $6 million.
<PAGE>
Other operating and general expenses included charges for possible losses on
agents' balances, other receivables and other assets in the following
amounts: 1999 - $5.1 million; 1998 - $2.8 million; and 1997 - $10.5 million.
Losses and loss adjustment expenses included charges for possible losses on
reinsurance recoverables of $.4 million in 1999 and $14.2 million in 1998.
The aggregate allowance for all such losses amounted to approximately $148
million and $149 million at December 31, 1999 and 1998, respectively.
F-35
<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.
1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $9,862 $9,862 $10,323 $10,323
Other stocks 410 410 430 430
Investment in investee 160 114 192 229
Liabilities:
Annuity benefits
accumulated $5,520 $5,371 $ 5,450 $ 5,307
Long-term debt:
Holding companies 113 113 315 326
Subsidiaries 240 230 177 176
Trust preferred securities 220 205 225 231
AFC preferred stock 72 69 72 80
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.
Unrealized Gain (Loss) on Marketable Securities, Net The components of the
Consolidated Balance Sheet caption "Unrealized gain (loss) on marketable
securities, net" in shareholders' equity are summarized as follows (in
millions):
Unadjusted Adjusted
Asset Effect of Asset
(Liability) SFAS 115 (Liability)
1999
Fixed maturities $10,101.0 ($238.8) $9,862.2
Other stocks 229.2 180.5 409.7
Deferred acquisition costs 656.1 4.6 660.7
Annuity benefits accumulated (5,532.6) 13.1 (5,519.5)
Pretax unrealized (40.6)
Deferred taxes 85.1 13.4 98.5
Minority interest (502.7) 12.5 (490.2)
Unrealized gain (loss) ($ 14.7)
<PAGE>
1998
Fixed maturities $9,920.4 $403.0 $10,323.4
Other stocks 207.3 223.0 430.3
Deferred acquisition costs 472.9 (8.9) 464.0
Annuity benefits accumulated (5,424.1) (25.5) (5,449.6)
Pretax unrealized 591.6
Deferred taxes 197.2 (205.8) (8.6)
Minority interest (486.8) (37.5) (524.3)
Unrealized gain (loss) $348.3
F-36
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1999,
AFC and its subsidiaries had commitments to fund credit facilities and
contribute limited partnership capital totaling up to $54 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 2000 from
its insurance subsidiaries without seeking regulatory clearance is
approximately $186 million. Total "restrictions" on intercompany transfers
from AFC's subsidiaries cannot be quantified due to the discretionary nature
of the restrictions.
Benefit Plans AFC expensed approximately $13 million in 1999, $22 million in
1998 and $21 million in 1997 for its retirement and employee savings plans.
Transactions With Affiliates AFG owns a $3.7 million minority interest in a
residential homebuilding company. A brother of AFC's Chairman also owns a
minority interest. AAG has extended a line of credit to this company under
which the homebuilder may borrow up to $8 million at 13% with interest
deferred and added to principal. At December 31, 1999 and 1998, $8 million
and $6.1 million was due under the credit line, respectively.
In a 1997 transaction, AAG purchased for $4.9 million a minority ownership
position in a company engaged in the production of ethanol. 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, 1999 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.
F-37
