<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1995
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
OHIO
(State or other jurisdiction
of 31-1422526
incorporation or (IRS Employer
organization) Identification Number)
</TABLE>
ONE EAST FOURTH STREET
CINCINNATI, OHIO 45202
(513) 579-2121
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
<TABLE>
<S> <C> <C>
WITH COPIES TO: JAMES C. KENNEDY, ESQ. WITH COPIES TO:
SECRETARY
GARY P. KREIDER, ESQ. AMERICAN FINANCIAL GROUP, INC. TIMOTHY E. HOBERG, ESQ.
KEATING, MUETHING & KLEKAMP ONE EAST FOURTH STREET TAFT, STETTINIUS & HOLLISTER
1800 PROVIDENT TOWER CINCINNATI, OHIO 45202 1800 STAR BANK CENTER
ONE EAST FOURTH STREET (513) 579-2538 425 WALNUT STREET
CINCINNATI, OHIO 45202 (Name, address, including zip code, and telephone number, CINCINNATI, OHIO 45202
(513) 579-6400 including area code, of agent for service) (513) 381-2838
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value per share........... 4,600,000 $28.06 $129,076,000 $25,815.20
========================================================================================================================
<FN>
(1) Includes 600,000 shares which may be purchased by the Underwriters in order
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely
for the purpose of calculating the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1995
4,000,000 Shares
American Financial Group, Inc.
Common Stock
($1.00 par value)
------------------
All of the shares of Common Stock, par value $1.00 per share (the "Common
Stock") of American Financial Group, Inc. ("AFG" or the "Company") offered
hereby are being sold by the Company (the "Offering"). The Company's Common
Stock is listed on the New York Stock Exchange under the symbol "AFG." On
November , 1995, the last reported sale price of the Common Stock on the
New York Stock Exchange composite tape was $ per share. See "Price
Range of Common Stock and Dividends."
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 13.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company (1)
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total (2).................................... $ $ $
<FN>
(1) Before deduction of expenses payable by the Company estimated at
$ .
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 600,000
additional shares of Common Stock to cover over-allotments of shares. If the
option is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ and Proceeds to Company
will be $ .
------------------
</TABLE>
The shares of Common Stock are offered by the several Underwriters when, as
and if issued by the Company, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
the shares of Common Stock will be ready for delivery on or about December ,
1995.
CS First Boston
Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz Incorporated
The date of this Prospectus is December , 1995.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
periodic reports, proxy and information statements and other information with
the Securities and Exchange Commission (the "Commission"). The Company has filed
a Registration Statement on Form S-3 (the "Registration Statement") with the
Commission under the Securities Act of 1933 (the "Securities Act") with respect
to the Offering. This Prospectus does not contain all the information, exhibits
and undertakings contained in the Registration Statement, to which reference is
hereby made. Statements contained in this Prospectus as to the terms of any
contract or other document are not necessarily complete with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement. Reference is made to the exhibits for a more complete
description of the matter involved. Such reports, proxy and information
statements, the Registration Statement and other information filed with the
Commission by AFG may be inspected at and obtained from the Commission at its
public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at Suite 1400, 500 West Madison
Avenue, Chicago, Illinois, and at 7 World Trade Center, 13th Floor, New York,
New York. Copies of such material can also be obtained, at prescribed rates, by
mail from the Public Reference Section of the Commission at its Washington, D.C.
address set forth above. In addition, material filed by the Company can be
obtained and inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005 (the "NYSE"), on which AFG's Common Stock
is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference certain documents relating to the
Company which are not delivered herewith. These documents (other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents) are available, without charge, on oral or
written request by any person to whom this Prospectus is delivered. Written or
telephone requests should be directed to Fred J. Runk, Senior Vice President and
Treasurer, One East Fourth Street, Cincinnati, Ohio 45202, telephone (513)
579-2488. The following documents, which have been filed by the Company and its
predecessors with the Commission, are hereby incorporated by reference in this
Prospectus:
American Financial Group, Inc. (File No. 1-11453):
(i) Quarterly Reports on Form 10-Q for the periods ended June 30, 1995
and September 30, 1995;
(ii) Current Reports on Form 8-K dated May 30, 1995 and August 29,
1995; and
(iii) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-B filed on April 17, 1995.
American Premier Underwriters, Inc. (File No. 1-1569):
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1994;
(ii) Quarterly Report on Form 10-Q for the period ended March 31,
1995;
(iii) Current Report on Form 8-K dated April 7, 1995; and
(iv) Proxy Statement/Prospectus filed on February 21, 1995.
American Financial Corporation (File No. 1-7361):
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1994;
(ii) Quarterly Report on Form 10-Q for the period ended March 31,
1995; and
(iii) Current Report on Form 8-K dated April 7, 1995.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this Offering
shall be deemed to be incorporated by reference in this Prospectus and to be a
part of this Prospectus from the date of filing thereof. Any statement contained
in a
2
<PAGE> 4
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
------------------
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
------------------
THE LAWS OF VARIOUS STATES PROHIBIT ANY PERSON OR ENTITY FROM DIRECTLY OR
INDIRECTLY ACQUIRING 10% OR MORE (5% OR MORE IN ALABAMA AND FLORIDA) OF THE
VOTING CONTROL OF ANY DOMESTIC INSURANCE HOLDING COMPANY WITHOUT APPROVAL OF
SUCH STATE'S RESPECTIVE COMMISSIONER OF INSURANCE.
3
<PAGE> 5
CORPORATE STRUCTURE
The following summary organizational chart illustrates the corporate
relationships among the Company and certain of its subsidiaries and does not
reflect precise ownership relationships.
<TABLE>
<S> <C> <C>
------------------------------
I I
I AMERICAN FINANCIAL I
I GROUP, INC. I
I I
------------------------------
I
I
----------------------------------------I
I I
I I
- ----------------------------------- ------------------------------ ----------------------------
I I I I I I
I AMERICAN PREMIER I I AMERICAN FINANCIAL I ------------I AMERICAN ANNUITY I
I UNDERWRITERS, INC. I I CORPORATION I I I GROUP, INC. I
I I I I I I I
I (NON-STANDARD AUTOMOBILE, I ------------------------------ I ----------------------------
I CALIFORNIA WORKERS' I I I I
I COMPENSATION INSURANCE) I I I I
I I ------------------------------ I --------------------------------------
- ----------------------------------- I I I I I
I GREAT AMERICAN I I I GREAT AMERICAN I
I HOLDING CORPORATION I I I LIFE INSURANCE I
I I I I COMPANY I
------------------------------ I I I
I I I (TAX SHELTERED ANNUITIES, I
I I I LIFE AND HEALTH INSURANCE) I
------------------------------------------- I I I
I I I --------------------------------------
I GREAT AMERICAN I I
I INSURANCE COMPANY I I
I I------
I (SPECIALTY, MULTI-LINE PROPERTY I
I AND CASUALTY INSURANCE) I
I I
-------------------------------------------
</TABLE>
4
<PAGE> 6
PROSPECTUS SUMMARY
This summary is qualified by the more detailed information and financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Unless otherwise indicated, all information in the Prospectus
assumes that the over-allotment option granted to the Underwriters is not
exercised. All financial data and ratios presented in this Prospectus have been
determined in accordance with generally accepted accounting principles ("GAAP")
except where otherwise indicated. Discussion of the Company's business prior to
the Merger (as defined below) reflects the combined insurance operations of
American Premier Underwriters, Inc. and American Financial Corporation.
THE COMPANY
OVERVIEW
American Financial Group, Inc. ("AFG" or the "Company") is a holding
company which, through its subsidiaries, is engaged primarily in specialty and
multi-line property and casualty insurance businesses and in the sale of
tax-deferred annuities. AFG's property and casualty operations originated in
1872 and are the sixteenth largest property and casualty group in the United
States based on 1994 statutory net premiums written of $3.1 billion. AFG was
formed through the combination of American Premier Underwriters, Inc. ("APU")
and American Financial Corporation ("AFC") in a merger transaction completed on
April 3, 1995 (the "Merger"). At September 30, 1995, the Company had total
assets of $13.9 billion and shareholders' equity of $1.1 billion.
The Company's strategy is to build shareholder value as a property and
casualty insurance and annuity specialist by:
- Concentrating on specialty insurance lines. Seventy-eight percent of 1994
property and casualty statutory net premiums written were from lines of business
which the Company considers to be specialty insurance lines. Management believes
that such lines offer greater profit potential for AFG and added value for its
customers. The Company's annuity business similarly concentrates on specialty
business, marketing annuities principally to employees of primary and secondary
educational institutions and hospitals, and recently has expanded by acquisition
into the financial institution, payroll deduction and pre-need funeral markets.
- Achieving superior underwriting results. AFG's property and casualty
insurance operations have operated at a lower combined ratio than the property
and casualty insurance industry in each of the last ten years. Management
believes that its record of producing superior underwriting results can be
attributed to its concentration on specialty insurance lines, pricing
discipline, focus on profitability rather than premium growth and management
compensation plans which reward unit managers based primarily on underwriting
results.
- Operating on a decentralized basis. The Company's insurance business is
conducted through approximately 30 separate business units. Each unit has
independent management with significant operating autonomy to oversee the
important operational functions of the business unit including underwriting,
pricing, marketing, policy processing and claims service. Management believes
that operating on a decentralized basis promotes creativity and entrepreneurship
within the Company, enhances its ability to act quickly and opportunistically in
each of its insurance markets, enables the Company to provide a high level of
service to its insureds and, as a result, has contributed to the Company's
record of superior underwriting performance.
- Continuing to strengthen its balance sheet. Since the Merger, the Company
has reduced its debt to capital ratio from 58.4% to 44.8% at September 30, 1995.
As adjusted for net reductions of debt which have occurred through November 15,
1995, the debt to capital ratio would have been 42.4% at September 30, 1995. The
Company will use the proceeds of the Offering to further reduce subsidiary debt.
On a pro forma basis, taking into account the fourth quarter 1995 net debt
reduction and the application of the net proceeds of the Offering, AFG's debt to
capital ratio would be further reduced to 38.0%. See "Capitalization."
5
<PAGE> 7
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The Company manages and operates its property and casualty business in
three major business segments: Non-Standard Automobile Insurance; Specialty
Lines; and Commercial and Personal Lines. Each segment is comprised of multiple
business units which operate autonomously but with strong central financial
controls and full accountability. Decentralized control allows each unit the
autonomy necessary to respond to local and specialty market conditions while
capitalizing on the efficiencies of centralized investment, actuarial, financial
and legal support functions. Management's focus on underwriting profitability
has resulted in a statutory combined ratio averaging 101.1% for the period 1990
to 1994, as compared to 109.9% for the property and casualty industry over the
same period (Source: A.M. Best Company, Inc. ("A.M. Best")). The statutory
combined ratio for the first nine months of 1995 was 103.5%, which includes 1.4%
from losses recorded in the second quarter due to Texas hailstorms in late April
and early May.
The following table presents net premiums written data for the Company's
property and casualty insurance business:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------- ----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Non-Standard Automobile......................... $ 930.8 40% $1,154.1 37%
Specialty Lines................................. 861.2 37 1,282.0 41
Commercial and Personal Lines................... 525.5 23 682.5 22
Other lines(a).................................. 0.8 -- 5.9 --
-------- --- -------- ---
$2,318.3 100% $3,124.5 100%
======== === ======== ===
- ---------------
<FN>
(a) Represents discontinued insurance operations.
</TABLE>
Non-Standard Automobile Insurance
AFG's Non-Standard Automobile Insurance group (the "NSA Group") writes
automobile insurance policies for drivers who may represent higher-than-normal
risks due to a record of prior accidents, traffic violations or other factors.
AFG believes that it is the second largest writer of this coverage through
independent agents and the fifth largest overall in the U.S. Management believes
that its careful selection of risks and pricing has contributed to its
underwriting success compared to industry averages. The NSA Group writes
business in 41 states and the United Kingdom with over one million policies in
force covering approximately 1.6 million vehicles.
Specialty Lines
AFG's Specialty Lines insurance operations include a highly diversified
group of over 25 specialty business units offering a wide range of commercial
and specialty coverages. Major lines in this group include California workers'
compensation, executive liability, ocean and inland marine, agricultural-related
coverages, non-profit liability, umbrella and excess and surplus lines.
Specialization is the key element to the underwriting success of these business
units. These specialty lines are opportunistic, and their premium volume will
vary by product based on current market conditions.
Commercial and Personal Lines
The Company's Commercial and Personal Lines insurance business consists
primarily of standard automobile and homeowners' insurance and commercial
multi-peril, workers' compensation, umbrella, excess and general liability
insurance. In the Commercial Lines businesses, the Company emphasizes
underwriting profitability by intensely targeting specific customer groups and
markets that have adequate rate level potential and by stressing customer
service and retention of business. In the Personal Lines businesses, the Company
emphasizes the use of market segmentation data to price its products more
accurately for different insureds. In order to improve its underwriting results
in standard personal automobile insurance, the Company is focused on further
refining its market segmentation techniques and implementing selective premium
rate increases
6
<PAGE> 8
where needed. The Company has aggressively reduced exposure to catastrophes in
homeowners' insurance by reducing the number of policies written in geographic
areas that are known to be susceptible to weather-related events and by
increasing policy deductibles.
ANNUITY OPERATIONS
As a complement to its property and casualty insurance business, the
Company operates an annuity business through its 81%-owned subsidiary, American
Annuity Group, Inc. ("AAG"). The remaining common stock of AAG is publicly held
and trades on the NYSE. At September 30, 1995, the market capitalization of AAG
was approximately $474 million. AAG's principal insurance subsidiary, Great
American Life Insurance Company ("GALIC"), issues and services tax-deferred
annuities, principally to employees of primary and secondary educational
institutions and hospitals, and expects to begin marketing variable annuities in
the fourth quarter of 1995. GALIC had over $5.4 billion in assets at September
30, 1995, and ranked among the top 5% of all U.S. stock life insurance companies
based on total assets at December 31, 1994.
AAG has recently broadened its distribution channels and product offerings
by acquiring Laurentian Capital Corporation ("Laurentian") in November 1995.
Laurentian sells life, accident and health insurance and annuities to the
financial institution and payroll deduction markets and sells individual life
insurance and annuity policies in the pre-need funeral market through its
subsidiaries, Loyal American Life Insurance Company ("Loyal") and Prairie States
Life Insurance Company ("Prairie"). See "Business -- Annuity Operations."
The following table sets forth selected financial data of GALIC for each of
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Annuity receipts...................... $ 338 $ 313 $ 443 $ 400 $ 361
Total assets at end of period......... 5,432 4,965 5,044 4,883 4,436
</TABLE>
THE MERGER
AFG was formed for the purpose of acquiring AFC and APU. At the date of the
Merger, AFC held 18.7 million shares of APU (44% of the then-outstanding
shares). In the Merger, the Company issued 71.4 million shares of its Common
Stock in exchange for all of the outstanding common stock of AFC and APU. The
18.7 million shares of Common Stock held by AFC and its subsidiaries are
accounted for as retired.
The Merger was consistent with APU's previously announced intention to
consummate a significant acquisition in the property and casualty insurance
industry. AFC's property and casualty and annuity business lines were
complementary to APU's non-standard automobile and California workers'
compensation insurance businesses with very little product line or geographic
duplication of operations. The composition of AFG's property and casualty
insurance business is oriented towards specialty insurance lines, which
management believes have the most potential for growth and profitability.
Approximately 78% of AFG's 1994 net written premiums were derived from specialty
lines of business. As a result of the Merger, AFG's combined insurance
operations have become significantly more diversified, which management believes
will provide earnings stability and a broader base of expertise to take
advantage of new business and acquisition opportunities. Property and casualty
insurance business lines can be affected by factors specific to a locality or
region, such as insurance regulatory issues in specific states or losses due to
localized severe weather conditions. Product line diversification has become
particularly important with non-standard automobile insurance and California
workers' compensation businesses facing more competitive markets. Because of the
large holding of APU stock by AFC, a stock-for-stock acquisition of AFC could be
effected with a substantially smaller increase in the overall number of shares
of Common Stock outstanding after the acquisition than would have been involved
in an acquisition of an unaffiliated company of comparable size. The opportunity
to invest APU's
7
<PAGE> 9
excess cash in AFC's insurance business through the retirement of high cost
debt, coupled with management efficiencies, offered the possibility of
substantially increased earnings per share following an acquisition.
For financial reporting purposes, because the former shareholders of AFC
owned more than 50% of AFG following the Merger, the Merger was accounted for as
a reverse acquisition whereby AFC was deemed to have acquired APU. As a result,
the financial statements of the Company for periods prior to the Merger are
those of AFC. The operations of APU are included in AFG's financial statements
from the effective date of the Merger.
DEBT REDUCTIONS
Since the Merger in April 1995, over $600 million of AFC and APU debt has
been retired or replaced with lower cost debt, resulting in a reduction of
aggregate debt by approximately one-third and a reduction in the Company's debt
to capital ratio from 58.4% at the date of the Merger to 44.8% at September 30,
1995. As adjusted for net debt reductions through November 15, 1995, the debt to
capital ratio would have been 42.4% at September 30, 1995. AFG will use the
proceeds of the Offering to further reduce subsidiary debt. On a pro forma
basis, taking into account the fourth quarter 1995 net debt reduction and the
application of the net proceeds of the Offering, AFG's consolidated debt to
capital ratio will be reduced further to 38.0% (based upon an assumed public
offering price of $28.125 per share). After giving effect to the debt retirement
and replacement since the Merger and the application of the proceeds of the
Offering, the Company's annual interest expense will have been reduced by
approximately $73 million since the date of the Merger. See "Capitalization."
INVESTMENTS
The Company invests its insurance portfolios in a mix of securities to
balance strong total returns with prudent asset preservation. Investments in
fixed income securities constituted approximately 93% of the Company's
investment portfolio at September 30, 1995. Approximately 95% of the bonds and
redeemable preferred stocks held by AFG at that date were rated "investment
grade" (credit rating of AAA to BBB-) by a nationally recognized rating agency.
See "Business--Investments."
The Company has generally followed a practice of concentrating its equity
investments in a relatively limited number of issues rather than maintaining
relatively limited positions in a larger number of issues. This practice permits
concentration of attention on a limited number of companies in relatively few
industries. A large equity position is often considered attractive to persons
seeking to control or influence the policies of a company and AFG believes that
a concentration in a relatively small number of companies may permit it to
identify investments with above average potential to increase in value. Because
of its significant ownership percentage of the voting stock of certain
companies, AFG utilizes the equity method of accounting in those companies,
which results in AFG including in its results its proportionate share of the
investee's earnings and losses. At September 30, 1995, AFG utilized the equity
method of accounting with respect to its investments of $255.4 million in
Chiquita Brands International, Inc. ("Chiquita"), a world leader in marketing,
processing and producing fresh fruit and vegetables, and $72.8 million in
Citicasters Inc. ("Citicasters"), an owner and operator of radio and television
stations in major metropolitan markets in the United States. As of September 30,
1995, the market values of AFG's investments in Chiquita and Citicasters were
$411.6 million and $168.4 million, respectively.
LINDNER FAMILY OWNERSHIP
As of November 15, 1995, Carl H. Lindner and members of his immediate
family (collectively the "Lindner Family") beneficially owned approximately 26.2
million shares or 48.2% of AFG's outstanding Common Stock. After giving effect
to the Offering, the Lindner Family will beneficially own approximately 44.9% of
the outstanding Common Stock of the Company.
Between April 3, 1995 (the effective date of the Merger) and November 15,
1995, the Lindner Family purchased 924,890 shares of AFG at an aggregate cost of
approximately $21.3 million through open market transactions, exercise of stock
options and participation in the Company's Dividend Reinvestment Plan.
8
<PAGE> 10
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered............................. 4,000,000 shares
Common Stock Outstanding after the Offering...... 59,493,140(a)
Use of Proceeds.................................. The net proceeds to the Company from the
sale of the 4,000,000 shares of Common
Stock offered hereby, assuming a $28.125
per share offering price, are estimated to
be approximately $107.7 million ($123.9
million if the Underwriters'
over-allotment option is exercised in
full) after deducting estimated
underwriting commissions and Offering
expenses payable by the Company. The net
proceeds of the Offering will be used to
reduce the indebtedness of certain
subsidiaries, including the redemption of
$89.6 million principal amount of AFC 10%
Debentures due 1999 which are callable at
par, with the balance of the proceeds used
to repurchase other subsidiary
indebtedness at an assumed yield of 10%.
NYSE Symbol...................................... AFG
- ---------------
<FN>
(a) Includes 1,373,385 shares held by APU at November 1, 1995 for distribution
to certain pre-1978 reorganization creditors and other claimants and
excludes 18,666,614 shares held by AFC and American Financial Enterprises,
Inc., an 83%-owned subsidiary of AFC.
</TABLE>
9
<PAGE> 11
SELECTED SEGMENT DATA OF AFG
The following combined historical financial data should be read in
conjunction with the consolidated financial statements of AFC and APU and the
notes thereto incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
PROPERTY AND CASUALTY
INSURANCE OPERATIONS:
Net written premiums.......................... $2,318.3 $2,321.9 $3,124.5 $2,666.7 $2,296.3
% Change in net written premiums.............. (0.2%) 18.1% 17.2% 16.1% 11.4%
Net earned premiums........................... $2,238.6 $2,174.5 $2,936.5 $2,514.4 $2,224.2
Statutory ratios:
Loss & LAE (a).............................. 74.8% 69.4% 71.0% 69.3% 70.6%
Underwriting expense........................ 26.8 26.4 26.3 26.9 28.1
Policyholder dividend....................... 1.9 3.6 3.6 2.5 2.3
-------- -------- -------- -------- --------
Combined ratio (a).......................... 103.5% 99.4% 100.9% 98.7% 101.0%
======== ======== ======== ======== ========
Industry statutory combined ratio (b)......... n/a 109.8% 108.4% 106.9% 115.7%
NON-STANDARD AUTO GROUP
Net written premiums.......................... $ 930.8 $ 858.9 $1,154.1 $ 901.9 $ 660.4
% Change in net written premiums.............. 8.4% 31.6% 28.0% 36.6% 29.5%
Net earned premiums........................... $ 893.4 $ 788.1 $1,071.9 $ 804.4 $ 594.8
Statutory ratios:
Loss and LAE (c)............................ 83.3% 75.6% 76.0% 72.5% 69.7%
Underwriting expense........................ 21.9 23.6 23.7 24.4 26.1
-------- -------- -------- -------- --------
Combined ratio (c).......................... 105.2% 99.2% 99.7% 96.9% 95.8%
======== ======== ======== ======== ========
SPECIALTY LINES
Net written premiums (d)...................... $ 861.2 $ 967.5 $1,282.0 $1,092.6 $ 930.9
% Change in net written premiums.............. (11.0%) 16.0% 17.3% 17.4% 13.4%
Net earned premiums........................... $ 823.0 $ 900.6 $1,210.1 $1,042.6 $ 898.6
Statutory ratios:
Loss and LAE (e)............................ 67.1% 63.4% 66.9% 64.8% 64.4%
Underwriting expense........................ 29.0 25.3 25.3 23.4 22.5
Policyholder dividend....................... 4.7 8.2 8.3 6.0 5.3
-------- -------- -------- -------- --------
Combined ratio (e).......................... 100.8% 96.9% 100.5% 94.2% 92.2%
======== ======== ======== ======== ========
COMMERCIAL AND PERSONAL
Net written premiums.......................... $ 525.5 $ 489.9 $ 682.5 $ 665.6 $ 699.7
% Change in net written premiums.............. 7.3% 2.2% 2.5% (4.9%) (4.3%)
Net earned premiums........................... $ 521.0 $ 484.8 $ 655.9 $ 663.7 $ 725.5
Statutory ratios:
Loss and LAE (f)............................ 68.6% 66.1% 67.0% 65.0% 76.8%
Underwriting expense........................ 31.4 33.3 32.4 36.0 37.2
Policyholder dividend....................... 0.5 0.7 1.0 -- 0.6
-------- -------- -------- -------- --------
Combined ratio (f).......................... 100.5% 100.1% 100.4% 101.0% 114.6%
======== ======== ======== ======== ========
ANNUITY OPERATIONS:
Annuity receipts
Flexible premium deferred annuities......... $ 178.2 $ 180.3 $ 246.7 $ 270.0 $ 281.3
Single premium deferred annuities........... 160.1 132.8 196.0 130.1 79.4
-------- -------- -------- -------- --------
Total annuity receipts.................... $ 338.3 $ 313.1 $ 442.7 $ 400.1 $ 360.7
======== ======== ======== ======== ========
% Change in annuity receipts.................. 8.0% 6.1% 10.6% 10.9% (21.6%)
Investment income............................. $ 300.9 $ 281.0 $ 376.7 $ 358.2 $ 334.0
</TABLE>
- ---------------
(a) In the first nine months of 1995, Texas hailstorm losses which occurred in
late April and early May increased the loss and LAE ratio and combined ratio
by 1.4% and reserve strengthening in the NSA Group in the third quarter
increased these ratios by 0.6%.
10
<PAGE> 12
(b) Ratios for the years 1992 to 1994 are derived from A.M. Best Best's
Aggregates and Averages Property-Casualty. The ratio for the first nine
months of 1994 is derived from BestWeek Property/Casualty Supplement
(December 21, 1994 edition).
(c) In the first nine months of 1995, Texas hailstorm losses increased the loss
and LAE ratio and the combined ratio by 1.8% and reserve strengthening in
the third quarter increased these ratios by 1.6%.
(d) The decline in net written premiums during 1995 is due primarily to the
decrease in California workers' compensation writings.
(e) In the first nine months of 1995, Texas hailstorm losses increased the loss
and LAE ratio and the combined ratio by 1.3%.
(f) In the first nine months of 1995, Texas hailstorm losses increased the loss
and LAE ratio and the combined ratio by 0.8%.
11
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The summary unaudited pro forma financial information set forth below gives
effect to (i) the Merger assuming it was consummated on January 1 of each period
presented for purposes of the income statement data and (ii) the Offering for
purposes of the balance sheet data. The pro forma effect of the Offering on
AFG's net earnings per share is not expected to be material. This information
should be read in conjunction with the pro forma financial information appearing
herein under the heading "Unaudited Pro Forma Financial Information" and the
separate historical financial statements and related Management's Discussion and
Analysis of Operations and Financial Condition of each of AFG, APU and AFC which
are incorporated herein by reference.
The unaudited pro forma financial information does not necessarily reflect
the Company's results of operations which would have actually resulted had the
Merger occurred as of the dates indicated above, nor should they be taken as
indicative of the future results of operations of the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
<S> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
INCOME STATEMENT DATA:
Property and casualty premiums........................ $2,238.6 $ 2,936.5
Revenues.................................... 2,980.7 3,831.6
Property and casualty loss, loss adjustment and
underwriting expense and policyholder dividends..... 2,287.6 2,938.0
Interest on borrowed money............................ 89.5 112.7
Earnings from continuing operations before income
taxes............................................... 186.6 134.5
Net earnings from continuing operations............... 139.6(a) 58.7(b)
Net earnings per common share from continuing
operations.......................................... $2.63(a) $1.11(b)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------
ACTUAL AS ADJUSTED (C)
----------- ---------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................. $13,942,630 $13,942,630
Long-term debt............................................ 1,139,957 928,457
Minority interest......................................... 305,026 305,026
Shareholders' equity...................................... 1,100,493 1,208,193
Long-term debt as a percentage of total capitalization.... 44.8% 38.0%
Book value per share...................................... $19.90 $20.38
</TABLE>
- ---------------
(a) On a pro forma basis, the first nine months of 1995 included net realized
gains of $29.1 million. Excluding such gains, earnings from continuing
operations were $110.5 million, or $2.09 per share.
(b) During 1994, AFC and APU both reported certain transactions involving
disposition of their ownership interests in subsidiaries, affiliates and
certain other operations and gains and losses on the sales of investments.
Management believes that reported results which include these transactions
are not indicative of future results of operations. On a pro forma basis,
the after-tax effect of these transactions would be to reduce earnings by
$53.3 million, or $1.01 per share, for 1994. Excluding these transactions,
pro forma earnings from continuing operations were $112.0 million, or $2.12
per share.
(c) Assumes $89.6 million of the proceeds of the Offering are used to redeem AFC
10% Debentures due 1999 and the balance of the proceeds are used to
repurchase other subsidiary indebtedness at an assumed yield of 10%. Also
reflects the fourth quarter 1995 net debt reductions. See "Capitalization."
12
<PAGE> 14
RISK FACTORS
Prospective investors in the Common Stock should consider carefully all of
the information set forth in this Prospectus including the information in the
documents incorporated by reference and, in particular, should evaluate the
specific factors set forth below for risks involved with an investment in the
Company's Common Stock.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Company and its direct subsidiaries, APU and AFC, are organized as
holding companies with almost all of their operations being conducted by
subsidiaries. These parent corporations, however, have continuing expenditures
for administrative expenses, corporate services, the payment of principal and
interest on borrowings, common stock dividends and, with respect to AFC, for
dividends on AFC preferred stock. The Company, AFC and APU rely primarily on
dividends and tax payments from their subsidiaries for funds to meet their
obligations.
As of September 30, 1995, AFC had outstanding long-term debt of $375.3
million; APU had outstanding long-term debt of $381.3 million; Great American
Holding Corporation ("GAHC"), a wholly-owned subsidiary of AFC, had outstanding
long-term debt of $149.4 million; AAG had outstanding long-term debt of $149.7
million; and other AFG subsidiaries had outstanding long-term debt of $84.3
million.
Payments of dividends by the insurance subsidiaries of AFC and APU are
subject to various laws and regulations which limit the amount of dividends that
can be paid without prior approval from the applicable state Department of
Insurance. Without such approval, the maximum amount of dividends payable in
1995 to AFC is approximately $95 million. The maximum amount of dividends which
may be paid to APU by its subsidiaries during 1995 without such approval is
approximately $84 million. The maximum dividend permitted by law is not
indicative of an insurer's actual ability to pay dividends, which may be further
constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's ratings, competitive
position, the amount of premiums that can be written and the ability to pay
future dividends. Furthermore, each state Department of Insurance has broad
discretion to limit the payment of dividends by insurance companies domiciled in
that state.
The Company believes that the amounts currently available through dividends
and tax payments without approval are sufficient to meet the expenses of the
Company, AFC and APU. A prolonged material decline in insurance subsidiary
profits or materially adverse insurance regulatory developments, however, could
subject the Company, AFC or APU to shortages of cash because of their inability
to receive dividends from subsidiaries.
CYCLICALITY OF THE INSURANCE INDUSTRY; IMPACT OF CATASTROPHES
The Company's insurance subsidiaries operate in a highly competitive
industry that is affected by many factors which can cause significant
fluctuations in their results of operations. The Company's insurance operations
are subject to operating cycles and losses from catastrophes. The property and
casualty insurance industry has historically been subject to pricing cycles
characterized by periods of intense competition and lower premium rates (a
"downcycle") followed by periods of reduced competition, reduced underwriting
capacity and higher premium rates (an "upcycle"). The property and casualty
insurance industry is currently in an extended downcycle, which has lasted
approximately eight years. The underwriting results for the Company's property
and casualty operations have been adversely affected by this downcycle,
particularly in unfavorable pricing in certain standard commercial lines of
business.
As with other property and casualty insurers, the Company's operating
results can be adversely affected by unpredictable catastrophe losses. The
Company's insurance subsidiaries generally seek to reduce their exposure to such
events through individual risk selection and the purchase of reinsurance. Major
catastrophes in recent years included hailstorms in Texas in the second quarter
of 1995; the Northridge earthquake in Southern California and the winter storms
in the South and Northeast in 1994; winter storms and flooding in the Midwest in
1993; Hurricanes Andrew and Iniki, Chicago flooding and Los Angeles civil
disorder in 1992;
13
<PAGE> 15
and the Oakland fires in 1991. Total net losses to the Company's insurance
operations from catastrophes were $58 million in the first nine months of 1995;
$56 million in 1994; $30 million in 1993; and $45 million in 1992.
REGULATION
AFG's insurance subsidiaries are regulated under the insurance and
insurance holding company laws of their states of domicile and other states in
which they operate. These laws, in general, require approval of the particular
insurance regulators prior to certain actions by the insurance companies, such
as the payment of dividends in excess of statutory limitations (as discussed
under "Holding Company Structure; Dividend Restrictions" above) and certain
transactions and continuing service arrangements with affiliates. Regulation and
supervision of each insurance subsidiary is administered by a state insurance
commissioner who has broad statutory powers with respect to the granting and
revoking of licenses, approvals of premium rates, forms of insurance contracts
and types and amounts of business which may be conducted in light of the
policyholders' surplus of the particular company. The statutes of most states
provide for the filing of premium rate schedules and other information with the
insurance commissioner, either directly or through rating organizations. The
commissioner generally has powers to disapprove such filings or make changes to
the rates if they are found to be excessive, inadequate or unfairly
discriminatory. The determination of rates is based on various factors,
including loss and loss adjustment expense experience. The failure to obtain, or
delay in obtaining, the required approvals could have an adverse impact on the
operations of the Company's insurance subsidiaries.
The National Association of Insurance Commissioners ("NAIC") has adopted
the Risk-Based Capital For Insurers Model Act (the "Model Act") which 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
Act 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." The risk-based capital formulas became effective in 1993 for
life companies and in 1994 for property and casualty companies. Based on the
1994 results, all of the Company's insurance subsidiaries meet or exceed all
minimum applicable risk-based capital calculations developed by the NAIC.
RATINGS; COMPETITION
A.M. Best, publisher of Best's Insurance Reports, Property-Casualty, has
given AFC's principal insurance subsidiary, Great American Insurance Company
("GAI"), a rating of A (Excellent). Although some of the large insurance
companies against which GAI competes have higher ratings, management believes
that the current rating is adequate to enable GAI to compete successfully. A
downgrade in the A.M. Best rating below A (Excellent) could adversely affect the
competitive position of GAI.
The four major operating units in the NSA Group are Atlanta Casualty
Company ("Atlanta Casualty"), Windsor Insurance Company ("Windsor"), Infinity
Insurance Company ("Infinity") and Leader National Insurance Company ("Leader
National") and their respective subsidiaries. In November 1995 A.M. Best
downgraded its rating of Atlanta Casualty, Windsor and Republic Indemnity
Company of America ("Republic Indemnity") from A+ (Superior) to A (Excellent)
and affirmed its rating of A (Excellent) for Infinity and A- (Excellent) for
Leader National. In announcing the rating adjustments of these companies, which
had been under review, A.M. Best expressed its opinion that each of these new
ratings primarily reflects the significant financial leverage of AFG.
GALIC is rated A (Excellent). Management believes that a rating in the "A"
category is necessary to successfully market tax-deferred annuities to public
education employees and other not-for-profit groups, the markets in which GALIC
competes. A downgrade in the A.M. Best rating below the "A" category could
materially and adversely affect the competitive position of GALIC.
Prairie and Loyal, which have recently become subsidiaries of GALIC, are
rated B+ (Very Good) and A- (Excellent) by A.M. Best, respectively. A downgrade
in either of these Company's A.M. Best rating could adversely affect such
company's competitive position.
14
<PAGE> 16
CALIFORNIA WORKERS' COMPENSATION MARKET
Republic Indemnity's insurance activities are regulated by the California
Department of Insurance for the benefit of policyholders. Prior to January 1,
1995, minimum premium rates for workers' compensation insurance were determined
by the California Insurance Commissioner based in part upon recommendations of
the Workers' Compensation Insurance Rating Bureau of California. In July 1993,
California enacted legislation effecting an immediate overall 7% reduction in
workers' compensation insurance premium rates and replaced the workers'
compensation insurance minimum rate law, effective January 1, 1995, with a
procedure permitting insurers to use any rate within 30 days after its filing
with the California Insurance Commissioner unless the rate is disapproved by the
California Insurance Commissioner. Since December 1, 1993 and before the "open
rating" policy went into effect on January 1, 1995, the California Insurance
Commissioner approved rate decreases totalling more than 25%. Republic
Indemnity's net written premiums declined 50% and 39% for the third quarter and
first nine months of 1995, respectively. Republic Indemnity has encountered
extremely competitive pricing in the marketplace. Republic Indemnity has
continued to operate on a profitable basis, but no assurance can be given that
it can continue to do so in light of adverse conditions in the California
workers' compensation market.
INVESTMENT PORTFOLIO; EFFECTS OF CHANGES IN INTEREST RATES
The Company's investment portfolio primarily consists of fixed maturity
securities, such as investment grade, publicly traded corporate debt securities
and mortgage-backed securities, including collateralized mortgage obligations
("CMOs"). At September 30, 1995, 93% of the Company's investment portfolio was
invested in fixed maturity securities, of which approximately 21% was invested
in mortgage-backed securities. Certain risks are inherent in connection with
fixed maturity securities, including loss upon default and price volatility in
reaction to changes in interest rates and general market factors. Certain
additional risks are inherent with mortgage-backed securities, including the
risks associated with reinvestment of proceeds due to prepayments of such
obligations in a period of declining interest rates.
ANNUITY PRODUCT CONCENTRATION; POTENTIAL IMPACT OF FUTURE CHANGES IN FEDERAL
INCOME TAX TREATMENT OF ANNUITY PRODUCTS
GALIC's business is primarily the sale of flexible premium deferred
annuities ("FPDAs") and single premium deferred annuities ("SPDAs"). The
majority of the FPDAs issued by GALIC are to employees of qualified
not-for-profit organizations under Section 403(b) of the Internal Revenue Code.
These employees are eligible to save for retirement through contributions made
on a pre-tax basis. The majority of SPDAs issued by GALIC have resulted from
rollovers of tax-deferred funds previously maintained by policyholders with
other insurers.
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by an annuitant. Taxes, if any,
are payable on the accumulated tax-deferred earnings when those earnings are
paid to the annuitant. If the federal income tax laws were to change so that
accumulated earnings on annuity products do not enjoy the tax deferral described
above, or such that other savings and investment products were to achieve
similar tax deferral status, or such that tax rates were significantly lowered
so that the annuitant's ability to defer income tax on annuity earnings was no
longer a significant factor for the policyholder, consumer demand for the
affected annuity products could decline materially or be eliminated. From time
to time, proposals to one or more of these effects have been made in Congress
and no assurance can be given that a tax law change will not occur in the
future. If the demand for its annuity products were to decrease significantly
for any reason, GALIC's operations and financial condition could be materially
and adversely affected.
ADEQUACY OF INSURANCE LOSS RESERVES
The insurance subsidiaries of AFG establish reserves to cover their
estimated liability for losses and loss adjustment expense with respect to both
reported and unreported claims as of the end of each accounting period. By their
nature, such reserves do not represent an exact calculation of liabilities.
Rather, except for
15
<PAGE> 17
reserves related to environmental and asbestos type claims, such reserves are
estimates involving management's projections as to the ultimate settlement and
administration of claims. These expectations are, in turn, based on facts and
circumstances known at the time, predictions of future events, estimates of
future trends in the severity and frequency of claims and judicial theories of
liability as well as inflation.
In recent years, AFG's insurance subsidiaries have increased their premium
writings in specialty commercial lines of business. Estimation of loss reserves
for many specialty commercial lines of business is more difficult than for
certain standard commercial lines because claims may not become apparent for a
number of years (such period of time being referred to as the "tail"), and a
relatively higher proportion of ultimate losses is considered incurred but not
reported. As a result, variations in loss development are more likely in these
lines of business.
Certain of AFG's insurance subsidiaries face liabilities for asbestos and
environmental ("A&E") claims. A&E claims arise out of general liability and
commercial multi-peril policies issued by GAI prior to the early 1980's when
providing coverage for A&E exposures was not specifically contemplated by GAI's
policies.
The insurance industry typically includes only claims relating to polluted
waste sites and asbestos in defining environmental exposures. GAI extends its
definition of A&E claims to include claims 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 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 and that, as a result, a reasonable estimate of ultimate
liability for A&E exposure is not possible at this time. GAI's A&E reserves at
December 31, 1994 were approximately $227 million. The reserve for A&E exposures
for GAI is reevaluated regularly based on an analysis of GAI's exposures,
together with industry reserving levels and financial reporting principles.
AFG regularly reviews its reserving techniques and reserve positions and
believes that adequate provision has been made for loss reserves. Nevertheless,
there can be no assurance that currently established reserves will prove
adequate in light of subsequent actual experience. Future earnings could be
adversely impacted should future loss development require increases in reserves
previously established for prior periods.
REINSURANCE
AFG relies to a certain extent on the use of reinsurance to limit the
amount of risk it retains. The availability and cost of reinsurance are subject
to prevailing market conditions which are beyond the Company's control and which
may affect its level of business and profitability. AFG is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve AFG of its liability to insureds. As of September 30, 1995, AFG had
reinsurance recoverables of approximately $822 million, representing estimated
amounts recoverable from reinsurers pertaining to paid and unpaid claims, claims
incurred but not reported and prepaid reinsurance premiums.
USX LITIGATION
In May 1994, lawsuits were filed against APU by USX Corporation ("USX") and
its former subsidiary, Bessemer and Lake Erie Railroad Company ("B&LE"), seeking
contribution by APU, as the successor to the railroad business conducted by Penn
Central Transportation Company, APU's predecessor ("PCTC") prior to 1976, for
all or a portion of the approximately $600 million that USX paid in satisfaction
of a judgment against B&LE in 1991 for its participation in an unlawful
antitrust conspiracy among certain railroads commencing in the 1950's and
continuing through the 1970's. The lawsuits argue that USX's liability for that
16
<PAGE> 18
payment was attributable to PCTC's alleged activities in furtherance of the
conspiracy. On October 13, 1994, the U.S. District Court for the Eastern
District of Pennsylvania enjoined USX and B&LE from continuing their lawsuits
against APU, ruling that their claims are barred by the 1978 consummation order
issued by that Court in PCTC's bankruptcy reorganization proceedings. USX and
B&LE have appealed the District Court's ruling to the U.S. Court of Appeals for
the Third Circuit. Briefing of the appeal has been completed, the case was
orally argued on July 24, 1995 and the parties are awaiting the Court of
Appeals' decision. If the Court of Appeals were to reverse the District Court
and allow these lawsuits to proceed in spite of the bankruptcy consummation
order, management believes that the Company has other defenses which should
enable it to prevail on the merits.
CONCENTRATION OF CERTAIN EQUITY INVESTMENTS
Because of its significant ownership percentage of the voting stock of
Chiquita and Citicasters, AFG utilizes the equity method of accounting for these
companies. This method results in AFG including in its results its proportionate
share of the investees' earnings and losses. At September 30, 1995, the carrying
values of AFG's investments in Chiquita and Citicasters were $255.4 million and
$72.8 million, respectively.
From 1984 to 1991, Chiquita reported a continuous record of growth in
annual earnings. In 1992, 1993 and 1994, however, Chiquita reported net losses.
The following factors relate to Chiquita's business.
Excluding the revenues of its meat division held for sale, approximately
60% of Chiquita's consolidated net sales comes from the sale of bananas. Banana
marketing is highly competitive. Selling prices which importers receive for
bananas are significantly affected by fluctuations in the available supplies of
bananas and other fresh fruit in each market and by the relative quality and
wholesaler and retailer acceptance of bananas offered by competing importers.
Excess supplies may result in increased price competition. Although production
of bananas tends to be relatively stable throughout the year, competition in the
sale of bananas comes not only from bananas sold by others, but also from other
fresh fruit which may be seasonal in nature. The resulting seasonal variations
in demand cause banana pricing to be seasonal. As a result, quarterly results of
Chiquita, and therefore AFG's equity in Chiquita's earnings, are subject to
significant seasonal variations with stronger quarterly results occurring in the
first six months of the calendar year.
On July 1, 1993, the European Union ("EU") implemented a new quota
restricting the volume of Latin American bananas imported into the EU, which had
the effect of decreasing Chiquita's volume and market share in Europe. The quota
regime grants preferred status to producers and importers within the EU and its
former colonies, while imposing new quotas and tariffs on bananas imported from
other sources, including Latin America, Chiquita's primary source of fruit. In
March 1994, four countries which had previously filed actions against the EU
banana policy (Costa Rica, Colombia, Nicaragua and Venezuela) reached a
settlement with the EU by signing a "Framework Agreement." The Framework
Agreement authorizes the imposition of additional restrictive and discriminatory
quotas and export licenses on U.S. banana marketing firms, while leaving EU
firms exempt. Costa Rica and Colombia began implementing the Framework Agreement
in early 1995, resulting in increased costs to Chiquita to export bananas from
these sources.
In September 1995, the United States Government, joined by Guatemala,
Honduras and Mexico, commenced a new international trade challenge against the
EU regime using the procedures of the new World Trade Organization. However,
there can be no assurance as to the outcome of this proceeding or its impact, if
any, on the EU quota regime or the Framework Agreement.
A significant portion of Chiquita's operations are conducted in foreign
countries, and are subject to risks that are inherent in operating in such
foreign countries, including government regulation, fluctuations in exchange
rates, currency restrictions and other restraints, risks of expropriation and
burdensome taxes.
CONTROLLING SHAREHOLDERS
As of November 15, 1995, approximately 48.2% of AFG's Common Stock was
owned by Carl H. Lindner, his sons Carl H. Lindner III, S. Craig Lindner, Keith
E. Lindner and members of their families. These persons currently serve as the
Company's Chairman of the Board and Chief Executive Officer, Director
17
<PAGE> 19
and President, Vice Chairman of the Board and Vice Chairman of the Board,
respectively. Through their ownership of AFG Common Stock and their positions
with AFG, these persons control the Company and have the practical ability to
elect a majority of directors, approve or disapprove mergers or similar
transactions and amend the Company's Articles of Incorporation without the
necessity of securing votes of other shareholders. In addition, it would be
virtually impossible for a third party to gain control of AFG without the
approval of the Lindner Family.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby, assuming a $28.125 per share offering price, are
estimated to be approximately $107.7 million ($123.9 million if the
Underwriters' over-allotment option is exercised in full) after deducting
estimated underwriting commissions and Offering expenses payable by the Company.
The net proceeds of the Offering will be used to reduce the indebtedness of
certain subsidiaries, including the redemption of $89.6 million principal amount
of AFC 10% Debentures due 1999 which are callable at par, with the balance of
the proceeds used to repurchase other subsidiary indebtedness at an assumed
yield of 10%.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
AFG Common Stock is listed and traded on the NYSE. The information
presented in the table below represents the high and low sales prices per share
reported on the NYSE Composite Tape. For periods prior to the Second Quarter of
1995, the prices listed represent the prices of APU, known prior to March 1994
as The Penn Central Corporation. For current price information, shareholders of
AFG are urged to consult publicly available sources.
<TABLE>
<CAPTION>
PRICE PER SHARE
OF COMMON STOCK
-----------------
CALENDAR YEAR HIGH LOW DIVIDENDS PAID
------ ------ --------------
<S> <C> <C> <C>
1993
First Quarter............................................ $28 5/8 $23 1/2 $ 0.21
Second Quarter........................................... 33 7/8 25 1/2 0.21
Third Quarter............................................ 39 3/4 30 3/8 0.21
Fourth Quarter........................................... 34 1/8 29 0.21
1994
First Quarter............................................ 33 1/4 23 3/8 0.22
Second Quarter........................................... 30 23 3/4 0.22
Third Quarter............................................ 27 5/8 23 3/4 0.22
Fourth Quarter........................................... 27 21 5/8 0.22
1995
First Quarter............................................ 26 1/8 22 7/8 0.25
Second Quarter........................................... 26 1/4 23 1/4 0.25
Third Quarter............................................ 32 1/8 28 0.25
Fourth Quarter (through November 15, 1995)............... 30 1/4 27 3/4 0.25
</TABLE>
On November 15, 1995, the closing price per share of AFG Common Stock was
$28 1/8. There were approximately 18,750 shareholders of record of AFG Common
Stock as of November 15, 1995.
AFG's policy is to pay quarterly dividends on its Common Stock, in amounts
determined by its Board of Directors. The Board has declared its intention that
the Company pay a dividend of $0.25 per share per quarter. The ability of AFG to
pay dividends will be dependent upon, among other things, the availability of
dividends and payments under intercompany tax allocation agreements from its
insurance company subsidiaries. See "Risk Factors -- Holding Company Structure;
Dividend Restrictions."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1995, as adjusted to give effect to certain transactions and as
further adjusted to give effect to the Offering (based upon an assumed public
offering price of $28.125 per share and after deducting estimated underwriting
commissions and Offering expenses payable by the Company).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(A) ADJUSTED(B)
---------- -------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Long-term debt:
Direct obligations of AFG...................... $ -- $ -- $ --
Obligations of AFG subsidiaries:
American Financial Corporation (parent
only)..................................... 375,252 405,052 315,432
American Premier Underwriters (parent
only)..................................... 381,271 352,634 333,980
Great American Holding Corporation.......... 149,389 45,000 45,000
American Annuity Group, Inc................. 149,725 149,725 149,725
Other subsidiaries.......................... 84,320 84,320 84,320
---------- ---------- ----------
Total long-term debt................... 1,139,957 1,036,731 928,457
---------- ---------- ----------
Minority interest (c)............................ 305,026 305,026 305,026
---------- ---------- ----------
Shareholders' equity:
Common Stock, $1.00 par value.................. 55,291 55,291 59,291
Capital surplus................................ 611,312 611,312 715,012
Retained earnings.............................. 312,590 312,590 312,590
Net unrealized gain on marketable securities,
net of deferred income taxes................ 121,300 121,300 121,300
---------- ---------- ----------
Total shareholders' equity............. 1,100,493 1,100,493 1,208,193
---------- ---------- ----------
Total capitalization............................. $2,545,476 $2,442,250 $2,441,676
========== ========== ==========
Long-term debt as a percentage of total
capitalization................................. 44.8% 42.4% 38.0%
Book value per share............................. $19.90 $19.90 $20.38
- ---------------
<FN>
(a) Adjusted to reflect the following transactions through November 15, 1995:
AFC's issuance of $30 million principal amount of 9 3/4% debentures; APU's
retirement of $26 million principal amount of 10 7/8% notes; GAHC's
redemption of $150 million principal amount of 11% notes, and GAHC's net
borrowings of $45 million under its bank line of credit.
(b) Assumes that $89.6 million of the proceeds of the Offering are used to
redeem all outstanding AFC 10% Debentures due 1999 and the balance of the
proceeds are used to repurchase other subsidiary indebtedness at an assumed
yield of 10%.
(c) Minority interest represents the interests of noncontrolling shareholders in
AFG subsidiaries and includes AFC preferred stock.
</TABLE>
20
<PAGE> 22
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Income Statements for the nine months
ended September 30, 1995 and for the year ended December 31, 1994 were prepared
assuming that the Merger was consummated on January 1, 1995 and 1994,
respectively. These statements give effect to (i) the issuance of 28.3 million
shares of Common Stock to the common shareholders of AFC, (ii) the application
of approximately $601 million of parent company investments to reduce $516
million of long-term debt (including premiums of $1 million) and for the
investment of $85 million into AFC's insurance operations, (iii) the utilization
of approximately $83 million of such investments to repurchase 3.3 million
shares of APU common stock between January 1, 1995 and February 13, 1995, (iv)
the payment of transaction costs and expenses of approximately $25 million, (v)
the payment of approximately $54 million for AFC's obligations under its book
value incentive plan, (vi) the receipt of approximately $9 million upon exercise
of AFC stock options and (vii) the revaluation of APU's net assets as described
below.
The unaudited pro forma income statements do not necessarily reflect the
Company's results of operations which would have actually resulted had the
Merger occurred as of the dates indicated, nor should they be taken as
indicative of the future results of operations of the Company. Since the Merger,
over $600 million of debt has been retired or replaced with lower cost debt. It
was assumed in the pro forma income statements that all debt was retired at the
beginning of the periods presented.
Since APU is the acquired company for financial reporting purposes,
generally accepted accounting principles require that APU's historical net
assets be adjusted to their fair market values at the date of the acquisition.
Because AFC owned approximately 44% of APU prior to the Merger, only that
portion of APU's net assets that was attributable to APU public shareholders
immediately prior to the acquisition (approximately 56%) are affected by such
revaluation. The revaluation of APU's net assets was based on a market value of
$24.375 per share, which was the market price of APU common stock on April 3,
1995, the closing date. Since APU is treated as the acquired company, the
financial information of the Company for periods prior to the acquisition date
are those of AFC. Furthermore, since the acquisition occurred on April 3, 1995,
APU's 1995 first quarter earnings are included in the financial results of the
Company only to the extent of AFC's equity in the 1995 first quarter earnings of
APU.
The pro forma effect of the Offering on AFG's net earnings per share is not
expected to be material. Assuming AFG uses the net proceeds of the Offering to
retire debt at an average yield of 10%, the Offering has a dilutive effect on
AFG's earnings per share at annual earnings per share amounts over $2.53. The
effect of the Offering at various earnings per share levels is illustrated
below:
ASSUMED ANNUAL NET EARNINGS PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
PRO FORMA
PRIOR TO AFTER
OFFERING OFFERING
- ----------- -----------
<S> <C>
$1.00 $1.11
2.00 2.04
3.00 2.97
4.00 3.90
</TABLE>
21
<PAGE> 23
AMERICAN FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
----------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
ADD
HISTORICAL 1ST QTR AFG
AFG APU ADJUSTMENTS PRO FORMA
---------- ------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME
Property and casualty insurance
premiums.............................. $1,856.7 $381.9 $ -- $2,238.6
Investment income........................ 552.3 48.9 (8.5)(a) 592.7
Realized gains (losses) on sales of
securities............................ 35.0 (0.2 ) -- 34.8
Equity in net earnings (losses) of
investee corporations................. 33.5 -- (6.5)(b) 27.0
Other income............................. 84.1 3.5 -- 87.6
---------- ------- ----------- ---------
2,561.6 434.1 (15.0) 2,980.7
---------- ------- ----------- ---------
COSTS AND EXPENSES
Property and casualty insurance:
Losses and loss adjustment expenses... 1,387.6 287.0 -- 1,674.6
Commissions and other underwriting
expenses............................ 520.0 93.0 -- 613.0
Interest charges on:
Annuity policyholders' funds.......... 194.2 -- -- 194.2
Borrowed money........................ 95.5 13.1 (19.1)(c) 89.5
Other operating and general expenses..... 210.6 14.8 (2.6)(d) 222.8
---------- ------- ----------- ---------
2,407.9 407.9 (21.7) 2,794.1
---------- ------- ----------- ---------
Earnings from continuing operations before
income taxes............................. 153.7 26.2 6.7 186.6
Income tax expense......................... 39.9 9.9 (2.8)(e) 47.0
---------- ------- ----------- ---------
Net earnings from continuing operations.... 113.8 16.3 9.5 139.6
Preferred dividend requirement of AFC...... 6.4 -- (6.4) --
---------- ------- ----------- ---------
Net earnings from continuing operations
available for common shareholders........ $ 107.4 $ 16.3 $ 15.9 $ 139.6 (f)
========= ====== =========== =========
Earnings per common share from continuing
operations............................... $2.39 $2.63 (f)
========= =========
Weighted average common shares
outstanding.............................. 44.9 52.9
========= =========
</TABLE>
- ---------------
(a) Reflects the decrease in investment income attributable to the assumed use
of parent company investments.
(b) Elimination of the equity in earnings of APU recorded by AFC in the 1995
first quarter.
(c) Reduction in interest expense related to the assumed debt retirements.
(d) Includes a reduction of $9.0 million in operating expenses expected to
result from the Merger and an increase in minority interest expenses of $6.4
million for the 1995 first quarter dividends paid on AFC's preferred stock.
(e) Represents the statutory federal rate applied to the estimated adjustments
to pre-tax income excluding amortization of goodwill and other permanent
items.
(f) Excluding net realized gains of $29.1 million, such earnings were $110.5
million, or $2.09 per share.
22
<PAGE> 24
AMERICAN FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA AFG
APU AFC ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME:
Property and casualty insurance premiums..... $1,557.9 $1,378.6 $ -- $2,936.5
Investment income............................ 168.3 582.9 (33.5)(a) 717.7
Realized gains (losses) on sales of
securities................................ (75.7) 48.4 -- (27.3 )
Equity in net losses of investee
corporations.............................. -- (16.6) (1.1)(b) (17.7 )
Gains on sales of investee corporations...... -- 1.7 -- 1.7
Gains (losses) on sales of subsidiaries...... (4.0) -- -- (4.0 )
Sales of other products and services......... 116.9 -- -- 116.9
Other income................................. -- 107.8 -- 107.8
---------- ---------- ----------- ---------
1,763.4 2,102.8 (34.6) 3,831.6
---------- ---------- ----------- ---------
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses....... 1,090.7 987.0 -- 2,077.7
Commissions and other underwriting
expenses................................ 356.0 428.6 -- 784.6
Policyholder dividends.................... 75.7 -- -- 75.7
Interest charges on:
Annuity policyholders' funds.............. -- 241.8 -- 241.8
Borrowed money............................ 53.2 115.2 (55.7)(c) 112.7
Cost of sales................................ 70.1 -- -- 70.1
Book value incentive plan.................... -- 34.7 (34.7)(d) --
Other operating and general expenses......... 76.5 251.9 6.1(e) 334.5
---------- ---------- ----------- ---------
1,722.2 2,059.2 (84.3) 3,697.1
---------- ---------- ----------- ---------
Earnings from continuing operations before
income taxes................................. 41.2 43.6 49.7 134.5
Income tax expense............................. 40.4 24.7 10.7(f) 75.8
---------- ---------- ----------- ---------
Net earnings from continuing operations........ 0.8 18.9 39.0 58.7
Preferred dividend requirement of AFC.......... -- (25.7) 25.7(e) --
---------- ---------- ----------- ---------
Net earnings from continuing operations
available for common shareholders............ $ 0.8 $ (6.8) $ 64.7 $ 58.7
========= ========= =========== =========
Earnings per common share from continuing
operations(h)................................ $ 0.02 $ 1.11
========= =========
Weighted average common shares outstanding..... 48.0 4.9(g) 52.9
========= =========== =========
</TABLE>
23
<PAGE> 25
- ---------------
(a) Reflects the decrease in investment income primarily attributable to the use
of parent company investments as described in the introduction to Unaudited
Pro Forma Financial Information.
(b) Elimination of AFC's equity in earnings of APU.
(c) Reflects the decrease in interest expense attributable to the assumed debt
retirements.
(d) Elimination of the book value incentive plan charge expensed by AFC during
1994.
(e) Includes an estimated reduction of $19.6 million expected to result from the
Merger (including a reduction in goodwill amortization) offset by an
increase of $25.7 million of expenses attributable to dividends on AFC
preferred stock.
(f) Represents the statutory federal rate applied to the estimated adjustments
to pre-tax income excluding amortization of goodwill and other permanent
items.
(g) Earnings per share is calculated based on the assumption that 52.9 million
shares of Common Stock were outstanding during the entire period, reflecting
the net increase in AFG shares consisting of 28.3 million shares issued to
AFC common shareholders reduced by (i) 18.7 million shares held by AFC and
its subsidiaries which were accounted for as retired by AFG after the Merger
and (ii) 4.9 million shares repurchased from December 1994 through February
13, 1995.
(h) During 1994, AFC and APU both reported certain transactions involving
disposition of their ownership interests in subsidiaries, affiliates and
certain other operations and gains and losses on the sales of investments.
Management believes that reported results which include these transactions
are not indicative of future results of operations. During 1994, the
after-tax effect of such APU transactions was a loss of $73.7 million, or
$1.53 per share. Excluding these transactions, APU's earnings from
continuing operations were $74.5 million, or $1.55 per share. On a pro forma
basis, the after-tax effect of these transactions was a loss of $53.3
million, or $1.01 per share, for 1994. Excluding these transactions, pro
forma earnings from continuing operations were $112.0 million, or $2.12 per
share.
24
<PAGE> 26
BUSINESS
The Company is a holding company which, through its subsidiaries, is
engaged primarily in specialty and multi-line property and casualty insurance
businesses and in the sale of tax-deferred annuities. AFG's property and
casualty operations originated in 1872 and are the sixteenth largest property
and casualty group in the United States based on 1994 statutory net premiums
written of $3.1 billion. At September 30, 1995, the Company had total assets of
$13.9 billion and shareholders' equity of $1.1 billion.
The Company's business lines are summarized below.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
BUSINESS PRODUCTS/SERVICES 1995 1994
- ------------------------------------ --------------------------------------- -------------- -------------
(DOLLARS IN MILLIONS)
NET WRITTEN PREMIUMS
------------------------------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
Non-Standard Automobile........... Writes automobile insurance policies $931 $ 1,154
for "non-standard" risks, that is,
drivers who may represent higher risks,
such as those with a record of prior
accidents or traffic violations.
Specialty Lines................... A diversified group of over 25 separate $861 $ 1,282
insurance business lines. Major
components are:
- California Workers' Compensation
- Executive Liability
- Inland Marine
- U.S. Operations of Japanese
Companies
- Ocean Marine
- Liability Insurance for Non-Profit
Organizations
- Excess & Surplus
- Crop Hail & Multi-Peril Crop
Commercial and Personal Lines..... Provides commercial multi-peril, $526 $ 683
workers' compensation, commercial
automobile and umbrella, excess and
general liability insurance. Writes
coverage primarily for standard private
passenger automobile and homeowners'
insurance.
</TABLE>
<TABLE>
<CAPTION>
ANNUITY RECEIPTS
------------------------------
<S> <C> <C> <C>
ANNUITIES
American Annuity Group............ Issues and services tax-deferred, fixed $338 $ 443
rate annuities.
</TABLE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The Company manages and operates its property and casualty business in
three major business segments: NSA Group, Specialty Lines and Commercial and
Personal Lines. Each segment is comprised of multiple business units which
operate autonomously but with strong central financial controls and full
accountability. Decentralized control allows each unit the autonomy necessary to
respond to local and specialty market conditions while capitalizing on the
efficiencies of centralized investment, actuarial, financial and legal support
functions.
The primary objective of the property and casualty insurance operations is
to achieve underwriting profitability. Management's focus on underwriting
profitability has resulted in a statutory combined ratio
25
<PAGE> 27
averaging 101.1% for the period 1990 to 1994, as compared to 109.9% for the
property and casualty industry over the same period (Source: A.M. Best). In
1994, these operations had an overall GAAP combined ratio of 99.5%. On a
statutory basis, the combined ratio was 100.9%, compared with the property and
casualty insurance industry average of 108.4% (Source: A.M. Best). The Company
experienced net written premium growth of 17.2% from 1993 to 1994. 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.
For the first nine months of 1995, net written premiums exceeded $2.3
billion, approximately the same level as the comparable 1994 period. Favorable
premium growth in most of the insurance lines has been offset by a decline in
the California workers' compensation writings. See "-- Specialty Lines." Aside
from the California workers' compensation business, net written premiums have
grown 7% through the first nine months of 1995. The GAAP combined ratio for the
first nine months of 1995 was 102.2% compared with 98.8% for the 1994 period.
Losses due to Texas hailstorms which occurred in late April and May as well as
reserve strengthening in the NSA Group increased the 1995 combined ratio by
2.0%.
Non-Standard Automobile Insurance
General. The NSA Group underwrites private passenger automobile physical
damage and liability insurance policies for "non-standard risks." The NSA Group
has four principal operating units comprised of Atlanta Casualty, Windsor,
Infinity and Leader National and their respective subsidiaries and includes a
total of thirteen domestic insurance companies. Atlanta Casualty, Windsor,
Infinity and Leader National are rated A (Excellent), A (Excellent), A
(Excellent) and A- (Excellent), respectively, by A.M. Best.
Non-standard insureds are those individuals who are unable to obtain
insurance through standard market carriers due to factors such as age, record of
prior accidents, driving violations, particular occupation or type of vehicle.
Premium rates for non-standard risks are generally higher than for standard
risks. Total private passenger automobile insurance premiums written by
insurance carriers in the United States in 1994 have been estimated by A.M. Best
to be approximately $98 billion. Because it can be viewed as a residual market,
the size of the non-standard private passenger automobile insurance market
changes with the insurance environment and grows when standard coverage becomes
more restrictive. Although this factor, as well as industry differences in the
criteria which distinguish standard from non-standard insurance, makes it
difficult to estimate the size of the non-standard market, management believes
that the voluntary non-standard market has accounted for approximately 12% to
16% of total private passenger automobile insurance premiums written in recent
years.
The NSA Group attributes its premium growth in recent years primarily to
entry into additional states, increased market penetration in its existing
states, overall growth in the non-standard market, premium rate increases and
the purchase of Leader National. Management believes the non-standard market has
experienced growth in recent years as standard insurers have become more
restrictive in the types of risks they write. The NSA Group writes business in
41 states and holds licenses to write policies in 48 states and the District of
Columbia.
26
<PAGE> 28
The U.S. geographic distribution of the NSA Group's statutory net written
premiums in the first nine months of 1995 and in 1994 was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
----------------------
PERCENTAGE
DOLLARS ----------
------- YEAR ENDED
DECEMBER 31, 1994
----------------------
PERCENTAGE
DOLLARS ----------
-------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
-------------------------------------------------
Texas..................................... $ 122 13% $ 145 13%
Florida................................... 96 11 126 11
Georgia................................... 92 10 129 12
California................................ 79 9 72 7
Connecticut............................... 45 5 31 3
Arizona................................... 41 4 63 6
Tennessee................................. 36 4 60 5
Pennsylvania.............................. 33 4 10 1
Oklahoma.................................. 33 4 39 3
Indiana................................... 33 4 45 4
All other................................. 288 32 386 35
-----
---
---- - ------ ---- -
Total........................... $ 898 100% $1,106 100%
======== ===== ====== =====
</TABLE>
In addition, the Company owns a 1993 start-up insurance company in the
United Kingdom which specializes in non-standard automobile insurance. During
the nine months ended September 30, 1995 and the full year 1994, this company
had gross written premiums of $41.5 million and $63.1 million, respectively, of
which $18.1 million and $26.6 million, respectively, were assumed by one of the
Company's wholly owned insurance subsidiaries.
Management believes that the NSA Group's underwriting success over the past
several years as compared to the automobile insurance industry as a whole is
due, in part, to the refinement of various risk profiles, thereby dividing the
consumer market into more defined segments which can either be excluded from
coverage or priced properly. The NSA Group also generally writes policies of
short duration which allow more frequent rating evaluations of individual risks,
providing management greater flexibility in the ongoing assessment of the
business. In addition, the NSA Group has implemented cost control measures both
in the underwriting and claims handling areas.
27
<PAGE> 29
The following table presents certain information with respect to the NSA
Group's insurance operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------
1995 1994 1994 1993 1992
------- ------ -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net written premiums...................... $ 930.8 $858.9 $1,154.1 $901.9 $660.4
======= ====== ======== ====== ======
Net earned premiums....................... $ 893.4 $788.1 $1,071.9 $804.4 $594.8
Loss and LAE.............................. 743.1 595.2 813.7 575.8 414.8
Underwriting expenses..................... 197.8 185.7 256.3 204.4 156.7
------- ------ -------- ------ ------
Underwriting profit (loss)................ $(47.5) $ 7.2 $ 1.9 $ 24.2 $ 23.3
======= ====== ======== ====== ======
GAAP ratios:
Loss and LAE ratio...................... 83.1% 75.5% 75.9% 71.6% 69.7%
Underwriting expense ratio.............. 22.1 23.6 23.9 25.4 26.4
------- ------ -------- ------ ------
Combined ratio.......................... 105.2% 99.1% 99.8% 97.0% 96.1%
======= ====== ======== ====== ======
Statutory ratios: (a)
Loss and LAE ratio...................... 83.3% 75.6% 76.0% 72.5% 69.7%
Underwriting expense ratio.............. 21.9 23.6 23.7 24.4 26.1
------- ------ -------- ------ ------
Combined ratio.......................... 105.2% 99.2% 99.7% 96.9% 95.8%
======= ====== ======== ====== ======
Industry statutory combined ratio(b)...... n/a n/a 105.7% 101.7% 102.0%
- ---------------
<FN>
(a) Based on domestic insurance operations only.
(b) This information refers to the private passenger automobile industry
statutory combined ratio derived from A.M. Best Best's Aggregates & Averages
Property-Casualty (1995 edition). Although the Company believes that there
is no reliable regularly published combined ratio data for the non-standard
automobile insurance industry, the Company believes that such a combined
ratio would present a less favorable comparison in that it would be lower
than the private passenger automobile industry average shown above.
</TABLE>
Recent Results. For the first nine months of 1995, net written premiums of
the NSA Group grew 8% over the comparable 1994 period due to increased
penetration within the NSA Group's existing markets, limited expansion into new
states and an increase in premium rates. The increase in the combined ratio for
the first nine months of 1995 compared with the comparable 1994 period was due
primarily to inadequate rate levels in certain markets and weather-related
losses, principally from hailstorms in Texas. In addition, the combined ratio
for the first nine months of 1995 includes 1.6% for reserve strengthening
related to prior accident years. These factors were partially offset by a
reduction in the underwriting expense ratio due largely to cost control
measures. Premium rate increases were implemented in several states during 1994
and the NSA Group has continued to increase rates in 1995. Rate increases
implemented and to be implemented in various states during 1995 will average
approximately 10% across the NSA Group's entire book of business. The higher
rate levels and competitive pressures in the non-standard automobile insurance
industry have impacted the premium growth rates during 1995.
Marketing. Each of the four principal units in the NSA Group is
responsible for its own marketing, sales, underwriting and claims processing.
Sales efforts are primarily directed toward independent agents to convince them
to select an NSA Group insurance company for their customers. These units each
write policies through approximately 5,000 to 12,000 independent agents.
Of the approximately 1,010,000 NSA Group policies in force at December 31,
1994, approximately 11% had policy limits in excess of $50,000 per occurrence.
Most NSA Group policies are written for policy periods of six months or less,
with some as short as one month.
Competition. A large number of national, regional and local insurers write
non-standard private passenger automobile insurance coverage. Insurers in this
market generally compete on the basis of price
28
<PAGE> 30
(including differentiation on liability limits, variety of coverages offered and
deductibles), geographic availability and ease of enrollment and, to a lesser
extent, reputation for claims handling, financial stability and customer
service. NSA Group management believes that sophisticated data analysis for
refinement of risk profiles has helped the NSA Group to compete successfully on
the basis of price without negatively affecting underwriting profitability. The
NSA Group attempts to provide selected pricing for a wider spectrum of risks and
with a greater variety of payment options, deductibles and limits of liability
than are offered by many of its competitors.
Specialty Lines
General. The Specialty Lines segment emphasizes the writing of specialized
insurance coverage where Company personnel are experts in particular lines of
business or customer groups. The major lines of business include California
workers' compensation, executive liability, ocean and inland marine,
agricultural-related coverages, non-profit liability, umbrella and excess and
surplus lines. The Specialty Lines workers' compensation operations write
coverage for statutorily prescribed benefits payable to employees (principally
in California) who are injured on the job. The executive liability line markets
professional liability coverage for lawyers and directors and officers. Ocean
and inland marine businesses provide such coverage as marine cargo, boat
dealers, marina operators/dealers, excursion vessels, builder's risk,
contractor's equipment, excess property and transportation cargo. The
agricultural-related businesses provide multi-peril crop insurance covering all
weather and disease perils as well as coverage for full-time operating
farms/ranches and agribusiness operations on a nationwide basis through
independent agents who specialize in the rural market. The non-profit liability
business provides property, general/professional liability, automobile, umbrella
and crime coverage for a wide range of non-profit organizations. These
operations also provide excess and surplus commercial property and casualty
insurance in a variety of industries.
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant operating
autonomy to oversee the important operational functions of its business such as
underwriting, pricing, marketing, policy processing and claims service. These
specialty lines are opportunistic and their premium volume will vary based on
current market conditions. The Company continually evaluates new specialty
markets.
The U.S. geographic distribution of the Specialty Lines statutory net
written premiums in the first nine months of 1995 and in 1994 was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
----------------------
PERCENTAGE
DOLLARS ----------
------- YEAR ENDED
DECEMBER 31, 1994
----------------------
PERCENTAGE
DOLLARS ----------
-------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
California................................ $ 300 35% $ 597 47%
Texas..................................... 65 8 77 6
Massachusetts............................. 50 6 59 5
New York.................................. 45 5 63 5
Oklahoma.................................. 34 4 47 4
Florida................................... 25 3 34 2
Illinois.................................. 24 3 34 2
New Jersey................................ 21 2 27 2
Pennsylvania.............................. 21 2 25 2
Michigan.................................. 17 2 23 2
Other..................................... 262 30 294 23
-----
---
---- - ------ ---- -
Total........................... $ 864 100% $1,280 100%
======== ===== ====== =====
</TABLE>
29
<PAGE> 31
The following table sets forth statutory net written premium data by NAIC
annual statement line for each of the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------- ----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
------- ---------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Workers' compensation.......................... 261 30% 522 41
Other liability................................ 168 20 212 17
Auto liability................................. $ 100 12 $ 121 9%
Commercial multi-peril......................... 69 8 69 5
Inland marine.................................. 68 8 81 6
Ocean marine................................... 38 4 50 4
Auto physical damage........................... 35 4 39 3
Surety......................................... 23 3 29 2
Fire........................................... 21 2 36 3
Other.......................................... 81 9 125 10
----- --- ------ ---
Total................................ $ 864 100% $1,284 100%
===== === ====== ===
</TABLE>
The following table presents certain information with respect to the
Specialty Lines.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------------
1995 1994 1994 1993 1992
------ ------ -------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net written premiums..................... $861.2 $967.5 $1,282.0 $1,092.6 $930.9
====== ====== ======== ======== ======
Net earned premiums...................... $823.0 $900.6 $1,210.1 $1,042.6 $898.6
Loss and LAE............................. 552.6 570.1 804.4 672.6 565.7
Underwriting expenses.................... 241.5 224.5 300.4 238.0 198.9
Policyholder dividends................... 3.7 68.8 75.8 93.2 68.8
------ ------ -------- -------- ------
Underwriting profit...................... $ 25.2 $ 37.2 $ 29.5 $ 38.8 $ 65.2
====== ====== ======== ======== ======
GAAP Ratios:
Loss and LAE ratio..................... 67.2% 63.3% 66.5% 64.5% 62.9%
Underwriting expense................... 29.3 24.9 24.8 22.8 22.1
Policyholder dividend.................. 0.5 7.6 6.3 9.0 7.7
------ ------ -------- -------- ------
Combined ratio......................... 97.0% 95.8% 97.6% 96.3% 92.7%
====== ====== ======== ======== ======
Statutory Ratios:
Loss and LAE........................... 67.1% 63.4% 66.9% 64.8% 64.4%
Underwriting expense................... 29.0 25.3 25.3 23.4 22.5
Policyholder dividend.................. 4.7 8.2 8.3 6.0 5.3
------ ------ -------- -------- ------
Combined ratio......................... 100.8% 96.9% 100.5% 94.2% 92.2%
====== ====== ======== ======== ======
Industry Statutory Combined Ratio (a).... n/a 109.8% 108.4% 106.9% 115.7%
- ---------------
<FN>
(a) Ratios for the years 1992 to 1994 are derived from A.M. Best Best's
Aggregates and Averages Property - Casualty. The ratio for the first nine
months of 1994 is derived from Best Week Property/Casualty Supplement
(December 21, 1994 edition).
</TABLE>
Recent Results. Net written premiums for the specialty operations declined
11% during the first nine months of 1995 over the comparable 1994 period due to
a decrease in the California workers' compensation writings, partially offset by
increases in the writings of other specialty niche lines. The third quarter 1995
combined ratios include losses resulting from participation in a voluntary pool,
offset by a similar amount of
30
<PAGE> 32
favorable reserve development in the specialty niche lines. AFG will
significantly reduce its participation in voluntary pools beginning in December
1995.
Marketing. The Specialty Lines operations direct their sales efforts
primarily toward independent property and casualty insurance agents and brokers.
These businesses write insurance through over 2,000 agents, none of whom
produced more than 4% of premiums in 1994. These businesses have in excess of
310,000 policies in force, the largest of which represents less than 1% of
premiums written.
Competition. These businesses compete with other insurers as well as the
California State Fund in the California workers' compensation insurance market.
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. Competitors include individual
insurers and insurance groups of varying sizes, some of which are insurance
companies possessing competitive advantages in that all their profits inure to
their policyholders. Management believes that sophisticated data analysis for
refinement of risk profiles, extensive specialized knowledge and loss prevention
service have helped these businesses compete successfully.
Commercial and Personal Lines
General. The Commercial Lines Division offers a wide variety of property
and casualty coverages through independent agents. Its major lines of business
are workers' compensation, commercial multi-peril, umbrella, excess and general
liability insurance. The workers' compensation business has experienced solid
growth and profitability due to improved rate structures and favorable trends in
medical care costs and the success of its Drug-Free workplace program. The
Personal Lines Division consists primarily of standard private passenger auto
and homeowners' insurance and currently writes business in 38 states. Its
approach is to develop tailored rates for its personal automobile customers
based on a wide variety of factors, including make and model of the insured
automobile and the driving record of the insureds. The approach to homeowners
business is to limit writings in locations with catastrophic exposures such as
windstorms, earthquakes and hurricanes.
The Commercial Lines Division writes insurance in approximately 25 states
where management believes adequate rates can be obtained and where involuntary
changes are not excessive. The states with the largest premium volumes in 1994
in these businesses were New York, New Jersey and North Carolina.
The U.S. geographic distribution of the Commercial and Personal Lines
statutory net written premiums in the first nine months of 1995 and in 1994 was
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------- ----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
------- ---------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Connecticut............................... $ 83 16% $100 15%
New York.................................. 60 11 80 12
North Carolina............................ 56 11 74 11
New Jersey................................ 55 10 65 10
Pennsylvania.............................. 38 7 47 7
Texas..................................... 29 6 33 5
Maryland.................................. 22 4 28 4
Michigan.................................. 21 4 29 4
Ohio...................................... 19 4 27 4
Florida................................... 18 3 23 3
Other..................................... 126 24 172 25
---- --- ---- ---
Total........................... $527 100% $678 100%
==== === ==== ===
</TABLE>
31
<PAGE> 33
The Commercial Lines approach focuses on specific customer groups, such as
restaurants, light manufacturers, high rise habitational and hotels/motels, and
emphasizes site visits for prospective customers to ensure underwriter
familiarity with risk factors relating to each insured and to avoid those risks
which are unacceptable to underwriters.
The Drug Free Workplace program assists Commercial Lines insureds in
setting up drug testing programs (to the extent permitted by law), drug and
alcohol education programs and work safety programs. At September 30, 1995,
there were almost 600 insureds in 14 states with such programs producing
approximately $50 million in net written premiums as of that date.
The following table sets forth statutory net written premium data by NAIC
annual statement line for each of the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
----------------------
PERCENTAGE
DOLLARS ----------
------- YEAR ENDED
DECEMBER 31, 1994
----------------------
PERCENTAGE
DOLLARS ----------
-------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Auto liability............................ $ 154 29% $ 209 31%
Workers' compensation..................... 90 17 98 14
Commercial multi-peril.................... 89 17 127 19
Auto physical damage...................... 66 12 84 12
Homeowners................................ 61 12 80 12
Other liability........................... 38 7 44 6
Inland marine............................. 10 2 12 2
Other..................................... 19 4 24 4
-----
---
---- - ----- - ---- -
Total.............................. $ 527 100% $ 678 100%
======== ===== ====== =====
</TABLE>
The following table presents certain information with respect to the
Commercial and Personal Lines.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ------------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net written premiums...................... $525.5 $489.9 $682.5 $665.6 $699.7
====== ====== ======== ====== ======
Net earned premiums....................... $521.0 $484.8 $655.9 $663.7 $725.5
Loss and LAE.............................. 355.5 319.4 429.9 430.3 557.3
Underwriting expenses..................... 164.3 159.5 210.4 238.1 264.4
Policyholder dividends.................... 3.8 2.6 7.7 1.8 3.0
-------
-
------ ------ ------ ------
Underwriting profit (loss)................ ($ 2.6) $ 3.3 $ 7.9 ($ 6.5) ($99.2)
====== ====== ======== ====== ======
GAAP ratios:
Loss and LAE ratio...................... 68.2% 65.9% 65.5% 64.8% 76.8%
Underwriting expense ratio.............. 31.6 32.9 32.1 35.9 36.5
Policyholder dividend ratio............. 0.7 0.5 1.2 0.3 0.4
-------
-
------ ------ ------ ------
Combined ratio.......................... 100.5% 99.3% 98.8% 101.0% 113.7%
====== ====== ======== ====== ======
Statutory ratios:
Loss and LAE ratio...................... 68.6% 66.1% 67.0% 65.0% 76.8%
Underwriting expense ratio.............. 31.4 33.3 32.4 36.0 37.2
Policyholder dividend ratio............. 0.5 0.7 1.0 -- 0.6
-------
-
------ ------ ------ ------
Combined ratio.......................... 100.5% 100.1% 100.4% 101.0% 114.6%
====== ====== ======== ====== ======
Industry statutory combined ratio(a)...... n/a 109.8% 108.4% 106.9% 115.7%
</TABLE>
32
<PAGE> 34
- ---------------
(a) Ratios for the years 1992 to 1994 are derived from A.M. Best Best's
Aggregates and Averages Property - Casualty. The ratio for the first nine
months of 1994 is derived from Best Week Property/Casualty Supplement
(December 21, 1994 edition).
Recent Results. Net written premiums for the Commercial and Personal Lines
operations increased 7% for the first nine months of 1995 over the comparable
1994 period due principally to increased commercial lines writings.
Marketing. The Commercial and Personal Lines direct their sales efforts
primarily toward independent property and casualty brokers. These businesses
write insurance through over 3,000 agents. These businesses have in excess of
525,000 policies in force, the largest of which represents less than 1% of
premiums written.
Competition. These businesses compete with other insurers, primarily on the
basis of price (including differentiation on policy limits, coverages offered
and deductibles), agent commissions and profit sharing terms. Customer service,
loss prevention and reputation for claims handling are also important factors.
Competitors include individual insurers and insurance groups of varying sizes,
some of which are insurance companies possessing competitive advantages in that
all their profits inure to their policyholders. Management believes that
sophisticated data analysis for refinement of risk profiles, disciplined
underwriting practices and aggressive loss prevention procedures have enabled
these businesses to compete successfully on the basis of price without
negatively affecting underwriting profitability.
Reinsurance
Consistent with standard practice of most insurance companies, AFG
reinsures a portion of its business with other reinsurance companies and assumes
a limited 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. AFG is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve AFG of its liability to its insureds. As of September 30, 1995, AFG
had net reinsurance recoverables of approximately $822 million, representing
estimated amounts recoverable from reinsurers pertaining to paid and unpaid
claims, claims incurred but not reported and prepaid reinsurance premiums. In
order to minimize losses from uncollectible reinsurance, AFG regularly monitors
the financial strength of its reinsurers and places its reinsurance with a
number of different reinsurers.
GAI currently has treaty reinsurance programs which generally provide
reinsurance coverage above specified retention maximums. For workers'
compensation policies, the retention maximum is $1 million per loss occurrence
with reinsurance coverage for the next $49 million. For all other casualty
policies, the retention maximum is $5 million per loss occurrence with
reinsurance coverage for the next $15 million. For property coverages, a
property per risk excess of loss treaty is maintained with a retention maximum
of $5 million per risk and reinsurance coverage for the next $25 million. For
catastrophe coverage on property risks, the retention is $20 million with
reinsurance covering 91% of the next $110 million in losses and an additional
layer of reinsurance providing coverage for 76% of the next $50 million for the
peril of wind only. In addition, GAI 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. Premiums for reinsurance ceded by
GAI in 1994 were 21.3% of gross written premiums for the period.
Republic Indemnity also reinsures a portion of its exposure with other
insurance companies to limit its maximum loss arising out of any one occurrence.
Republic Indemnity retains the first $1.5 million of each loss, the next $1.5
million of each loss is reinsured with a major reinsurance company, the next $2
million of each loss is shared equally by Republic Indemnity and the reinsurance
company and the remaining $145 million of each loss is covered by reinsurance
treaties provided by a group of more than 50 reinsurance companies. Republic
Indemnity does not assume reinsurance, except as an accommodation to
policyholders who have a small percentage of their employees outside the state
of California. Premiums for reinsurance ceded by Republic Indemnity in 1994 were
less than 1% of gross written premiums for the period.
33
<PAGE> 35
Due in part to the limited exposure on individual policies, none of the
insurance companies in the NSA Group is involved to a material degree in
reinsuring risks with third party insurance companies. Premiums for reinsurance
ceded by the NSA Group in 1994 were less than 1% of gross written premiums for
the period.
Loss and Loss Adjustment Expense Reserves
Regarding AFC. The consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses ("LAE") of GAI. This
liability represents estimates of the ultimate net cost of all unpaid losses and
LAE and is determined by using case-basis evaluations and statistical
projections. These estimates are subject to the effects of claim amounts and
frequency and are continually reviewed and adjusted as additional information
becomes known. In accordance with industry practices, such adjustments are
reflected in current year operations.
Future costs of claims are projected based on historical trends adjusted
for changes in underwriting standards, policy provisions, the anticipated effect
of inflation and general economic trends. These anticipated trends are monitored
based on actual development and are reflected in estimates of ultimate claim
costs.
The liability for losses and LAE for certain long-term scheduled payments
under workers' compensation, auto liability and other liability insurance has
been discounted at rates ranging from 4% to 8%. As a result, the total liability
for losses and LAE at December 31, 1994, 1993 and 1992 has been reduced by $71
million, $56 million and $51 million, respectively.
The limits on risks retained vary by type of policy and risks in excess of
certain retention limits are reinsured. Each insurance subsidiary establishes
its own retention limits based on the individual company's surplus.
Generally, reserves for reinsurance and involuntary pools and associations
are reflected in GAI's results at the amounts reported by those entities.
The following table provides an analysis of changes in AFC's estimated
liability for losses and LAE, net of reinsurance (and grossed up), over the past
three years on a GAAP basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of year............................. $2,113 $2,123 $2,129
Provision for losses and LAE occurring in the current
year................................................... 1,027 879 882
Net decrease in provision for claims occurring in prior
years.................................................. (40) (3) (14)
------ ------ ------
987 876 868
Payments for losses and LAE occurring during:
Current year........................................... (381) (320) (313)
Prior years............................................ (532) (566) (561)
------ ------ ------
(913) (886) (874)
------ ------ ------
Balance at end of year................................... $2,187 $2,113 $2,123
====== ====== ======
Add back reinsurance recoverables........................ 730 611 547
------ ------ ------
Unpaid losses and LAE, gross of reinsurance.............. $2,917 $2,724 $2,670
====== ====== ======
</TABLE>
34
<PAGE> 36
Major components of the net decrease in the provision for claims occurring
in prior years as reflected in the table above were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Adjustment for reserve data reported by reinsureds and
involuntary pools and associations....................... $ 28 $ 45 $ 32
Adjustment for claim payments and anticipated claim
payments in amounts less than previously anticipated..... (73) (53) (47)
Amortization of discount on certain long-term reserves..... 5 5 1
----- ----- -----
Net decrease............................................... $ (40) $ (3) $ (14)
===== ===== =====
Net decrease as a percent of prior year's liability........ (1.9)% (0.1)% (0.7)%
</TABLE>
35
<PAGE> 37
The following table presents the development of the liability for losses
and LAE, net of reinsurance, on a GAAP basis for the last ten years. The top
line of the table shows the estimated liability 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, 1994. The remainder of the
table presents development as percentages of the estimated liability. The
development results from additional information and experience in subsequent
years. The middle line shows a cumulative deficiency (redundancy) which
represents the aggregate percentage increase (decrease) in the liability
initially estimated. The lower portion of the table indicates the cumulative
amounts paid as of successive periods as a percentage of the original loss
reserve liability.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated...... $1,302 $1,605 $1,843 $2,024 $2,209 $2,246 $2,137 $2,129 $2,123 $2,113 $2,187
As re-estimated at December
31, 1994................... 2,101 2,379 2,250 2,214 2,275 2,271 2,120 2,086 2,085 2,073 n/a
Liability re-estimated as of:
One year later............... 108.2% 109.2% 102.7% 102.5% 99.8% 100.4% 98.6% 99.3% 99.9% 98.1%
Two years later.............. 120.5% 116.7% 107.3% 103.6% 100.0% 99.3% 97.7% 98.7% 98.2%
Three years later............ 126.2% 123.4% 109.7% 103.1% 99.7% 98.4% 97.4% 98.0%
Four years later............. 132.8% 129.9% 110.8% 102.5% 98.7% 98.2% 99.2%
Five years later............. 138.8% 132.3% 111.8% 102.6% 99.1% 101.1%
Six years later.............. 142.2% 134.8% 112.7% 103.5% 103.0%
Seven years later............ 145.5% 136.6% 115.3% 109.4%
Eight years later............ 148.1% 140.7% 122.1%
Nine years later............. 153.0% 148.2%
Ten years later.............. 161.4%
Cumulative deficiency
(Redundancy)................. 61.4% 48.2% 22.1% 9.4% 3.0% 1.1% (0.8)% (2.0)% (1.8)% (1.9)% n/a
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- - - - - - - - - - -
Cumulative paid as of:
One year later............... 44.8% 45.5% 33.0% 29.2% 29.4% 32.3% 26.1% 26.4% 26.7% 25.2%
Two years later.............. 68.3% 69.0% 52.5% 49.0% 48.6% 48.2% 43.2% 43.0% 43.7%
Three years later............ 87.0% 84.6% 67.7% 63.5% 59.8% 59.2% 55.3% 55.4%
Four years later............. 99.6% 96.6% 79.3% 72.2% 67.9% 67.6% 64.8%
Five years later............. 109.3% 106.4% 86.4% 78.5% 74.0% 74.3%
Six years later.............. 117.7% 112.4% 91.9% 83.6% 79.5%
Seven years later............ 123.3% 117.3% 96.1% 87.7%
Eight years later............ 127.9% 121.3% 100.0%
Nine years later............. 131.8% 125.2%
Ten years later.............. 135.9%
</TABLE>
This table does 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, a deficiency related to
losses settled in 1994, but incurred in 1984, would be included in the
re-estimated liability and cumulative deficiency percentage for each of the
years 1984 through 1993. 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 earlier years in the table above was partially
caused by the effect of 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. Two significant changes in the early to mid-1980s were the trend
towards an adverse litigious climate and the change from contributory to
comparative negligence.
36
<PAGE> 38
The adverse litigious climate is evidenced by an increase in lawsuits and
damage awards, changes in judicial interpretation of legal liability and of the
scope of policy coverage, and a lengthening of time it takes to settle cases. In
addition, a trend has developed in the manner and timeliness of first claim
notices. Historically, the first notification of claim came directly from the
claimant; in recent years, however, there has been a gradual increase in the
number of notifications in the form of direct legal action. Not only has this
notification been less timely, it has been more adversarial in nature.
The change in rules of negligence governing tort claims has also influenced
the loss development trend. During the early to mid-1980s, most states changed
from contributory to comparative negligence rules. When contributory negligence
rules control, a plaintiff seeking damages is barred from recovering damages for
a loss if it can be demonstrated that the plaintiff's own negligence contributed
in any way to the cause of the injury. When comparative negligence rules
control, a plaintiff's negligence is no longer a bar to recovery. Instead, the
degree of plaintiff's negligence is compared to the negligence of any other
party. Generally, if the plaintiff's negligence is 50% or less of the cause of
the injury, the plaintiff can recover damages, but in an amount reduced by the
portion of damage attributable to the plaintiff's own negligence. Many claims
which would have been successfully defended under contributory negligence rules
now result in an award of damages or a settlement during suit under the
comparative negligence rules.
Asbestos and Environmental Reserves of GAI. The insurance industry
typically includes only claims relating to polluted waste sites and asbestos in
defining environmental exposures. GAI extends this definition to include claims
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 ("A&E").
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 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.
Prior to the fourth quarter of 1994, GAI maintained reserves only on its
reported A&E claims; reserves for claims incurred but not reported ("IBNR") were
not allocated to A&E claims. Following completion of a detailed analysis in the
fourth quarter, GAI allocated a specific portion of its IBNR reserves to A&E
claims. Based on known facts, current law, and current industry practices,
management believes that its reserves for such claims are adequate.
The following table is a progression of reserves for exposures for which
GAI has been held liable under general liability policies written years ago
where environmental coverage was not intended and, in many cases, was
specifically excluded.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Reserves at beginning of year.................... $141.5 $142.6 $141.3
Incurred losses and LAE(a)....................... 118.3 36.4 27.9
Paid losses and LAE.............................. (33.0) (37.5) (26.6)
------ ------ ------
Reserves at end of year, net of reinsurance
recoverable.................................... 226.8 141.5 142.6
Reinsurance recoverable.......................... 155.0 106.9 86.9
------ ------ ------
Gross reserves at end of year.................... $381.8 $248.4 $229.5
====== ====== ======
</TABLE>
- ---------------
(a) Amounts in 1994 reflect an allocation of a specific portion of IBNR reserves
to A&E claims as described above.
37
<PAGE> 39
Since the mid-1980's, GAI has also written certain environmental coverages
(asbestos abatement and underground storage tank liability) in which the premium
charged is intended to provide coverage for the specific environmental exposures
inherent in these policies. The business has been profitable since its
inception. To date, approximately $160 million of premiums has been written and
reserves for unpaid losses and LAE aggregated $56 million at December 31, 1994
(not included in the above table).
Regarding APU. The following table provides an analysis of changes in
APU's estimated liability for losses and LAE over the past three years, net of
all reinsurance activity, on a GAAP basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of year...................... $ 916 $ 764 $ 664
Provision for losses and LAE occurring in the
current year.................................... 1,170 914 707
Net decrease in provision for claims occurring in
prior years(a).................................. (79) (58) (20)
------ ----- -----
1,091 856 687
Reserves of subsidiaries purchased................ 13 54 --
Payments for losses and LAE occurring during:
Current year.................................... (554) (413) (295)
Prior years..................................... (386) (345) (292)
------ ----- -----
(940) (758) (587)
------ ----- -----
Balance at end of year............................ $1,080 $ 916 $ 764
====== ===== =====
Add back reinsurance recoverables................. 51 45
------ -----
Unpaid losses and LAE, gross of reinsurance....... $1,131 $ 961
====== =====
</TABLE>
- ---------------
(a) Represents reductions in the estimates of ultimate losses and LAE related to
such claims.
The following table presents the development of APU's liability for losses
and LAE, net of reinsurance, on a GAAP basis since 1989 (the year APU acquired
its first insurance subsidiary).
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1989 1990 1991 1992 1993 1994
------ ------ ----- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Liability for Unpaid Losses and Loss Adjustment Expenses:
As originally estimated................................ $ 369 $ 602 $ 664 $ 764 $ 916 $1,080
As re-estimated at December 31, 1994................... 313 539 600 672 837 n/a
Liability Re-estimated as of:
One year later......................................... 97.0% 96.5% 97.0% 92.4% 91.4%
Two years later........................................ 89.7% 93.0% 93.4% 87.9%
Three years later...................................... 85.7% 91.0% 90.4%
Four years later....................................... 85.5% 89.6%
Five years later....................................... 84.7%
Cumulative Redundancy (15.3)% (10.4)% (9.6)% (12.1)% (8.6)% n/a
====== ====== ===== ====== ====== ======
Cumulative Paid as of:
One year later......................................... 19.5% 43.0% 44.1% 40.6% 40.9%
Two years later........................................ 49.1% 64.4% 64.5% 59.3%
Three years later...................................... 64.6% 75.2% 74.2%
Four years later....................................... 71.4% 79.8%
Five years later....................................... 75.1%
</TABLE>
ANNUITY OPERATIONS
General. AAG is a holding company whose primary asset is the capital stock
of GALIC which it acquired from GAI on December 31, 1992. GALIC sells annuities
primarily to employees of qualified not-for-
38
<PAGE> 40
profit organizations. GALIC is currently rated A (Excellent) by A.M. Best. AAG
and its subsidiaries employ approximately 750 persons.
The following table presents information concerning GALIC on a GAAP basis,
unless otherwise noted.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total assets.................................. $5,432 $4,965 $5,044 $4,883 $4,436
Annuity policyholders' funds accumulated...... 4,837 4,487 4,596 4,257 3,974
GAAP stockholders' equity..................... 540 454 449 520 418
Statutory Basis:
Capital and surplus......................... 272 256 256 251 216
Asset valuation reserve (a)................. 84 81 80 70 71
Interest maintenance reserve (a)............ 28 30 28 36 17
Annuity Receipts:
Flexible premium:
First year............................... $ 33 $ 28 $ 39 $ 47 $ 48
Renewal.................................. 145 152 208 223 233
------ ------ ------ ------ ------
178 180 247 270 281
Single premium.............................. 160 133 196 130 80
------ ------ ------ ------ ------
Total annuity receipts................... $ 338 $ 313 $ 443 $ 400 $ 361
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Allocation of surplus for statutory reporting purposes.
Annuity Products. Annuities are long-term retirement savings plans that
allow policyholders to accrue interest on a tax-deferred basis. Certain
employees of educational institutions and other not-for-profit groups are
eligible to save for retirement through contributions made on a pre-tax basis.
Contributions are made at the discretion of the participants through payroll
deductions or through tax-free "rollovers" of funds. Federal income taxes are
not payable on contributions or earnings until amounts are withdrawn.
GALIC's principal products are FPDAs and SPDAs. FPDAs are characterized by
premium payments that are flexible in amount and timing as determined by the
policyholder. SPDAs are issued in exchange for a one-time lump-sum premium
payment. Since January 1, 1990, approximately three-fourths of GALIC's SPDA
receipts have resulted from rollovers of tax-deferred funds previously
maintained by policyholders with other insurers. In 1994, FPDAs accounted for
approximately 55% of GALIC's total annuity receipts.
All of GALIC's annuity products have been fixed rate annuities. With a
fixed rate annuity, an interest crediting rate is set by the issuer,
periodically reviewed by the issuer and changed from time to time as determined
to be appropriate. At December 31, 1994, approximately 94% of GALIC's
policyholder liabilities consisted of annuities which offered a minimum interest
rate guarantee of 4%. GALIC's new products offer a minimum guaranteed rate of
3%. All of GALIC's annuity policies permit GALIC to change the crediting rate at
any time (subject to the minimum guaranteed interest rate). In determining the
frequency and extent of changes in the crediting rate, GALIC takes into account
the profitability of its annuity business and the relative competitive position
of its products.
AAG expects to begin marketing variable annuities in the fourth quarter of
1995. With variable annuities, the earnings credited to the policy vary based on
the investment results of the underlying investment options chosen by the
policyholder. Policyholders may also choose to direct all or a portion of their
premiums to various fixed rate options. For AAG's products, all premiums
directed to the variable options will be placed in funds managed by third party
investment advisers. Premiums directed to one of the fixed rate options will
become part of the Company's general account.
39
<PAGE> 41
GALIC seeks to maintain a desired spread between the yield on its
investment portfolio and the rate it credits to its policies. GALIC accomplishes
this by (i) offering crediting rates which it has the option to change, (ii)
designing annuity products that encourage persistency and (iii) maintaining an
appropriate matching of assets and liabilities. GALIC imposes certain surrender
charges and front-end fees during the first five to ten years of a policy to
discourage customers from surrendering or withdrawing funds in those early
years. Over the past five years, the annual persistency rate of GALIC's annuity
products has averaged 92%.
At December 31, 1994, GALIC had approximately 250,000 annuity policies in
force, nearly all of which were individual contracts. GALIC's policyholders are
employees of over 8,300 institutions nationwide. Of the $4.7 billion in total
statutory reserves held by GALIC as of December 31, 1994, approximately 94% were
attributable to policies in the accumulation phase. Annuity surrender payments
have averaged approximately 8% of statutory reserves over the past five years.
Marketing. GALIC markets its annuities principally to employees of primary
and secondary educational institutions. GALIC's management believes that this
market segment is attractive because of the growth potential and persistency
rate it has demonstrated. In 1994, written premiums from this market segment
represented approximately three-fourths of GALIC's total tax qualified premiums.
GALIC markets its annuity products through approximately 75 managing
general agents ("MGAs") who, in turn, direct more than 1,000 actively producing
independent agents. GALIC has developed its business since 1980 on the basis of
its relationships with MGAs and independent agents primarily through a
consistent marketing approach and responsive service.
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia and Virgin Islands. The geographical distribution of
GALIC's annuity premiums written in 1994 and the nine months ended September 30,
1995 was as follows.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------- ----------------------
LOCATION DOLLARS PERCENTAGE DOLLARS PERCENTAGE
- ------------------------------------------ ------- ---------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California................................ $ 64 18.9% $ 91 20.6%
Florida................................... 26 7.7 38 8.6
Massachusetts............................. 23 6.8 35 7.9
Michigan.................................. 22 6.5 40 9.0
Ohio...................................... 22 6.5 27 6.1
North Carolina............................ 18 5.3 13 2.9
Washington................................ 17 5.0 16 3.6
Texas..................................... 15 4.4 11 2.5
Minnesota................................. 14 4.1 20 4.5
New Jersey................................ 13 3.9 20 4.5
Connecticut............................... 11 3.3 20 4.5
Illinois.................................. 10 3.0 14 3.2
All others................................ 83 24.6 98 22.1
------- ---------- ------- ----------
$ 338 100.0% $ 443 100.0%
====== ========= ====== =========
</TABLE>
Sales of annuities are affected by many factors, including: (i) competitive
rates and products; (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; and
(vii) general economic conditions.
40
<PAGE> 42
Acquisition of Laurentian. On November 13, 1995, AAG completed the
acquisition of Laurentian, a Philadelphia-based life insurance holding company.
Laurentian's principal insurance subsidiaries are Loyal and Prairie.
AAG paid approximately $106 million for the outstanding common stock of
Laurentian and repaid $45 million of Laurentian indebtedness concurrently with
the acquisition. Approximately $90 million of the purchase price came from
GALIC's funds available for investment. AAG funded the balance with the proceeds
of a rights offering completed in August 1995 (which raised approximately $37
million), borrowings under its line of credit and cash on hand.
Loyal, located in Mobile, Alabama, markets various forms of life, accident
and health insurance and annuities, principally with the sponsorship of credit
union and banks. It also writes life and health insurance through independent
brokers. Loyal has been endorsed by 15 state credit union leagues and currently
has access to over three million credit union members and their families. In
1994, Loyal acquired Purity Financial Corporation ("Purity"), a marketing
organization that has developed a selling technique used at credit union
locations which focuses on financial planning for credit union members. Purity
has selling relationships which provide access to more than one million credit
union members. An expanding market segment for Loyal has been the
employer/employee market where products are sold on a payroll deduction basis.
In 1994, and for nine months ended September 30, 1995, Loyal collected $43
million and $31 million, respectively, in life, health and annuity premiums. At
September 30, 1995, Loyal had total statutory assets of approximately $252
million, reserves for future policy benefits of approximately $195 million, and
capital and surplus of approximately $35 million.
Prairie, located in Rapid City, South Dakota, markets individual life
insurance and annuity policies with the sponsorship of state associations of
funeral directors as well as individual funeral directors across the country. At
year-end 1994, Prairie had relationships with more than 2,000 funeral homes
nationwide. In 1994 and for the nine months ended September 30, 1995, Prairie
collected $53 million and $56 million, respectively, in life and annuity
premiums. At September 30, 1995, Prairie had total statutory assets of
approximately $353 million, reserves for future policy benefits of approximately
$312 million and capital and surplus of approximately $24 million.
REGULATION
Each of AFG's insurance company subsidiaries is subject to regulation in
the jurisdictions where it does 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 earnings or statutory surplus. Under applicable restrictions,
the maximum amount of dividends that may be paid by the Company's insurance
subsidiaries during 1995 without seeking regulatory clearance is $179 million.
Changes in state insurance laws and regulations have the potential to
materially affect the revenues and expenses of the insurance operations. The
Company is unable to predict whether or when laws or regulations may be adopted
or enacted in such states or what the impact of such developments would be on
the future operations and revenues of its insurance businesses in such states.
In August 1994, the California Supreme Court upheld Proposition 103, an
insurance reform measure passed by California voters in 1988. In addition to
increasing rate regulation, Proposition 103 gives the California Insurance
Commissioner (the "California Commissioner") power to mandate rate rollbacks for
most lines of property and casualty insurance. By its terms, Proposition 103
does not affect workers'
41
<PAGE> 43
compensation insurance. During 1995, the Company finalized a settlement
agreement with the California Department of Insurance setting its refund
obligation at $19 million.
Prior to January 1, 1995, minimum premium rates for California workers'
compensation insurance were determined by the California Commissioner based in
part upon recommendations of the Workers' Compensation Insurance Rating Bureau
of California. In July 1993, California enacted legislation (the "Reform
Legislation") effecting an immediate overall 7% reduction in workers'
compensation insurance premium rates and replacing the workers' compensation
insurance minimum rate law, effective January 1, 1995, with a procedure
permitting insurers to use any rate within 30 days after its filing with the
California Commissioner unless the rate is disapproved by the California
Commissioner. On December 1, 1993, the California Commissioner ordered an
additional 12.7% minimum premium rate decrease effective January 1, 1994 for new
and renewal policies entered into on or after January 1, 1994. On September 21,
1994, the California Commissioner approved an additional 16% minimum premium
rate decrease effective October 1, 1994 for all new and renewal policies with
anniversary dates on or after October 1, 1994 as well as the unexpired portion
of policies incepting on or after January 1, 1994.
Also as a result of the Reform Legislation's provisions permitting
employers to require injured workers to obtain medical services from "managed"
health care organizations under prescribed circumstances, several health care
organizations have become affiliated, contractually and otherwise, with certain
workers' compensation insurers. During 1994, Republic Indemnity entered into a
managed care arrangement with a health care organization. The Company continues
to evaluate the implications of these provisions, as well as the resulting
affiliations, but is unable to predict their ultimate impact on its workers'
compensation insurance operations.
The NAIC is an organization which is comprised of the chief insurance
regulator for each of the 50 states and the District of Columbia. In 1990, the
NAIC began an accreditation program to ensure that states have adequate
procedures in place for effective insurance regulation, especially with respect
to financial solvency. The accreditation program requires that a state meet
specific minimum standards in over 15 regulatory areas to be considered for
accreditation. The accreditation program is an ongoing process and once
accredited, a state must enact any new or modified standards approved by the
NAIC within two years following adoption. As of September 30, 1995, 46 states
were accredited, including Ohio, California, Delaware, Florida, Illinois and
Indiana, states which regulate AFG's largest insurance subsidiaries.
The NAIC has adopted the Risk Based Capital For Insurers Model Act which
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 Act 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". The risk-based capital formulas became
effective in 1993 for life companies and became effective with the filing of the
1994 Annual Statement for property and casualty companies. Based on the 1994
results of AFG's insurance companies, all such companies are adequately
capitalized.
The NAIC has been considering the adoption of a model investment law for
several years. The current projection for adoption of a model law is 1996, at
the earliest. It is not yet determined whether the model law would be added to
the NAIC accreditation standards so that consideration of the model for adoption
in states would be required for the achievement or continuation of any state's
accreditation. It is not possible to predict the impact of these activities on
AFG's insurance subsidiaries.
42
<PAGE> 44
INVESTMENT PORTFOLIO
General. A breakdown of AFG's September 30, 1995 investment portfolio by
business segment follows (excluding investment in equity securities of investee
corporations).
<TABLE>
<CAPTION>
CARRYING VALUE TOTAL
------------------------------------- MARKET
P&C ANNUITY OTHER TOTAL VALUE
------ ------- ----- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and short-term investments........... $ 151 $ 55 $ 54 $ 260 $ 260
Bonds and redeemable preferred stocks..... 4,351 4,685 44 9,080 9,248
Other stocks, options and warrants........ 204 25 -- 229 229
Loans receivable.......................... 221 472 4 697 697(a)
Real estate and other investments......... 125 36 54 215 215(a)
------ ------ ---- ------- -------
$5,052 $5,273 $156 $10,481 $10,649
====== ====== ==== ======= =======
- ---------------
<FN>
(a) Carrying value used since market values are not readily available.
</TABLE>
Fixed Maturity Investments. Unlike most insurance groups which have
portfolios that are invested heavily in tax-exempt bonds, AFG invests
substantial amounts in taxable bonds. The NAIC assigns quality ratings which
range from Class 1 (highest quality) to Class 6 (lowest quality). The following
table shows AFG's bonds and mandatory redeemable preferred stocks, by NAIC
designation (and comparable Standard & Poor's Corporation rating) as of
September 30, 1995.
<TABLE>
<CAPTION>
% OF
NAIC AMORTIZED MARKET TOTAL
RATING COMPARABLE S&P RATING COST VALUE MARKET
- ------ --------------------- --------- ------ ------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C>
1 AAA, AA, A........................................ $5,918 $6,094 66%
2 BBB............................................... 2,594 2,667 29
------ ------ ---
Total investment grade............................ 8,512 8,761 95
------ ------ ---
3 BB................................................ 318 325 3
4 B................................................. 143 153 2
5 CCC, CC, C........................................ -- -- --
6 D................................................. -- 9 (a)
------ ------ ---
Total non-investment grade........................ 461 487 5
------ ------ ---
Total............................................. $8,973 $9,248 100%
====== ====== ===
- ---------------
<FN>
(a) Less than 1%
</TABLE>
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: credit worthiness, changes in interest rates, the number
of market makers and investors, defaults by major issuers of securities and
public concern about concentrations in certain types of securities by
institutions.
AFG's primary investment objective for bonds and mandatory redeemable
preferred stocks is to receive interest and dividend income rather than to
realize capital gains. AFG invests in bonds and mandatory 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. AFG'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 AFG's concentration in a relatively small number of companies may permit it
to identify investments with above average potential to increase in value.
43
<PAGE> 45
At September 30, 1995, the carrying values and the market values of AFG's
investment in Chiquita and Citicasters, as well as its ownership percentages in
these investee corporations, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------------------------
CARRYING MARKET AFG'S OWNERSHIP
VALUE VALUE PERCENTAGE
-------- ------ ----------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Chiquita................. $255.4 $411.6 45%
Citicasters.............. 72.8 168.4 37%
-------- ------
$328.2 $580.0
======== ======
</TABLE>
CHIQUITA
Chiquita is a leading international marketer, processor and producer of
quality fresh and processed food products. The core of Chiquita's fresh foods
operations is the marketing, distribution and sourcing of bananas. Sales of
bananas comprise approximately 60% of Chiquita's total net sales, excluding its
meat division held for sale. In 1994, Chiquita sold over 40% of its total banana
volumes in each of Europe and North America. Chiquita has generally been able to
obtain a premium price for its bananas due to its reputation for quality and its
innovative marketing techniques. The Company currently owns, either directly or
indirectly, 45% of Chiquita. See "Risk Factors -- Concentration of Certain
Equity Investments" for further discussion of Chiquita's foreign operations.
CITICASTERS
Citicasters owns and operates two network-affiliated television stations,
12 FM radio stations and four AM radio stations. Substantially all of
Citicasters' broadcast revenues come from the sale of advertising time to local
and national advertisers. Local advertisements are sold by each stations' sales
personnel and national spots are sold by independent national sales
representatives.
Citicasters' AM radio stations offer their listeners a wide range of
programs including news, music, discussion, commentary and sports. Citicasters'
FM radio stations offer programming more focused on music. Citicasters'
television stations receive a significant portion of their programming from
their respective networks; the networks sell commercial advertising time within
such programming. The competitive position of the stations is directly affected
by viewer acceptance of network programs. The non-network programs broadcast by
the stations are either produced by the stations or acquired from other sources.
Locally originated programs include a wide range of show types such as news,
entertainment, sports, public affairs and religious programs. At September 30,
1995, the Company controlled 37% of Citicasters (24% through GAI and 13% through
American Financial Enterprises, Inc., an 83%-owned subsidiary of AFG ("AFEI")).
44
<PAGE> 46
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE(A) POSITION
- ---------------------- ------ -------------------------------------------------
<S> <C> <C>
Carl H. Lindner 76 Chairman of the Board and Chief Executive Officer
Carl H. Lindner III 42 President and a Director
S. Craig Lindner 40 Vice Chairman of the Board
Keith E. Lindner 36 Vice Chairman of the Board
Theodore H. Emmerich 69 Director
James E. Evans 49 Senior Vice President, General Counsel and a
Director
Thomas M. Hunt 72 Director
William R. Martin 66 Director
Alfred W. Martinelli 67 Director
Neil M. Hahl 47 Senior Vice President
Thomas E. Mischell 47 Senior Vice President - Taxes
Fred J. Runk 52 Senior Vice President and Treasurer
</TABLE>
- ---------------
(a) As of November 1, 1995
Carl H. Lindner is Chairman of the Board and Chief Executive Officer of the
Company. Mr. Lindner has been Chairman of the Board and Chief Executive Officer
of AFC since it was founded over 35 years ago and has been Chairman of the Board
and Chief Executive Officer of APU since 1987. Mr. Lindner serves as Chairman of
the Board of the following additional companies: AAG, AFEI, Chiquita and
Citicasters. Carl H. Lindner is the father of Carl H. Lindner III, S. Craig
Lindner and Keith E. Lindner.
Carl H. Lindner III is the President of AFG and has been President of GAI
for more than five years. He also has been President of APU since 1991.
S. Craig Lindner is a Vice Chairman of AFG. He has been President of AAG
since 1993 and a Senior Executive Vice President of American Money Management
Corporation, an AFG subsidiary providing investment services to the Company and
certain of its affiliates, for more than five years. Mr. Lindner is also a
director of AAG, Chiquita and Citicasters.
Keith E. Lindner is a Vice Chairman of AFG. He is also President, Chief
Operating Officer and a director of Chiquita.
Theodore H. Emmerich is a retired managing partner of Ernst & Young LLP,
certified public accountants, Cincinnati, Ohio. He is also a director of
Citicasters, Carillon Fund, Inc., Carillon Investment Trust, Gradison-McDonald
Municipal Custodian Trust, Gradison-McDonald Cash Reserve Trust and Summit
Investment Trust.
James E. Evans is Senior Vice President, General Counsel and a director of
AFG. He has served as Vice President and General Counsel of AFC for more than
five years. Mr. Evans is also a director of AFEI and Citicasters.
Thomas M. Hunt has been Chairman of the Board of Hunt Petroleum
Corporation, an oil and gas production company, for over five years.
William R. Martin has been Chairman of the Board of MB Computing, Inc., a
computer software and services company, for more than five years. He is also a
director of AAG.
Alfred W. Martinelli was President and Chief Executive Officer of APU from
1982 until 1987. For more than five years he has been Chairman and Chief
Executive Officer of Buckeye Management Company, an
45
<PAGE> 47
APU subsidiary which is the sole general partner of Buckeye Partners, L.P., a
limited partnership principally engaged in pipeline transportation of refined
petroleum products. He is also a director of AAG.
Neil M. Hahl is a Senior Vice President of the Company. He has been a
Senior Vice President of APU for more than five years.
Thomas E. Mischell is Senior Vice President - Taxes of AFG. He has served
as a Vice President of AFC for more than five years.
Fred J. Runk is Senior Vice President and Treasurer of AFG. He has served
as Vice President and Treasurer of AFC for more than five years. He is also a
director of AFEI and Chiquita.
HOLDINGS OF MANAGEMENT
The following table sets forth information, as of the effective date of the
Merger in April 1995 and at November 15, 1995, concerning ownership of
outstanding AFG Common Stock by the Company's directors and executive officers:
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK HELD AT
HELD AT NOVEMBER 15,
DIRECTOR OR EXECUTIVE OFFICER APRIL 3, 1995(A) 1995(A)(B)
--------------------------------------------------- ---------------- --------------------
<S> <C> <C>
Carl H. Lindner ................................... 11,122,474 11,748,818(b)
Carl H. Lindner III................................ 4,653,129 4,710,607(c)
S. Craig Lindner................................... 4,653,130 4,710,608(c)
Keith E. Lindner................................... 4,653,131 4,710,609(c)
Theodore H. Emmerich............................... 400 400
James E. Evans..................................... 25,000 41,071(d)
Thomas M. Hunt..................................... 3,000 3,000
William R. Martin.................................. -- --
Alfred W. Martinelli............................... 446,799(e) 446,799(e)
Neil M. Hahl....................................... 37,814 37,851
Thomas E. Mischell................................. 9,500 20,439(f)
Fred J. Runk....................................... 725 1,606
---------------- --------------------
Total.................................... 25,605,102 26,431,808
============ ================
</TABLE>
- ---------------
(a) Includes shares held (i) by trusts over which the individual or his spouse
has voting and investment power, (ii) by the minor children, or trusts for
the benefit of the minor children, of the individual listed or (iii) in the
individual's account in the Company's Employee Stock Purchase Plan. Excludes
shares issuable upon the exercise of employee stock options.
(b) Includes 652,722 shares purchased upon exercise of employee stock options in
August 1995 at an aggregate exercise price of $13.6 million and 99,734
shares purchased in October 1995 at an aggregate cost of $2.9 million
pursuant to the provisions of the Company's Dividend Reinvestment Plan.
(c) Includes, for each person, 25,000 shares purchased in an open market
transaction in May 1995 at a cost of $618,000 each. Also includes for each
person 32,478 shares purchased in October 1995 at an aggregate cost of
$950,000 each pursuant to the provisions of the Company's Dividend
Reinvestment Plan.
(d) Includes 4,400 shares purchased in open market transactions in November 1995
at an aggregate cost of $126,500 and 10,819 shares purchased upon exercise
of employee stock options at an exercise price of $238,000.
(e) Represents shares issuable upon conversion of the Company's convertible
preferred stock.
(f) Includes 10,400 shares purchased in open market transactions at an aggregate
cost of $275,425.
46
<PAGE> 48
DESCRIPTION OF COMMON STOCK
AFG is incorporated under the laws of the State of Ohio. The following
description is a summary and is qualified in its entirety by the provisions of
AFG's Articles of Incorporation, Code of Regulations and the Ohio General
Corporation Law.
The total number of authorized shares of Common Stock is 200,000,000.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders. Holders of Common Stock have
the right to cumulate their votes in the election of directors but are not
entitled to any preemptive rights.
Subject to preferences which may be granted to holders of preferred stock,
holders of Common Stock are entitled to the share of such dividends as the Board
of Directors, in its discretion, may validly declare from funds legally
available. In the event of liquidation, each outstanding share of Common Stock
entitles its holder to participate ratably in the assets remaining after the
payment of liabilities and any preferred stock liquidation preferences.
AFG is authorized to issue 12,500,000 shares of voting preferred stock and
12,500,000 shares of nonvoting preferred stock, each without par value. At
September 30, 1995, AFG had 212,698 shares of convertible preferred stock
outstanding. There are 446,799 shares of Common Stock reserved for issuance upon
conversion of the convertible preferred stock. AFG's Articles of Incorporation
authorize the Board of Directors, without further shareholder approval, to
designate for any series of preferred stock not fixed in AFG's Articles of
Incorporation the designations, preferences, conversion rights, and relative,
participating, optional and other special rights, and such qualifications,
limitations or restrictions, as they determine and as are permitted by the Ohio
General Corporation Law.
AFG's stock option plan allows for the grant of options for up to 6.1
million shares of Common Stock at a price not less than the fair market value of
the underlying Common Stock at the date of grant. Options granted to officers
and key employees become exercisable at the rate of 20% per year commencing one
year after grant; those granted to non-employee directors of AFG are fully
exercisable upon grant. All options expire ten years after the date of grant. At
September 30, 1995, options for 2,617,519 shares were outstanding.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to amend the Articles of Incorporation and to
approve mergers, reorganizations, share exchanges and similar transactions.
The Company acts as its own transfer agent and registrar.
CERTAIN UNITED STATES FEDERAL TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following general discussion is a summary of certain U.S. federal
income and estate tax consequences of the ownership and disposition of Common
Stock applicable to Non-U.S. Holders of such Common Stock who acquire and own
such Common Stock as a capital asset within the meaning of Section 1221 of the
Code. A "Non-U.S. Holder" is a person other than (i) a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any state, or (iii)
an estate or trust whose income is includable in gross income for United States
federal income tax purposes regardless of its source. For purposes of the
withholding tax on dividends discussed below, a non-resident fiduciary of an
estate or trust will be considered a Non-U.S. Holder.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular Non-U.S. Holder's tax position and does not consider
U.S. state and local or non-U.S. tax consequences. This discussion also does not
consider the tax consequences to any person who is a shareholder, partner or
beneficiary of a holder of the Common Stock. Further, it does not consider
Non-U.S. Holders subject to special tax treatment under the federal income tax
laws (including banks and insurance companies, dealers in securities, and
holders of securities held as part of a "straddle," "hedge," or "conversion
transaction").
47
<PAGE> 49
The following discussion is based on provisions of the Code, the applicable
Treasury regulations promulgated and proposed thereunder, judicial authority and
administrative interpretations, and the relevant facts as of the date hereof.
The foregoing are subject to change, possibly on a retroactive basis, and any
such change could affect the continuing validity of this discussion.
The following summary is included herein for general information.
Accordingly, each prospective Non-U.S. Holder is urged to consult a tax advisor
with respect to the United States federal tax consequences of acquiring, holding
and disposing of Common Stock, as well as any tax consequences that may arise
under the laws of any U.S. state, local or other U.S. or non-U.S. tax
jurisdiction.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to withholding of U.S. federal income tax at a 30% rate unless such rate
is reduced by an applicable income tax treaty. The Income Tax Treaty Between
Canada and the United States generally reduces the withholding tax rate on
dividends to 15% for holders of less than 10% of the voting stock of the Company
and to 10% for holders of 10% or more of the voting stock of the Company. Under
the third Protocol to the Treaty, which became effective on November 9, 1995,
the withholding tax rate is further reduced for holders of 10% or more of the
voting stock of the Company. Dividends that are effectively connected with such
holder's conduct of a trade or business in the United States or, if a tax treaty
applies, attributable to permanent establishment, or, in the case of an
individual, a "fixed base," in the United States ("U.S. trade or business
income") are generally subject to U.S. federal income tax at regular rates, but
are not generally subject to the 30% withholding tax if the Non-U.S. Holder
files the appropriate form with the payor. Any U.S. trade or business income
received by a Non-U.S. Holder that is a corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be applicable under an income tax treaty.
Dividends paid to an address in a foreign county are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding discussed above, and under the current
interpretation of U.S. Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under proposed U.S. Treasury regulations,
not currently in effect, however, a Non-U.S. Holder of Common Stock who wishes
to claim the benefit of a reduced treaty rate would be required to satisfy
applicable certification and other requirements, including the requirement to
file a form containing the holder's name and address and an official statement
by the competent authority in the foreign country attesting to the holder's
status as a resident thereof.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income treaty, or whose dividends have
otherwise been subjected to withholding in an amount which exceeds such holder's
U.S. federal income tax liability, may obtain a refund of any excess amounts
currently withheld by filing an appropriate claim for a refund with the U.S.
Internal Revenue Service.
DISPOSITION OF COMMON STOCK
Except as described below, Non-U.S. Holders generally will not be subject
to U.S. federal income tax in respect of gain recognized on a disposition of
Common Stock provided that: (a) the gain is not U.S. trade or business income,
(b) the Non-U.S. Holder is not an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and who meets
certain other requirements, (c) the Non-U.S. Holder is not subject to tax
pursuant to the provisions of the U.S. tax law applicable to certain United
States expatriates, and (d) either the Company is not a "U.S. real property
holding corporation" for federal income tax purposes or (i) the Common Stock are
"regularly traded on an established securities market" (within the meaning of
the relevant provisions of the Code) and (ii) the Non-U.S. Holder has not held,
directly or indirectly, at any time during the 5-year period ending on the date
of disposition, more than 5% of the Common Stock. The Company believes that it
is not now and has not been within the past five years, and anticipates that it
will not become, a U.S. real property holding corporation for U.S. federal
income tax purposes.
48
<PAGE> 50
FEDERAL ESTATE TAXES
In general, an individual who is a Non-U.S. Holder for U.S. estate tax
purposes will incur liability for U.S. federal estate tax if the fair market
value of the property included in such individual's taxable estate for U.S.
federal estate tax purposes exceeds the statutory threshold amount. For these
purposes, Common Stock owned or treated as owned by an individual who is a
Non-U.S. Holder at the time of death will be included in the individual's
taxable estate for U.S. federal estate tax purposes, unless an applicable tax
treaty provides otherwise. Under the Protocol, which would have limited
retroactive effect, Common Stock of a Non-U.S. Holder who is a Canadian
resident, for purposes of the Treaty and who is not a citizen of the United
States, would not be includable in such Holder's taxable estate provided that
such shares are not part of the business property of a permanent establishment
or fixed base in the United States, the value of the decedent's worldwide gross
estate does not exceed $1.2 million, and the Company is not and has not been
within the past five years a U.S. real property holding corporation for U.S.
federal income tax purposes.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply whether or
not withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
Non-U.S. Holder resides. The United States backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish the information required under the United States
information reporting requirements) will generally not apply to dividends paid
on Common Stock to a Non-U.S. Holder to an address outside the United States.
Except as provided below, Non-U.S. Holders will not be subject to backup
withholding with respect to the payment of proceeds from the disposition of
Common Stock effected by the foreign office of a broker; provided, however,
that, if the broker is a U.S. person or a U.S. related person, information
reporting (but not backup withholding) would apply unless the broker had
documentary evidence in its records as to the Non-U.S. Holder's foreign status,
or the Non-U.S. Holder certifies as to its foreign status under penalty or
perjury or otherwise establishes an exemption. For this purpose, a "U.S. related
person" is (i) a "controlled foreign corporation" for U.S. federal income tax
purposes, or (ii) a foreign person 50% or more of whose gross income form all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business.
49
<PAGE> 51
UNDERWRITING
Under terms and subject to the conditions contained in an Underwriting
Agreement dated , 1995 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and Furman Selz
Incorporated are acting as representatives (the "Representatives"), have
severally but not jointly agreed to purchase from the Company the following
respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
CS First Boston Corporation...........................
Donaldson, Lufkin & Jenrette Securities Corporation...
Furman Selz Incorporated..............................
---------
Total............................................ 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 600,000 additional shares of
Common Stock at the initial public offering price less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such option may be exercised only to cover over-allotments in the
sale of the shares of Common Stock. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
it was obligated to purchase pursuant to the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the Underwriters and such dealers may allow a discount
of $ per share on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Representatives.
The Company and its executive officers and directors have agreed that they
will not offer, sell, contract to sell, announce their intention to sell,
pledge, or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any shares of its Common Stock or securities convertible into or
exchangeable or exercisable for any shares of the Company's Common Stock without
the prior written consent of CS First Boston Corporation, for a period of 90
days after the date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Each of the Representatives and certain of the Underwriters have provided
from time to time, and expect to provide in the future, investment banking
services to the Company and its affiliates, for which such Underwriters have
received and will receive customary fees and commissions.
50
<PAGE> 52
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of Common Stock in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Common Stock are effected. Accordingly, any resale of Common Stock in
Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights for damages or recission or rights of action under the civil
liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #88/5, a copy of which may be obtained from the Company. Only one such
report must be filed in respect to Common Stock acquired on the same date and
under the same prospectus exemption.
51
<PAGE> 53
LEGAL MATTERS
The legality of the shares of Common Stock and certain other legal matters
in connection with the Offering will be passed upon for the Company by Keating,
Muething & Klekamp. Certain legal matters will be passed upon for the
Underwriters by Taft, Stettinius & Hollister.
EXPERTS
The consolidated financial statements of AFC appearing in AFC's Annual
Report (Form 10-K) for the year ended December 31, 1994, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such report is based in
part on the reports of Deloitte & Touche LLP, independent auditors, relating to
the consolidated financial statements of American Premier Underwriters, Inc. and
of Deloitte & Touche, independent auditors, relating to the consolidated
financial statements of General Cable Corporation. The financial statements
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
The financial statements and the related financial statement schedules
incorporated in this Prospectus by reference from American Premier Underwriters,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated by reference herein, and have been incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
52
<PAGE> 54
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Corporate Structure................... 4
Prospectus Summary.................... 5
Risk Factors.......................... 13
Use of Proceeds....................... 18
Price Range of Common Stock and
Dividends........................... 19
Capitalization........................ 20
Unaudited Pro Forma Financial
Information......................... 21
Business.............................. 25
Management............................ 45
Holdings of Management................ 46
Description of Common Stock........... 47
Certain United States Federal Tax
Consequences to Non-United States
Holders............................. 47
Underwriting.......................... 50
Notice to Canadian Residents.......... 51
Legal Matters......................... 52
Experts............................... 52
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
American
Financial
Group, Inc.
4,000,000 Shares
Common Stock
($1.00 par value)
PROSPECTUS
CS First Boston
Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz Incorporated
- ------------------------------------------------------
<PAGE> 55
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee*.............................. $ 25,815
National Association of Securities Dealers, Inc. filing fee*...................... 13,407
New York Stock Exchange listing fee*.............................................. 16,100
Accounting fees and expenses...................................................... 25,000
Legal fees and expenses........................................................... 17,500
Blue Sky fees and expenses........................................................ 7,500
Printing and engraving expenses................................................... 75,000
Marketing expenses................................................................ 75,000
Miscellaneous..................................................................... 44,678
--------
TOTAL........................................................................ $300,000
========
</TABLE>
- ---------------
* Actual; other expenses are estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Ohio Revised Code, Section 1701.13(E), allows indemnification by the
Registrant to any person made or threatened to be made a party to any
proceedings, other than a proceeding by or in the right of the Registrant, by
reason of the fact that he is or was a director, officer, employee or agent of
the Registrant, against expenses, including judgment and fines, if he acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Registrant and, with respect to criminal actions, in which
he had no reasonable cause to believe that his conduct was unlawful. Similar
provisions apply to actions brought by or in the right of the Registrant, except
that no indemnification shall be made in such cases when the person shall have
been adjudged to be liable for negligence or misconduct to the Registrant unless
deemed otherwise by the court. Indemnifications are to be made by a majority
vote of a quorum of disinterested directors or the written opinion of
independent counsel or by the shareholders or by the court. The Registrant's
Code of Regulations extends such indemnification.
The Registrant maintains, at its expense, Directors and Officers Liability
and Company Reimbursement Liability Insurance. The Directors and Officers
Liability portion of such policy covers all directors and officers of the
Registrant and of the companies which are, directly or indirectly, more than 50%
owned by the Registrant. The policy provides for payment on behalf of the
directors and officers, up to the policy limits and after expenditure of a
specified deductible, of all Loss (as defined) from claims made against them
during the policy period for defined wrongful acts, which include errors,
misstatements or misleading statements, acts or omissions and neglect or breach
of duty by directors and officers in the discharge of their individual or
collective duties as such. The insurance includes the cost of investigations and
defenses, appeals and bonds and settlements and judgments, but not fines or
penalties imposed by law. The insurance does not cover any claim arising out of
acts alleged to have been committed prior to October 24, 1978. The insurer limit
of liability under the policy is $50,000,000 in the aggregate for all losses
each year subject to certain individual and aggregate deductibles. The policy
contains various exclusions and reporting requirements.
The Registrant also has entered into indemnification agreements with its
executive officers and directors providing for indemnification against certain
liabilities to the fullest extent provided by Ohio law.
II-1
<PAGE> 56
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<C> <S>
1 Form of Proposed Underwriting Agreement.
5 Opinion of Keating, Muething & Klekamp as to legality of the shares of Common
Stock.
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
23.3 Consent of Keating, Muething & Klekamp (contained in Exhibit 5).
24 Powers of Attorney (contained on the signature page).
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 57
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Cincinnati, State of Ohio, as of the 17th day of
November, 1995.
AMERICAN FINANCIAL GROUP, INC.
By: CARL H. LINDNER
-----------------------------
Carl H. Lindner
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person below whose signature is
preceded by an (*) hereby constitutes and appoints Fred J. Runk and James C.
Kennedy, or either of them, his true and lawful attorney and agent, to do any
and all acts and instruments for him and in his name in the capacity indicated
below, which said attorneys and agents, or either of them, may deem necessary or
advisable to enable American Financial Group, Inc. to comply with the Securities
Act of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign amendments
(including post-effective amendments).
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* CARL H. LINDNER Chairman of the Board and Chief November 17, 1995
- ------------------------------
Carl H. Lindner Executive Officer and a Director
* CARL H. LINDNER III Director November 17, 1995
- ------------------------------
Carl H. Lindner III
* S. CRAIG LINDNER Director November 17, 1995
- ------------------------------
S. Craig Lindner
* KEITH E. LINDNER Director November 17, 1995
- ------------------------------
Keith E. Lindner
* JAMES E. EVANS Director November 17, 1995
- ------------------------------
James E. Evans
* THEODORE H. EMMERICH Director November 17, 1995
- ------------------------------
Theodore H. Emmerich
* WILLIAM R. MARTIN Director November 17, 1995
- ------------------------------
William R. Martin
* ALFRED W. MARTINELLI Director November 17, 1995
- ------------------------------
Alfred W. Martinelli
FRED J. RUNK Senior Vice President and Treasurer November 17, 1995
- ------------------------------
Fred J. Runk (Principal Financial and Accounting
Officer)
</TABLE>
II-3
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- --------------- -----------------------
<C> <S>
1 Form of Proposed Underwriting Agreement.
5 Opinion of Keating, Muething & Klekamp as to
legality of the shares of Common Stock.
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
23.3 Consent of Keating, Muething & Klekamp (contained in Exhibit 5).
24 Powers of Attorney (contained on the signature page).
</TABLE>
II-4
<PAGE> 1
Exhibit 1
4,000,000 SHARES
AMERICAN FINANCIAL GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
December __, 1995
CS FIRST BOSTON CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ INCORPORATED
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, N.Y. 10055
Dear Sirs:
1. Introductory. American Financial Group, Inc., an Ohio corporation
("Company"), proposes to issue and sell 4,000,000 shares ("Firm Securities") of
its common stock, $1.00 par value ("Securities"), and also proposes to issue
and sell to the Underwriters, at the option of the Underwriters, an aggregate
of not more than 600,000 additional shares ("Optional Securities") of its
Securities as set forth below. The Firm Securities and the Optional Securities
are herein collectively called the "Offered Securities". The Company hereby
agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 33- ) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i)
has been declared effective under the Securities Act of 1933 ("Act")
and is not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration statement") has been declared effective, either
(i) an additional registration statement ("additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such
Rule and the Offered Securities all have been duly registered under the
Act pursuant to the initial registration statement and, if applicable,
the additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment
<PAGE> 2
to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the
most recent amendment (if any) to each such registration statement has
been declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the
initial registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement means
(i) if the Company has advised the Representatives that it does not
propose to amend such registration statement, the date and time as of
which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration statement,
as amended at its Effective Time, including all material incorporated
by reference therein, including all information contained in the
additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act,
is hereinafter referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if
any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "Additional Registration Statement". The Initial Registration
Statement and the Additional Registration Statement are herein referred
to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and
in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement,
including all material incorporated by reference in such prospectus, is
hereinafter referred to as the "Prospectus". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (i)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the rules and regulations of the Commission
("Rules and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading
and (iii) on the date of this Agreement, the Initial Registration
Statement and, if the Effective Time of the Additional Registration
Statement is prior
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<PAGE> 3
to the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required)
at the Effective Date of the Additional Registration Statement in which
the Prospectus is included, each Registration Statement and the
Prospectus will conform, in all respects to the requirements of the Act
and the Rules and Regulations, and neither of such documents includes,
or will include, any untrue statement of a material fact or omits, or
will omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. If the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all respects to the requirements of the Act
and the Rules and Regulations, neither of such documents will include
any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and no Additional Registration Statement has been
or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(b).
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Ohio, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification, except
where the failure to so qualify will not, individually or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(d) Each subsidiary of the Company listed on Schedule A
annexed hereto has been duly incorporated and is an existing
corporation in good standing under the laws of the jurisdiction of its
incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus;
and each such subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to so qualify will not, individually or in the aggregate, have
a material adverse effect on the Company and its subsidiaries taken as
a whole; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued
and is fully paid and nonassessable; and the capital stock of each such
subsidiary owned by the Company, directly or through subsidiaries, is
owned free from liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares
of capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when the
Offered Securities have been delivered and paid for in accordance with
this Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against
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<PAGE> 4
the Company or any Underwriter for a brokerage commission, finder's fee
or other like payment with respect to the Offered Securities.
(g) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(h) The Offered Securities have been approved for listing on
the New York Stock Exchange subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
for the consummation of the transactions contemplated by this Agreement
in connection with the issuance and sale of the Offered Securities by
the Company, except such as have been obtained and made under the Act
and such as may be required under state securities laws.
(j) The execution, delivery and performance of this
Agreement, and the issuance and sale of the Offered Securities will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or Code of Regulations or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to authorize,
issue and sell the Offered Securities as contemplated by this
Agreement.
(k) This Agreement has been duly authorized, executed and
delivered by the Company.
(l) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them, in each case free
from liens, encumbrances and defects that would materially affect the
value thereof or materially interfere with the use made or to be made
thereof by them; and except as disclosed in the Prospectus, the Company
and its subsidiaries hold any leased real or personal property under
valid and enforceable leases with no exceptions that would materially
interfere with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the businesses now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a material adverse effect on the Company and its
subsidiaries taken as a whole.
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<PAGE> 5
(o) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(p) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute, any
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), owns or
operates any real property contaminated with any substance that is
subject to any environmental laws, is liable for any off-site disposal
or contamination pursuant to any environmental laws, or is subject to
any claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
condition (financial or other), business, prospects or results of
operations of the Company and its subsidiaries taken as a whole, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(r) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and,
except as noted thereon, such financial statements have been prepared
in conformity with the generally accepted accounting principles in the
United States applied on a consistent basis; and the schedules included
in each Registration Statement present fairly the information required
to be stated therein.
(s) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
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<PAGE> 6
(u) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida Statutes
and the Company agrees to comply with such Section if prior to the
completion of the distribution of the Offered Securities it commences
doing such business.
(v) Except as set forth in the Prospectus, (i) all of the
outstanding shares of capital stock and other ownership interests of
the Company and any of its subsidiaries in Chiquita Brands
International, Inc. ("Chiquita"), Citicasters Inc. ("Citicasters") and
American Financial Enterprises, Inc. ("AFEI") (each of Chiquita,
Citicasters and AFEI, an "AFG Affiliate" and, collectively, the "AFG
Affiliates") have been validly issued and are fully paid and
nonassessable and are beneficially owned by either the Company or
American Financial Corporation ("AFC") or by one of their directly or
indirectly wholly owned subsidiaries free and clear of all liens,
charges, claims or encumbrances, (ii) except as disclosed in the
Affiliate SEC Filings (as defined in Section 2(x) hereof), there are no
outstanding subscriptions, options, warrants, calls, rights,
convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other
ownership interest of any of the AFG Affiliates or securities
convertible into, exchangeable for or evidencing the right to subscribe
for any shares of such capital stock or other ownership interest, or
otherwise obligating any such AFG Affiliate to issue, transfer or sell
any such capital stock or other securities or other ownership interest
and (iii) there are no voting trusts or other arrangements or
understandings to which the Company, any subsidiary of the Company or
any of the AFG Affiliates is a party with respect to the voting of the
capital stock or other ownership interest of the AFG Affiliates.
(w) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not
(i) constitute a breach or violation of or default under the Articles
of Incorporation or Code of Regulations or by-laws or other charter
documents of any AFG Affiliate or any of its subsidiaries or (ii)
violate, conflict with or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the
properties or assets of any AFG Affiliate or any of its subsidiaries
under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which any AFG Affiliate or any of its
subsidiaries is a party or to which they or any of their respective
properties or assets may be subject, other than, in the case of clause
(ii), breaches, conflicts or violations that would not have a material
adverse effect on the Company and its subsidiaries taken as a whole.
The execution, delivery and performance by the Company of this
Agreement and the consummation by the Company of the transactions
contemplated hereby will not constitute a breach or violation of or
default under any law, rule or regulation or any judgment, decree,
order, governmental permit or license to which any AFG Affiliate or any
of its subsidiaries is subject, except to the extent the same would not
have a material adverse effect on the Company and its subsidiaries
taken as a whole.
(x) The Company has previously delivered to you true and
complete copies of each AFG Affiliate's (i) Annual Report on Form 10-K
for the year ended December 31, 1994, as filed with the Commission, and
all amendments thereto; (ii) Quarterly Reports on Form 10- Q for the
periods ended March 31, 1995, June 30, 1995 and September 30, 1995, as
filed with the SEC: (iii) proxy statements relating to all meetings of
its shareholders (whether annual or special) held or scheduled to be
held since January 1, 1995; and (iv) all other reports, statements and
registration statements (including Current Reports on Form 8-K) filed
by it with the Commission since December 31, 1994 (collectively, the
"Affiliate SEC Filings"). As of their respective dates,
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<PAGE> 7
the Affiliate SEC Filings did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of each AFG Affiliate included in the Affiliate
SEC Filings present fairly, in all materials respects, the financial
condition, results of operations and changes in financial position of
such AFG Affiliate as at the dates or for the periods indicated therein
in conformity with generally accepted accounting principles applied on
a consistent basis.
(y) Except as set forth in the Affiliate SEC Filings or the
Prospectus, since December 31, 1994, each AFG Affiliate and its
subsidiaries has conducted business only in the ordinary and usual
course and there has not occurred any adverse change in the financial
condition, business, results of operations, prospects, properties or
assets of the AFG Affiliates and their subsidiaries taken as a whole
that, in the aggregate, may reasonably be expected to have a material
adverse effect on the Company and its subsidiaries taken as a whole.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price of $ per share, the
respective numbers of shares of Firm Securities set forth opposite the names of
the Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price by
certified or official bank check or checks in New York Clearing House (next
day) funds drawn to the order of the Company at the office of
, at A.M., New York time, on , or at such other
time not later than seven full business days thereafter as CS First Boston
Corporation ("CS First Boston") and the Company determine, such time being
herein referred to as the "First Closing Date". For purposes of Rule 15c6-1
under the Securities Exchange Act of 1934, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CS First Boston requests and will be made available for checking
and packaging at the above office of at least 24
hours prior to the First Closing Date.
In addition, upon written notice from CS First Boston given to the
Company from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CS First Boston to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CS First Boston to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each
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<PAGE> 8
Optional Closing Date, if any, being sometimes referred to as a "Closing
Date"), shall be determined by CS First Boston but shall be not later than five
full business days after written notice of election to purchase Optional
Securities is given. The Company will deliver the Optional Securities being
purchased on each Optional Closing Date to the Representatives for the accounts
of the several Underwriters, against payment of the purchase price therefor by
certified or official bank check or checks in New York Clearing House (next
day) funds drawn to the order of the Company, at the above office of
. The certificates for the Optional Securities being purchased
on each Optional Closing Date will be in definitive form, in such denominations
and registered in such names as CS First Boston requests upon reasonable written
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of at a
reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CS First Boston, subparagraph (4)) of Rule 424(b) not later than the
earlier of (A) the second business day following the execution and
delivery of this Agreement or (B) the fifteenth business day after the
Effective Date of the Initial Registration Statement. The Company will
advise CS First Boston promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not
occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectuses is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CS First Boston.
(b) The Company will advise CS First Boston promptly of any
proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or the
Initial Registration Statement, the Additional Registration Statement
(if any) or the Prospectus and will not effect such amendment or
supplementation without CS First Boston's consent; and the Company will
also advise CS First Boston promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of
the institution by the Commission of any stop order proceedings in
respect of a Registration Statement and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CS First Boston of such event and will
promptly prepare and file with the
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<PAGE> 9
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect
such compliance. Neither CS First Boston's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (four of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as delivery of a prospectus relating to the Offered Securities is
required to be delivered under the Act in connection with sales by any
Underwriter or dealer, the Prospectus and all amendments and
supplements to such documents, in each case in such quantities as CS
First Boston reasonably requests. The Prospectus shall be so furnished
on or prior to 3:00 P.M., New York time, on the business day following
the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will
pay the expenses of printing and distributing to the Underwriters all
such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as CS
First Boston designates and will continue such qualifications in effect
so long as required for the distribution.
(g) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to shareholders for such year; and
the Company will furnish to the Representatives (i) as soon as
available, a copy of each report and any definitive proxy statement of
the Company filed with the Commission under the Securities Exchange Act
of 1934 or mailed to shareholders, and (ii) from time to time, such
other information concerning the Company as CS First Boston may
reasonably request.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement and will reimburse
the Underwriters (if and to the extent incurred by them) for any filing
fees and other reasonable expenses (including fees and disbursements
of counsel which attorneys' fees shall not, in the aggregate, exceed
Fifteen Thousand Dollars ($15,000)) incurred by them in connection with
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CS First Boston designates and the printing of
memoranda relating thereto, for the filing fee of the National
Association of Securities Dealers, Inc. relating to the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments
and supplements thereto) to the Underwriters.
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<PAGE> 10
(i) For a period of 90 days after the date of the initial
public offering of the Offered Securities, the Company will not, and
will cause its directors and executive officers not to, offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of the Company's Securities
or securities convertible into or exchangeable or exercisable for any
shares of the Company's Securities, or publicly disclose the intention
to make any such offer, sale, pledge, disposal or filing, without the
prior written consent of CS First Boston, except issuances of
Securities pursuant to the conversion or exchange of convertible or
exchangeable securities in connection with the Plan of Reorganization
of the Penn Central Transportation Company, or the exercise of warrants
or options, in each case outstanding on the date hereof, grants of
employee stock options pursuant to the terms of a plan in effect on the
date hereof, issuances of Securities pursuant to the exercise of such
options or the exercise of any other employee stock options outstanding
on the date hereof or issuances of Securities pursuant to the Company's
dividend reinvestment plan or existing employee stock purchase plans or
other existing employee benefit plans of the Company or its
subsidiaries.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Ernst & Young LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules of AFC and American Premier Underwriters, Inc.
examined by them and included in the Registration Statements
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements of the
Company included in the Registration Statements;
(iii) on the basis of the review referred to in clause
(ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements of the
Company included in the Registration Statements do not
comply as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements for them to be in
conformity with generally accepted accounting
principles;
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<PAGE> 11
(B) at the date of the latest available
balance sheet of the Company read by such accountants,
or at a subsequent specified date not more than five
days prior to the date of this Agreement, there was
any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the
Company and its consolidated subsidiaries or, at the
date of the latest available balance sheet of the
Company read by such accountants, there was any
decrease in consolidated net assets, as compared with
amounts shown on the latest balance sheet included in
the Prospectus; or
(C) for the period from the closing date of
the latest income statement of the Company included in
the Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year and with the
period of corresponding length ended the date of the
latest income statement included in the Prospectus, in
net operating income or in the total or per share
amounts of consolidated income before extraordinary
items or net income,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter;
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise
specified in such letter; and
(v) While they do not express any opinion on the
unaudited pro forma condensed consolidated financial
statements included in the Registration Statement or on the
pro forma adjustments applied to the historical amounts
included in those statements, they have:
(A) Read the unaudited pro forma condensed
consolidated statements of income for the year ended
December 31, 1994, and the nine-month period ended
September 30, 1995, included in the Registration
Statement;
(B) Made inquires of certain officials of
the Company who have responsibility for financial and
accounting matters about:
(i) The basis for their determination
of the pro forma adjustments, and
(ii) Whether the unaudited pro forma
condensed consolidated financial
statements referred to in (v)(A)
comply in form in all material
respects with the applicable
accounting requirements of Rule 11-02
of Regulation S-X; and
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<PAGE> 12
(C) Checked the arithmetic accuracy of the
application of the pro forma adjustments to the
historical amounts in the unaudited pro forma
condensed consolidated financial statements,
and nothing has come to their attention as a
result of the procedures specified in this paragraph
(v) that has caused them to believe that the
unaudited pro forma condensed consolidated financial
statements referred to in (v)(A) do not comply in
form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been
properly applied to the historical amounts in the
compilation of those statements.
For purposes of this subsection 6(a), (i) if the Effective
Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement, "Registration
Statements" shall mean the initial registration statement as
proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time,
(ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this
Agreement but the Effective Time of the Additional
Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration
Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its
Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements. All
financial statements and schedules included in material
incorporated by reference into the Prospectus shall be deemed
included in the Registration Statements for purposes of this
subsection.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or such later
date as shall have been consented to by CS First Boston. If the
Effective Time of the Additional Registration Statement (if any) is
not prior the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on
the date of this Agreement or, if earlier, the time the Prospectus is
printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CS First Boston.
If the Effective Time of the Initial Registration Statement is prior
to the execution and delivery of this Agreement, the Prospectus shall
have been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose
shall have been instituted or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is
material and adverse and makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating
of any debt securities or preferred stock of the Company by any
"nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Act), or any public announcement
that any such organization has under surveillance or review its rating
of any debt securities or preferred stock of the Company (other than
an
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<PAGE> 13
announcement with positive implications of a possible upgrading, and
no implication of a possible downgrading, of such rating); (iii) any
suspension or limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any
banking moratorium declared by U.S. Federal or New York authorities;
or (v) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Keating, Muething & Klekamp, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Ohio, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; and, to such counsel's knowledge, the Company is
duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification;
(ii) Each subsidiary of the Company listed on
Schedule A annexed hereto (for purposes of this Section 6(d),
the "Subsidiaries") has been duly incorporated and is an
existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus; and, to such
counsel's knowledge, each Subsidiary is duly qualified to do
business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except when the failure to be so qualified
would not have a material adverse effect on the condition
(financial or otherwise) of the Company and its subsidiaries
taken as a whole; all of the issued and outstanding capital
stock of each Subsidiary has been duly authorized and validly
issued and is fully paid and nonassessable; and, to such
counsel's knowledge, the capital stock of each Subsidiary
owned by the Company, directly or through Subsidiaries, is
owned free from liens, encumbrances and defects.
(iii) The Offered Securities delivered on such
Closing Date and all other outstanding shares of the Common
Stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the
description thereof contained in the Prospectus; and the
shareholders of the Company have no preemptive rights with
respect to the Securities;
(iv) There are no contracts, agreements or
understandings known to such counsel between the Company and
any person granting such person the right to require the
Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act;
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<PAGE> 14
(v) The Company and its subsidiaries possess
adequate certificates, authorizations or permits issued by
appropriate governmental agencies or bodies necessary to
conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
material adverse effect on the Company and its subsidiaries
taken as a whole.
(vi) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term
is defined in the Investment Company Act of 1940;
(vii) No consent, approval, authorization or order
of, or filing with, any governmental agency or body or any
court is required for the consummation of the transactions
contemplated by this Agreement in connection with the issuance
or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and the Rules and
Regulations and such as may be required under state securities
laws (as to which state securities laws counsel need express
no opinion);
(viii) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any statute,
rule, regulation or order of any governmental agency or body
or any court having jurisdiction over the Company or any
Subsidiary or any of their properties, or any agreement or
instrument known to such counsel to which the Company or any
such Subsidiary is a party or by which the Company or any such
Subsidiary is bound or to which any of the properties of the
Company or any such Subsidiary is subject, or the charter or
Code of Regulations or by-laws or other charter documents of
the Company or any such Subsidiary, and the Company has full
power and authority to authorize, issue and sell the Offered
Securities as contemplated by this Agreement;
(ix) Except as disclosed in the Prospectus, such
counsel knows of no actions, suits or proceedings pending
against or affecting the Company, the Subsidiaries or any of
their respective properties that, if determined adversely to
the Company or any of the Subsidiaries, would individually or
in the aggregate have a material adverse effect on the
condition (financial or other), business, prospects or results
of operations of the Company and its subsidiaries taken as a
whole, or would materially and adversely affect the ability of
the Company to perform its obligations under this Agreement,
or which are otherwise material in the context of the sale of
the Offered Securities; and no such actions, suits or
proceedings are, to such counsel's knowledge, threatened or
contemplated.
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<PAGE> 15
(x) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act, and
each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any
part of a Registration Statement or any amendment thereto, as
of its effective date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements
and Prospectus of statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel
do not know of any legal or governmental proceedings required
to be described in a Registration Statement or the Prospectus
which are not described as required or of any contracts or
documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel
need express no opinion as to the financial statements or
other financial data contained in the Registration Statements
or the Prospectus; and
(xi) This Agreement has been duly authorized,
executed and delivered by the Company.
(xii) The Offered Securities have been approved for
listing on the New York Stock Exchange subject to notice of
issuance.
(xiii) To the best of such counsel's knowledge after
due inquiry, except as set forth in the Prospectus, (i) all
of the outstanding shares of capital stock and other ownership
interests of the Company and any of its subsidiaries in
Chiquita, Citicasters and AFEI have been validly issued and
are fully paid and nonassessable and are beneficially owned by
either the Company or AFC or one of its directly or indirectly
wholly owned subsidiaries free and clear of all liens,
charges, claims or encumbrances, (ii) except as disclosed in
the Affiliate SEC Filings, there are no outstanding
subscriptions, options, warrants, calls, rights, convertible
securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other
ownership interest of any of the AFG Affiliates or securities
convertible into, exchangeable for or evidencing the right to
subscribe for any shares of such capital stock or other
ownership interest, or otherwise obligating any such AFG
Affiliate to issue, transfer or sell any such capital stock or
other securities or other ownership interest and (iii) there
are no voting trusts or other arrangements or understandings
to which the Company, any subsidiary of the Company or any of
the
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<PAGE> 16
AFG Affiliates is a party with respect to the voting of the
capital stock or other ownership interest of the AFG
Affiliates.
(xiv) The execution, delivery and performance of this
Agreement and the consummation of the transactions
contemplated hereby will not (i) constitute a breach or
violation of or default under the Articles of Incorporation,
Code of Regulations, by-laws or other charter documents of any
AFG Affiliate or any of the Subsidiaries or (ii) violate,
conflict with or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under,
or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of
any AFG Affiliate or any of the Subsidiaries under any of the
terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which any AFG Affiliate or any of
the Subsidiaries is a party or to which they or any of their
respective properties or assets may be subject, other than, in
the case of clause (ii), breaches, conflicts or violations
that would not have a material adverse effect on the Company
and its subsidiaries taken as a whole. The execution,
delivery and performance by the Company of this Agreement and
the consummation by the Company of the transactions
contemplated hereby will not constitute a breach or violation
of or default under any law, rule or regulation or any
judgment, decree, order, governmental permit or license to
which any AFG Affiliate or any of the Subsidiaries is subject,
except to the extent the same would not have a material
adverse effect on the Company and its subsidiaries taken as a
whole.
In rendering the foregoing opinion, such counsel may rely, to
the extent they deem such reliance proper, on the opinions (in form
and substance reasonably satisfactory to Underwriters' counsel) of
other counsel reasonably acceptable to Underwriters' counsel as to
matters governed by the laws of jurisdictions other than the United
States, the State of Ohio or the General Corporation Law of the State
of Delaware and, as to matters of fact, upon certificates of officers
of the Company and of government officials; provided that such counsel
shall state that the opinion of any other counsel is in form
satisfactory to such counsel and, in such counsel's opinion, such
counsel and the Representatives are justified in relying on such
opinions of other counsel. Copies of all such opinions and
certificates shall be furnished to counsel to the Underwriters on each
Closing Date. Such counsel may state that they are not passing on
matters relating to patents and trademarks.
(e) The Representatives shall have received from Taft,
Stettinius & Hollister, counsel for the Underwriters, such opinion or
opinions, dated such Closing Date, with respect to the incorporation
of the Company, the sufficiency of all corporate proceedings, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice-President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date, that no stop order suspending
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<PAGE> 17
the effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated
by the Commission; the Additional Registration Statement (if any)
satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to
any Underwriter; and, subsequent to the date of the most recent
financial statements in the Prospectus, there has been no material
adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole except as set forth in or contemplated
by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated
such Closing Date, of Ernst & Young LLP which meets the requirements
of subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than five days
prior to such Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CS First Boston may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (b) below; and provided,
further, that with respect to any untrue statement or omission or alleged
untrue statement or omission made in any preliminary prospectus the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages
or liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus (exclusive of material incorporated by reference) if the Company
had previously furnished copies thereof to such Underwriter.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained
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<PAGE> 18
in any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representatives specifically for
use therein, and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legends concerning over-allotments and stabilizing on the
inside front cover page, the concession and reallowance figures appearing in
the fourth paragraph under the caption "Underwriting" and the information
appearing in the seventh paragraph under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above or to the extent the indemnifying party is
not prejudiced as a proximate result of such failure. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action. An indemnifying party will not be liable for any settlement of
any action or claim effected without its prior written consent, provided that
such consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The
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<PAGE> 19
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (d).
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each director of the Company, to each officer of the
Company who has signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing
Date, CS First Boston may make arrangements satisfactory to the Company for the
purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Offered Securities that
such defaulting Underwriters agreed but failed to purchase on such Closing
Date. If any Underwriter or Underwriters so default and the aggregate number of
shares of Offered Securities with respect to which such default or defaults
occur exceeds 10% of the total number of shares of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date and arrangements
satisfactory to CS First Boston and the Company for the purchase of such
Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 9
(provided that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and
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<PAGE> 20
will survive delivery of and payment for the Offered Securities. If this
Agreement is terminated pursuant to Section 8 or if for any reason the purchase
of the Offered Securities by the Underwriters is not consummated, the Company
shall remain responsible for the expenses to be paid or reimbursed by it
pursuant to Section 5 and the respective obligations of the Company and the
Underwriters pursuant to Section 7 shall remain in effect, and if any Offered
Securities have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o CS First Boston Corporation, Park Avenue
Plaza, New York, N.Y. 10055, Attention: Investment Banking
Department-Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at American Financial
Group, Inc., One East Fourth Street, Cincinnati, Ohio 45202, Attention: James
C. Kennedy, Corporate Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 7, and no
other person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action
under this Agreement taken by the Representatives jointly or by CS First Boston
will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
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<PAGE> 21
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement between
the Company and the several Underwriters in accordance with its terms.
Very truly yours,
AMERICAN FINANCIAL GROUP, INC.
By
------------------------------
[Title]
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CS FIRST BOSTON CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ INCORPORATED
Acting on behalf of themselves and
as the Representatives of the several
Underwriters.
By CS FIRST BOSTON CORPORATION
By
---------------------------
[Title]
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<PAGE> 22
SCHEDULE A
Underwriter Number of
----------- Firm Securities
---------------
CS First Boston Corporation.......................
Donaldson, Lufkin & Jenrette
Securities Corporation..........................
Furman Selz Incorporated..........................
________________________
Total
========================
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<PAGE> 1
EXHIBIT 5
KEATING, MUETHING & KLEKAMP
ONE EAST FOURTH STREET
CINCINNATI, OHIO 45202
November 17, 1995
American Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
Gentlemen:
We have examined the corporate records and proceedings of American
Financial Group, Inc. (the "Corporation") with respect to:
1. The organization of the Corporation;
2. The legal sufficiency of all corporate proceedings of the Corporation in
connection with the creation and issuance of all of the present outstanding and
issued Common Shares of the Corporation; and
3. The legal sufficiency of all corporate proceedings taken in connection
with the authorization of the issuance of 4,000,000 shares of Common Shares,
plus up to an additional 600,000 shares to cover an over-allotment option, all
to be issued in a public offering pursuant to a Registration Statement filed
with the Securities and Exchange Commission.
Based upon such examination, we are of the opinion:
1. That the Corporation is a duly organized and validly existing
corporation under the laws of the State of Ohio; and
2. That the Corporation has taken all necessary and required corporate
action in connection with the proposed issuance of the aforesaid 4,600,000
shares of Common Shares and that when, and if, issued, delivered and paid for,
the aforesaid 4,600,000 shares of Common Shares will be duly authorized, validly
issued, fully paid and non-assessable shares of Common Shares of the Corporation
free of any claim of pre-emptive rights.
We hereby consent to be named in the Registration Statement and the
Prospectus part thereof as the attorneys who will pass upon legal matters in
connection with the aforesaid Common Shares and to the filing of this opinion as
an exhibit to the Registration Statement, and furthermore consent to all
references made to this firm in the Registration Statement.
Very truly yours,
KEATING, MUETHING & KLEKAMP
By: GARY P. KREIDER
-----------------------------
Gary P. Kreider
II-5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of American Financial
Group, Inc. for the registration of 4,600,000 shares of Common Stock and to the
incorporation by reference therein of our report dated March 28, 1995, with
respect to the consolidated financial statements and schedules of American
Financial Corporation included in its Annual Report (Form 10-K) for the year
ended December 31, 1994, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Cincinnati, Ohio
November 17, 1995
II-6
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-3 of American Financial Group, Inc., for the registration of 4,600,000
shares of its Common Stock, of (a) the report of Deloitte & Touche LLP dated
February 15, 1995 (March 23, 1995 with respect to the acquisition of American
Financial Corporation as discussed in Note 2 to the financial statements)
relating to the consolidated financial statements of American Premier
Underwriters, Inc. and (b) the report of Deloitte & Touche dated February 18,
1994 relating to the consolidated financial statements of General Cable
Corporation, both appearing in the American Financial Corporation Annual Report
on Form 10-K for the year ended December 31, 1994, and to the reference to
Deloitte & Touche LLP and Deloitte & Touche under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
November 17, 1995
II-7
