<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1999 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
Series J Voting Cumulative Preferred Stock Pacific Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 1, 2000, there were 10,593,000 shares of the Registrant's Common
Stock outstanding all of which were owned by American Financial Group, Inc. At
that date there were 2,886,161 shares of Series J Voting Preferred Stock
outstanding (all of which were owned by non-affiliates). The aggregate market
value of the Preferred Stock at that date was approximately $67.8 million.
-------------
Documents Incorporated by Reference:
Proxy Statement for the 2000 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN FINANCIAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
----
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 15
Other Companies 19
Investment Portfolio 19
Foreign Operations 21
Regulation 21
Item 2 - Properties 22
Item 3 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of Security Holders (a)
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk 36
Item 8 - Financial Statements and Supplementary Data 36
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
Part III
Item 10 - Directors and Executive Officers of the Registrant 36
Item 11 - Executive Compensation 36
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 36
Item 13 - Certain Relationships and Related Transactions 36
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) The response to this Item is "none".
Forward-Looking Statements The Private Securities Litigation Reform Act of 1995
encourages corporations to provide investors with information about the
company's anticipated performance and provides protection from liability if
future results are not the same as management's expectations. This document,
chiefly in Items 1, 3, 5, 7 and 8, contains certain forward-looking statements
that are based on assumptions which management believes are reasonable, but by
their nature, inherently uncertain. Future results could differ materially from
those projected. Factors that could cause such differences include, but are not
limited to: changes in economic conditions especially with regard to
availability of and returns on capital, regulatory actions, changes in legal
environment, levels of catastrophe and other major losses, availability of
reinsurance, and competitive pressures. AFC undertakes no obligation to update
any forward-looking statements.
<PAGE>
PART I
ITEM 1
Business
--------
Please refer to "Forward Looking Statements" following the Index in front of
this Form 10-K.
Introduction
American Financial Corporation ("AFC") is a holding company which, through
its subsidiaries, is engaged primarily in private passenger automobile and
specialty property and casualty insurance businesses and in the sale of
tax-deferred annuities and certain life and supplemental health insurance
products. AFC's property and casualty operations originated in the 1800's and
make up one of the twenty five largest property and casualty groups in the
United States based on statutory net premiums written. AFC was incorporated as
an Ohio corporation in 1955. Its address is One East Fourth Street, Cincinnati,
Ohio 45202; its phone number is (513) 579-2121. At December 31, 1999, all of the
outstanding Common Stock of AFC was owned by American Financial Group, Inc.
("AFG").
At the close of business on December 31, 1996, AFG contributed to AFC 81% of
the common stock of American Premier Underwriters, Inc. ("APU" or "American
Premier"). Because AFC and American Premier have been under the common control
of AFG since merger transactions completed in April 1995 (the "Mergers"), the
acquisition of American Premier has been recorded by AFC at AFG's historical
cost in a manner similar to a pooling of interests. Accordingly, the historical
consolidated financial statements of AFC for periods subsequent to the Mergers
have been restated to include the accounts of American Premier.
General
Generally, companies have been included in AFC's consolidated financial
statements when the ownership of voting securities has exceeded 50%; for
investments below that level but above 20%, AFC has accounted for the
investments as investees. (See Note E to AFC's financial statements.) The
following table shows AFC's percentage ownership of voting securities of its
significant affiliates over the past several years:
Voting Ownership at December 31,
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
American Premier Underwriters 81% 81% 81% 81% (a)
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 83% 82% 81% 81% 81%
American Financial Enterprises 80% 80% 80% 83% 83%
Chiquita Brands International 36% 37% 39% 43% 44%
Citicasters - - - (b) 38%
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
<PAGE>
The following summarizes the more significant changes in ownership
percentages shown in the above table.
American Premier Underwriters In April 1995, APU became a subsidiary of AFG
as a result of the Mergers.
1
<PAGE>
Chiquita Brands International During the second half of 1997 and the first
half of 1998, Chiquita issued an aggregate of 4.6 million shares and 4.0 million
shares of its common stock, respectively, in connection with the purchase of new
businesses.
Citicasters In 1996, the investment in Citicasters was sold to an
unaffiliated company.
Property and Casualty Insurance Operations
Following the sale of substantially all of its Commercial lines division,
AFC's property and casualty group is engaged primarily in private passenger
automobile and specialty insurance businesses. Accordingly, AFC manages its
property and casualty group as two major business groups: Personal and
Specialty. Each group reports to an individual senior executive and is comprised
of multiple business units which operate autonomously but with certain strong
central controls and full accountability. Decentralized control allows each unit
the autonomy necessary to respond to local and specialty market conditions while
capitalizing on the efficiencies of centralized investment and administrative
support functions. AFC's property and casualty insurance operations employ
approximately 7,800 persons.
AFC sold the Commercial lines division to Ohio Casualty Corporation in
December 1998 for approximately $300 million plus warrants to purchase 6 million
(post split) shares of Ohio Casualty common stock. AFC may receive up to an
additional $40 million in the year 2000 based upon the retention and growth
through May 31, 2000 of the insurance businesses acquired by Ohio Casualty. The
commercial lines business sold generated net written premiums of approximately
$230 million in 1998 prior to the sale and $315 million in 1997.
In April 1999, AFC acquired Worldwide Insurance Company (formerly, Providian
Auto and Home Insurance Company), for $157 million in cash. The purchase price
reflects about $45 million in capital and surplus retained by Worldwide that had
been anticipated to be paid as a dividend by Worldwide after AFC's acquisition.
Worldwide is a provider of direct response private passenger automobile
insurance and is licensed in 45 states. The acquisition provides AFC with a
significant base for selling private passenger auto insurance business and a
variety of other insurance products directly to consumers, including over the
Internet. In 1999, Worldwide generated net written premiums of $94 million,
including $71 million after its acquisition.
AFC operates in a highly competitive industry that is affected by many
factors which can cause significant fluctuations in its results of operations.
The industry has historically been subject to pricing cycles characterized by
periods of intense competition and lower premium rates (a "downcycle") followed
by periods of reduced competition, reduced underwriting capacity due to lower
policyholders' surplus and higher premium rates (an "upcycle"). The property and
casualty insurance industry has been in an extended downcycle for over a decade,
although early indications of some price firming and increases are being seen in
certain specialty markets and in the private passenger automobile market.
<PAGE>
The primary objective of AFC's property and casualty insurance operations is
to achieve underwriting profitability. Underwriting profitability is measured by
the combined ratio which is a sum of the ratios of underwriting losses, loss
adjustment expenses ("LAE"), underwriting expenses and policyholder dividends to
premiums. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, other income or federal income taxes.
2
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Management's focus on underwriting performance has resulted in a statutory
combined ratio averaging 104.0% for the period 1995 to 1999, as compared to
105.4% for the property and casualty industry over the same period (Source:
"Best's Review/Preview - Property/Casualty" - January 2000 Edition). AFC
believes that its product line diversification and underwriting discipline have
contributed to the Company's ability to consistently outperform the industry's
underwriting results. Management's philosophy is to refrain from writing
business that is not expected to produce an underwriting profit even if it is
necessary to limit premium growth to do so.
Generally, while financial data is reported on a statutory basis for
insurance regulatory purposes, it is reported in accordance with generally
accepted accounting principles ("GAAP") for shareholder and other investment
purposes. In general, statutory accounting results in lower capital surplus and
net earnings than result from application of GAAP. Major differences include
charging policy acquisition costs to expense as incurred rather than spreading
the costs over the periods covered by the policies; recording bonds and
redeemable preferred stocks primarily at amortized cost; netting of reinsurance
recoverables and prepaid reinsurance premiums against the corresponding
liability; requiring additional loss reserves; and charging to surplus certain
assets, such as furniture and fixtures and agents' balances over 90 days old.
Unless indicated otherwise, the financial information presented for the
property and casualty insurance operations herein is presented based on GAAP and
includes for all periods (i) the insurance operations of AFC and American
Premier and (ii) the commercial lines businesses sold up to the sale date.
The following table shows (in millions) certain information of AFC's property
and casualty insurance operations.
1999 1998 1997
---- ---- ----
Statutory Basis
---------------
Premiums Earned $ 2,197 $ 2,657 $2,802
Admitted Assets 6,332 6,463 6,983
Unearned Premiums 1,005 914 1,133
Loss and LAE Reserves 3,525 3,702 3,475
Capital and Surplus 1,664 1,840 1,916
GAAP Basis
----------
Premiums Earned $ 2,211 $ 2,699 $2,824
Total Assets 9,487 10,053 9,212
Unearned Premiums 1,326 1,233 1,329
Loss and LAE Reserves 4,795 4,773 4,225
Shareholder's Equity 3,158 3,174 3,019
<PAGE>
The following table shows the segment, independent ratings, and size (in
millions) of AFC's major property and casualty insurance subsidiaries. AFC
continues to focus on growth opportunities in what it believes to be more
profitable specialty and private passenger auto businesses which represented the
bulk of 1999 net written premiums.
Net Written Premiums
--------------------
Company (Ratings - AM Best/S&P) Personal Specialty
--------------------------------------- -------- ---------
Great American Pool(*) A A+ $ 204 $ 811
Republic Indemnity A A+ - 135
Mid-Continent A A+ - 105
National Interstate A- - - 37
American Empire Surplus Lines A A+ - 15
Atlanta Casualty A- A+ 281 -
Infinity A A+ 308 -
Windsor A A+ 229 -
Leader A- A+ 125 -
Other 7 8
------ ------
$1,154 $1,111
====== ======
(*) The Great American Pool represents approximately 15 subsidiaries,
including Great American Insurance, American National Fire and Worldwide.
Duff & Phelps assigned the Great American Pool a rating of AA- (very
high).
3
<PAGE>
The following table shows the performance of AFC's property and casualty
insurance operations (dollars in millions):
1999 1998 1997
---- ---- ----
Net written premiums $2,263 $2,609(a) $2,858
====== ====== ======
Net earned premiums $2,211 $2,699 $2,824
Loss and LAE 1,589 2,001 2,076
Special A&E charge - 214 -
Underwriting expenses 661 764 783
Policyholder dividends 4 9 7
------ ------ ------
Underwriting loss ($ 43) ($ 289) ($ 42)
====== ====== ======
GAAP ratios:
Loss and LAE ratio 71.9% 82.1% 73.5%
Underwriting expense ratio 29.9 28.3 27.7
Policyholder dividend ratio .2 .3 .2
----- ----- -----
Combined ratio (b) 102.0% 110.7% 101.4%
===== ===== =====
Statutory ratios:
Loss and LAE ratio 73.4% 82.7% 73.4%
Underwriting expense ratio 30.0 27.9 27.3
Policyholder dividend ratio .3 .5 .7
----- ----- -----
Combined ratio (b) 103.7% 111.1% 101.4%
===== ===== =====
Industry statutory combined ratio (c) 107.5% 105.6% 101.6%
(a) Includes $232 million generated by the Commercial lines sold.
(b) The 1998 combined ratios include effects of the strengthening of
insurance reserves relating to asbestos and other environmental matters
("A&E") of 7.9 percentage points (GAAP) and 8.0 percentage points
(statutory).
(c) Ratios are derived from "Best's Review/Preview - Property/Casualty"
(January 2000 Edition).
As with other property and casualty insurers, AFC's operating results can be
adversely affected by unpredictable catastrophe losses. Certain natural
disasters (hurricanes, tornadoes, floods, forest fires, etc.) and other
incidents of major loss (explosions, civil disorder, fires, etc.) are classified
as catastrophes by industry associations. Losses from these incidents are
usually tracked separately from other business of insurers because of their
sizable effects on overall operations. AFC generally seeks to reduce its
exposure to such events through individual risk selection and the purchase of
reinsurance. Major catastrophes in recent years included midwestern hailstorms
and tornadoes and Hurricanes Bonnie and Georges in 1998. Total net losses to
AFC's insurance operations from catastrophes were $24 million in 1999; $60
million in 1998; and $20 million in 1997. These amounts are included in the
tables herein.
4
<PAGE>
Personal
General The Personal group writes primarily private passenger automobile
liability and physical damage insurance, and to a lesser extent, homeowners'
insurance.
The majority of AFC's auto premiums has been from sales in the nonstandard
market covering drivers unable to obtain insurance through standard market
carriers due to factors such as age, record of prior accidents, driving
violations, particular occupation or type of vehicle. Though the Personal group
will continue to write coverage in this market, it has launched an expanded
approach making personal automobile coverage available to drivers across a full
spectrum from preferred to nonstandard with emphasis on the preferred and
standard categories. AFC's approach to its auto business is to develop tailored
rates for its personal automobile customers based on a variety of factors,
including the driving record of the insureds, the number of and type of vehicles
covered, etc.
AFC's approach to homeowners business is to limit exposure in locations which
have significant catastrophic potential (such as windstorms, earthquakes and
hurricanes). Since the beginning of 1998, AFC has ceded 90% of its homeowners'
business through reinsurance agreements and will continue to do so at least
through the end of 2000.
The Personal group writes business in 49 states and holds licenses to write
policies in all states and the District of Columbia. The U.S. geographic
distribution of the Personal group's statutory direct written premiums in 1999
compared to 1995, was as follows:
1999 1995 1999 1995
---- ---- ---- ----
California 18.1% 5.8% Arizona 2.1% 3.3%
New York 9.7 * Tennessee * 3.1
Georgia 9.6 6.8 Oklahoma * 2.5
Connecticut 9.4 8.4 Indiana * 2.5
Florida 9.0 8.7 Washington * 2.2
Pennsylvania 5.1 7.2 Mississippi * 2.2
Texas 4.6 19.5 Alabama * 2.2
New Jersey 3.4 2.0 Ohio * 2.0
North Carolina 2.4 3.0 Other 26.6 18.6
----- -----
--------------- 100.0% 100.0%
(*) less than 2% ===== =====
Management believes that the Personal group's underwriting success has been
due, in part, to the refinement of various risk profiles, thereby dividing the
consumer market into more defined segments which can be underwritten or priced
properly. In addition, the Personal group has implemented cost control measures
both in the underwriting and claims handling areas.
5
<PAGE>
The following table shows the performance of AFC's Personal group insurance
operations (dollars in millions):
1999 1998 1997
---- ---- ----
Net written premiums $1,154 $1,279 $1,345
====== ====== ======
Net earned premiums $1,163 $1,290 $1,357
Loss and LAE 881 958 1,019
Underwriting expenses 290 298 318
Policyholder dividends - - (1)
------ ------ ------
Underwriting profit (loss) ($ 8) $ 34 $ 21
====== ====== ======
GAAP ratios:
Loss and LAE ratio 75.7% 74.2% 75.1%
Underwriting expense ratio 25.0 23.1 23.5
Policyholder dividend ratio - - (.1)
----- ---- ----
Combined ratio 100.7% 97.3% 98.5%
===== ==== ====
Statutory ratios:
Loss and LAE ratio 75.6% 74.3% 75.2%
Underwriting expense ratio 25.4 22.4 22.9
----- ---- ----
Combined ratio 101.0% 96.7% 98.1%
===== ==== ====
Industry statutory combined ratio (a) 106.0% 104.3% 100.1%
(a) Represents the personal lines industry statutory combined ratio derived
from "Best's Review/Preview - Property/Casualty" (January 2000 Edition).
Marketing A goal of the Personal group is to be able to provide a full
spectrum of quality, competitively priced products to customers at any time and
in any manner desirable to the customer, whether through independent agents or
direct marketing channels, including over the Internet. The acquisition of
Worldwide Insurance Company was important to the Personal group's overall
marketing strategy as it enhances AFC's ability to sell products over the
Internet and through other direct marketing channels. By the end of the year
2000, AFC expects to have the capability to sell over the Internet in as many as
twelve states which together represent the majority of the U.S. auto market.
The Personal group had approximately 1.1 million policies in force at
December 31, 1999, just under 80% of which had policy limits of $50,000 or less
per occurrence.
<PAGE>
Competition A large number of national, regional and local insurers write
private passenger automobile and homeowners' insurance coverage. Insurers in
this market generally compete on the basis of price (including differentiation
on liability limits, variety of coverages offered and deductibles), geographic
presence and ease of enrollment and, to a lesser extent, reputation for claims
handling, financial stability and customer service. Management believes that
sophisticated data analysis for refinement of risk profiles has helped the
Personal group to compete successfully. The Personal group attempts to provide
selected pricing for a wider spectrum of risks and with a greater variety of
payment options, deductibles and limits of liability than are offered by many of
its competitors.
6
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Specialty
General The Specialty group emphasizes the writing of specialized insurance
coverage where AFC personnel are experts in particular lines of business or
customer groups. The following are examples of such specialty businesses:
Inland and Ocean Marine Provides coverage primarily for
marine cargo, boat dealers, marina operators/dealers,
excursion vessels, builder's risk, contractor's
equipment, excess property and motor truck cargo.
Workers' Compensation Writes coverage for prescribed benefits
payable to employees (principally in California) who
are injured on the job.
Agricultural-related Provides federally reinsured multi-peril crop
(allied lines) insurance covering most perils as well as crop
hail, equine mortality and other coverages for
full-time operating farms/ranches and agribusiness
operations on a nationwide basis.
Executive and Markets liability coverage for attorneys and for
Professional Liability directors and officers of businesses and not-
for-profit organizations.
Japanese Business Provides coverage primarily for workers'
compensation, commercial auto, umbrella, and general
liability of Japanese businesses operating in the
U.S.
Fidelity and Provides surety coverage for various
Surety Bonds types of contractors and public and private
corporations and fidelity and crime coverage for
government, mercantile and financial institutions.
Collateral Protection Provides coverage for insurance risk
management programs for lending and leasing
institutions.
Umbrella and Excess Consists primarily of large liability
coverage in excess of primary layers.
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant operating
autonomy to oversee the important operational functions of its business such as
underwriting, pricing, marketing, policy processing and claims service. These
specialty businesses are opportunistic and their premium volume will vary based
on current market conditions. AFC continually evaluates expansion in existing
markets and opportunities in new specialty markets.
7
<PAGE>
The U.S. geographic distribution of the Specialty group statutory direct
written premiums in 1999 compared to 1995 is shown below.
1999 1995 1999 1995
---- ---- ---- ----
California 26.3% 25.7% Pennsylvania 2.3% 3.1%
Texas 7.8 6.6 Ohio 2.2 2.6
New York 5.7 8.4 North Dakota 2.1 *
Florida 4.4 3.1 Georgia 2.0 *
Illinois 4.0 3.5 North Carolina * 3.4
Massachusetts 3.7 4.1 Michigan * 3.2
Oklahoma 3.3 2.7 Connecticut * 2.6
New Jersey 2.5 4.3 Maryland * 2.0
Other 33.7 24.7
----- -----
--------------- 100.0% 100.0%
===== =====
(*) less than 2%
The following table sets forth a distribution of statutory net written
premiums for AFC's Specialty group by NAIC annual statement line for 1999
compared to 1995.
1999 1995
---- ----
Other liability 19.3% 18.6%
Workers' compensation 18.7 30.9
Inland marine 13.3 6.2
Commercial multi-peril 9.8 14.7
Auto liability 9.3 8.3
Allied lines 5.9 6.5
Fidelity and surety 4.9 2.5
Auto physical damage 4.5 2.7
Ocean marine 3.7 3.4
General aviation 2.8 *
Collateral protection 2.7 *
Other 5.1 6.2
----- -----
--------------- 100.0% 100.0%
===== =====
(*) less than 2%
<PAGE>
The following table shows the performance of AFC's Specialty group insurance
operations (dollars in millions):
1999 1998 1997
---- ---- ----
Net written premiums $1,111 $1,312(a) $1,468
====== ====== ======
Net earned premiums $1,048 $1,372 $1,429
Loss and LAE 702 979 967
Underwriting expenses 370 451 454
Policyholder dividends 4 9 8
------ ------ ------
Underwriting profit (loss) ($ 28) ($ 67) $ -
====== ====== ======
GAAP ratios:
Loss and LAE ratio 67.0% 71.4% 67.6%
Underwriting expense ratio 35.3 32.9 31.8
Policyholder dividend ratio .4 .7 .6
----- ----- -----
Combined ratio 102.7% 105.0% 100.0%
===== ===== =====
Statutory ratios:
Loss and LAE ratio 70.2 72.1% 67.6%
Underwriting expense ratio 34.8 34.1 31.5
Policyholder dividend ratio .5 1.0 1.4
----- ----- -----
Combined ratio 105.5% 107.2% 100.5%
===== ===== =====
Industry statutory combined ratio (b) 109.0% 107.3% 103.7%
(a) Includes $232 million generated by the Commercial lines sold.
(b) Represents the commercial industry statutory combined ratio derived
from "Best's Review/Preview - Property/Casualty" (January 2000
Edition).
8
<PAGE>
Marketing The Specialty group operations direct their sales efforts primarily
through independent property and casualty insurance agents and brokers, although
portions are written through employee agents. These businesses write insurance
through several thousand agents and brokers and have approximately 330,000
policies in force.
Competition These businesses compete with other individual insurers, state
funds and insurance groups of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all their profits inure to
their policyholders. They also compete with self- insurance plans, captive
programs and risk retention groups. Because of the specialty nature of these
coverages, competition is based primarily on service to policyholders and
agents, specific characteristics of products offered and reputation for claims
handling. Price, commissions and profit sharing terms are also important
factors. Management believes that sophisticated data analysis for refinement of
risk profiles, extensive specialized knowledge and loss prevention service have
helped AFC's Specialty group compete successfully.
Reinsurance
Consistent with standard practice of most insurance companies, AFC reinsures
a portion of its business with other insurance companies and assumes a
relatively small amount of business from other insurers. Ceding reinsurance
permits diversification of risks and limits the maximum loss arising from large
or unusually hazardous risks or catastrophic events. The availability and cost
of reinsurance are subject to prevailing market conditions which may affect the
volume and profitability of business that is written. AFC is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers
generally does not relieve AFC of its liability to its insureds.
Reinsurance is provided on one of two bases, facultative or treaty.
Facultative reinsurance is generally provided on a risk by risk basis.
Individual risks are ceded and assumed based on an offer and acceptance of risk
by each party to the transaction. Treaty reinsurance provides for risks meeting
prescribed criteria to be automatically ceded and assumed according to contract
provisions. The following table presents (by type of coverage) the amount of
each loss above the specified retention maximum generally covered by treaty
reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
-------- --------- -----------
California Workers' Compensation $ .5 $150.0(b)
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(c)
Property - Catastrophe 10.0 65.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) In 1999 and 1998, AFC ceded 30% of its California workers' compensation
business through a reinsurance agreement. This agreement was commuted in
2000.
(c) In 1999 and 1998, AFC ceded 90% (80% in 1997) of its homeowners insurance
coverage through a reinsurance agreement.
<PAGE>
AFC also purchases facultative reinsurance providing coverage on a risk by
risk basis, both pro rata and excess of loss, depending on the risk and
available reinsurance markets. Due in part to the limited exposure on individual
policies, the nonstandard auto business is not materially involved in reinsuring
risks with third party insurance companies.
Included in the balance sheet caption "recoverables from reinsurers and
prepaid reinsurance premiums" were approximately $140 million on paid losses and
LAE and $1.6 billion on unpaid losses and LAE at December 31, 1999. The
collectibility of a reinsurance balance is based upon the financial condition of
a reinsurer as well as individual claim considerations. At December 31, 1999,
AFC's insurance subsidiaries had allowances of approximately $82 million for
doubtful collection of reinsurance recoverables, most of which related to unpaid
losses.
9
<PAGE>
In 1998, AFC ceded $170 million in premiums to Ohio Casualty in connection
with the sale of the Commercial lines division. In addition, AFC agreed to
continue to issue and renew policies (in certain states) related to the business
transferred until Ohio Casualty receives the required approvals and licensing to
begin writing this business on its own behalf. Under the agreement, AFC cedes
100% of these premiums to Ohio Casualty. In 1999, AFC ceded approximately $337
million in premiums under the agreement.
In 1999 and 1998, AFC ceded approximately 30% of its California workers'
compensation business through a reinsurance agreement with Reliance Insurance
Company. Due to concerns over Reliance's participation in a reinsurance pool run
by Unicover Managers, Inc., AFC's reinsurance contracts with Reliance were
commuted in January 2000. Under the commutation, AFC received cash in exchange
for releasing Reliance from its obligations under the contracts. While amounts
have been reserved in connection with the original insurance policies and the
reinsurance agreement, no significant gain or loss was incurred from the
commutation itself.
AFC regularly monitors the financial strength of its reinsurers. This process
periodically results in the transfer of risks to more financially secure
reinsurers. Substantially all reinsurance is ceded to reinsurers having more
than $100 million in capital and A.M. Best ratings of "A-" or better. Excluding
business ceded to Ohio Casualty and Reliance (discussed above), the following
companies assumed nearly half of AFC's 1999 ceded reinsurance: Mitsui Marine and
Fire Insurance Company, American Re-Insurance Company, General Reinsurance
Corporation, Hartford Fire Insurance Company, NAC Reinsurance Corporation,
Transatlantic Reinsurance Company, Employers Reinsurance Corporation, Swiss
Reinsurance America Corporation, Zurich Reinsurance North America, Inc. and
Underwriters Reinsurance Company.
Premiums written for reinsurance ceded and assumed are presented in the
following table (in millions):
1999 1998 1997
---- ---- ----
Reinsurance ceded $898 $788 $614
Reinsurance assumed - including
involuntary pools and associations 48 38 89
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated liability for
unpaid losses and LAE of AFC's insurance subsidiaries. This liability represents
estimates of the ultimate net cost of all unpaid losses and LAE and is
determined by using case-basis evaluations and actuarial projections. These
estimates are subject to the effects of changes in claim amounts and frequency
and are periodically reviewed and adjusted as additional information becomes
known. In accordance with industry practices, such adjustments are reflected in
current year operations.
<PAGE>
Future costs of claims are projected based on historical trends adjusted for
changes in underwriting standards, policy provisions, product mix and other
factors. Estimating the liability for unpaid losses and LAE is inherently
judgmental and is influenced by factors which are subject to significant
variation. Through the use of analytical reserve development techniques,
management monitors items such as the effect of inflation on medical,
hospitalization, material, repair and replacement costs, general economic trends
and the legal environment. Although management believes that the reserves
currently established reflect a reasonable provision for the ultimate cost of
all losses and claims, actual development may vary materially.
AFC recognizes underwriting profit only when realization is reasonably
determinable and assured. In certain specialty businesses, where experience is
limited or where there is potential for volatile results, AFC holds reasonable
"incurred but not reported" reserves and does not recognize underwriting profit
until the experience matures.
Generally, reserves for reinsurance and involuntary pools and associations
are reflected in AFC's results at the amounts reported by those entities.
10
<PAGE>
Unless otherwise indicated, the following discussion of insurance reserves
includes the reserves of American Premier's subsidiaries for only those periods
following the Mergers. See Note O to the Financial Statements for an analysis of
changes in AFC's estimated liability for losses and LAE, net and gross of
reinsurance, over the past three years on a GAAP basis.
The following table presents the development of AFC's liability for losses
and LAE, net of reinsurance, on a GAAP basis for the last ten years, excluding
reserves of American Premier subsidiaries prior to the Mergers. The top line of
the table shows the estimated liability (in millions) for unpaid losses and LAE
recorded at the balance sheet date for the indicated years. The second line
shows the re-estimated liability as of December 31, 1999. The remainder of the
table presents development as percentages of the estimated liability. The
development results from additional information and experience in subsequent
years. The middle line shows a cumulative deficiency (redundancy) which
represents the aggregate percentage increase (decrease) in the liability
initially estimated. The lower portion of the table indicates the cumulative
amounts paid as of successive periods as a percentage of the original loss
reserve liability. The percentage of the December 31, 1997 reserve liability
paid in 1998 includes approximately 10 percentage points for reserves ceded in
connection with the sale of the Commercial lines division.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
- ----------------------------
As originally estimated $2,246 $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489 $3,305 $3,224
As re-estimated at
December 31, 1999 2,785 2,538 2,453 2,385 2,299 2,384 3,499 3,582 3,649 3,283 N/A
Liability re-estimated (*):
- --------------------------
One year later 100.4% 98.6% 99.3% 99.9% 98.1% 95.9% 98.7% 100.9% 104.5% 99.3%
Two years later 99.3% 97.7% 98.7% 98.2% 94.1% 99.3% 98.5% 105.9% 104.6%
Three years later 98.4% 97.4% 98.0% 95.2% 97.4% 99.9% 103.9% 105.2%
Four years later 98.2% 99.2% 97.3% 100.3% 98.9% 109.4% 103.1%
Five years later 101.1% 100.0% 103.0% 102.6% 109.7% 109.0%
Six years later 102.7% 106.3% 105.6% 113.6% 108.8%
Seven years later 109.2% 109.4% 116.9% 112.3%
Eight years later 112.2% 120.9% 115.2%
Nine years later 123.4% 118.8%
Ten years later 124.0%
Cumulative deficiency
(redundancy) 24.0% 18.8% 15.2% 12.3% 8.8% 9.0% 3.1% 5.2% 4.6% (.7%) N/A
==== ==== ==== ==== === === === === === === ===
<PAGE>
Cumulative paid as of:
- ---------------------
One year later 32.3% 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8% 41.7% 29.8%
Two years later 48.2% 43.2% 43.0% 43.7% 40.6% 42.5% 51.6% 58.0% 56.6%
Three years later 59.2% 55.3% 55.4% 54.2% 50.9% 54.4% 67.2% 66.7%
Four years later 67.6% 64.8% 63.3% 60.8% 59.1% 66.3% 72.0%
Five years later 74.3% 71.1% 67.8% 67.0% 68.0% 69.8%
Six years later 78.8% 74.5% 72.7% 74.0% 70.8%
Seven years later 81.2% 78.6% 78.6% 76.3%
Eight years later 84.8% 83.9% 80.5%
Nine years later 89.0% 85.5%
Ten years later 93.2%
<FN>
(*) Reflects significant A&E charges and reallocations in 1994, 1996 and 1998
for prior years' losses. Excluding these items, the re-estimated liability
shown above would decrease ranging from approximately 17 percentage points
in 1989 to 6 percentage points in 1997.
</FN>
</TABLE>
The following is a reconciliation of the net liability to the gross liability
for unpaid losses and LAE.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489 $3,305 $3,224
Add reinsurance recoverables 611 730 704 720 736 1,468 1,571
------ ------ ------ ------ ------ ------ ------
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225 $4,773 $4,795
====== ====== ====== ====== ====== ====== ======
As re-estimated at December 31, 1999:
Net liability shown above $2,299 $2,384 $3,499 $3,582 $3,649 $3,283
Add reinsurance recoverables 937 929 1,014 1,037 1,133 1,614
------ ------ ------ ------ ------ ------
Gross liability $3,236 $3,313 $4,513 $4,619 $4,782 $4,897 N/A
====== ====== ====== ====== ====== ====== ===
Gross cumulative deficiency
(redundancy) 18.8% 13.6% 10.2% 12.0% 13.2% 2.6% N/A
==== ==== ==== ==== ==== === ===
</TABLE>
11
<PAGE>
These tables do not present accident or policy year development data.
Furthermore, in evaluating the re-estimated liability and cumulative deficiency
(redundancy), it should be noted that each percentage includes the effects of
changes in amounts for prior periods. For example, AFC's $214 million special
charge for A&E claims related to losses recorded in 1998, but incurred before
1989, is included in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the previous years shown. Conditions and
trends that have affected development of the liability in the past may not
necessarily exist in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
The adverse development in the tables is due primarily to A&E exposures for
which AFC has been held liable under general liability policies written years
ago where environmental coverage was not intended. Other factors affecting
development included higher than projected inflation on medical,
hospitalization, material, repair and replacement costs. Additionally, changes
in the legal environment have influenced the development patterns over the past
ten years. For example, changes in the California workers' compensation law in
1993 and subsequent court decisions, primarily in late 1996, greatly limited the
ability of insurers to challenge medical assessments and treatments. These
limitations, together with changes in work force characteristics and medical
delivery costs, are contributing to an increase in claims severity.
The differences between the liability for losses and LAE reported in the
annual statements filed with the state insurance departments in accordance with
statutory accounting principles ("SAP") and that reported in the accompanying
consolidated financial statements in accordance with GAAP at December 31, 1999
are as follows (in millions):
Liability reported on a SAP basis, net of $377 million
of retroactive reinsurance $3,148
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (8)
Reserves of foreign operations 2
Reinsurance recoverables, net of allowance 1,571
Reclassification of allowance for uncollectible
reinsurance 82
------
Liability reported on a GAAP basis $4,795
======
12
<PAGE>
Asbestos and Environmental Reserves ("A&E") In defining environmental
exposures, the insurance industry typically includes claims relating to polluted
waste sites and asbestos as well as other mass tort claims such as those
relating to breast implants, repetitive stress on keyboards, DES (a drug used in
pregnancies years ago alleged to cause cancer and birth defects) and other
latent injuries.
Establishing reserves for A&E claims is subject to uncertainties that are
greater than those presented by other types of claims. Factors contributing to
those uncertainties include a lack of sufficiently detailed historical data,
long reporting delays, uncertainty as to the number and identity of insureds
with potential exposure, unresolved legal issues regarding policy coverage, and
the extent and timing of any such contractual liability. Courts have reached
different and sometimes inconsistent conclusions as to when a loss is deemed to
have occurred, what policies provide coverage, what claims are covered, whether
there is an insured obligation to defend, how policy limits are determined and
other policy provisions. Management believes these issues are not likely to be
resolved in the near future.
Significant industrywide information concerning A&E reserves first became
broadly available in mid-1996 following the publication of new data relating to
that subject in the 1995 Annual Statements of insurance companies. During 1995
and 1996, a number of insurers recorded large reserve increases for A&E
exposures. During this time, the industry's survival ratio (reserves divided by
annual paid losses) was used as a benchmark for reserving such claims.
Industry actions and statistics in 1995 caused AFC to re-evaluate its
position in relation to its peers as part of the continuing process of obtaining
additional information and revising accounting estimates. This process led
management to conclude in 1996 that the A&E reserves should be increased
sufficiently to bring AFC's three-year survival ratio in line with those of the
top 50 companies. In the third quarter of 1996, AFC recorded a noncash, pretax
charge of $80 million and reallocated $40 million in reserves from its Specialty
group.
As part of the continuing process of monitoring appropriate reserve needs and
prompted by the retention of certain A&E exposures under the agreement covering
the sale of its Commercial lines division, AFC began a thorough study of its A&E
exposures in 1998. Based on this study and observations of industry trends in
this regard, AFC decided that the survival ratio may not be the best basis for
measuring ultimate A&E exposures. AFC's study was reviewed by independent
actuaries who used state of the art actuarial techniques that have wide
acceptance in the industry. AFC recorded a fourth quarter charge of $214 million
in 1998 to increase A&E reserves to its best estimate of the ultimate liability.
At December 31, 1999, AFC's three year survival ratio is approximately 15 times
paid losses.
13
<PAGE>
The following table (in millions) is a progression of A&E reserves. The
significantly larger amount of payments made in 1999 reflects an acceleration of
the settlement process; individual claims were generally paid at projected
levels previously recorded as reserve liabilities. During the review of A&E
exposures in 1998, $13.8 million in reserves recorded prior to 1998 and not
identified as A&E were determined to be A&E reserves. In addition, the allowance
for uncollectible reinsurance applicable to ceded A&E reserves was not reflected
in the following table prior to 1998.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Reserves at beginning of year $625.4 $347.9 $343.4
Incurred losses and LAE (a) .1 247.5 43.2
Paid losses and LAE (48.8) (26.1) (38.7)
Reserves transferred with sale of
Commercial lines - (11.4) -
Reserves not classified as A&E prior to 1998:
Reserves - 13.8 -
Allowance for uncollectable reinsurance
applicable to ceded A&E reserves - 53.7 -
------ ------ ------
Reserves at end of year, net of
reinsurance recoverable 576.7 625.4 347.9
Reinsurance recoverable, net of
allowance in 1999 and 1998 219.8 240.7 173.2
------ ------ ------
Gross reserves at end of year $796.5 $866.1 $521.1
====== ====== ======
<FN>
(a) Includes a special charge of $214 million in 1998.
</FN>
</TABLE>
Since the mid-1980's, AFC has also written certain environmental coverages
(asbestos abatement and underground storage tank liability) in which the premium
charged is intended to provide coverage for the specific environmental exposures
inherent in these policies. To date, approximately $200 million of premiums has
been written; losses and LAE incurred (paid and reserved) through December 31,
1999 are estimated at less than 50% of premiums. This business is not included
in the discussion or table above.
14
<PAGE>
Annuity and Life Operations
General
AFC's annuity and life operations are conducted through American Annuity
Group, Inc. ("AAG"), a holding company which markets primarily retirement
annuity products as well as life and supplemental health insurance through the
following major entities which were acquired or formed in the years shown. AAG
and its subsidiaries employ approximately 1,900 persons.
Great American Life Insurance Company ("GALIC") - 1992(*)
Annuity Investors Life Insurance Company ("AILIC") - 1994
Loyal American Life Insurance Company ("Loyal") - 1995
Great American Life Assurance Company of Puerto Rico, Inc. ("GAPR") - 1997
GALIC's Life Division - 1997
United Teacher Associates Insurance Company ("UTA") - 1999
(*) Acquired from Great American.
Acquisitions in recent years have supplemented AAG's internal growth as the
assets of the holding company and its operating subsidiaries have increased from
$4.5 billion at the end of 1992 to approximately $7.5 billion at the end of
1999. Premiums over the last three years were as follows (in millions):
Insurance Product(*) 1999 1998 1997
-------------------- ---- ---- ----
Annuities $588 $521 $489
Life and health 126 104 42
---- ---- ----
$714 $625 $531
-------------------- ==== ==== ====
(*) Table does not include premiums of subsidiaries or divisions until their
first full year following acquisition or formation. All periods exclude
premiums of subsidiaries sold.
In October 1999, AAG acquired United Teacher Associates. UTA provides retired
and active teachers with supplemental health products and retirement annuities,
and purchases blocks of insurance policies from other insurance companies. In
July 1999, AAG acquired Consolidated Financial Corporation, an insurance agency.
Consolidated Financial historically has been one of the top 10 sellers of AAG's
annuity products. In February 1999, AAG acquired Great American Life Insurance
Company of New York (formerly known as Old Republic Life Insurance Company of
New York) to facilitate AAG's entry into the New York market.
In September 1998, AAG sold its Funeral Services division. This division had
assets of approximately $1 billion and 1997 premiums of $111 million.
Retirement Products
AAG's principal retirement products are Flexible Premium Deferred Annuities
("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). Annuities are
long-term retirement saving instruments that benefit from income accruing on a
tax-deferred basis. The issuer of the annuity collects premiums, credits
interest on the policy and pays out a benefit upon death, surrender or
annuitization. FPDAs are characterized by premium payments that are flexible in
both amount and timing as determined by the policyholder. SPDAs are issued in
exchange for a one-time lump-sum premium payment.
15
<PAGE>
The following table (in millions) presents combined financial information
concerning AAG's principal annuity subsidiaries.
1999 1998 1997
---- ---- ----
GAAP Basis
----------
Total Assets $6,657 $6,549 $6,289
Fixed Annuity Reserves 5,349 5,396 5,355
Variable Annuity Reserves 354 120 37
Stockholder's Equity 801 862 770
Statutory Basis
---------------
Total Assets $6,493 $6,159 $5,977
Fixed Annuity Reserves 5,564 5,538 5,469
Variable Annuity Reserves 354 120 37
Capital and Surplus 404 350 317
Asset Valuation Reserve (a) 67 63 65
Interest Maintenance Reserve (a) 10 21 24
Annuity Receipts:
Flexible Premium:
First Year $ 55 $ 45 $ 38
Renewal 145 149 160
------ ------ ------
200 194 198
Single Premium 388 327 291
------ ------ ------
Total Annuity Receipts $ 588 $ 521 $ 489
====== ====== ======
----------------
(a) Allocation of surplus.
Sales of annuities are affected by many factors, including: (i) competitive
annuity products and rates; (ii) the general level of interest rates; (iii) the
favorable tax treatment of annuities; (iv) commissions paid to agents; (v)
services offered; (vi) ratings from independent insurance rating agencies; (vii)
other alternative investments and (viii) general economic conditions. At
December 31, 1999, AAG had approximately 280,000 annuity policies in force.
Annuity contracts are generally classified as either fixed rate (including
equity-indexed) or variable. The following table presents premiums by
classification:
Premiums 1999 1998 1997
-------- ---- ---- ----
Traditional fixed 55% 72% 83%
Variable 35 17 9
Equity-indexed 10 11 8
--- --- ---
100% 100% 100%
=== === ===
With a traditional fixed rate annuity, the interest crediting rate is
initially set by the issuer and thereafter may be changed from time to time by
the issuer subject to any guaranteed minimum interest crediting rates in the
policy.
<PAGE>
AAG seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its fixed rate annuities. AAG accomplishes
this by: (i) offering crediting rates which it has the option to change; (ii)
designing annuity products that encourage persistency and (iii) maintaining an
appropriate matching of assets and liabilities. AAG designs its products with
certain provisions to encourage policyholders to maintain their funds with AAG
for at least five to ten years. Partly due to these features, annuity surrenders
have averaged less than 10% of statutory reserves over the past five years.
16
<PAGE>
All of AAG's traditional fixed rate annuities offer a minimum interest rate
guarantee of 3% or 4%; the majority permit AAG to change the crediting rate at
any time (subject to the minimum guaranteed interest rates). In determining the
frequency and extent of changes in the crediting rate, AAG takes into account
the economic environment and the relative competitive position of its products.
Over the last few years, traditional fixed rate annuities have met
substantial competition from mutual funds and other equity-based investments. In
response, AAG began offering variable annuities and equity-indexed annuities.
Industry sales of variable annuities have increased substantially over the last
ten years as investors have sought to obtain the returns available in the equity
markets while enjoying the tax-deferred status of annuities. With a variable
annuity, the earnings credited to the policy vary based on the investment
results of the underlying investment options chosen by the policyholder.
Premiums directed to the variable options in policies issued by AAG are invested
in funds managed by various independent investment managers. AAG earns a fee on
amounts deposited into variable accounts. Policyholders may also choose to
direct all or a portion of their premiums to various fixed rate options, in
which case AAG earns a spread on amounts deposited.
An equity-indexed fixed annuity provides policyholders with a crediting rate
tied, in part, to the performance of an existing stock market index while
protecting them against the related downside risk through a guarantee of
principal. AAG hedges the equity-based risk component of this product through
the purchase of call options on the appropriate index. These options are
designed to offset substantially all of the increases in the liabilities
associated with equity-indexed annuities.
The following table reflects the geographical distribution of AAG's annuity
premiums in 1999 compared to 1995.
1999 1995 1999 1995
---- ---- ---- ----
California 28.5% 19.1% New Jersey 3.6 3.8
Ohio 7.2 6.1 North Carolina 3.2 5.8
Washington 6.7 5.6 Indiana 2.8 *
Massachusetts 4.7 6.2 Connecticut 2.5 3.3
Florida 4.6 7.4 Pennsylvania 2.1 *
Michigan 4.4 5.8 Illinois * 3.2
Texas 4.1 4.6 Iowa * 2.1
Minnesota 4.0 4.2 Other 21.6 22.8
----- -----
--------------- 100.0% 100.0%
(*) less than 2% ===== =====
AAG's FPDAs are sold primarily to employees of qualified not-for- profit
organizations. Employees of these organizations are eligible to save for
retirement through contributions made on a before-tax basis. Contributions are
made at the discretion of the participants through payroll deductions or through
tax-free "rollovers" of funds from other qualified investments. Federal income
taxes are not payable on contributions or earnings until amounts are withdrawn.
Historically, AAG's principal marketing focus had been on sales to employees
of educational institutions in the kindergarten through high school segment.
However, sales of non-qualified annuities have begun to represent an increasing
percentage of premiums (30% in 1999 compared to 15% in 1995) as AAG has
developed products and distribution channels targeted to the non-qualified
markets.
<PAGE>
AAG distributes its annuity products through more than 100 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. To extend the distribution of its annuities to a broader
customer base, AAG developed a personal producing general agent ("PPGA")
distribution system. More than 100 PPGAs are contracted to sell annuities in
those territories not served by an MGA.
17
<PAGE>
Life, Accident and Health Products
AAG offers a variety of life, accident and health products through Loyal,
GAPR and GALIC's life division. This group produced over $120 million of
statutory premiums in 1999. It also had more than 740,000 policies and $11.9
billion of life insurance in force.
Loyal offers a variety of life and supplemental health insurance products
through payroll deduction plans and credit unions. The principal products sold
by Loyal include cancer, universal life, traditional whole life, hospital
indemnity, and short-term disability insurance. Loyal's products are marketed
with the endorsement or consent of the employer or the credit union management.
GAPR sells in-home service life and supplemental health products through a
network of company-employed agents. Ordinary life, cancer, credit and group life
products are sold through independent agents.
In December 1997, GALIC's life division began offering term, universal and
whole life insurance products through national marketing organizations.
In October 1999, AAG acquired UTA, a provider of supplemental health products
and annuities to retired and active teachers.
In late 1999, AAG began offering long-term care products.
Sale of Funeral Services Division
In September 1998, AAG sold its Funeral Services division for approximately
$165 million in cash. The Funeral Services division provided life insurance and
annuities to fund pre-arranged funerals, as well as administrative services for
pre-arranged funeral trusts. This division included American Memorial Life
Insurance Company (acquired in 1995) and Arkansas National Life Insurance
Company (acquired in 1998).
Independent Ratings
AAG's principal insurance subsidiaries are rated by Standard & Poor's, A.M.
Best and Duff & Phelps. In addition, GALIC is rated A3 (good financial security)
by Moody's. Such ratings are generally based on items of concern to
policyholders and agents and are not directed toward the protection of
investors.
Standard
& Poor's A.M. Best Duff & Phelps
----------- ------------- ---------------
GALIC A+ (Strong) A (Excellent) AA- (Very high)
AILIC A+ (Strong) A (Excellent) AA- (Very high)
Loyal A+ (Strong) A (Excellent) AA- (Very high)
GAPR Not rated A (Excellent) Not rated
UTA Not rated A- (Excellent) Not rated
AAG believes that the ratings assigned by independent insurance rating
agencies are important because potential policyholders often use a company's
rating as an initial screening device in considering annuity products. AAG
believes that a rating in the "A" category by at least one rating agency is
necessary to successfully market tax-deferred annuities to public education
employees and other not-for-profit groups.
<PAGE>
Although AAG believes that its insurance companies' ratings are very stable,
those companies' operations could be materially adversely affected by a
downgrade in ratings.
18
<PAGE>
Competition
AAG's insurance companies operate in highly competitive markets. They compete
with other insurers and financial institutions based on many factors, including:
(i) ratings; (ii) financial strength; (iii) reputation; (iv) service to
policyholders and agents; (v) product design (including interest rates credited
and premium rates charged); and (vi) commissions. Since policies are marketed
and distributed primarily through independent agents (except at GAPR), the
insurance companies must also compete for agents.
No single insurer dominates the markets in which AAG's insurance companies
compete. Competitors include (i) individual insurers and insurance groups, (ii)
mutual funds and (iii) other financial institutions. In a broader sense, AAG's
insurance companies compete for retirement savings with a variety of financial
institutions offering a full range of financial services. Financial institutions
have demonstrated a growing interest in marketing investment and savings
products other than traditional deposit accounts.
Other Companies
Through subsidiaries, AFC is engaged in a variety of other businesses,
including The Golf Center at Kings Island (golf and tennis facility) in the
Greater Cincinnati area; commercial real estate operations in Cincinnati (office
buildings and The Cincinnatian Hotel), New Orleans (Le Pavillon Hotel), Cape Cod
(Chatham Bars Inn), Austin (Driskill Hotel), Chesapeake Bay (Skipjack Cove
Yachting Resort) and apartments in Lafayette (Louisiana), Louisville,
Pittsburgh, St. Paul and Tampa Bay. These operations employ approximately 700
full-time employees.
Investment Portfolio
General
A summary of AFC's December 31, 1999, investment portfolio by business
segment follows (excluding investment in equity securities of investee
corporations) (in millions).
<TABLE>
<CAPTION>
Carrying Value Total
---------------------------------- Market
P&C Annuity Other Total Value
--- ------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 260 $ 120 $ 9 $ 389 $ 389
Fixed maturities 3,903 5,947 12 9,862 9,862
Other stocks, options and
warrants 339 70 1 410 410
Policy loans - 217 - 217 217 (a)
Real estate and other investments 130 114 21 265 265 (a)
------ ------ --- ------- -------
$4,632 $6,468 $43 $11,143 $11,143
====== ====== === ======= =======
<FN>
(a) Carrying value used since market values are not readily available.
</FN>
</TABLE>
19
<PAGE>
The following tables present the percentage distribution and yields of AFC's
investment portfolio (excluding investment in equity securities of investee
corporations) as reflected in its financial statements.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and Short-term Investments 3.5% 2.5% 1.9% 3.5% 4.0%
Fixed Maturities:
U.S. Government and Agencies 4.9 4.4 5.0 4.1 3.7
State and Municipal 2.7 1.2 1.3 1.0 .7
Public Utilities 5.1 6.0 6.8 8.2 9.8
Mortgage-Backed Securities 22.0 20.8 21.4 22.3 20.9
Corporate and Other 55.3 53.2 52.5 51.7 50.0
Redeemable Preferred Stocks .6 .5 .6 .5 1.0
----- ----- ----- ----- -----
90.6 86.1 87.6 87.8 86.1
Net Unrealized Gains (Losses) on
fixed maturities held
Available for Sale (2.1) 3.5 2.5 1.1 2.7
----- ----- ----- ----- -----
88.5 89.6 90.1 88.9 88.8
Other Stocks, Options and Warrants 3.7 3.7 3.7 2.9 2.3
Policy Loans 1.9 1.9 2.0 2.1 2.2
Real Estate and Other Investments 2.4 2.3 2.3 2.6 2.7
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.7% 7.8% 7.8% 7.9% 7.9%
Including realized gains and losses 7.6% 8.0% 7.9% 7.7% 8.8%
Yield on Stocks:
Excluding realized gains and losses 5.9% 5.4% 5.6% 5.8% 3.9%
Including realized gains and losses 20.7% (5.3%) 30.2% 15.1% 8.4%
Yield on Investments (*):
Excluding realized gains and losses 7.7% 7.8% 7.8% 7.8% 7.9%
Including realized gains and losses 7.9% 7.8% 8.2% 7.8% 8.8%
<FN>
(*) Excludes "Real Estate and Other Investments".
</FN>
</TABLE>
<PAGE>
Fixed Maturity Investments
Unlike many insurance groups which have portfolios that are invested heavily
in tax-exempt bonds, AFC's bond portfolio is invested primarily in taxable
bonds. The NAIC assigns quality ratings which range from Class 1 (highest
quality) to Class 6 (lowest quality). The following table shows AFC's bonds and
redeemable preferred stocks, by NAIC designation (and comparable Standard &
Poor's Corporation rating) as of December 31, 1999 (dollars in millions).
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
- ------ --------------------- --------- ------- ---
1 AAA, AA, A $ 7,041 $6,886 70%
2 BBB 2,085 2,025 20
------- ------ ---
Total investment grade 9,126 8,911 90
------- ------ ---
3 BB 448 434 5
4 B 420 410 4
5 CCC, CC, C 99 97 1
6 D 8 10 *
------- ------ ---
Total noninvestment grade 975 951 10
------- ------ ---
Total $10,101 $9,862 100%
======= ====== ===
- ---------------
(*) Less than 1%
20
<PAGE>
Risks inherent in connection with fixed income securities include loss upon
default and market price volatility. Factors which can affect the market price
of securities include: creditworthiness, changes in interest rates, the number
of market makers and investors and defaults by major issuers of securities.
AFC's primary investment objective for fixed maturities is to earn interest
and dividend income rather than to realize capital gains. AFC invests in bonds
and redeemable preferred stocks that have primarily short- term and
intermediate-term maturities. This practice allows flexibility in reacting to
fluctuations of interest rates.
Equity Investments
AFC's equity investment practice permits concentration of attention on a
relatively limited number of companies. Some of the equity investments, because
of their size, may not be as readily marketable as the typical small investment
position. Alternatively, a large equity position may be attractive to persons
seeking to control or influence the policies of a company and AFC's
concentration in a relatively small number of companies may permit it to
identify investments with above average potential to increase in value.
Chiquita At December 31, 1999, AFC owned 24 million shares of Chiquita common
stock representing 36% of its outstanding shares. The carrying value and market
value of AFC's investment in Chiquita were approximately $160 million and $114
million, respectively, at December 31, 1999. Chiquita is a leading international
marketer, producer and distributor of quality fresh fruits and vegetables and
processed foods. In addition to bananas, these products include a wide variety
of other fresh fruits and vegetables; fruit and vegetable juices and beverages;
processed bananas and other processed fruits and vegetables; private-label and
branded canned vegetables; fresh cut and ready-to-eat salads; and edible
oil-based consumer products.
Other Stocks AFC's $231 million investment in Provident Financial Group,
Inc., a Cincinnati-based commercial banking and financial services company,
comprised approximately three-fifths of the equity investments included in
"Other stocks" in AFC's Balance Sheet at December 31, 1999.
Foreign Operations
AFC sells life and supplemental health products in Puerto Rico and property
and casualty products in Canada, Mexico, Europe and Asia. In addition, AAG has
an office in India where employees perform computer programming and certain back
office functions. Less than 3% of AFC's revenues and costs and expenses are
derived from foreign sources.
<PAGE>
Regulation
AFC's insurance company subsidiaries are subject to regulation in the
jurisdictions where they do business. In general, the insurance laws of the
various states establish regulatory agencies with broad administrative powers
governing, among other things, premium rates, solvency standards, licensing of
insurers, agents and brokers, trade practices, forms of policies, maintenance of
specified reserves and capital for the protection of policyholders, deposits of
securities for the benefit of policyholders, investment activities and
relationships between insurance subsidiaries and their parents and affiliates.
Material transactions between insurance subsidiaries and their parents and
affiliates generally must be disclosed and prior approval of the applicable
insurance regulatory authorities generally is required for any such transaction
which may be deemed to be material or extraordinary. In addition, while
differing from state to state, these regulations typically restrict the maximum
amount of dividends that may be paid by an insurer to its shareholders in any
twelve-month period without advance regulatory approval. Such limitations are
generally based on net earnings or statutory surplus. Under applicable
restrictions, the maximum amount of dividends available to AFC in 2000 from its
insurance subsidiaries without seeking regulatory clearance is approximately
$186 million.
21
<PAGE>
Changes in state insurance laws and regulations have the potential to
materially affect the revenues and expenses of the insurance operations. For
example, between July 1993 and January 1995, the California Commissioner ordered
reductions in workers' compensation insurance premium rates totaling more than
30% and subsequently replaced the workers' compensation insurance minimum rate
law with an "open rating" policy. The Company is unable to predict whether or
when other state insurance laws or regulations may be adopted or enacted or what
the impact of such developments would be on the future operations and revenues
of its insurance businesses.
Most states have created insurance guaranty associations to provide for the
payment of claims of insurance companies that become insolvent. Annual
assessments for AFC's insurance companies have not been material. In addition,
many states have created "assigned risk" plans or similar arrangements to
provide state mandated minimum levels of automobile liability coverage to
drivers whose driving records or other relevant characteristics make it
difficult for them to obtain insurance otherwise. Automobile insurers in those
states are required to provide such coverage to a proportionate number of those
drivers applying as assigned risks. Premium rates for assigned risk business are
established by the regulators of the particular state plan and are frequently
inadequate in relation to the risks insured, resulting in underwriting losses.
Assigned risks accounted for approximately one percent of AFC's net written
premiums in 1999.
The NAIC is an organization which is comprised of the chief insurance
regulator for each of the 50 states and the District of Columbia. The NAIC model
law for Risk Based Capital applies to both life and property and casualty
companies. The risk-based capital formulas determine the amount of capital that
an insurance company needs to ensure that it has an acceptably low expectation
of becoming financially impaired. The model law provides for increasing levels
of regulatory intervention as the ratio of an insurer's total adjusted capital
and surplus decreases relative to its risk-based capital, culminating with
mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called "mandatory control level". At December 31, 1999, the
capital ratios of all AFC insurance companies substantially exceeded the risk-
based capital requirements.
Legislation adopted in 1999 substantially eliminated restrictions on
affiliations among insurance companies, banks and securities firms. It is too
early to predict what impact this legislation will have in the markets in which
the insurance companies compete.
ITEM 2
Properties
----------
Subsidiaries of AFC own several buildings in downtown Cincinnati. AFC and its
affiliates occupy about three-fourths of the aggregate 660,000 square feet of
commercial and office space.
AFC's insurance subsidiaries lease the majority of their office and storage
facilities in numerous cities throughout the United States, including Great
American's and AAG's home offices in Cincinnati. An AAG subsidiary owns an
office building in Austin, Texas; approximately 80% of its 40,000 square feet is
used by the company for its operations.
<PAGE>
AFC subsidiaries own transferable rights to develop approximately 1.5 million
square feet of floor space in the Grand Central Terminal area in New York City.
The development rights were derived from ownership of the land upon which the
terminal is constructed.
22
<PAGE>
ITEM 3
Legal Proceedings
-----------------
Please refer to "Forward Looking Statements" following the Index in front of
this Form 10-K.
AFC and its subsidiaries are involved in various litigation, most of which
arose in the ordinary course of business, including litigation alleging bad
faith in dealing with policyholders and challenging certain business practices
of insurance subsidiaries. Except for the following, management believes that
none of the litigation meets the threshold for disclosure under this Item.
In February 1994, the USX Corporation ("USX") paid nearly $600 million in
satisfaction of antitrust judgments entered against its subsidiary, The Bessemer
& Lake Erie Railroad ("B&LE"). In May 1994, USX/B&LE filed two lawsuits, one in
state and the other in federal court, against American Premier as the
reorganized successor of The Penn Central Corporation seeking to recover this
amount under theories of indemnity and contribution law. In disclosing the
existence of these lawsuits, American Premier stated that it had sufficient
defenses and did not expect to suffer any material loss from the litigation.
In May 1998, the largest and last of these lawsuits was dismissed in state
court; a companion federal lawsuit had been dismissed earlier in 1998. Both of
the lawsuits were dismissed on American Premier's Motion for Summary Judgment
filed in state and federal court.
The state court action was appealed to the Eighth Appellate District of Ohio
in Cleveland, Ohio. The federal court action was appealed to the US Court of
Appeals for the Sixth Circuit in Cincinnati, Ohio. Both appellate courts
affirmed the decisions of the lower courts dismissing the lawsuits. In both
cases, Plaintiffs petitioned for re-hearing by the federal and state panels of
appellate court judges; the Sixth Circuit Court of Appeals denied the petition
as did the state appellate court. American Premier and its outside counsel
continue to believe that American Premier will not suffer any material loss from
either of these cases.
<PAGE>
American Premier is a party or named as a potentially responsible party in a
number of proceedings and claims by regulatory agencies and private parties
under various environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), seeking to
impose responsibility on American Premier for hazardous waste remediation costs
at certain railroad sites formerly owned by Penn Central Transportation Company
("PCTC") and at certain other sites where hazardous waste allegedly generated by
PCTC's railroad operations is present. It is difficult to estimate American
Premier's liability for remediation costs at these sites for a number of
reasons, including the number and financial resources of other potentially
responsible parties involved at a given site, the varying availability of
evidence by which to allocate responsibility among such parties, the wide range
of costs for possible remediation alternatives, changing technology and the
period of time over which these matters develop. Nevertheless, American Premier
believes that its previously established loss accruals for potential pre-
reorganization environmental liabilities at such sites are adequate to cover the
probable amount of such liabilities, based on American Premier's estimates of
remediation costs and related expenses at such sites and its estimates of the
portions of such costs that will be borne by other parties. Such estimates are
based on information currently available to American Premier and are subject to
future change as additional information becomes available. American Premier
intends to seek reimbursement from certain insurers for portions of whatever
remediation costs it incurs.
In terms of potential liability to American Premier, the company believes
that the most significant such site is the railyard at Paoli, Pennsylvania
("Paoli Yard") which PCTC transferred to Consolidated Rail Corporation
("Conrail") in 1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial action for
clean-up of polychlorinated biphenyls ("PCB's") at Paoli Yard having an
estimated cost of approximately $28 million. American Premier has accrued its
portion of such estimated clean-up costs in its financial statements (in
addition to other expenses) but has not accrued the entire amount because it
believes it is probable that other parties, including Conrail,
23
<PAGE>
will be responsible for substantial percentages of the clean-up costs by virtue
of their operation of electrified railroad cars at Paoli Yard that discharged
PCB's at higher levels than discharged by cars operated by PCTC.
In management's opinion, the outcome of the foregoing environmental claims
and contingencies will not, individually or in the aggregate, have a material
adverse effect on the financial condition of American Premier. In making this
assessment, management has taken into account previously established loss
accruals in its financial statements and probable recoveries from third parties.
Great American Life Insurance Company ("GALIC") was named a defendant in
purported class action lawsuits (Woodward v. Great American Life Insurance
Company, Hamilton County Court of Common Pleas, Case No. A9900587, filed
February 2, 1999 and Marshak v. Great American Life Insurance Company, Harris
County, Texas filed June 18, 1999). The complaints seek unspecified money
damages (the Texas complaint also seeks declaratory relief) based on alleged (i)
failure of GALIC to allow the tax- free transfer of the annuity value of certain
annuities to other product providers, and (ii) misleading and fraudulent
disclosures concerning GALIC's interest crediting practices. The Texas complaint
also alleges that the sale of annuities to tax-qualified plans was
inappropriate. The plaintiffs in the Texas action have suspended that case
pending developments in the Ohio case. GALIC believes it has meritorious
defenses but it is not possible to predict the ultimate impact of this action on
the company.
In March 2000, a jury in Dallas, Texas, awarded a verdict against GALIC in
the amount of $11.2 million. The case (Martin v. Great American Life Insurance
Company, 191st District Court of Dallas County, Texas, Case No. 96-04843) was
brought by two former agents of GALIC who alleged that GALIC had engaged in
fraudulent conduct in connection with the termination of the agency
relationship. GALIC believes that the verdict was contrary to both the facts and
the law and expects to prevail on appeal. The ultimate outcome of this case will
not have a material adverse impact on the financial condition of the company.
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Not applicable - Registrant's Common Stock is owned by American Financial
Group, Inc. See the Consolidated Financial Statements for information regarding
dividends.
24
<PAGE>
ITEM 6
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>
25
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
------------------------------------------------
Please refer to "Forward Looking Statements" following the Index in front of
this Form 10-K.
GENERAL
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AFC's financial condition and results of operations. This discussion should be
read in conjunction with the financial statements beginning on page F-1.
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.
<PAGE>
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.
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.
26
<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.
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.
<PAGE>
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.
27
<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.
28
<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.
<PAGE>
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.
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.
29
<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.
30
<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.
31
<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.
32
<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%.
33
<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.
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.
<PAGE>
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.
34
<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.
35
<PAGE>
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The information required by Item 7A is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8
Financial Statements and Supplementary Data
-------------------------------------------
Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1999 and 1998 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note O to the
Consolidated Financial Statements.
Please refer to "Forward Looking Statements" following the Index in front of
this Form 10-K.
---------------------------
PART III
The information required by the following Items will be included in AFC's
definitive Proxy Statement for the 2000 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission within 120 days after
the end of Registrant's fiscal year and is incorporated herein by reference.
ITEM 10 Directors and Executive Officers of the Registrant
--------------------------------------------------
ITEM 11 Executive Compensation
----------------------
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
ITEM 13 Certain Relationships and Related Transactions
----------------------------------------------
36
<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-1
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
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 asset 384,567 343,554
Cost in excess of net assets acquired 335,652 285,469
----------- -----------
$16,023,809 $15,847,867
=========== ===========
<PAGE>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<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> <C> <C> <C>
Income:
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-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars In Thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized
Preferred and Capital Retained Gain (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-4
<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-5
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
--------------
A. Accounting Policies I. Minority Interest
B. Acquisitions and Sales of Subsidiaries J. Shareholders' Equity
and Investees K. Income Taxes
C. Segments of Operations L. Extraordinary Items
D. Investments M. Commitments and Contingencies
E. Investment in Investee 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-6
<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-7
<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.
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-8
<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.
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-9
<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.
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-10
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables (in thousands) show AFC's assets, revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
<PAGE>
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
=========== =========== ===========
<FN>
(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.
</FN>
</TABLE>
F-11
<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-12
<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 $243 million at December 31, 1999 and 1998, respectively.
Realized gains (losses) and changes in unrealized appreciation (depreciation)
on fixed maturity and equity security investments are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Fixed Equity Tax
Maturities Securities Effects Total
---------- ---------- ------- -----
<S> <C> <C> <C> <C>
1999
----
Realized ($ 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
<FN>
(*) Includes $6.8 million in realized gains on fixed maturities
transferred to Ohio Casualty in connection with the sale of the
Commercial lines division.
</FN>
</TABLE>
<PAGE>
Transactions in fixed maturity investments included in the Statement of Cash
Flows consisted of the following (in millions):
<TABLE>
<CAPTION>
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
--------- ----------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
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)
======== ======== ======== ===== =====
<FN>
(*) Prior to reclassification to available for sale at December 31, 1998.
</FN>
</TABLE>
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-13
<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-14
<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-15
<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-16
<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.
<PAGE>
Unrealized Gain (Loss) on Marketable Securities, Net The change in unrealized
gain (loss) on marketable securities included the following (in millions):
<TABLE>
<CAPTION>
Tax Minority
Pretax Effects Interest Net
------ ------- -------- ---
<S> <C> <C> <C> <C>
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
====== ====== ===== ======
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
====== ====== ===== ======
</TABLE>
F-17
<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
($9.3) million in 1997.
<PAGE>
The total income tax provision consists of (in thousands):
1999 1998 1997
---- ---- ----
Current taxes (credits):
Federal ($ 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
======= ======= ========
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-18
<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-19
<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-20
<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
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1999
-----------------------------------------
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-21
<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):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
<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-22
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statutory Information AFC's insurance subsidiaries are required to file
financial statements with state insurance regulatory authorities prepared on
an accounting basis prescribed or permitted by such authorities (statutory
basis). Net earnings and policyholders' surplus on a statutory basis for the
insurance subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
------------------ --------------
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.
<PAGE>
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.
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-23
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fair Value of Financial Instruments The following table presents (in
millions) the carrying value and estimated fair value of AFC's financial
instruments at December 31.
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-24
<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-25
<PAGE>
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A.Selected Quarterly Financial Data is included in Note N to the
Consolidated Financial Statements.
B.Schedules filed herewith for 1999, 1998 and 1997:
Page
----
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the applicable
regulation of the Securities and Exchange Commission have been
omitted as they are not applicable, not required, or the
information required thereby is set forth in the Financial
Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
-----------------------
December 31,
----------------------------
1999 1998
---- ----
Assets:
Cash and short-term investments $ 941 $ 4,767
Investment in securities 1,214 3,129
Receivables from affiliates 126,118 72,772
Investment in subsidiaries 2,730,621 2,769,112
Investment in investee corporation - 22,364
Other assets 3,899 8,623
---------- ----------
$2,862,793 $2,880,767
========== ==========
Liabilities and Shareholders' Equity:
Accounts payable, accrued expenses and other
liabilities $ 109,455 $ 122,564
Payables to affiliates 1,352,121 1,060,469
Long-term debt 77,110 167,078
Shareholders' equity 1,324,107 1,530,656
---------- ----------
$2,862,793 $2,880,767
========== ==========
Condensed Statement of Earnings
-------------------------------
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Income:
Dividends from:
Subsidiaries $ 71,061 $ 50,061 $ 1,247
Investees 177 177 177
-------- --------- ---------
71,238 50,238 1,424
Equity in undistributed earnings of
subsidiaries and investees 228,331 237,599 358,816
Realized gains (losses) on sales of:
Securities 1,461 11 (2,618)
Investees - 347 421
Subsidiaries - - 731
Investment and other income 18,311 10,978 55,404
-------- -------- --------
319,341 299,173 414,178
<PAGE>
Costs and Expenses:
Interest charges on intercompany borrowings 39,025 36,479 28,772
Interest charges on other borrowings 7,993 14,542 15,250
Other operating and general expenses 34,875 37,331 36,392
-------- -------- --------
81,893 88,352 80,414
-------- -------- --------
Earnings before income taxes, extraordinary
items and accounting change 237,448 210,821 333,764
Provision for income taxes 84,945 81,418 125,227
-------- -------- --------
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
======== ======== ========
S-2
<PAGE>
AMERICAN FINANCIAL CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
---------------------------------
<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 earnings of subsidiaries (192,920) (180,328) (224,949)
Equity in net (earnings) losses of investees (98) 486 212
Depreciation and amortization 498 647 1,086
Realized losses (gains) on sales
of subsidiaries and investments (1,461) (358) 2,262
Change in receivables from and payables
to affiliates 50,142 (8,155) 69,603
Increase (decrease) in payables (15,005) 15,596 57,017
Dividends from subsidiaries and investees 71,238 21,359 1,424
Other 5,329 939 841
-------- -------- --------
70,226 (20,411) 116,033
Investing Activities:
Purchases of subsidiaries and other
investments (41,591) - (122,969)
Sales of subsidiaries and other investments - - 143,728
Other, net (564) (172) 250
-------- -------- --------
(42,155) (172) 21,009
Financing Activities:
Additional long-term borrowings 198,232 112,488 150
Reductions of long-term debt (293,324) (79,418) (94,049)
Borrowings from affiliates 265,600 46,213 315,000
Repayments of borrowings from affiliates (215,300) (77,621) (153,500)
Repurchases of Preferred Stock - - (243,939)
Capital contributions from parent 18,667 18,667 18,667
Cash dividends paid (5,772) (5,772) (15,071)
-------- -------- --------
(31,897) 14,557 (172,742)
Net Decrease in Cash and Short-term Investments (3,826) (6,026) (35,700)
Cash and short-term investments at beginning
of period 4,767 10,793 46,493
-------- -------- --------
Cash and short-term investments at end
of period $ 941 $ 4,767 $ 10,793
======== ======== ========
</TABLE>
S-3
<PAGE>
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1999
(IN MILLIONS)
--------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------------------------------------------------------------------------
(a)
RESERVES FOR
DEFERRED UNPAID CLAIMS (b)
AFFILIATION POLICY AND CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
--------------------------------------------------------------------------
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1999 $254 $4,795 $30 $1,326
1998 $217 $4,773 $41 $1,233
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
--------------------------------------------------------------------------------------------------------------------------
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES AMORTIZATION PAID
INCURRED RELATED TO OF DEFERRED CLAIMS
NET POLICY AND CLAIM
EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
PREMIUMS INCOME YEARS YEARS COSTS EXPENSES WRITTEN
--------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $2,211 $297 $1,691 ($102) $498 $1,738 $2,263
1998 $2,699 $324 $2,059 $156 $589 $1,995 $2,471
1997 $2,824 $316 $2,045 $ 31 $620 $1,991 $2,858
<FN>
(a) Grossed up for reinsurance recoverables of $1,571 and $1,468 at
December 31, 1999 and 1998, respectively.
(b) Discounted at approximately 8%.
(c) Grossed up for prepaid reinsurance premiums of $320 and $314 at
December 31, 1999 and 1998, respectively.
</FN>
</TABLE>
S-4
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, American Financial Corporation has duly caused this Report to be signed on
its behalf by the undersigned, duly authorized.
American Financial Corporation
Signed: March 28, 2000 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
s/CARL H. LINDNER Chairman of the Board March 28, 2000
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director* March 28, 2000
Theodore H. Emmerich
s/JAMES E. EVANS Director March 28, 2000
James E. Evans
s/THOMAS M. HUNT Director* March 28, 2000
Thomas M. Hunt
s/CARL H. LINDNER III Director March 28, 2000
Carl H. Lindner III
s/KEITH E. LINDNER Director March 28, 2000
Keith E. Lindner
s/S. CRAIG LINDNER Director March 28, 2000
S. Craig Lindner
s/WILLIAM R. MARTIN Director* March 28, 2000
William R. Martin
s/FRED J. RUNK Senior Vice President and March 28, 2000
Fred J. Runk Treasurer (principal
financial and accounting
officer)
* Member of the Audit Committee
<PAGE>
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
- ------ -------------------
3(a) Amended Articles of
Incorporation, filed as Exhibit 3(a)
to AFC's Form 10-K for 1997. (*)
3(b) Amended Code of Regulations, filed as
Exhibit 3(b) to AFC's Form 10-K
for 1997. (*)
4 Instruments defining the rights of The rights of holders of
security holders. Registrant's Preferred
Stock are defined in the
Articles of Incorporation.
Registrant has no
outstanding debt issues
exceeding 10% of the assets
of Registrant and
consolidated subsidiaries.
Management Contracts:
10(a) Nonqualified Auxiliary RASP, as amended,
filed as Exhibit 10(a) to AFC's Form 10-K
for 1998. (*)
10(b) 1999 Annual Bonus Plan. -----
10(c) Deferred Compensation Plan, filed as
Exhibit 10 to Registration Statement No.
333-91945 on Form S-8 on December 2, 1999 (*)
12 Computation of ratios of earnings
to fixed charges. -----
21 Subsidiaries of the Registrant. -----
27 Financial data schedule. (**)
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the
Securities and Exchange Commission.
E-1
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax income $231,447 $209,563 $322,563 $304,651 $253,449
Minority interest in subsidiaries
having fixed charges (*) 44,790 45,120 45,098 52,838 27,076
Less undistributed equity in (earnings)
losses of investees 32,156 17,997 10,363 31,353 (1,559)
Fixed charges:
Interest expense 65,858 73,868 88,402 88,144 124,633
Debt discount (premium) and expense (449) (631) (701) (1,174) (1,023)
One-third of rentals 12,226 11,883 10,152 9,279 9,471
-------- -------- -------- -------- --------
EARNINGS $386,028 $357,800 $475,877 $485,091 $412,047
======== ======== ======== ======== ========
Fixed charges:
Interest expense $ 65,858 $ 73,868 $ 88,402 $ 88,144 $124,633
Debt discount (premium) and expense (449) (631) (701) (1,174) (1,023)
One-third of rentals 12,226 11,883 10,152 9,279 9,471
Accrued distribution of subsidiary
trust preferred subsidiaries 18,575 19,031 15,499 1,031 -
-------- -------- -------- -------- --------
FIXED CHARGES $ 96,210 $104,151 $113,352 $ 97,280 $133,081
======== ======== ======== ======== ========
Fixed charges and preferred dividends:
Fixed charges - per above $ 96,210 $104,151 $ 113,352 $ 97,280 $133,081
Preferred dividends 8,991 9,403 21,967 25,190 25,376
-------- -------- -------- -------- --------
FIXED CHARGES AND PREFERRED
DIVIDENDS $105,201 $113,554 $135,319 $122,470 $158,457
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 4.01 3.44 4.20 4.99 3.10
==== ==== ==== ==== ====
Earnings in Excess of Fixed Charges $289,818 $253,649 $362,525 $387,811 $278,966
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges
and Preferred Dividends 3.67 3.15 3.52 3.96 2.60
==== ==== ==== ==== ====
Earnings in Excess of Fixed Charges
and Preferred Dividends $280,827 $244,246 $340,558 $362,621 $253,590
======== ======== ======== ======== ========
<FN>
(*) Amounts include accrued distributions on trust preferred securities.
</FN>
</TABLE>
E-2
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1999. All
corporations are subsidiaries of AFC and, if indented, subsidiaries of the
company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
- --------------- ------------- -------------
American Premier Underwriters, Inc. Pennsylvania 100
Pennsylvania Company Delaware 100
Atlanta Casualty Company Ohio 100
Infinity Insurance Company Indiana 100
Leader Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 83
AAG Holding Company, Inc. Ohio 100
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
Great American Life Insurance Company Ohio 100
Loyal American Life Insurance Company Ohio 100
United Teacher Associates Insurance Company Texas 100
American Empire Surplus Lines Insurance Company Delaware 100
American National Fire Insurance Company New York 100
Brothers Property Corporation Ohio 80
Mid-Continent Casualty Company Oklahoma 100
National Interstate Corporation Ohio 58
Stonewall Insurance Company Ohio 100
Transport Insurance Company Ohio 100
Worldwide Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries in the
aggregate would not constitute a significant subsidiary.
E-3
1999 ANNUAL BONUS PLAN
Adopted on July 21, 1999
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
1999 ANNUAL BONUS PLAN
1. PURPOSE
The purpose of the Annual Bonus Plan (the "Plan") is to
further the profitability of American Financial Group, Inc.
(the "Company") to the benefit of the shareholders of the
Company by providing incentive to the Plan participants.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan
shall be administered by the Compensation Committee or a
successor committee or subcommittee (the "Committee") of the
Board of Directors of the Company (the "Board") composed
solely of two or more "outside directors" as defined
pursuant to Section 162(m) of the Internal Revenue Code. No
member of the Committee while serving as such shall be
eligible to be granted a bonus under the Plan. Subject to
the provisions of the Plan (and to the approval of the Board
where specified in the Plan), the Committee shall have
exclusive power to determine the conditions (including
performance requirements) to which the payment of the
bonuses may be subject and to certify that performance goals
are attained. Subject to the provisions of the Plan, the
Committee shall have the authority to interpret the Plan and
establish, adopt or revise such rules and regulations and to
make all determinations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan.
The Committee's interpretation of the Plan and all of its
actions and decisions with respect to the Plan shall be
final, binding and conclusive on all parties.
3. PLAN TERM AND BONUS YEARS
The term of the Plan is one year, commencing January 1,
1999, which term shall be renewed from year to year unless
and until the Plan shall be terminated or suspended as
provided in Section 9. As used in the Plan the term "Bonus
Year" shall mean a calendar year.
4. PARTICIPATION
Subject to the approval of the Committee and the Board
of Directors (based on the recommendation of the Committee),
the Chief Executive Officer and each of the Co-Presidents
shall participate in the Plan (the "Participants"). The
Executive Committee may designate other employees of the
Company or its subsidiaries to be governed by the terms of
2
<PAGE>
the Plan, including consideration that a portion of payments
made to such employees be in shares of common stock of the
Company.
5. ESTABLISHMENT OF INDIVIDUAL BONUS TARGETS AND
PERFORMANCE CRITERIA
The Committee shall approve the individual target
amount of bonus (the "Bonus Target") that may be awarded to
each Participant and recommend that the Board adopt such
action. In no event shall the establishment of any
Participant's Bonus Target give a Participant any right to
be paid all or any part of such amount unless and until a
bonus is actually awarded pursuant to Section 6.
The Committee shall establish the performance criteria,
both subjective and objective, (the "Performance Criteria")
that will apply to the determination of the bonus of the
Chief Executive Officer and each of the Co-Presidents for
that Bonus Year and recommend that the Board adopt such
action. The Bonus Targets and Performance Criteria set
forth on Schedules I and II have been recommended by the
Committee and approved by the Board.
6. DETERMINATION OF BONUSES AND TIME OF PAYMENT
As soon as practicable after the end of 1999, the
Committee shall certify whether or not the performance
criteria of the Chief Executive Officer and each of the Co-
Presidents has been attained and shall recommend to the
Board, and the Board shall determine, the amount of the
bonus, if any, to be awarded to each Participant for 1999
according to the terms of this Plan. Such bonus
determinations shall be based on achievement of the
Performance Criteria for 1999.
Once the bonus is so determined for the Chief Executive
Officer and each of the Co-Presidents, it shall be paid
seventy-five percent in cash and twenty-five percent in
Company Common Stock to the Participant (less any applicable
withholding and employment taxes) as soon as practicable.
The number of shares of Company Common Stock to be issued to
a Participant shall be determined by dividing twenty-five
percent of the bonus payable (before applicable taxes and
deductions) by the average of the per share Fair Market
Value of the Common Stock for all of the trading days of
January 2000; the resulting number shall then be rounded to
the nearest hundred. Any shares of Company Common Stock
issued pursuant to this Plan will be "restricted."
"Fair Market Value" means the last sale price reported
on any stock exchange or over-the-counter trading system on
which Company Common Stock is trading on the last trading
day prior to a specified date or, if no last sales price is
reported, the average of the closing bid and asked prices
for a share of Common Stock on a specified date. If no sale
3
<PAGE>
has been made on any date, then prices on the last preceding
day on which any such sale shall have been made shall be
used in determining Fair Market Value under either method
prescribed in the previous sentence.
7. TERMINATION OF EMPLOYMENT
If a Participant's employment with the Company or a
subsidiary, as the case may be, is terminated for any reason
other than discharge for cause, he may be entitled to such
bonus, if any, as the Committee, in its sole discretion, may
determine.
In the event of a Participant's discharge for cause
from the employ of the Company or a Subsidiary, as the case
may be, he shall not be entitled to any amount of bonus
unless the Committee, in its sole discretion, determines
otherwise.
8. MISCELLANEOUS
A. Government and Other Regulations. The
obligation of the Company to make payment of bonuses
shall be subject to all applicable laws, rules and
regulations and to such approvals by governmental
agencies as may be required.
B. Tax Withholding. The Company or a
Subsidiary, as appropriate, shall have the right to
deduct from all bonuses paid in cash any federal, state
or local taxes required by law to be withheld with
respect to such cash payments.
C. Claim to Bonuses and Employment Rights. The
designation of persons to participate in the Plan shall
be wholly at the discretion of the Board. Neither this
Plan nor any action taken hereunder shall be construed
as giving any Participant any right to be retained in
the employ of the Company or a Subsidiary.
D. Beneficiaries. Any bonuses awarded under
this Plan to a Participant who dies prior to payment
shall be paid to the beneficiary designated by the
Participant on a form filed with the Company. If no
such beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's
legal representative. A beneficiary designation may be
changed or revoked by a Participant at any time
provided the change or revocation is filed with the
Company.
E. Nontransferability. A person's rights and
interests under the Plan may not be assigned, pledged
or transferred except, in the event of a Participant's
death, to his designated beneficiary as provided in the
Plan or, in the absence of such designation, by will or
the laws of descent and distribution.
4
<PAGE>
F. Indemnification. Each person who is or shall
have been a member of the Committee or of the Board
shall be indemnified and held harmless by the Company
(to the extent permitted by the Articles of
Incorporation and Code of Regulations of the Company
and applicable law) against and from any loss, cost,
liability or expense that may be imposed upon or
reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to
which he may be a party or in which they may be
involved by reason of any action taken or failure to
act under the Plan and against and from any and all
amounts paid by him in settlement thereof, with the
Company's approval, or paid by him, in satisfaction of
judgment in any such action, suit or proceeding against
him. He shall give the Company an opportunity, at its
own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf.
The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to
which such person may be entitled under the Company's
Articles of Incorporation or Code of Regulations, as a
matter of law or otherwise or of any power that the
Company may have to indemnify him or hold him harmless.
G. Reliance on Reports. Each member of the
Committee and each member of the Board shall be fully
justified in relying or acting in good faith upon any
report made by the independent certified public
accountants of the Company or of its Subsidiaries or
upon any other information furnished in connection with
the Plan by any officer or director of the Company or
any of its Subsidiaries. In no event shall any person
who is or shall have been a member of the Committee or
of the Board be liable for any determination made or
other action taken or any omission to act in reliance
upon any such report or information or for any action
taken, including the furnishing of information, or
failure to act, if in good faith.
H. Expenses. The expenses of administering the
Plan shall be borne by the Company and its Subsidiaries
in such proportions as shall be agreed upon by them
from time to time.
I. Pronouns. Masculine pronouns and other words
of masculine gender shall refer to both men and women.
J. Titles and Headings. The titles and headings
of the sections in the Plan are for convenience of
reference only, and, in the event of any conflict
between any such title or heading and the text of the
Plan, such text shall control.
5
<PAGE>
9. AMENDMENT AND TERMINATION
The Board may at any time terminate the Plan. The
Board may at any time, or from time to time, amend or
suspend and, if suspended, reinstate the Plan in whole or in
part. Notwithstanding the foregoing, the Plan shall
continue in effect to the extent necessary to settle all
matters relating to the payment of bonuses awarded prior to
any such termination or suspension.
6
<PAGE>
Schedule I
----------
Annual Bonus Plan
for 1999
Participants and
Bonus Targets
<TABLE>
<CAPTION>
Total Company
Bonus EPS Performance
Name Position Target Component Component
- ------------------- ------------------------- -------- --------- -----------
<S> <C> <C> <C> <C>
Carl H. Lindner Chairman of the Board $950,000 50% 50%
& Chief Executive Officer
Carl H. Lindner III Co-President $950,000 50% 50%
Keith E. Lindner Co-President $950,000 50% 50%
S. Craig Lindner Co-President $950,000 50% 50%
</TABLE>
<PAGE>
Schedule II
-----------
Annual Bonus Plan
-----------------
1999 Performance Criteria for Participants
------------------------------------------
The overall bonus for 1999 for each Participant will be the sum
of such Participant's bonuses for the following two Performance
Criteria components:
Weighting of Dollar Amount of Bonus Target
-----------------------------------------------------
(Assuming Schedule I indicates $925,000 Bonus Target)
Earnings Per Share ("EPS") - 50% $462,500
Company Performance - 50% $462,500
A. EPS Component.
Each participant's bonus will range from 0% to 175% of the
dollar amount of the Bonus Target allocated to the EPS
Component, based on the following levels of reported
earnings per common share achieved by the Company and its
consolidated subsidiaries for 1999:
Percentage of Bonus Target to be paid
Operating EPS for EPS Component
------------------ -------------------------------------
$2.06 or less than 0
$2.75 100%
more than $2.75 more than 100% up to 175%
Where the Operating EPS is between $2.06 and $2.75, the
bonus will be determined by straight line interpolation; if
it is above $2.75, the Committee, in its discretion, shall
determine the percentage of bonus above 100%.
The Operating EPS to be considered is diluted EPS from the
Company's insurance operations and not including investee
results, realized gains and losses in the investment
portfolio and unusual or non-recurring items.
Additionally, the Committee shall have the power and
authority, in its discretion, to adjust reported EPS upward
or downward for purposes of the Plan to the extent the
Committee deems equitable in the event of occurrences which
might unfairly affect the computation of EPS for purposes
of the Plan.
<PAGE>
B. Company Performance Component
Each participant's bonus could range up to 175% of the
dollar amount of the Bonus Target allocated to the Company
Performance Component and will be determined by the Board,
upon the Compensation Committee's recommendation, based on
the Compensation Committee's subjective rating of the
Company's relative overall performance for 1999. Such
rating shall include a consideration of all factors deemed
relevant, including financial (and non-financial) and
strategic factors.
When determining the Company's performance for 1999, the
Committee intends to take into consideration the factors it
believes are relevant to such performance. For 1999, it
may be appropriate to consider factors including, but not
limited to: earnings per share, including a specific
review of the impact of any extraordinary transactions and
investees results; return on equity; per share price of
common stock relative to prior periods and comparable
companies as well as financial markets; status of credit
ratings on outstanding debt and claims paying ability of
the Company's subsidiaries; status of debt-to-capital
ratio; combined ratio of the Company's subsidiaries;
investment portfolio performance including realized gains
and losses; and other operating criteria.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
American Financial Corporation Form 10-K for December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> $389,018
<SECURITIES> 10,431,890<F1>
<RECEIVABLES> 656,924
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,023,809
<CURRENT-LIABILITIES> 0
<BONDS> 352,290
0
72,154
<COMMON> 9,625
<OTHER-SE> 1,242,328
<TOTAL-LIABILITY-AND-EQUITY> 16,023,809
<SALES> 0
<TOTAL-REVENUES> 3,341,979
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 364,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,888
<INCOME-PRETAX> 309,742
<INCOME-TAX> 101,020
<INCOME-CONTINUING> 152,503
<DISCONTINUED> 0
<EXTRAORDINARY> (3,849)
<CHANGES> (3,854)
<NET-INCOME> 144,800
<EPS-BASIC> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $160 million.
<F2>Not applicable since all common shares are owned by American Financial
Group, Inc.
</FN>
</TABLE>
