SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2 to
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1996 No. 1-11453
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1422526
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
<PAGE>
PART I
ITEM 1
Business
Introduction
American Financial Group, Inc. ("AFG") was incorporated as an Ohio
corporation in 1994. Its address is One East Fourth Street, Cincinnati, Ohio
45202; its phone number is (513) 579-2121. AFG 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 seventeenth largest property and casualty group in the United States based
on 1995 statutory net premiums written of $3.1 billion. AFG was formed for
the purpose of acquiring American Financial Corporation ("AFC") and American
Premier Underwriters, Inc. ("APU" or "American Premier") in merger transactions
completed in April 1995 (the "Mergers").
For financial reporting purposes, because the former shareholders of AFC
owned more than 50% of AFG following the Mergers, the financial statements of
AFG for periods prior to the Mergers are those of AFC. The operations of APU
are included in AFG's financial statements from the effective date of the
Mergers.
At December 31, 1996, Carl H. Lindner, members of his immediate family and
trusts for their benefit (collectively the "Lindner Family") beneficially
owned approximately 43% of AFG's outstanding voting common stock.
General
Generally, companies have been included in AFG's consolidated financial
statements when the ownership of voting securities has exceeded 50%; for
investments below that level but above 20%, AFG has accounted for the
investments as investees. (See Note F to AFG's financial statements.)
The following table shows AFG's percentage ownership of voting securities of
its significant affiliates over the past several years:
Voting Ownership at December 31,
1996 1995 1994 1993 1992
American Financial Corporation 76% 79% n/a n/a n/a
American Premier Underwriters 100% 100% 42% 41% 51%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 81% 81% 80% 80% 82%
American Financial Enterprises 83% 83% 83% 83% 83%
Chiquita Brands International 43% 44% 46% 46% 46%
Citicasters (a) 38% 37% 20% 40%
General Cable - - (b) 45% 45%
(a) Sold in September 1996.
(b) Sold in June 1994.
<PAGE>
The following summarizes the more significant changes in
ownership percentages shown in the above table.
American Financial Corporation For financial reporting purposes, AFC is
the predecessor to AFG. In April 1995, AFC became a subsidiary of AFG as a
result of the Mergers. Holders of AFC Series F and G Preferred Stock were
granted voting rights equal to approximately 21% of the total voting power of
AFC shareholders immediately prior to the Mergers.
American Premier Underwriters In 1993, American Financial Enterprises, Inc.
("AFEI") sold 4.5 million shares of American Premier common stock in a
secondary public offering. In April 1995, APU became a subsidiary of AFG as a
result of the Mergers.
1
<PAGE>
Citicasters In December 1993, Great American Communications Company
("GACC") completed a prepackaged plan of reorganization. In the restructuring,
AFC's previous holdings of GACC stock and debt were exchanged for 20% of the
new common stock. GACC changed its name to Citicasters to reflect the nature
of its business. In June 1994, AFEI purchased approximately 10% of Citicasters
common stock. In the second half of 1994, Citicasters repurchased and retired
approximately 21% of its common stock. In September 1996, the investments in
Citicasters were sold to an unaffiliated company.
General Cable In 1994, AFC sold its investment in General Cable to an
unaffiliated company.
Property and Casualty Insurance Operations
AFG manages and operates its property and casualty business in three major
business segments: Nonstandard 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. AFG's property and casualty insurance
operations employ approximately 7,800 persons.
Unless indicated otherwise, the financial information presented for the
property and casualty insurance operations is presented based on generally
accepted accounting principles ("GAAP") and includes the insurance operations
of AFC and American Premier for all periods.
The following table shows the size (in millions), segment and A.M. Best
rating of AFG's major property and casualty insurance subsidiaries.
1996 Net Written Premiums
Commercial NSA A.M. Best
and Personal Specialty Group Rating
Great American $660 $636 $ - A
Republic Indemnity - 222 - A
Mid-Continent - 90 - A
American Empire Surplus Lines - 28 - A+
Atlanta Casualty - - 391 A
Windsor - - 323 A
Infinity - - 232 A
Leader National - - 63 A-
Transport - - 106 A
Other - 17 20
$660 $993 $1,135
The primary objective of the property and casualty insurance operations is
to achieve underwriting profitability. Underwriting profitability is measured
by the combined ratio which is a sum of the ratios of underwriting losses, loss
adjustment expenses ("LAE"), underwriting expenses and policyholder dividends
to premiums. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, other income or federal income taxes.
2
<PAGE>
Management's focus on underwriting performance has resulted in a statutory
combined ratio averaging 101.2% for the period 1992 to 1996, as compared to
108.8% for the property and casualty industry over the same period
(Source: "Best's Review - Property/Casualty" - January 1997 Edition).
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 1996, net written premiums were nearly $2.8 billion compared to
$3.1 billion in 1995. The decrease reflects the effect of significant rate
increases initiated by the nonstandard auto group, the continuing competitive
pricing environment in the California workers' compensation market as well as
the casualty markets, withdrawal from an unprofitable pool at the end of 1995
and reduced writings of homeowners' insurance in certain states.
The following table shows (in millions) certain information of AFG's
property and casualty insurance operations. While financial data is reported
on a statutory basis for insurance regulatory purposes, it is reported in
accordance with GAAP for shareholder and other investment purposes. In
general, statutory accounting results in lower capital surplus and net
earnings than result from application of GAAP. Major differences include
charging policy acquisition costs to expense as incurred rather than spreading
the costs over the periods covered by the policies; recording bonds and
redeemable preferred stocks primarily at amortized cost; netting of
reinsurance recoverables and prepaid reinsurance premiums against the
corresponding liability; requiring additional loss reserves; and charging to
surplus certain assets, such as furniture and fixtures and agents' balances
over 90 days old.
1996 1995 1994
Statutory Basis
Premiums Earned $2,821 $3,006 $2,915
Admitted Assets 6,603 6,753 6,398
Unearned Premiums 1,104 1,160 1,093
Loss and LAE Reserves 3,397 3,394 3,275
Capital and Surplus 1,659 1,595 1,586
GAAP Basis
Premiums Earned $2,845 $3,031 $2,945
Total Assets 8,623 9,002 8,617
Unearned Premiums 1,248 1,294 1,213
Loss and LAE Reserves 4,124 4,097 4,021
Shareholder's Equity 2,695 2,893 2,615
3
<PAGE>
The following table shows the performance of AFG's property and
casualty insurance operations in various categories (dollars in millions):
1996 1995 1994
Net written premiums $2,788 $3,092 $3,124
Net earned premiums $2,845 $3,031 $2,945
Loss and LAE 2,132 2,265 2,077
Underwriting expenses 780 792 770
Policyholder dividends 14 8 84
Underwriting profit (loss) ($ 81) ($ 34) $ 14
GAAP ratios:
Loss and LAE ratio 75.0% 74.8% 70.5%
Underwriting expense ratio 27.4 26.1 26.1
Policyholder dividend ratio .5 .3 2.8
Combined ratio (a) 102.9% 101.2% 99.4%
Statutory ratios:
Loss and LAE ratio 74.8% 74.8% 71.0%
Underwriting expense ratio 27.2 25.9 26.3
Policyholder dividend ratio .4 1.7 3.6
Combined ratio (a) 102.4% 102.4% 100.9%
Industry statutory combined ratio (b) 107.0% 106.5% 108.5%
(a) The 1996 combined ratios include an increase of 2.8 percentage points
attributable to the strengthening of insurance reserves relating to
asbestos and other environmental matters ("A&E").
(b) Ratios are derived from "Best's Review - Property/Casualty"
(January 1997 Edition).
Nonstandard Automobile Insurance
General. The Nonstandard Automobile Insurance segment ("NSA Group")
underwrites private passenger automobile liability and physical damage
insurance policies for "nonstandard" risks. Nonstandard insureds are those
individuals who are unable to obtain insurance through standard market
carriers due to factors such as age, record of prior accidents, driving
violations, particular occupation or type of vehicle. Premium rates for
nonstandard risks are generally higher than for standard risks.
Total private passenger automobile insurance premiums written by insurance
carriers in the United States in 1996 have been estimated by A.M. Best to be
approximately $110 billion. Because it can be viewed as a residual market,
the size of the nonstandard private passenger automobile insurance market
changes with the insurance environment and grows when standard coverage
becomes more restrictive. When this occurs, the criteria which differentiate
standard from nonstandard insurance risks change. The size of the voluntary
nonstandard market is also affected by rate levels adopted by state
administered involuntary plans. According to A.M. Best, the voluntary
nonstandard market has accounted for about 15% of total private passenger
automobile insurance premiums written in recent years.
The NSA Group's implementation of significant rate increases during the last
couple years and competitive pressures in the nonstandard automobile insurance
industry served to curtail the trend of annual premium growth it had
experienced previously. These rate increases contributed to an improvement,
however, in underwriting profitability for 1996.
4
<PAGE>
The NSA Group writes business in 42 states and holds licenses to write
policies in 48 states and the District of Columbia. The U.S. geographic
distribution of the NSA Group's statutory direct written premiums in 1996
compared to 1992, was as follows:
1996 1992 1996 1992
Florida 12.1% 20.1% Mississippi 3.2% 3.3%
Pennsylvania 10.1 * Oklahoma 3.1 2.9
Texas 9.4 2.2 Missouri 3.0 2.2
Georgia 8.9 13.7 New York 3.0 *
California 8.0 8.4 Arizona 2.5 5.9
Connecticut 5.8 3.5 Washington 2.4 *
Indiana 3.3 3.6 Alabama 2.1 4.2
Tennessee 3.2 4.7 Other 19.9 25.3
100.0% 100.0%
_____________
* less than 2%
In addition, the NSA Group writes approximately 4% of its net premiums
annually in the United Kingdom.
Management believes that the NSA Group's underwriting success has been due,
in part, to the refinement of various risk profiles, thereby dividing the
consumer market into more defined segments which can be underwritten or priced
properly. The 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.
<PAGE>
The following table shows the performance of AFG's NSA Group insurance
operations in various categories (dollars in millions):
1996 1995 1994
Net written premiums $1,135 $1,277 $1,186
Net earned premiums $1,183 $1,246 $1,097
Loss and LAE 904 1,036 833
Underwriting expenses 278 273 265
Underwriting profit (loss) $ 1 ($ 63) ($ 1)
GAAP ratios:
Loss and LAE ratio 76.4% 83.2% 75.9%
Underwriting expense ratio 23.5 22.0 24.1
Combined ratio 99.9% 105.2% 100.0%
Statutory ratios:
Loss and LAE ratio 75.8% 83.1% 76.0%
Underwriting expense ratio 22.5 21.6 23.9
Combined ratio 98.3% 104.7% 99.9%
Industry statutory combined ratio (a) 101.0% 101.3% 101.3%
(a) Represents the private passenger automobile industry statutory combined
ratio derived from "Best's Review - Property/Casualty" (January 1997
Edition). Although AFG believes that there is no reliable regularly
published combined ratio data for the nonstandard automobile insurance
industry, AFG believes that such a combined ratio would be lower than
the private passenger automobile industry average shown above.
5
<PAGE>
Marketing. Each of the principal units in the NSA Group is responsible
for its own marketing, sales, underwriting and claims processing. Sales
efforts are directed primarily toward independent agents. These units each
write policies through several thousand independent agents.
The NSA Group had approximately 900,000 policies in force at
December 31, 1996, just under 90% of which had policy limits of
$50,000 or less 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 nonstandard private passenger automobile insurance coverage. Insurers
in this market generally compete on the basis of price (including
differentiation on liability limits, variety of coverages offered and
deductibles), geographic 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. 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 AFG personnel are experts in particular
lines of business or customer groups. Examples include California workers'
compensation, executive liability, ocean and inland marine,
agricultural-related coverages (allied lines), non-profit liability,
umbrella and excess and surplus lines. The Specialty Lines workers'
compensation operations write coverage for prescribed benefits payable to
employees (principally in California) who are injured on the job. The
executive and professional liability divisions market liability coverage for
corporate directors and officers and attorneys. Ocean and inland marine
businesses provide coverage primarily for 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 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, trustee liability,
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.
<PAGE>
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant
operating autonomy to oversee the important operational functions of its
business such as underwriting, pricing, marketing, policy processing and
claims service. These specialty lines are opportunistic and their premium
volume will vary based on current market conditions. AFG continually
evaluates expansion in existing markets and opportunities in new
specialty markets.
The U.S. geographic distribution of the Specialty Lines statutory
direct written premiums in 1996 compared to 1992, was as follows:
1996 1992 1996 1992
California 30.4% 47.4% Florida 3.5% *
Texas 7.3 2.7 New Jersey 2.8 2.6%
New York 5.2 5.7 Ohio 2.1 2.1
Massachusetts 5.1 2.8 Pennsylvania 2.0 2.1
Illinois 4.0 3.4 Other 33.9 25.3
Oklahoma 3.7 5.9 100.0% 100.0%
_____________
* less than 2%
6
<PAGE>
The following table sets forth a distribution of statutory net written
premiums for AFG's Specialty Lines by NAIC annual statement line for
1996 compared to 1992:
1996 1992
Workers' compensation 26.0% 47.2%
Other liability 23.4 15.7
Commercial multi-peril 10.1 3.1
Inland marine 9.2 5.8
Auto liability 8.3 8.7
Allied lines 5.7 4.2
Ocean marine 4.6 4.6
Surety 3.8 3.0
Auto physical damage 2.5 2.2
Other 6.4 5.5
100.0% 100.0%
The following table shows the performance of AFG's Specialty Lines
insurance operations in various categories (dollars in millions):
1996 1995 1994
Net written premiums $993 $1,097 $1,250
Net earned premiums $976 $1,085 $1,185
Loss and LAE 527 730 785
Underwriting expenses 295 302 291
Policyholder dividends - (3) 76
Underwriting profit $154 $ 56 $ 33
GAAP ratios:
Loss and LAE ratio 53.9% 67.2% 66.2%
Underwriting expense ratio 30.2 27.9 24.6
Policyholder dividend ratio - (.3) 6.4
Combined ratio (a) 84.1% 94.8% 97.2%
Statutory ratios:
Loss and LAE ratio 54.1% 67.5% 66.7%
Underwriting expense ratio 30.3 28.1 25.2
Policyholder dividend ratio .5 4.2 8.5
Combined ratio (a) 84.9% 99.8% 100.4%
Industry statutory combined ratio (b) 111.0% 109.9% 107.9%
(a) The 1996 combined ratios reflect a reduction of 4.1 percentage points
attributable to a reallocation of loss reserves in connection with the
strengthening of A&E reserves.
(b) Represents the commercial industry statutory combined ratio derived
from "Best's Review - Property/Casualty" (January 1997 Edition).
<PAGE>
Marketing. The Specialty Lines operations direct their sales efforts
primarily toward independent property and casualty insurance agents and
brokers. These businesses write insurance through several thousand agents
and brokers and have nearly 275,000 policies in force.
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 mutual 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 AFG's specialty lines compete successfully.
7
<PAGE>
Commercial and Personal Lines
General. Major commercial lines of business are workers' compensation,
commercial multi-peril, umbrella (including primary and excess layers) 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.
AFG's Drug-Free Workplace program for workers' compensation customers
assists insureds in setting up drug testing programs (as permitted by law),
drug and alcohol education programs and work safety programs.
At December 31, 1996, there were more than 850 insureds in 20 states with
such programs producing approximately $67 million in annual net written
premiums.
Commercial business is written in 26 states where management believes
adequate rates can be obtained and where assigned risk costs are not
excessive. AFG's approach focuses on specific customer groups, such as fine
restaurants, light manufacturers, hotels/motels, workers' compensation safety
groups and insureds with large umbrella coverages. The approach also
emphasizes site visits at prospective customers to ensure underwriter
familiarity with risk factors relating to each insured and to avoid those
risks which have unacceptable frequency or severity exposures.
Personal lines business consists primarily of standard private passenger
automobile and homeowners' insurance and is currently being marketed in
25 states. AFG's approach is to develop tailored rates for its personal
automobile customers based on a variety of factors, including the driving
record of the insureds. The approach to homeowners business is to limit
exposure in locations which are likely to be unprofitable and those which
have significant catastrophic potential (such as windstorms,
earthquakes and hurricanes).
The U.S. geographic distribution of the Commercial and Personal Lines
statutory direct written premiums in 1996 compared to 1992, was as follows:
1996 1992 1996 1992
Connecticut 13.6% 12.1% Ohio 3.6% 4.5%
New York 12.0 8.1 Florida 2.9 3.9
New Jersey 11.5 7.4 Massachusetts 2.8 *
North Carolina 11.0 10.3 Illinois 2.2 2.9
Pennsylvania 7.0 4.5 California * 7.1
Texas 3.9 2.7 Oregon * 2.5
Michigan 3.8 2.9 Washington * 2.4
Maryland 3.7 3.5 Other 22.0 25.2
100.0% 100.0%
_____________
* less than 2%
<PAGE>
The following table sets forth a distribution of statutory net written
premiums for AFG's Commercial and Personal Lines by NAIC annual statement
line for 1996 compared to 1992:
1996 1992
Auto liability 26.5% 28.2%
Workers' compensation 21.1 12.7
Commercial multi-peril 17.2 20.8
Auto physical damage 12.9 13.4
Homeowners 9.9 11.0
Other liability 7.6 8.9
Other 4.8 5.0
100.0% 100.0%
8
<PAGE>
The following table shows the performance of AFG's Commercial and
Personal Lines insurance operations in various categories (dollars
in millions):
1996 1995 1994
Net written premiums $ 660 $ 717 $ 683
Net earned premiums $ 685 $ 698 $ 656
Loss and LAE 538 468 430
Underwriting expenses 206 214 211
Policyholder dividends 14 11 8
Underwriting profit (loss) ($ 73) $ 5 $ 7
GAAP ratios:
Loss and LAE ratio 78.5% 66.9% 65.5%
Underwriting expense ratio 30.0 30.6 32.2
Policyholder dividend ratio 2.1 1.6 1.2
Combined ratio (a) 110.6% 99.1% 98.9%
Statutory ratios:
Loss and LAE ratio 78.8% 67.2% 67.0%
Underwriting expense ratio 30.4 29.9 32.4
Policyholder dividend ratio 1.0 .6 1.0
Combined ratio (a) 110.2% 97.7% 100.4%
Industry statutory combined ratio (b) 107.0% 106.5% 108.5%
(a) The 1996 combined ratios include 3.9 percentage points (GAAP) and
3.8 percentage points (statutory) due to losses from Hurricane Fran.
(b) Ratios are derived from "Best's Review - Property/Casualty"
(January 1997 Edition).
Marketing. The Commercial and Personal Lines business units direct their
sales efforts primarily toward independent agents and brokers. These
businesses write insurance through more than 5,000 agents and have
approximately 425,000 policies in force.
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 mutual 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.
<PAGE>
Reinsurance
Consistent with standard practice of most insurance companies,
AFG reinsures a portion of its business with other reinsurance
companies and assumes a relatively small amount of business from
other insurers. Ceding reinsurance permits diversification of
risks and limits the maximum loss arising from large or unusually
hazardous risks or catastrophic events. AFG's insurance companies
enter into separate reinsurance programs due to their differing
exposures. 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.
9
<PAGE>
Reinsurance is provided on one of two bases, facultative or
treaty. Facultative reinsurance is generally provided on a risk by
risk basis. Individual risks are ceded and assumed based on an
offer and acceptance of risk by each party to the transaction.
Treaty reinsurance provides for risks meeting prescribed criteria
to be automatically ceded and assumed according to contract
provisions.
In order to limit the maximum loss arising out of any one
occurrence, AFG's insurance companies reinsure a portion of their
exposure under treaty and facultative reinsurance programs. The
following table presents (by type of coverage) the amount of each
loss above the specified retention maximum generally covered by
treaty reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
California Workers' Compensation $ 1.5 $148.5
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 15.0
Property - General 5.0 25.0(b)
Property - Catastrophe 20.0 130.0
(a) Reinsurance covers substantial portions of losses in excess of retention.
(b) Beginning in 1997, AFG will cede 80% of its homeowners insurance
coverage through a reinsurance agreement.
AFG purchases facultative reinsurance providing coverage on a risk by
risk basis, both pro rata and excess of loss, depending on the risk and
available reinsurance markets. Due in part to the limited exposure on
individual policies, the NSA Group is not materially involved in
reinsuring risks with third party insurance companies.
Included in the balance sheet caption "recoverables from reinsurers and
prepaid reinsurance premiums" were $79 million on paid losses and LAE and
$720 million on unpaid losses and LAE at December 31, 1996. The
collectibility of a reinsurance balance is based upon the financial condition
of a reinsurer as well as individual claim considerations. Market conditions
over the past few years have forced many reinsurers into financial
difficulties or liquidation proceedings. At December 31, 1996, AFG's
insurance subsidiaries had allowances of approximately $79 million for
doubtful collection of reinsurance recoverables, substantially all related
to unpaid losses. AFG regularly monitors the financial strength of its
reinsurers. This process periodically results in the transfer of risks to
more financially secure reinsurers. Substantially all reinsurance is ceded
to reinsurers having more than $100 million in capital and A.M. Best ratings
of A- or better. AFG's major reinsurers include American Re-Insurance
Company, Employers Reinsurance Corporation, NAC Reinsurance Corporation,
Mitsui Marine and Fire Insurance Company and General Reinsurance Corporation.
These five companies assume approximately one-third of AFG's ceded reinsurance.
Premiums written for reinsurance ceded and assumed are presented in the
following table (in millions):
1996 1995 1994
Reinsurance ceded $518 $482 $422
Reinsurance assumed - including
involuntary pools and associations 58 98 119
10
<PAGE>
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated liability for
unpaid losses and LAE of AFG's insurance subsidiaries. This liability
represents estimates of the ultimate net cost of all unpaid losses and LAE and
is determined by using case-basis evaluations and actuarial projections. These
estimates are subject to the effects of changes in claim amounts and frequency
and are periodically reviewed and adjusted as additional information becomes
known. In accordance with industry practices, such adjustments are reflected
in current year operations.
Future costs of claims are projected based on historical trends adjusted for
changes in underwriting standards, policy provisions, product mix and other
factors. Estimating the liability for unpaid losses and LAE is inherently
judgmental and is influenced by factors which are subject to significant
variation. Through the use of analytical reserve development techniques,
management monitors items such as the effect of inflation on medical,
hospitalization, material, repair and replacement costs, general economic
trends and the legal environment. Although management believes that the
reserves currently established reflect a reasonable and sufficient estimate of
the ultimate cost of all losses and claims, actual development may vary
materially.
AFG recognizes underwriting profit only when realization is reasonably
determinable and assured. In certain specialty lines, where experience is
limited or where there is potential for volatile results, AFG holds reasonable
"incurred but not reported" reserves and does not recognize underwriting
profit until the accident years mature.
Generally, reserves for reinsurance and involuntary pools and associations
are reflected in AFG's results at the amounts reported by those entities.
Unless otherwise indicated, the following discussion of insurance reserves
includes the reserves of American Premier's subsidiaries for only those periods
following the Mergers. See Note O to the Financial Statements for an analysis
of changes in AFG's estimated liability for losses and LAE, net of reinsurance
(and grossed up), over the past three years on a GAAP basis.
<PAGE>
The following table presents the development of AFG's liability for
losses and LAE, net of reinsurance, on a GAAP basis for the last ten years,
excluding reserves of American Premier subsidiaries prior to the Mergers.
The top line of the table shows the estimated liability (in millions) for
unpaid losses and LAE recorded at the balance sheet date for the indicated
years. The second line shows the re-estimated liability as of
December 31, 1996. 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.
1986 1987 1988 1989 1990
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $1,843 $2,024 $2,209 $2,246 $2,137
As re-estimated at
December 31, 1996 2,459 2,423 2,472 2,462 2,280
Liability re-estimated (*):
One year later 102.7% 102.5% 99.8% 100.4% 98.6%
Two years later 107.3% 103.6% 100.0% 99.3% 97.7%
Three years later 109.7% 103.1% 99.7% 98.4% 97.4%
Four years later 110.8% 102.5% 98.7% 98.2% 99.2%
Five years later 111.8% 102.6% 99.1% 101.1% 98.4%
Six years later 112.7% 103.5% 103.0% 101.1% 106.7%
Seven years later 115.3% 109.4% 103.0% 109.6%
Eight years later 122.1% 109.8% 111.9%
Nine years later 122.5% 119.7%
Ten years later 133.4%
Cumulative deficiency
(redundancy) 33.4% 19.7% 11.9% 9.6% 6.7%
Cumulative paid as of:
One year later 33.0% 29.2% 29.4% 32.3% 26.1%
Two years later 52.5% 49.0% 48.6% 48.2% 43.2%
Three years later 67.7% 63.5% 59.8% 59.2% 55.3%
Four years later 79.3% 72.2% 67.9% 67.6% 64.8%
Five years later 86.4% 78.5% 74.0% 74.3% 70.4%
Six years later 91.9% 83.6% 79.5% 78.1% 74.9%
Seven years later 96.1% 87.7% 82.4% 81.7%
Eight years later 100.0% 90.3% 85.7%
Nine years later 102.7% 93.3%
Ten years later 105.7%
<PAGE>
1991 1992 1993 1994 1995 1996
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,129 $2,123 $2,113 $2,187 $3,393 $3,404
As re-estimated at
December 31, 1996 2,199 2,134 2,058 2,170 3,345 N/A
Liability re-estimated (*):
One year later 99.3% 100.0% 98.1% 95.1% 98.6%
Two years later 98.8% 98.2% 92.7% 99.2%
Three years later 98.0% 93.5% 97.4%
Four years later 95.8% 100.5%
Five years later 103.3%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency
(redundancy) 3.3% .5% (2.6%) (.8%) (1.4%) N/A
Cumulative paid as of:
One year later 26.4% 26.7% 25.2% 26.5% 33.0%
Two years later 43.0% 43.7% 40.1% 42.4%
Three years later 55.4% 53.6% 50.8%
Four years later 62.6% 61.0%
Five years later 68.1%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
(*) Reflects significant A&E charges and reallocations in 1994 and 1996
for prior years losses.
The following is a reconciliation of the net liability to the gross
liability for unpaid losses and LAE.
1993 1994 1995 1996
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404
Add reinsurance recoverables 611 730 704 720
Gross liability $2,724 $2,917 $4,097 $4,124
As re-estimated at
December 31, 1996:
Net liability shown above $2,058 $2,170 $3,345
Add reinsurance recoverables 553 637 726
Gross liability $2,611 $2,807 $4,071 N/A
Gross cumulative deficiency
(redundancy) (4.1%) (3.8%) (.6%) N/A
11
<PAGE>
The following table presents certain data from the table above,
adjusted to include reserves of American Premier's subsidiaries
for periods subsequent to their entry into the insurance business
in 1989 and prior to the Mergers in 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,616 $2,739 $2,793 $2,886 $3,029 $3,267
As re-estimated at
December 31, 1996 2,776 2,818 2,801 2,779 2,835 3,146
Cumulative deficiency
(redundancy) 6.1% 2.9% .3% (3.7%) (6.4%) (3.7%)
Reconciliation of gross
liability to net liability:
As originally estimated:
Net liability shown above $3,029 $3,267
Add reinsurance recoverables 656 781
Gross liability $3,685 $4,048
As re-estimated at
December 31, 1996:
Net liability shown above $2,835 $3,146
Add reinsurance recoverables 574 691
Gross liability $3,409 $3,837
Gross cumulative deficiency
(redundancy) (7.5%) (5.2%)
</TABLE>
These tables do not present accident or policy year development data.
Furthermore, in evaluating the re-estimated liability and cumulative
deficiency (redundancy), it should be noted that each percentage includes
the effects of changes in amounts for prior periods. For example, AFG's
$80 million charge for asbestos and environmental claims related to losses
recorded in 1996, but incurred before 1986 is included in the re-estimated
liability and cumulative deficiency (redundancy) percentage for each of the
years shown. Conditions and trends that have affected development of the
liability in the past may not necessarily exist in the future. Accordingly,
it may not be appropriate to extrapolate future redundancies or deficiencies
based on this table.
The adverse development in the tables is due primarily to asbestos and
environmental exposures for which AFC has been held liable under general
liability policies written years ago where environmental coverage was not
intended. Other factors affecting development included higher than projected
inflation on medical, hospitalization, material, repair and replacement costs.
Additionally, changes in the legal environment have influenced the development
patterns over the past ten years. 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.
The adverse litigious climate was 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. Under comparative negligence rules, a plaintiff's negligence
is no longer a bar to recovery. Instead, 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. Recent years have seen a moderation of
inflation and the enactment of legislation intended to limit the patterns
of the previous years.
<PAGE>
The differences between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
("SAP") and that reported in the accompanying consolidated
financial statements in accordance with GAAP at December 31, 1996,
are as follows (in millions):
Liability reported on a SAP basis $3,397
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (23)
Reserves of foreign operations 31
Estimated salvage and subrogation recoveries
based on a cash basis for SAP and on an accrual
basis for GAAP (1)
Reinsurance recoverables 720
Liability reported on a GAAP basis $4,124
12
<PAGE>
Asbestos and Environmental Reserves ("A&E"). The insurance industry
typically includes only claims relating to polluted waste sites and asbestos
in defining environmental exposures. AFG 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.
Establishing reserves for A&E claims is subject to uncertainties that are
greater than those presented by other types of claims. Factors contributing
to those uncertainties include a lack of sufficiently detailed historical data,
long reporting delays, uncertainty as to the number and identity of insureds
with potential exposure, unresolved legal issues regarding policy coverage,
and the extent and timing of any such contractual liability. Courts have
reached different and sometimes inconsistent conclusions as to when a loss is
deemed to have occurred, what policies provide coverage, what claims are
covered, whether there is an insured obligation to defend, how policy
limits are determined and other policy provisions. Management believes
these issues are not likely to be resolved in the near future.
Prior to the fourth quarter of 1994, AFG 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 that quarter, AFG allocated a specific portion of its IBNR reserves to A&E
claims.
Significant industrywide information concerning A&E reserves first became
broadly available in mid-1996 following the publication of new data relating
to that subject in the 1995 Annual Statements of insurance companies. During
1995 and 1996, a number of insurers recorded large reserve increases for A&E
exposures. By the end of 1995, the industry's one-year survival ratio
(reserves divided by average annual paid losses) had increased from a multiple
of six times in the early 1990's to more than nine times. The following table
compares AFG's three-year survival ratio for A&E claims with that of the
industry.
December 31,
Survival Ratio: 1996 1995 1994
AFG 10.5 6.5 7.0
Industry(a) 8.2 9.4 7.9
(a) Source: "BestWeek - Property and Casualty Supplement"
(September 15, 1997 Edition.)
Industry actions and statistics in 1995 caused AFG to re-evaluate its
position in relation to its peers as part of the continuing process of
obtaining additional information and revising accounting estimates. This
process led management to conclude that the A&E reserves should be increased
sufficiently to bring AFG's three-year survival ratio in line with those of
the top 50 companies. In the third quarter of 1996, AFG strengthened its A&E
reserve to approximately 10.5 times average annual paid losses based upon
these revised industry standards for reserving such claims. AFG recorded a
non-cash, pretax charge of $80 million and reallocated $40 million in reserves
from its Specialty Operations. Based on known facts, current law, and current
industry practices, management believes that its reserves for such claims are
appropriate.
<PAGE>
The following table (in millions) is a progression of reserves for A&E
exposures for which AFG has been held liable under general liability policies
written years ago where environmental coverage was not intended and, in many
cases, was specifically excluded.
1996 1995(*) 1994(*)
Reserves at beginning of year $225.7 $224.9 $143.5
Incurred losses and LAE 149.0 35.2 113.6
Paid losses and LAE (31.3) (34.4) (32.2)
Reserves at end of year, net of
reinsurance recoverable 343.4 225.7 224.9
Reinsurance recoverable 162.7 164.2 162.0
Gross reserves at end of year $506.1 $389.9 $386.9
(*) Amounts have been increased by $6.1 million in 1995 and
$5.1 million in 1994 to reflect certain items previously
classified as non-A&E.
Since the mid-1980's, AFG 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 $180 million of
premiums has been written, $20 million in losses and LAE has been paid and
reserves for unpaid losses and LAE aggregated $41 million at
December 31, 1996 (not included in the above table).
13
<PAGE>
Annuity and Life Operations
General. AFG's annuity operations are conducted through American Annuity
Group ("AAG"), a holding company whose primary subsidiary is Great American
Life Insurance Company ("GALIC") which it acquired from GAI on
December 31, 1992. GALIC sells (i) flexible premium and single premium
annuities in the qualified (not-for-profit) market and (ii) single premium
annuities in the non-qualified market. AAG and its subsidiaries employ
approximately 1,000 persons.
The following table (in millions) presents financial information
concerning GALIC.
1996 1995 1994
Statutory Basis
Total Assets $5,752 $5,414 $5,057
Insurance Reserves:
Annuities $5,298 $4,974 $4,655
Life 22 22 21
Accident and Health - - 1
$5,320 $4,996 $4,677
Capital and Surplus $ 285 $ 273 $ 256
Asset Valuation Reserve (a) 91 90 80
Interest Maintenance Reserve (a) 25 32 28
Annuity Receipts:
Flexible Premium:
First Year $ 35 $ 42 $ 39
Renewal 182 196 208
217 238 247
Single Premium 319 219 196
Total Annuity Receipts $ 536 $ 457 $ 443
GAAP Basis
Total Assets $5,934 $5,608 $5,044
Annuity Benefits Accumulated 5,205 4,917 4,596
Stockholder's Equity 658 623 449
(a) Allocation of surplus.
Annuity Products. Annuities are long-term retirement savings plans that
benefit from interest accruing on a tax-deferred basis. Employees of
qualified not-for-profit organizations are eligible to save for retirement
through contributions made on a before-tax basis. Contributions are made at
the discretion of the participants through payroll deductions or through
tax-free "rollovers" of funds. Federal income taxes are not payable on
contributions or earnings until amounts are withdrawn.
GALIC's principal products are Flexible Premium Deferred Annuities
("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). FPDAs are
characterized by premium payments that are flexible in both amount and timing
as determined by the policyholder. SPDAs are issued in exchange for a
one-time lump- sum premium payment.
<PAGE>
Annuity contracts are generally classified as either fixed rate or
variable. With a fixed rate annuity, the interest crediting rate is initially
set by the issuer and thereafter may be changed from time to time by the
issuer based on market conditions, subject to any guaranteed minimum interest
crediting rates in the policy. With a variable annuity, the value of the
policy is tied to an underlying securities portfolio or underlying mutual
funds. The majority of annuities issued by GALIC have been fixed rate
annuities.
In the third quarter of 1996, GALIC began marketing a new type of annuity
that offers the traditional features of a fixed annuity (guaranteed minimum
annual interest rate on a portion of the premium received and a guaranteed
minimum surrender value) with the opportunity to participate, in part, in
14
<PAGE>
increases in the S&P 500 Index over a selected term (generally a
minimum of six years).
A GALIC subsidiary began marketing variable annuities in the fourth
quarter of 1995. With a variable annuity, the earnings credited to the
policy vary based on the investment results of the underlying investment
options chosen by the policyholder. Policyholders may also choose to direct
all or a portion of their premiums to various fixed rate options. For these
annuity products, all premiums directed to the variable options are placed
in funds managed by third party investment advisers.
At December 31, 1996, substantially all of GALIC's annuity policyholder
benefit reserves consisted of fixed rate annuities which offered a minimum
interest rate guarantee of 3% or 4%. The majority of GALIC's fixed rate
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 economic environment and the relative competitive position of
its products.
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
designs its products with certain surrender charges and front-end fees to
discourage policyholders from surrendering or withdrawing funds during the
first five to ten years after issuance of a policy. Partly due to these
features, GALIC's annuity surrenders have averaged approximately 7% of
statutory reserves over the past five years.
Marketing. GALIC markets its FPDAs principally to employees of
educational institutions in the kindergarten through high school segment.
In 1996, written premiums from this market segment represented the majority
of GALIC's total tax-qualified premiums.
GALIC distributes its annuity products through over 75 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. GALIC has developed its business 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. The following table reflects the geographical
distribution of GALIC's annuity premiums in 1996 compared to 1992.
1996 1992 1996 1992
California 29.8% 20.2% North Carolina 3.0% 3.2%
Washington 7.0 * Minnesota 2.8 *
Texas 6.6 2.8 Connecticut 2.7 6.3
Florida 5.1 10.2 Indiana 2.3 *
Massachusetts 4.8 8.1 Arizona 2.1 *
Ohio 4.8 5.1 Illinois * 3.8
Michigan 3.5 9.9 Rhode Island * 2.6
Iowa 3.4 * New Hampshire * 2.3
New Jersey 3.1 6.2 Other 19.0 19.3
100.0% 100.0%
_____________
* less than 2%
<PAGE>
Sales of annuities are affected by many factors, including:
(i) competitive annuity products and rates; (ii) the general level
of interest rates; (iii) the favorable tax treatment of annuities;
(iv) commissions paid to agents; (v) services offered; (vi)
ratings from independent insurance rating agencies; (vii) other
alternative investments; and (viii) general economic conditions.
At December 31, 1996, GALIC had approximately 250,000 annuity
policies in force, nearly all of which were individual contracts.
15
<PAGE>
American Memorial Life Insurance. Acquired in November 1995,
American Memorial (formerly Prairie States Life Insurance Company)
offers a variety of life insurance and annuity products to finance
pre-arranged funerals. American Memorial markets its products
through funeral home operators in addition to a captive general
agency force. At year-end 1996, American Memorial had relationships
with approximately 2,200 funeral homes nationwide. In 1996,
American Memorial collected $97 million in life and annuity
premiums. At December 31, 1996, American Memorial had total
statutory assets of approximately $412 million, reserves for future
policy benefits of approximately $371 million, and capital and
surplus of approximately $27 million.
Loyal American Life Insurance. Acquired in November 1995,
Loyal offers a variety of supplemental life and health insurance
products through payroll deduction plans and credit unions.
Loyal's products are marketed with the endorsement or consent of
the employer or the credit union management. In 1996, Loyal
collected $41 million in life and accident and health premiums.
At December 31, 1996, Loyal had total statutory assets of
approximately $255 million, reserves for future policy benefits of
approximately $202 million, and capital and surplus of
approximately $37 million.
Independent Ratings. AAG's principal insurance subsidiaries
are currently rated by A.M. Best and Duff & Phelps as follows:
A.M. Best Duff & Phelps
GALIC A (Excellent) AA- (Very high claims paying ability)
American Memorial B+ (Very Good) AA- (Very high claims paying ability)
Loyal A- (Excellent) AA- (Very high claims paying ability)
AAG believes that the ratings assigned by independent insurance rating
agencies are important because potential policyholders often use a company's
rating as an initial screening device in considering annuity products. AAG
also believes that the majority of purchasers of tax-deferred annuities would
not be willing to purchase annuities from an issuer that had a rating below
certain levels. In addition, some school districts, hospitals and banks do
not allow insurers with a rating below certain levels to sell annuity
products through their institutions.
AAG believes that a rating in the "A" category by at least one rating
agency is necessary for GALIC to successfully market tax-deferred annuities to
public education employees and other not-for-profit groups.
American Memorial and Loyal compete in markets other than the sale of
tax-deferred annuities. While ratings are an important competitive factor in
their markets, AAG believes that American Memorial and Loyal can successfully
compete in these markets with their respective ratings.
Although management of AAG believes that its insurance companies'
ratings are very stable, those companies' operations could be materially
adversely affected by a downgrade in ratings.
<PAGE>
Competition. AAG's insurance companies operate in highly competitive
markets. They compete with other insurers and financial institutions based
on many factors, including: (i) ratings; (ii) financial strength; (iii)
reputation; (iv) service to policyholders; (v) product design (including
interest rates credited); (vi) commissions; and (vii) service to agents.
Since policies are marketed and distributed primarily through independent
agents, the insurance companies must also compete for agents. Management
believes that consistently targeting the same market and emphasizing
service to agents and policyholders provides a competitive advantage.
More than 150 insurance companies offer tax-deferred annuities. No single
insurer dominates the marketplace. Competitors include (i) individual
insurers and insurance groups, (ii) mutual funds and (iii) other financial
institutions of varying sizes. In a broader sense, AAG's insurance companies
compete for retirement savings with a variety of financial institutions
offering a full range of financial services. Financial institutions have
demonstrated a growing interest in marketing investment and savings products
16
<PAGE>
other than traditional deposit accounts. In addition, recent judicial and
regulatory decisions have expanded powers of financial institutions in this
regard. It is too early to predict what impact, if any, these developments
will have on AAG's insurance companies.
Other Companies
AFEI is a holding company with assets consisting primarily
of investments in the common stock of AFG and American Annuity.
Millennium Dynamics, Inc. ("MDI") was formed in 1995 by
Great American to market software tools developed internally to
solve the inability of certain of its information systems to
properly interpret dates for the year 2000 and beyond. MDI
licenses its Vantage YR2000 conversion toolset through its own
sales force in the U.S. and through independent software
distributors around the world. MDI also offers project
management and contract programming services to its customers.
Through subsidiaries, AFC is engaged in a variety of other
businesses, including The Golf Center at Kings Island (golf and
tennis facility) in the Greater Cincinnati area; commercial
real estate operations in Cincinnati (office buildings and The
Cincinnatian Hotel), Louisiana (Le Pavillon Hotel),
Massachusetts (Chatham Bars Inn), Texas (Driskill Hotel) and
apartments in Florida, Kentucky, Louisiana, Minnesota,
Oklahoma, Pennsylvania, Texas and Wisconsin. These operations
employ approximately 700 full-time employees.
In March 1996, American Premier sold its interest in an
independent pipeline common carrier of refined petroleum
products for approximately $60 million in cash, net of
transaction costs.
Investment Portfolio
General. A breakdown of AFG's December 31, 1996, investment
portfolio by business segment follows (excluding investment in
equity securities of investee corporations) (in millions).
Total
Carrying Value Market
P&C Annuity Other Total Value
Cash and short-term investments $ 190 $ 84 $174 $ 448 $ 448
Bonds and redeemable preferred
stocks 4,165 5,689 132 9,986 10,023
Other stocks, options and
warrants 196 51 81 328 328
Loans receivable 122 436 11 569 569(a)
Real estate and other investments 140 40 28 208 208(a)
$4,813 $6,300 $426 $11,539 $11,576
(a) Carrying value used since market values are not readily available.
17
<PAGE>
The following tables present the percentage distribution and yields
of AFG's investment portfolio (excluding investment in equity
securities of investee corporations) as reflected in its financial
statements.
1996 1995 1994 1993 1992
Cash and Short-term Investments 3.9% 4.9% 2.2% 2.3% 9.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 4.1 3.7 4.0 2.8 5.7
State and Municipal 1.0 .7 .8 .8 .6
Public Utilities 8.2 9.7 9.1 9.3 8.5
Mortgage-Backed Securities 22.2 20.7 21.8 24.7 22.9
Corporate and Other 49.3 46.8 48.6 42.0 33.9
Redeemable Preferred Stocks 0.5 1.0 1.4 1.3 .8
85.3 82.6 85.7 80.9 72.4
Net Unrealized Gains (Losses) on Bonds
and Redeemable Preferred Stocks held
Available for Sale 1.1 2.7 (1.0) 1.8 .8
86.4 85.3 84.7 82.7 73.2
Other Stocks, Options and Warrants 2.8 2.3 2.7 4.6 2.6
Loans Receivable 4.9 5.6 8.4 8.5 12.9
Real Estate and Other Investments 2.0 1.9 2.0 1.9 2.0
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.9% 7.9% 8.1% 8.0% 8.8%
Including realized gains and losses 7.7% 8.8% 8.1% 8.7% 9.8%
Yield on Stocks:
Excluding realized gains and losses 5.8% 3.9% 5.1% 4.4% 6.4%
Including realized gains and losses 15.1% 8.4% 35.4% 16.9% 15.5%
Yield on Investments (*):
Excluding realized gains and losses 7.8% 7.9% 8.1% 7.9% 8.7%
Including realized gains and losses 7.8% 8.8% 8.8% 9.0% 10.0%
(*)Excludes "Real Estate and Other Investments".
<PAGE>
Fixed Maturity Investments. Unlike many insurance groups which
have portfolios that are invested heavily in tax-exempt bonds,
AFG's bond portfolio is invested primarily in taxable bonds. The
NAIC assigns quality ratings which range from Class 1 (highest
quality) to Class 6 (lowest quality). The following table shows
AFG's bonds and redeemable preferred stocks, by NAIC designation
(and comparable Standard & Poor's Corporation rating) as of
December 31, 1996 (dollars in millions):
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $6,844.1 $ 6,944.8 69%
2 BBB 2,380.2 2,423.9 24
Total investment grade 9,224.3 9,368.7 93
3 BB 341.7 344.9 4
4 B 280.6 296.7 3
5 CCC, CC, C 7.1 9.9 *
6 D - 2.5 *
Total non-investment grade 629.4 654.0 7
Total $9,853.7 $10,022.7 100%
_______________
(*) Less than 1%
Risks inherent in connection with fixed income securities include loss
upon default and market price volatility. Factors which can affect the
market price of securities include: creditworthiness, changes in interest
rates, the number of market makers and investors and defaults by major
issuers of securities.
18
<PAGE>
AFG's primary investment objective for bonds and redeemable preferred stocks
is to earn interest and dividend income rather than to realize capital gains.
AFG invests in bonds and redeemable preferred stocks that have primarily
short-term and intermediate-term maturities. This practice allows flexibility
in reacting to fluctuations of interest rates.
Equity Investments. 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.
Chiquita At December 31, 1996, AFG owned 24 million shares of Chiquita
common stock representing 43% of its outstanding shares. The carrying value
and market value of AFG's investment in Chiquita were approximately
$200 million and $306 million, respectively, at December 31, 1996. Chiquita
is a leading international marketer, producer and distributor of bananas and
other quality fresh and processed food products. In addition to bananas,
these products include other tropical fruit and fresh produce; fruit and
vegetable juices and beverages; processed fruits and vegetables; salads; and
edible oil-based consumer products.
Citicasters In September 1996, AFG sold its investment in Citicasters to
Jacor Communications for approximately $220 million in cash plus warrants to
purchase Jacor common stock. Citicasters owned radio and television stations
in major markets throughout the country.
General Cable In 1994, AFC sold its investment in General Cable common
stock to an unaffiliated company for $27.6 million in cash. General Cable was
formed in 1992 to hold American Premier's wire and cable and heavy equipment
manufacturing businesses.
Regulation
AFG's insurance company subsidiaries are subject to regulation in the
jurisdictions where they do business. In general, the insurance laws of the
various states establish regulatory agencies with broad administrative powers
governing, among other things, premium rates, solvency standards, licensing of
insurers, agents and brokers, trade practices, forms of policies, maintenance
of specified reserves and capital for the protection of policyholders, deposits
of securities for the benefit of policyholders, investment activities and
relationships between insurance subsidiaries and their parents and affiliates.
Material transactions between insurance subsidiaries and their parents and
affiliates generally must be disclosed and prior approval of the applicable
insurance regulatory authorities generally is required for any such
transaction which may be deemed to be material or extraordinary. In addition,
while differing from state to state, these regulations typically restrict the
maximum amount of dividends that may be paid by an insurer to its shareholders
in any twelve-month period without advance regulatory approval. Such
limitations are generally based on net earnings or statutory surplus. Under
applicable restrictions, the maximum amount of dividends available to AFG
in 1997 from its insurance subsidiaries without seeking regulatory clearance
is approximately $253 million.
<PAGE>
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.
Prior to 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
19
<PAGE>
California. In July 1993, California enacted legislation (the "Reform
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 Commissioner unless the rate is disapproved by the California
Commissioner. Between December 1, 1993 and January 1, 1995, when the
"open rating" policy went into effect, the California Commissioner ordered
additional rate decreases totaling more than 25%.
Most states have created insurance guarantee associations to provide for
the payment of claims of insurance companies that become insolvent. Annual
assessments for AFG's insurance companies have not been material. In
addition, many states have created "assigned risk" plans or similar
arrangements to provide state mandated minimum levels of automobile liability
coverage to drivers whose driving records or other relevant characteristics
make it difficult for them to obtain insurance otherwise. Automobile insurers
in those states are required to provide such coverage to a proportionate
number of those drivers applying as assigned risks. Premium rates for
assigned risk business are established by the regulators of the particular
state plan and are frequently inadequate in relation to the risks insured,
resulting in underwriting losses. Assigned risks accounted for approximately
one-half of one percent of AFG's net written premiums in 1996.
The NAIC is an organization which is comprised of the chief insurance
regulator for each of the 50 states and the District of Columbia. In 1990,
the NAIC began an accreditation program to ensure that states have adequate
procedures in place for effective insurance regulation, especially with
respect to financial solvency. The accreditation program requires that a
state meet specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or modified standards
approved by the NAIC within two years following adoption. As of
December 31, 1996, the District of Columbia and 48 states were accredited
including states which regulate AFG's largest insurance subsidiaries.
The NAIC model law for Risk Based Capital applies to both life and property
and casualty companies. The risk-based capital formulas determine the amount
of capital that an insurance company needs to ensure that it has an acceptably
low expectation of becoming financially impaired. The model law provides for
increasing levels of regulatory intervention as the ratio of an insurer's
total adjusted capital and surplus decreases relative to its risk-based
capital, culminating with mandatory control of the operations of the insurer
by the domiciliary insurance department at the so-called "mandatory control
level". The risk-based capital formulas became effective in 1993 for life
companies and in 1995 for property and casualty companies. At
December 31, 1996, the capital ratios of all AFG insurance companies
substantially exceeded the risk-based capital requirements.
In September 1996, the NAIC adopted a model investment law. The law will
not be a requirement of the NAIC accreditation standards. However, each state
may adopt all, any part, or none of the model investment law to regulate the
investment policies of their insurance companies. At this time, it is not
possible to determine the impact, if any, this will have on AFG's insurance
subsidiaries.
20
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AFG's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-1.
As discussed in Note A to the financial statements, financial statements
for periods prior to the Mergers are those of AFC. The operations of
American Premier are included in AFG's financial statements from the date
of acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Ratios From the date of the Mergers to the end of 1996, approximately
$1.1 billion of AFC and American Premier debt was retired or replaced with
lower cost debt, resulting in a net reduction of aggregate debt by
approximately 75%. Consequently, AFG's debt to total capital ratio at the
parent holding company level improved from nearly 60% at the date of the
Mergers to approximately 15% at December 31, 1996. These debt reductions and
replacements will also reduce AFG's interest expense by over $100 million
annually.
AFG's ratio of earnings to fixed charges on a total enterprise basis was
4.22, 2.60 and 1.69 for the years ended December 31, 1996, 1995 and 1994,
respectively. Assuming the Mergers and related transactions occurred at the
beginning of each period, these ratios would have been 2.93 for 1995 and
2.07 for 1994.
The National Association of Insurance Commissioners' model law for risk
based capital ("RBC") applies to both life and property and casualty companies.
RBC formulas determine the amount of capital that an insurance company needs
to ensure that it has an acceptable expectation of not becoming financially
impaired. At December 31, 1996, the capital ratios of all AFG insurance
companies substantially exceeded the RBC requirements (the lowest capital
ratio of any AFG subsidiary was 2.8 times its authorized control level RBC;
weighted average of all AFG subsidiaries was 5.0 times).
Sources of Funds AFG and its subsidiaries, AFC and American Premier, are
organized as holding companies with almost all of their operations being
conducted by subsidiaries. These parent corporations, however, have
continuing cash needs for administrative expenses, the payment of principal
and interest on borrowings, and shareholder dividends. AFG, AFC and
American Premier rely primarily on dividends and tax payments from their
subsidiaries for funds to meet their obligations.
<PAGE>
Management believes AFG has sufficient resources to meet the liquidity
requirements of AFG, AFC and American Premier through operations in the
short-term and long-term future. If funds generated from operations,
including dividends from subsidiaries, are insufficient to meet fixed charges
in any period, these companies would be required to generate cash through
borrowings, sales of securities or other assets, or similar transactions.
Prior to the Mergers, American Premier had substantial cash and short-term
investments at the parent company level. Subsequent to the Mergers, AFC and
two of its subsidiaries entered into separate credit agreements with American
Premier. Funds borrowed from American Premier under these agreements were
used for debt retirements, capital contributions to subsidiaries, and other
corporate purposes. In addition, AFG and American Premier entered into a
reciprocal credit agreement under which these companies make funds available
to each other for general corporate purposes.
25
<PAGE>
In December 1996, American Premier paid a dividend to AFG in the form of a
$675 million note receivable from AFC under its credit agreement plus
$18.7 million of related accrued interest. AFG then contributed
$450 million of the note (without accrued interest) to the capital of AFC.
At the close of business on December 31, 1996, AFG contributed to AFC 81% of
the common stock of American Premier.
In September and October of 1996, three nationally recognized rating
agencies issued or upgraded ratings on AFC, American Premier and AAG public
debentures. All of the AFC and AAG senior debentures are now rated investment
grade; the APU and AAG subordinated debentures are rated investment grade by
two of the agencies. Generally, the upgrades reflect the expectation that
AFG's consolidated debt to total capital will remain conservative and that
coverage ratios will benefit from higher subsidiary earnings and a lower level
of fixed charges at AFG's subsidiaries.
Bank credit lines at several subsidiary holding companies provide ample
liquidity and can be used to obtain funds for the operating subsidiaries or,
if necessary, for the parent companies, AFC, American Premier and ultimately
AFG. Agreements with the banks generally run for three to seven years and are
renewed before maturity. While it is highly unlikely that all such amounts
would ever be borrowed at one time, a maximum of $510 million is available
under these bank facilities, $45 million of which was borrowed at
December 31, 1996.
In the past, funds have been borrowed under certain of these bank facilities
and used for working capital, capital infusions into subsidiaries, and to
retire other issues of short-term or high-rate debt. Also, AFG believes it may
be prudent and advisable to borrow up to $200 million of bank debt in the
normal course in order to retire public or privately held fixed rate
obligations over the next year or two.
In October 1996, a wholly-owned trust subsidiary of AFG issued four million
units of 9-1/8% Trust Originated Preferred Securities ("TOPrS") for
$100 million in cash. The Trust then purchased $100 million of newly issued
AFG 9-1/8% Subordinated Debentures due 2026, which, along with related interest
and principal payments received, will be the only assets of the Trust. AFG
used the proceeds to retire outstanding debt and preferred stock of
subsidiaries and for general corporate purposes. In addition, in
November 1996, a wholly-owned trust subsidiary of AAG issued $75 million of
similar TOPrS. AAG used $50 million of the proceeds to retire bank debt and
the remainder for general corporate purposes. Two nationally recognized
rating agencies gave both TOPrS investment grade ratings. In March 1997, AAG
raised an additional $75 million from a private offering of preferred
securities similar to the TOPrS.
<PAGE>
In February 1997, AFG filed a shelf registration statement for the future
issuance of up to an aggregate of $500 million in common stock, debt or trust
securities, with no more than $200 million of any one security being issued.
The filing provides AFG with greater flexibility to access the capital markets
from time to time as market and other conditions permit.
Dividend payments from subsidiaries have been very important to the
liquidity and cash flow of the individual holding companies in the past.
However, the reliance on such dividend payments has been lessened by the
combination of (i) strong capital at AFG's insurance subsidiaries (and the
related decreased likelihood of a need for investment in those companies),
(ii) the reductions of debt at the holding companies (and the related
decrease in ongoing cash needs for interest and principal payments),
(iii) AFG's ability to obtain financing in capital markets, as well as
(iv) the sales of Citicasters and Buckeye Management Company ("Buckeye").
26
<PAGE>
For statutory accounting purposes, equity securities are generally
carried at market value. At December 31, 1996, AFG's insurance companies
owned publicly traded equity securities with a market value of $1.3 billion,
including equity securities of AFG affiliates (including subsidiaries) of
$1.0 billion. Since significant amounts of these are concentrated in a
relatively small number of companies, decreases in the market prices could
adversely affect the insurance group's capital, potentially impacting the
amount of dividends available or necessitating a capital contribution.
Conversely, increases in the market prices could have a favorable impact on
the group's dividend-paying capability.
AFC and American Premier have each filed consolidated tax returns. Under
tax allocation agreements with AFC, its 80%-owned U.S. subsidiaries generally
compute tax provisions as if filing separate returns based on book taxable
income computed in accordance with generally accepted accounting principles.
American Premier has tax allocation agreements with its U.S. insurance
subsidiaries whereby such subsidiaries compute tax provisions based on
taxable income in accordance with statutory accounting principles. In each
case, the resulting provision (or credit) is currently payable to (or
receivable from) AFC or American Premier. American Premier's federal income
tax loss carryforward was available to offset taxable income and, as a
result, American Premier's obligation to pay federal income tax for 1996 was
substantially eliminated. Beginning with the 1997 federal tax return,
American Premier will join AFC's consolidated return.
Uncertainties Two lawsuits were filed in 1994 against American Premier by
USX Corporation ("USX") and a former USX subsidiary. The lawsuits seek
contribution from American Premier for all or a portion of a $600 million
final antitrust judgment entered against a USX subsidiary in 1994. The
lawsuits argue that USX's liability for that judgment is attributable to the
alleged activities of American Premier's predecessor in an unlawful antitrust
conspiracy among certain railroad companies. American Premier and its
outside counsel believe that American Premier has substantial defenses and
should not suffer a material loss as a result of this litigation.
Great American's liability for unpaid losses and loss adjustment expenses
includes amounts for various liability coverages related to environmental and
hazardous product claims. The insurance industry typically includes only
claims relating to polluted waste sites and asbestos in defining
environmental exposures, whereas Great American 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. At December 31, 1996, Great American
had recorded $343 million (net of reinsurance recoverables of $163 million)
for environmental pollution and hazardous products claims on policies written
many years ago where, in most cases, coverage was never intended. Due to
inconsistent court decisions on many coverage issues and the difficulty in
determining standards acceptable for cleaning up pollution sites, significant
uncertainties exist which are not likely to be resolved in the near future.
AFG's subsidiaries are parties in a number of proceedings relating to
former operations. See Note M to the financial statements.
While the results of all such uncertainties cannot be predicted, based
upon its knowledge of the facts, circumstances and applicable laws,
management believes that sufficient reserves have been provided.
27
<PAGE>
Investments Approximately 70% of AFG's consolidated assets are invested in
marketable securities. A diverse portfolio of bonds and redeemable preferred
stocks accounts for 95% of these securities. AFG attempts to optimize
investment income while building the value of its portfolio, placing emphasis
upon long-term performance. AFG's goal is to maximize return on an ongoing
basis rather than focusing on short-term performance.
Fixed income investment funds are generally invested in securities with
short-term and intermediate-term maturities with an objective of optimizing
total return while allowing flexibility to react to changes in market
conditions. At December 31, 1996, the average life of AFG's bonds and
redeemable preferred stocks was just over 6 years.
Approximately 93% of the bonds and redeemable preferred stocks held by AFG
were rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at December 31, 1996. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated and non-investment grade. Management believes that the high quality
investment portfolio should generate a stable and predictable investment
return.
Investments in mortgage-backed securities ("MBSs") represented approximately
one-fourth of AFG's bonds and redeemable preferred stocks at December 31, 1996.
AFG invests primarily in MBSs which have a reduced risk of prepayment.
Interest only (I/Os), principal only (P/Os) and other "high risk" MBSs
represented approximately two percent of AFG's total mortgage-backed
securities portfolio. In addition, the majority of MBSs held by AFG were
purchased at a discount. Management believes that the structure and discounted
nature of the MBSs will minimize the effect of prepayments on earnings over
the anticipated life of the MBS portfolio. More than 90% of AFG's MBSs are
rated "AAA" with substantially all being of investment grade quality. The
majority are collateralized by GNMA, FNMA and FHLMC single-family residential
pass-through certificates. The market in which these securities trade is
highly liquid. Aside from interest rate risk, AFG does not believe a
material risk (relative to earnings or liquidity) is inherent in holding such
investments.
Because most income of the property and casualty insurance subsidiaries has
been sheltered from income taxes through 1996, non-taxable municipal bonds
represent only a small portion (approximately 1%) of the portfolio.
AFG's equity securities are concentrated in a relatively limited number of
major positions. This approach allows management to more closely monitor the
companies and industries in which they operate.
The realization of capital gains, primarily through sales of equity
securities, was an integral part of AFG's investment program. Individual
securities are sold creating gains or losses as market opportunities exist.
Pretax capital gains recognized upon disposition of securities, including
investees, during the past five years have been: 1996 - $166 million;
1995 - $84 million; 1994 - $50 million; 1993 - $165 million and
1992 - $104 million. At December 31, 1996, the net unrealized gain on AFG's
bonds and redeemable preferred stocks was $169 million; the net unrealized
gain on equity securities was $185 million.
28
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1996
General As previously noted, financial statements for periods prior to the
April 1995 Mergers are those of AFC. The operations of American Premier are
included in AFG's financial statements from the date of acquisition. AFC had
accounted for American Premier as an investee from the second quarter of 1993
through the first quarter of 1995. Accordingly, current year income statement
components are not comparable to prior years.
Pretax earnings before extraordinary items were $353 million in 1996,
$247 million in 1995 and $44 million in 1994.
Results for 1996 include $203 million in pretax gains primarily on the
sales of Citicasters and Buckeye, reduced by a charge of $80 million
resulting from a decision to strengthen insurance reserves relating to
asbestos and other environmental matters ("A&E").
In addition to the earnings contribution resulting from the Mergers,
results for 1995 include $84 million in pretax gains on the sale of
securities.
Results for 1994 include AFC's share ($28 million) of American Premier's
loss on the sale of General Cable securities, Great American's
$19 million charge relating to a rate rollback liability in California
and a $35 million charge related to payments under AFC's Book Value
Incentive Plan.
Property and Casualty Insurance - Underwriting AFG manages and operates its
property and casualty business as three major sectors. The nonstandard
automobile insurance companies (the "NSA Group") insure risks not typically
accepted for standard automobile coverage because of the applicant's driving
record, type of vehicle, age or other criteria. The specialty lines
are a diversified group of over twenty-five business lines that offer a wide
variety of specialty insurance products. Some of the more significant areas
are California workers' compensation, executive liability, inland and ocean
marine, U.S.-based operations of Japanese companies, agricultural-related
coverages, excess and surplus lines and fidelity and surety bonds. The
commercial and personal lines provide coverages in commercial multi-peril,
workers' compensation, umbrella and commercial automobile, standard private
passenger automobile and homeowners insurance.
<PAGE>
To understand the overall profitability of particular lines, timing of
claims payments and the related impact of investment income must be
considered. Certain "short-tail" lines of business (primarily property
coverages) have quick loss payouts which reduce the time funds are held,
thereby limiting investment income earned thereon. On the other hand,
"long-tail" lines of business (primarily liability coverages and workers'
compensation) have payouts that are either structured over many years or take
many years to settle, thereby significantly increasing investment income
earned on related premiums received.
Underwriting profitability is measured by the combined ratio which is a sum
of the ratios of underwriting losses, loss adjustment expenses, underwriting
expenses and policyholder dividends to premiums. When the combined ratio is
under 100%, underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally considered
unprofitable. The combined ratio does not reflect investment income, other
income or federal income taxes.
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various specialty
lines listed above), management believes that it is prudent and appropriate
to use conservative assumptions until such time as the data, experience and
projections have more credibility, as evidenced by data volume, consistency
and maturity of the data. While this practice mitigates the risk of adverse
development on this business, it does not eliminate it.
While AFG desires and seeks to earn an underwriting profit on all of its
business, it is not always possible to do so. As a result, AFG attempts to
expand in the most profitable areas and control growth or even reduce its
involvement in the least profitable ones.
29
<PAGE>
Comparisons made in the following discussion of AFG's
insurance operations include American Premier's insurance
operations even though they were not consolidated in the
financial statements prior to the Mergers.
Net written premiums and combined ratios for AFG's property
and casualty insurance subsidiaries were as follows (dollars in
millions):
1996 1995 1994
Net Written Premiums (GAAP)
NSA Group $1,135 $1,277 $1,186
Specialty Operations 993 1,097 1,250
Commercial and Personal Operations 660 717 683
Other Lines - 1 5
$2,788 $3,092 $3,124
Combined Ratios (GAAP)
NSA Group 99.9% 105.2% 100.0%
Specialty Operations 84.1 94.8 97.2
Commercial and Personal Operations 110.6 99.1 98.9
Aggregate (including A&E and other lines) 102.9 101.2 99.4
Operating results for 1996 were adversely impacted by two unusual items:
(i) higher than normal catastrophe losses including approximately $30 million
in losses due to Hurricane Fran and (ii) the strengthening of A&E reserves
(exposures for which AFG may be liable under general liability policies
written years ago). A standard insurance measure used in analyzing the
adequacy of A&E reserves is the "survival ratio" (reserves divided by
three-year average annual paid losses). Due in part to the greater
uncertainties inherent in estimating A&E claims, management evaluates its
survival ratio in relation to those published for the industry. Based
primarily on industry survival ratios published in mid-1996, AFG increased
A&E reserves of its discontinued insurance lines by $120 million by recording
a third quarter, non-cash pretax charge of $80 million and reallocating
$40 million or approximately 2% of reserves from its Specialty Operations.
Reserves for unpaid losses and loss adjustment expenses of the Specialty
Lines were approximately $2.1 billion, $2.2 billion and $1.5 billion at
December 31, 1996, 1995 and 1994, respectively. Following a detailed analysis
of overall reserves, the reallocation was made based on available data,
experience and projections. A&E reserves at December 31, 1996, were
approximately $343 million, an amount equal to approximately 10.5 times the
preceding three years' average claim payments.
In 1996, underwriting results of AFG's insurance operations
significantly outperformed the industry average for the
eleventh consecutive year. AFG's insurance operations have
been able to exceed the industry's results by focusing on
highly specialized niche products, supplemented by commercial
lines coverages and personal automobile products.
NSA Group The NSA Group has implemented premium rate
increases in various states over the last three years. The
higher rate levels along with competitive pressures in the
nonstandard automobile insurance industry resulted in an 11%
decline in net written premiums in 1996 and adversely impacted
premium growth during 1995. These rate increases contributed
to an improvement, however, in the combined ratio for 1996.
The increase in the combined ratio for 1995 was due primarily
to inadequate rate levels in certain markets and weather-
related losses (principally from hailstorms in Texas) which
more than offset a reduction in underwriting expenses due
largely to cost control measures.
<PAGE>
Specialty Operations Net written premiums for the specialty
operations declined 9% and 12% during 1996 and 1995, respectively,
due primarily to a decrease in the California workers'
compensation business in both years and withdrawal from an
unprofitable pool at the end of 1995, partially offset by
increases in other specialty niche lines. The decline in
California workers' compensation premiums reflects (i) extremely
competitive pricing in the marketplace as a result of the repeal
of the California workers' compensation minimum rate law effective
January 1, 1995 and (ii) the impact of mandatory premium rate
reductions which took effect a year earlier.
Excluding the impact of the decreases in the California
workers' compensation business and the withdrawal from the
voluntary pool, specialty net written premiums increased
$16 million (2%) in 1996. The increase is due in part to
increases in specialized coverages for fidelity and surety bonds,
executive liability, animal mortality and collateral protection
exposures.
30
<PAGE>
The improvement in the combined ratio of the Specialty Lines
for 1996 includes 4.1 percentage points attributable to a
reallocation of loss reserves in connection with the
strengthening of A&E reserves. Further improvement is
attributable to (i) improved results in certain niche
businesses, (ii) reductions in loss, loss adjustment expense
and policyholder dividend reserves prompted by the fundamental
changes in the California workers' compensation market and
actuarial evaluations, and
(iii) losses in 1995 from participation in the voluntary pool.
The combined ratio of the specialty operations in 1995 reflects
improved results experienced in the crop hail and farm lines as well
as coverages of U.S. operations of Japanese companies. The 1995
combined ratio also includes losses resulting from participation in a
voluntary pool from which AFG withdrew.
Commercial and Personal Operations Net written premiums for
the commercial and personal operations decreased 8% in 1996. The
decrease is due primarily to significant reductions in homeowners
coverages in certain states as well as competitive pricing
conditions in the commercial casualty market, partially offset by
increases in writings of workers' compensation coverages. The
profitability of the commercial and personal operations declined
in 1996 due primarily to deterioration in personal lines
operations as well as weather-related losses, including losses
from Hurricane Fran.
Net written premiums increased 5% in 1995 due primarily to
increased writing of workers' compensation and commercial
umbrella insurance. The profitability of both of these lines
improved in 1995. These profitable results were offset by
unfavorable results in the personal lines operations from
weather-related losses, start-up costs related to a direct-to-
consumer operation and deteriorating automobile loss
experience.
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested
assets.
1996 compared to 1995 Investment income increased
$96 million (13%) from 1995; adjusting for the effects of the
Mergers retroactively to January 1, 1995, investment income
increased $55 million (7%) from 1995 due primarily to an
increase in the average amount of investments held.
1995 compared to 1994 AFC's investment income increased $50
million (9%) from 1994 due to an increase in the average amount
of investments held. For the period following the Mergers,
investment income includes $117 million attributable to
American Premier.
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFG owns a significant portion of
the voting stock) represents AFG's proportionate share of the
investees' earnings and losses.
<PAGE>
1996 compared to 1995 AFG's equity in net earnings of
investee corporations decreased $32 million compared to 1995.
Chiquita reported a decrease in operating income in 1996 of
$92 million. Chiquita recorded writedowns and costs of
$70 million resulting from (i) industry-wide flooding in Costa
Rica, Guatemala and Honduras, (ii) certain strategic
undertakings designed to achieve further long-term reductions
in the delivered product cost of Chiquita bananas and (iii)
certain claims relating to prior European Union quota
restructuring actions. Aside from the effects described above,
operating income from remaining core operations improved in
1996 primarily as a result of lower delivered product cost for
bananas. This improvement in core operating results
substantially offset the elimination of earnings from
Chiquita's Costa Rican edible oils operations which were sold
in December 1995.
1995 compared to 1994 AFG's equity in net earnings of investee
corporations increased $32 million in 1995. Chiquita reported a
$105 million improvement in operating income primarily due to net
gains from the sale of non-core assets, higher banana prices
outside the European Union, the favorable effect of foreign
exchange rates on European sales, and earnings improvements from
other food products.
31
<PAGE>
Gains on Sales of Investees The gains on sales of investees in
1996 represent pretax gains, before $6.5 million of minority
interest, on the sale of Citicasters common stock. The gains
on sales of investees in 1994 represent pretax gains on the
sale of General Cable common stock.
Gains on Sales of Subsidiaries The gains on sales of
subsidiaries in 1996 include a pretax gain of $33.9 million on
the sale of Buckeye and the settlement of litigation related to
a subsidiary sold in 1993.
Annuity Benefits For GAAP financial reporting purposes,
annuity receipts are accounted for as interest-bearing deposits
("annuity benefits accumulated") rather than as revenues.
Under these contracts, policyholders' funds are credited with
interest on a tax-deferred basis until withdrawn by the
policyholder. Annuity benefits represent primarily interest
related to annuity policyholders' funds held. The rate at
which GALIC credits interest on annuity policyholders' funds is
subject to change based on management's judgment of market conditions.
Annuity receipts totaled approximately $570 million in 1996,
$460 million in 1995 and $440 million in 1994. Annuity
receipts have increased over the last few years due to sales of
newly introduced single premium products and, in 1995, the
development of new distribution channels.
Annuity benefits increased $17 million (7%) in 1996 and
$13 million (5%) in 1995 primarily due to an increase in
average annuity benefits accumulated.
Interest on Borrowed Money Changes in interest expense result
from fluctuations in market rates as well as changes in
borrowings. AFG has generally financed its borrowings on a
long-term basis which has resulted in higher current costs.
<PAGE>
1996 compared to 1995 Interest expense for 1996 was $76.1 million and
interest expense for 1995, adjusted to reflect the effect of the Mergers
retroactively to January 1, 1995, was $116.3 million. The $40 million (35%)
decrease reflects significant debt retirements during both 1995 and 1996.
1995 compared to 1994 Excluding $29 million attributable to
American Premier, interest expense decreased by $22 million (19%) due
primarily to repayments of borrowings by AFC and certain subsidiaries and
the AFC debt exchange in 1994.
Other Operating and General Expenses Operating and general expenses in 1994
included a charge of $18 million for allowance for bad debts and a charge
of $19 million for a California insurance reform measure.
Income Taxes See Note K to the Financial Statements for an analysis
of items affecting AFG's effective tax rate.
32
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
Page
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1996 and 1995 F-2
Consolidated Statement of Earnings:
Years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statement of Cash Flows:
Years ended December 31, 1996, 1995 and 1994 F-4
Notes to Consolidated Financial Statements F-5
"Selected Quarterly Financial Data" has been included in Note N
to the Consolidated Financial Statements.
33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of
American Financial Group, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of earnings and cash
flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Financial Group, Inc. and subsidiaries at
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 25, 1997
F-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
1996 1995
Assets
Cash and short-term investments $ 448,296 $ 544,408
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,528,100 and $3,729,300) 3,491,126 3,588,943
Available for sale - at market
(amortized cost - $6,362,597 and $5,648,060) 6,494,597 5,949,260
Other stocks - principally at market
(cost - $142,364 and $136,944) 327,664 252,244
Investment in investee corporations 199,651 306,545
Loans receivable 568,765 631,408
Real estate and other investments 208,765 220,135
Total investments 11,290,568 10,948,535
Recoverables from reinsurers and prepaid
reinsurance premiums 942,450 923,080
Agents' balances and premiums receivable 609,403 703,274
Deferred acquisition costs 452,041 419,919
Other receivables 272,595 270,263
Deferred tax asset 137,284 200,392
Assets held in separate accounts 247,579 238,524
Prepaid expenses, deferred charges and other assets 372,321 391,339
Cost in excess of net assets acquired 278,581 314,136
$15,051,118 $14,953,870
<PAGE>
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,123,701 $ 4,096,703
Unearned premiums 1,247,806 1,294,054
Annuity benefits accumulated 5,365,612 5,051,959
Life, accident and health reserves 575,380 538,274
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 172,809 311,202
American Premier Underwriters (parent only) 166,695 337,334
American Annuity Group 114,900 167,734
Other subsidiaries 63,515 65,793
Liabilities related to separate accounts 247,579 238,524
Accounts payable, accrued expenses and other
liabilities 924,244 1,097,766
Total liabilities 13,002,241 13,199,343
Minority interest 494,440 314,390
Shareholders' Equity:
Common Stock, $1 par value
- 200,000,000 shares authorized
- 61,071,626 and 60,139,303 shares outstanding 61,072 60,139
Capital surplus 745,649 741,355
Retained earnings 559,716 387,143
Net unrealized gain on marketable securities,
net of deferred income taxes 188,000 251,500
Total shareholders' equity 1,554,437 1,440,137
$15,051,118 $14,953,870
See notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Income:
Property and casualty insurance premiums $2,844,512 $2,648,703 $1,378,628
Life, accident and health premiums 103,552 15,691 2,231
Investment income 846,428 750,640 582,931
Realized gains (losses) on sales
of securities (3,470) 84,028 48,342
Equity in net earnings (losses) of
investee corporations (16,955) 15,237 (16,573)
Gains on sales of investee corporations 169,138 335 1,694
Gains on sales of subsidiaries 36,837 - -
Other income 135,355 114,975 107,051
4,115,397 3,629,609 2,104,304
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expense 2,131,421 1,977,395 986,996
Commissions and other underwriting
expenses 793,800 707,340 428,590
Annuity benefits 271,821 254,650 241,811
Life, accident and health benefits 92,315 13,202 1,524
Interest charges on borrowed money 76,052 122,568 115,162
Minority interest expense 47,821 33,264 8,903
Book Value Incentive Plan - - 34,740
Other operating and general expenses 348,923 274,271 243,010
3,762,153 3,382,690 2,060,736
Earnings before income taxes and
extraordinary items 353,244 246,919 43,568
Provision for income taxes 91,277 56,489 24,650
Earnings before extraordinary items 261,967 190,430 18,918
Extraordinary items - gain (loss) on
prepayment of debt (28,667) 817 (16,818)
Net Earnings $ 233,300 $ 191,247 $ 2,100
Preferred dividend requirement of
predecessor company - 6,349 25,709
Net earnings (loss) available to
Common Shares $ 233,300 $ 184,898 ($ 23,609)
Earnings (loss) per Common Share:
Before extraordinary items $4.31 $3.87 ($.24)
Extraordinary items (.47) .01 (.59)
Net earnings (loss) $3.84 $3.88 ($.83)
Average number of Common Shares 60,801 47,620 28,324
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 233,300 $ 191,247 $ 2,100
Adjustments:
Extraordinary items 28,667 (817) 16,818
Depreciation and amortization 79,425 47,760 30,729
Annuity benefits 271,821 254,650 241,811
Equity in net (earnings) losses of investee
corporations 16,955 (15,237) 16,573
Changes in reserves on assets 5,656 2,302 17,094
Realized gains on investing activities (198,676) (84,995) (59,609)
Decrease (increase) in reinsurance and other
receivables 96,387 23,192 (223,113)
Decrease (increase) in other assets 23,541 (11,503) (96,596)
Increase in insurance claims and reserves 9,171 137,180 345,542
Increase (decrease) in other liabilities (212,720) (247,938) 67,799
Increase in minority interest 18,206 7,877 6,773
Dividends from investees 4,799 9,568 21,567
Other, net (3,552) (673) (1,488)
372,980 312,613 386,000
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,128,553) (2,378,427) (1,726,318)
Equity securities (10,528) (1,034) (7,315)
Investees and subsidiaries - (68,591) (29,306)
Real estate, property and equipment (38,035) (42,579) (27,185)
Maturities and redemptions of fixed maturity
investments 617,272 309,581 420,945
Sales of:
Fixed maturity investments 881,114 2,310,837 694,947
Equity securities 53,195 17,379 127,181
Investees and subsidiaries 284,277 - 27,621
Real estate, property and equipment 7,981 27,759 6,151
Cash and short-term investments of acquired
(former) subsidiaries (4,589) 392,100 -
Decrease (increase) in other investments 315 (11,466) (5,571)
(337,551) 555,559 (518,850)
<PAGE>
Financing Activities:
Annuity receipts 573,741 457,525 442,703
Annuity payments (517,881) (412,854) (321,038)
Additional long-term borrowings 288,775 337,076 244,311
Reductions of long-term debt (582,288) (1,061,187) (193,481)
Issuances of common stock 26,296 211,557 -
Repurchases of common stock (8,563) (17) -
Issuances of trust originated preferred securities 168,876 - -
Issuance of subsidiary preferred stock 16,800 - -
Repurchases of subsidiary preferred stock (36,912) - (6,738)
Cash dividends paid (60,385) (27,199) (29,522)
(131,541) (495,099) 136,235
Net Increase (Decrease) in Cash and Short-term
Investments (96,112) 373,073 3,385
Cash and short-term investments at beginning of
period 544,408 171,335 167,950
Cash and short-term investments at end of period $ 448,296 $ 544,408 $ 171,335
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Mergers I. Minority Interest
B. Accounting Policies J. Capital Stock
C. Acquisitions and Sales of Subsidiaries K. Income Taxes
and Investees L. Extraordinary Items
D. Segments of Operations M. Commitments and Contingencies
E. Investments N. Quarterly Operating Results
F. Investment in Investee Corporations O. Insurance
G. Cost in Excess of Net Assets Acquired P. Additional Information
H. Long-Term Debt Q. Subsequent Event
A. Mergers
American Financial Group, Inc. ("AFG") was formed in December 1994 for the
purpose of acquiring American Financial Corporation ("AFC") and American
Premier Underwriters, Inc. ("American Premier"). In Mergers completed on
April 3, 1995, AFG issued 71.4 million shares of its Common Stock in
exchange for all of the outstanding common stock of AFC and American
Premier. AFC received 18.7 million shares of AFG for its investment in
American Premier. These shares are accounted for herein as retired.
For financial reporting purposes, because the former shareholders of AFC
owned more than 50% of AFG following the Mergers, the Mergers were
accounted for as a reverse acquisition whereby AFC was deemed to have
acquired American Premier. Financial statements for periods prior to the
Mergers are those of AFC. The operations of American Premier are included
in AFG's financial statements from the date of the Mergers.
The valuation of American Premier's net assets was determined based on the
fair market value of the AFG shares issued to shareholders other than AFC
and was allocated to American Premier's assets and liabilities based on
their fair values at the date of acquisition. The following unaudited
pro forma data is presented as if the Mergers occurred on January 1, 1994
(in millions, except per share data).
1995 1994
Revenues $4,049 $3,832
Earnings before Extraordinary Items 216 59
Extraordinary Items 1 (17)
Net Earnings 217 42
Earnings Per Share $ 4.04 $ .79
<PAGE>
B. Accounting Policies
Basis of Presentation The consolidated financial statements include the
accounts of AFG and its subsidiaries. Mergers and changes in ownership
levels of subsidiaries and investees have resulted in certain differences
in the financial statements and have affected comparability between years.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Changes in circumstances could cause actual
results to differ materially from those estimates.
F-5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG's ownership of subsidiaries and significant investees with
publicly traded common shares at December 31, was as follows:
1996 1995 1994
American Annuity Group, Inc. ("AAG") 81% 81% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) (a) 42%
Chiquita Brands International, Inc. 43% 44% 46%
Citicasters Inc. (b) 38% 37%
(a) Became a 100%-owned subsidiary on April 3, 1995.
(b) Sold in September 1996.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AFG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as
"available for sale" and reported at fair value with unrealized gains and
losses reported as a separate component of shareholders' equity if the
securities are not classified as held to maturity or bought and held
principally for selling in the near term. Only in certain limited
circumstances, such as significant issuer credit deterioration or if
required by insurance or other regulators, may a company change its intent
to hold a certain security to maturity without calling into question its
intent to hold other debt securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized over
their expected average lives using the interest method. Gains or losses on
sales of securities are recognized at the time of disposition with the
amount of gain or loss determined on the specific identification basis.
When a decline in the value of a specific investment is considered to be
other than temporary, a provision for impairment is charged to earnings and
the carrying value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are stated
primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in securities of
20%- to 50%-owned companies are carried at cost, adjusted for AFG's
proportionate share of their undistributed earnings or losses.
Investments in less than 20%-owned companies are accounted for by
the equity method when, in the opinion of management, AFG can exercise
significant influence over operating and financial policies of the investee.
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries
and investees over AFG's equity in the underlying net assets ("goodwill")
is being amortized over 40 years. The excess of AFG's equity in the net
assets of other subsidiaries and investees over its cost of acquiring these
companies ("negative goodwill") is allocated to AFG's basis in these
companies' fixed assets, goodwill and other long-term assets and is
amortized on a 10- to 40-year basis.
Insurance As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
<PAGE>
Reinsurance In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFG's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsurance
policies. AFG's insurance subsidiaries report as assets (a) the
F-6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
estimated reinsurance recoverable on unpaid losses, including an
estimate for losses incurred but not reported, and (b) amounts paid
to reinsurers applicable to the unexpired terms of policies in
force. AFG's insurance subsidiaries also assume reinsurance from
other companies. Income on reinsurance assumed is recognized based
on reports received from ceding reinsurers.
Deferred Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related
to the production of new business are deferred ("DPAC"). For the
property and casualty companies, the deferral of acquisition costs
is limited based upon their recoverability without any consideration
for anticipated investment income. DPAC is charged against income
ratably over the terms of the related policies. For the annuity
companies, DPAC is amortized, with interest, in relation to the
present value of expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period on the direct business written; (b) estimates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of the
law and coverage litigation. These liabilities are subject to the
impact of changes in claim amounts and frequency and other factors.
In spite of the variability inherent in such estimates, management
believes that the liabilities for unpaid losses and loss adjustment
expenses are adequate. Changes in estimates of the liabilities for
losses and loss adjustment expenses are reflected in the Statement
of Earnings in the period in which determined.
Annuity Benefits Accumulated Annuity receipts and benefit payments
are recorded as increases or decreases in "annuity benefits
accumulated" rather than as revenue and expense. Increases in this
liability for interest credited are charged to expense and decreases
for surrender charges are credited to other income.
Life, Accident and Health Reserves Liabilities for future policy
benefits under traditional ordinary life, accident and health
policies are computed using a net level premium method.
Computations are based on anticipated investment yield (primarily
7%), mortality, morbidity and surrenders and include provisions for
unfavorable deviations. Reserves are modified as necessary to
reflect actual experience and developing trends.
<PAGE>
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
primarily deposits maintained by several banks under a previously
offered tax-deferred annuity program. AAG receives an annual fee
from each bank for sponsoring the program; if depositors elect to
purchase an annuity from AAG, funds are transferred to AAG.
Premium Recognition Property and casualty premiums are earned over
the terms of the policies on a pro rata basis. Unearned premiums
represent that portion of premiums written which is applicable to
the unexpired terms of policies in force. On reinsurance assumed
from other insurance companies or written through various
underwriting organizations, unearned premiums are based on reports
received from such companies and organizations. For traditional
life, accident and health products, premiums are recognized as
revenue when legally collectible from policyholders. For interest-
sensitive life and universal life products, premiums are recorded
in a policyholder account which is reflected as a liability.
Revenue is recognized as amounts are assessed against the
policyholder account for mortality coverage and contract expenses.
F-7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates of amounts payable on
participating policies which share in favorable underwriting
results. The estimate is accrued during the period in which the
related premium is earned. Changes in estimates are included in
income in the period determined. Policyholder dividends do not
become legal liabilities unless and until declared by the boards of
directors of the insurance companies.
Income Taxes AFC and American Premier have each filed consolidated
federal income tax returns which include all 80%-owned U.S.
subsidiaries, except for certain life insurance subsidiaries and
their subsidiaries. Because voting rights aggregating 21% were
extended to holders of AFC Series F and G Preferred Stock in
connection with the Mergers, AFC filed a separate consolidated
return for 1995 and will again for 1996. AFG (parent) is included
in American Premier's consolidated return for those years. At the
close of business on December 31, 1996, AFG contributed 81% of the
common stock of American Premier to AFC. Accordingly, AFC and
American Premier will file a consolidated return for 1997 and AFG
(parent) will file a separate return.
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax
bases and are measured using enacted tax rates. Deferred tax
assets are recognized if it is more likely than not that a benefit
will be realized.
Benefit Plans AFG provides retirement benefits to qualified employees of
participating companies through contributory and noncontributory defined
contribution plans. Contributions to benefit plans are charged against
earnings in the year for which they are declared. Both AFC and American
Premier had contributory employee savings plans and noncontributory
Employee Stock Ownership Retirement Plans ("ESORP"). Under one of the
savings plans, American Premier matched a specified portion of employee
contributions. Under the ESORP plans, contributions are invested in
securities of AFG and affiliates for the benefit of their employees. In
1997, these ESORP plans were combined into a new plan.
AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG also provides
postemployment benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other
company plans. The projected future cost of providing these
benefits is expensed over the period the employees qualify for such
benefits.
Under AFG's stock option plan, options are granted to officers,
directors and key employees at exercise prices equal to the fair
value of the shares at the dates of grant. No compensation
expense is recognized for stock option grants.
<PAGE>
In connection with the Mergers, full vesting was granted to holders
of units under AFC's Book Value Incentive Plan and the plan was
terminated. Cash payments, which were made in April 1995 to holders
of the units, were accrued at December 31, 1994.
Minority Interest For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries,
including AFC preferred stock and trust originated preferred securities
("TOPrS") issued by trust subsidiaries of AFG. For income statement
purposes, minority interest expense represents those shareholders'
interest in the earnings of AFG subsidiaries as well as AFC preferred
dividends following the Mergers and accrued distributions on the TOPrS.
Earnings Per Share Earnings per share are calculated on the basis
of the weighted average number of shares of common stock
outstanding during the period and the dilutive effect, if material,
of assumed conversion of common stock options. The weighted
average number of shares used for periods prior to April 1995, is
based upon the 28.3 million shares issued in exchange for AFC
shares in the Mergers discussed in Note A.
F-8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and acquiring
and disposing of debt or equity instruments and property and
equipment. "Financing activities" include obtaining resources from
owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing activities.
All other activities are considered "operating". Short-term
investments having original maturities of three months or less when
purchased are considered to be cash equivalents for purposes of the
financial statements.
Fair Value of Financial Instruments Methods and assumptions used in
estimating fair values are described in Note P to the financial
statements. These fair values represent point-in-time estimates of
value that might not be particularly relevant in predicting AFG's
future earnings or cash flows.
C. Acquisitions and Sales of Subsidiaries and Investees
Citicasters In September 1996, AFG sold its investment in
Citicasters to Jacor Communications for approximately $220 million
in cash plus warrants to purchase Jacor common stock. AFG realized
a pretax gain of approximately $169 million, before minority
interest of $6.5 million, on the sale. In 1994, AFEI purchased
approximately 10% of Citicasters common stock from an unaffiliated
company for $23.9 million in cash.
Buckeye In March 1996, AFG sold Buckeye Management Company to
Buckeye's management (including an AFG director who resigned in
March 1996) and employees for $60 million in cash, net of
transaction costs. AFG recognized a $33.9 million pretax gain on
the sale. In connection with the sale, the AFG director converted
his AFG convertible preferred stock into 446,799 shares of AFG
Common Stock and sold such shares in the open market.
General Cable In 1994, AFC sold its investment in General Cable
common stock to an unaffiliated company for $27.6 million in cash.
AFC realized a $1.7 million pretax gain on the sale (excluding its
share of American Premier's loss on its sale of General Cable
securities).
D. Segments of Operations AFG operates its property and casualty
insurance business in three major segments: nonstandard
automobile, specialty lines, and commercial and personal lines.
AFG's annuity and life business primarily sells tax-deferred
annuities to employees of primary and secondary educational
institutions and hospitals. These insurance businesses operate
throughout the United States. In addition, AFG has owned
significant portions of the voting equity securities of certain
companies (investee corporations - see Note F).
F-9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables (in thousands) show AFG's assets, revenues and
operating profit (loss) by significant business segment. Capital
expenditures, depreciation and amortization are not significant.
Operating profit (loss) represents total revenues less operating
expenses. Goodwill and its amortization have been allocated to the
various segments to which they apply. General corporate assets and
expenses have not been identified or allocated by segment.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Assets
Property and casualty insurance (a) $ 7,116,088 $ 7,443,115 $ 4,576,591
Annuities and life 7,009,127 6,600,377 5,078,928
Other 726,252 603,833 104,495
14,851,467 14,647,325 9,760,014
Investment in investee corporations 199,651 306,545 832,637
$15,051,118 $14,953,870 $10,592,651
Revenues (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 1,183,098 $ 954,210 $ 24,974
Specialty lines 976,150 995,528 698,365
Commercial and personal lines 684,776 697,512 648,222
Other lines 488 1,453 7,067
2,844,512 2,648,703 1,378,628
Investment and other income 500,897 465,998 314,731
3,345,409 3,114,701 1,693,359
Annuities and life (c) 585,079 444,082 379,534
Other 201,864 55,589 47,984
4,132,352 3,614,372 2,120,877
Equity in net earnings (losses)
of investee corporations (16,955) 15,237 (16,573)
$ 4,115,397 $ 3,629,609 $ 2,104,304
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Nonstandard automobile $ 1,015 ($ 60,316) ($ 3,080)
Specialty lines 154,329 50,690 (12,598)
Commercial and personal lines (72,513) 5,315 7,087
Other lines (d) (163,540) (31,721) (24,914)
(80,709) (36,032) (33,505)
Investment and other income 392,250 370,579 199,292
311,541 334,547 165,787
Annuities and life 77,119 79,579 58,748
Other (e) (18,461) (182,444) (164,394)
370,199 231,682 60,141
Equity in net earnings (losses) of
investee corporations (16,955) 15,237 (16,573)
$ 353,244 $ 246,919 $ 43,568
</TABLE>
<PAGE>
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other
income earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and other
environmental matters ("A&E").
(e) Includes holding company expenses.
F-10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investments Bonds, redeemable preferred stocks and other stocks at
December 31, consisted of the following (in millions):
<TABLE>
<CAPTION>
1996
Held to Maturity Available for Sale
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ - $ 472.2 $ 475.7 $ 7.3 ($ 3.8)
States, municipalities and
political subdivisions 80.0 79.9 1.1 (1.2) 39.6 39.7 .5 (.4)
Foreign government 8.5 9.0 .5 - 94.5 94.3 .8 (1.0)
Public utilities 501.4 501.4 6.4 (6.4) 443.8 453.6 13.1 (3.3)
Mortgage-backed securities 935.9 949.0 18.8 (5.7) 1,626.3 1,637.9 28.1 (16.5)
All other corporate 1,965.3 1,988.8 34.8 (11.3) 3,624.4 3,733.0 122.2 (13.6)
Redeemable preferred stocks - - - - 61.8 60.4 1.5 (2.9)
$3,491.1 $3,528.1 $61.6 ($24.6) $6,362.6 $6,494.6 $173.5 ($41.5)
Other stocks $ 142.4 $ 327.7 $191.6 ($ 6.3)
</TABLE>
<TABLE>
<CAPTION>
1995
Held to Maturity Available for Sale
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ - $ 413.9 $ 431.3 $ 17.5 ($ .1)
States, municipalities and
political subdivisions 55.0 56.6 1.7 (.1) 20.6 20.3 .3 (.6)
Foreign government 13.1 12.8 1.0 (1.3) 87.5 89.9 2.4 -
Public utilities 528.8 545.3 17.7 (1.2) 561.3 591.0 32.3 (2.6)
Mortgage-backed securities 945.7 980.3 35.3 (.7) 1,373.2 1,407.8 40.7 (6.1)
All other corporate 2,042.1 2,129.8 87.8 (.1) 3,087.1 3,304.3 219.8 (2.6)
Redeemable preferred stocks 4.2 4.5 .3 - 104.5 104.7 1.9 (1.7)
$3,588.9 $3,729.3 $143.8 ($ 3.4) $5,648.1 $5,949.3 $314.9 ($13.7)
Other stocks $ 136.9 $ 252.2 $115.9 ($ .6)
</TABLE>
<PAGE>
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1996. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 7.5 years at December 31, 1996.
Held to Available
Maturity Maturity for Sale
One year or less 6% 2%
After one year through five years 27 17
After five years through ten years 36 41
After ten years 4 15
73 75
Mortgage-backed securities 27 25
100% 100%
F-11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Certain risks are inherent in connection with fixed maturity
securities, including loss upon default, price volatility in
reaction to changes in interest rates, and general market factors
and risks associated with reinvestment of proceeds due to
prepayments or redemptions in a period of declining interest rates.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments are
summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1996
Realized ($ 16,545) $13,075 $ 8,199 $ 4,729
Change in Unrealized (272,583) 70,000 70,904 (131,679)
1995
Realized 77,963 6,065 (13,915) 70,113
Change in Unrealized 810,690 43,700 (288,001) 566,389
1994
Realized (1,107) 49,449 30 48,372
Change in Unrealized (673,001) (60,500) 256,725 (476,776)
Transactions in fixed maturity investments included in the Statement
of Cash Flows consisted of the following (in millions):
Maturities
and Gross Gross
Purchases Redemptions Sales Gains Losses
1996
Held to Maturity $ 202.8 $332.5 $ 9.3 $ 2.4 ($ 1.2)
Available for Sale 1,925.8 284.8 871.8 29.6 (47.3)
Total $2,128.6 $617.3 $ 881.1 $32.0 ($48.5)
1995
Held to Maturity $ 774.8 $176.3 $ 12.9 $ 1.9 ($ 2.3)
Available for Sale 1,603.6 133.3 2,297.9 88.0 (9.6)
Total $2,378.4 $309.6 $2,310.8 $89.9 ($11.9)
1994
Held to Maturity $1,090.0 $216.0 $ 8.0 $ 3.3 ($ 2.5)
Available for Sale 636.3 204.9 686.9 9.4 (11.3)
Total $1,726.3 $420.9 $ 694.9 $12.7 ($13.8)
Securities classified as "held to maturity" having an amortized cost
of $9.5 million, $14.7 million and $8.7 million were sold for a loss
of $159,000, $1.8 million and $712,000 in 1996, 1995 and 1994,
respectively, due to significant deterioration in the issuers'
creditworthiness.
F-12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investee Corporations The companies in the following
table are subject to the rules and regulations of the SEC. The
market value of the investments was approximately $306 million and
$509 million at December 31, 1996 and 1995, respectively. AFG's
investment (and common stock ownership percentage) and equity in
net earnings and losses of investees are stated below (dollars in
thousands):
<TABLE>
<CAPTION>
Investment (Ownership %) Equity in Net Earnings (Losses)
12/31/96 12/31/95 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Chiquita (a) $199,651 (43%) $232,466 (44%) ($18,415) $ 3,628 ($26,670)
Citicasters (b) - 74,079 (38%) 1,460 4,702 8,950
American Premier(c) - - - 6,907 1,147
$199,651 $306,545 ($16,955) $15,237 ($16,573)
</TABLE>
(a) Equity in net earnings (losses) excludes AFG's share of extraordinary
losses.
(b) Sold in September 1996.
(c) Became a 100%-owned subsidiary on April 3, 1995.
Chiquita is a leading international marketer, producer and
distributor of bananas and other quality fresh and processed food
products. Citicasters owned and operated radio and television
stations in major markets throughout the country.
Summarized financial information for Chiquita at December 31, is
shown below (in millions). See "Investee Corporations" in
Management's Discussion and Analysis.
Chiquita Brands International, Inc.
1996 1995 1994
Current Assets $ 844 $ 877
Non-current Assets 1,623 1,747
Current Liabilities 464 510
Non-current Liabilities 1,279 1,442
Shareholders' Equity 724 672
Net Sales of Continuing Operations $2,435 $2,566 $2,506
Operating Income 84 176 71
Income (Loss) from Continuing Operations (28) 28 (84)
Discontinued Operations - (11) 35
Extraordinary Loss from Debt Refinancings (23) (8) (23)
Net Income (Loss) (51) 9 (72)
G. Cost in Excess of Net Assets Acquired At December 31, 1996 and
1995, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately $121
million and $110 million, respectively. Amortization expense was
$10.8 million in 1996, $9.2 million in 1995 and $6.1 million in 1994.
F-13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
1996 1995
American Financial Corporation (Parent Company):
9-3/4% Debentures due April 2004, less discount
of $1,146 and $1,249 (imputed rate - 9.8%) $164,368 $302,510
Other 8,441 8,692
$172,809 $311,202
American Premier Underwriters, Inc. (Parent Company):
9-3/4% Subordinated Notes due August 1999,
including premium of $1,912 and $4,403
(imputed rate - 8.8%) $ 93,604 $161,531
10-5/8% Subordinated Notes due April 2000,
including premium of $2,629 and $7,210
(imputed rate - 8.8%) 54,595 120,222
10-7/8% Subordinated Notes due May 2011,
including premium of $1,642 and $5,082
(imputed rate - 9.6%) 18,496 55,581
$166,695 $337,334
American Annuity Group, Inc.:
Notes payable under bank line due September 1999 $ 44,700 $ 20,500
9-1/2% Senior Notes due August 2001 40,845 41,490
11-1/8% Senior Subordinated Notes due February 2003 24,080 101,443
Other 5,275 4,301
$114,900 $167,734
Other Subsidiaries:
Notes payable secured by real estate $ 52,543 $ 53,066
Other 10,972 12,727
$ 63,515 $ 65,793
At December 31, 1996, sinking fund and other scheduled
principal payments on debt for the subsequent five years were
as follows (in thousands):
American
AFC Premier
(Parent) (Parent) Other Total
1997 $5,616 $ - $ 2,533 $ 8,149
1998 - - 2,846 2,846
1999 - 91,692 47,137 138,829
2000 - 51,966 8,735 60,701
2001 - - 42,304 42,304
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures purchased
are applied to the earliest scheduled retirements.
F-14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Great American Holding Corporation ("GAHC"), a wholly-owned
subsidiary of AFC, and Pennsylvania Company ("Pennco"), a
wholly-owned subsidiary of American Premier, have revolving
loan agreements with groups of banks under which they can
borrow up to $300 million and $75 million, respectively.
Borrowings bear interest at floating rates based on prime or
LIBOR and are collateralized by certain stock of operating
subsidiaries. Each facility is guaranteed by the respective
immediate parent company. At December 31, 1996 and 1995, there
were no outstanding borrowings under either of these credit lines.
AAG and AFEI have revolving credit agreements with banks under which they
can borrow up to $115 million and $20 million, respectively. Borrowings
bear interest at floating rates based on prime or LIBOR and are
collateralized. At December 31, 1996 and 1995, the weighted average
interest rate on amounts borrowed under AAG's bank credit lines was 6.7%
and 6.8%, respectively. At December 31, 1996 and 1995, there were no
outstanding borrowings under the AFEI credit line.
During 1995, AFC redeemed $279 million of its various debentures, repaid
$187 million of GAHC's bank debt, and redeemed $200 million of GAHC's
Notes. Also during 1995, AFC sold an aggregate of $100 million of its
9-3/4% debentures due in 2004 for cash. During 1996, AFC repurchased
$138.2 million of its 9-3/4% debentures for $147.9 million in cash.
As the result of the Mergers and a subsequent ratings downgrade, holders of
American Premier's Notes had the right to "put" their Notes to American
Premier at face amount. Approximately $44 million of the Notes were tendered
under the put right in 1995. In addition, American Premier repurchased
$136 million of the Notes during 1995 for $142.7 million in cash.
In a December 1996 tender offer, American Premier retired $95.3 million of
its Notes for $105.6 million. In addition, American Premier repurchased
$64.8 million of its Notes for $71.6 million in cash during 1996.
During 1995, AAG repurchased $4.9 million of its Notes for $5.0 million in
cash. During 1996, AAG repurchased $78 million of its Notes for
$84.2 million in cash.
Cash interest payments of $75 million, $137 million and $115 million were
made on long-term debt in 1996, 1995 and 1994, respectively.
F-15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Minority Interest Included in minority interest in AFG's balance
sheet are TOPrS and AFC's preferred stock.
Trust Originated Preferred Securities In October 1996, a wholly-owned
subsidiary trust of AFG issued 4 million units of 9-1/8% TOPrS for
$100 million cash. The Trust then purchased $100 million of newly issued
AFG 9-1/8% Subordinated Debentures due 2026, which, along with related
interest and principal payments received, will be the only assets of the
Trust. Holders of the TOPrS are entitled to quarterly cash distributions of
$.57 per unit; payment dates and amounts for the TOPrS correspond to those
on the Subordinated Debentures. The TOPrS are mandatorily redeemable upon
maturity or redemption of the Subordinated Debentures. The Subordinated
Debentures are redeemable by AFG on or after October 22, 2001. AFG
effectively provides an unconditional guarantee of the Trust's obligations
under the TOPrS.
In November 1996, a wholly-owned subsidiary trust of AAG issued $75 million
of similar TOPrS. The related 9-1/4% Subordinated Debentures of the AAG
subsidiary are due in 2026 and are redeemable on or after November 7, 2001.
AFC Preferred Stock At December 31, 1996, AFC's Preferred Stock was voting,
cumulative, and consisted of the following:
Series F, $1 par value; $20.00 liquidating value per share; annual
dividends per share $1.80; nonredeemable after 1996; 11,900,725
and 13,744,754 shares (stated value $145.4 million and
$167.9 million) outstanding at December 31, 1996 and 1995, respectively.
Series G, $1 par value; annual dividends per share $1.05;
redeemable at $10.50 per share; 1,964,158 and 364,158 shares
(stated value $17.4 million and $600,000) outstanding at
December 31, 1996 and 1995, respectively.
In December 1996, AFC redeemed 1.6 million shares of its Series
F Preferred Stock for $31.9 million and, in October, AFC
purchased 250,000 shares of Series F from AFC's ESORP for $5.0 million.
In December 1996, AFC issued 1.6 million shares of its Series G
Preferred Stock to AFC's ESORP for $16.8 million.
During 1995 and 1994, AFC retired issues of its mandatorily
redeemable preferred stock for an aggregate of $2.9 million
and $6.6 million, respectively.
<PAGE>
J. Capital Stock In connection with the Mergers discussed in Note A,
AFG issued 51.3 million shares (net of 18.7 million shares held
by AFC and its subsidiaries, which are shown herein as retired)
of Common Stock on April 3, 1995. During 1995, AFG sold 7.4 million
newly issued shares of its Common Stock for an aggregate of $202.8 million
cash in connection with (i) exercises of Stock Options,
(ii) issuances under AFG's new Dividend Reinvestment Plan and its
Employee Stock Purchase Plan, and (iii) sales to the AFC ESORP
and in a public offering.
At December 31, 1996, there were 61,071,626 shares of AFG Common
Stock outstanding, including 1,371,802 shares held by American
Premier for distribution to certain creditors and other
claimants pursuant to a plan of reorganization relating to
American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting
Preferred Stock and 12.5 million shares of Nonvoting Preferred
Stock, each without par value. At December 31, 1995, AFG had
212,698 shares of convertible
F-16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
preferred stock outstanding with a stated value of $469,000
(included in Capital Surplus, net of related notes receivable).
These shares were converted into 446,799 shares of AFG Common
Stock in March 1996.
A progression of AFG's Shareholders' Equity is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Common Stock
Common and Capital Retained
Shares(*) Surplus Earnings Unrealized
<S> <C> <C> <C> <C>
Balance at December 31, 1993 18,971,217 $904 $210,846 $156,900
Net earnings - - 2,100 -
Change in unrealized - - - (153,400)
Purchase of Preferred Stock - - (56) -
Dividends on:
Preferred Stock - - (25,728) -
Common Stock - - (3,794) -
Decrease in capital subject to put
option - - 7,225 -
Transfer from capital subject
to put option - - 32,502 -
Balance at December 31, 1994 18,971,217 904 223,095 3,500
Dividends on AFC Preferred Stock - - (191) -
Exercise of AFC stock options 762,500 8,721 - -
Restatement of AFC equity in
terms of AFG Common Stock 8,590,159 - - -
Shares issued in Mergers to
holders of APU Common Stock 24,376,667 588,492 - -
Net earnings - - 191,247 -
Change in unrealized - - - 248,000
Dividends on Common Stock - - (27,008) -
Shares issued:
Exercise of stock options 883,974 18,875 - -
Dividend reinvestment plan 200,381 5,859 - -
Employee stock purchase plan 32,972 918 - -
Public offering 4,600,000 127,180 - -
Sale to AFC ESORP 1,703,000 50,004 - -
Employee gift shares 19,050 494 - -
Shares repurchased (617) (17) - -
Change in foreign currency translation - 64 - -
Balance at December 31, 1995 60,139,303 801,494 387,143 251,500
<PAGE>
Net earnings - - 233,300 -
Change in unrealized - - - (63,500)
Dividends on Common Stock - - (60,727) -
Shares issued:
Exercise of stock options 664,639 14,837 - -
Dividend reinvestment plan 10,491 342 - -
Employee stock purchase plan 81,041 2,551 - -
Employee stock bonus 4,300 131 - -
Directors fees paid in common shares 1,299 46 - -
Conversion of Preferred Stock 446,799 8,908 - -
Shares repurchased (276,246) (8,563) - -
Retirement of AFC Preferred Stock - (14,388) - -
Change in foreign currency translation - 1,363 - -
Balance at December 31, 1996 61,071,626 $806,721 $559,716 $188,000
</TABLE>
(*) Prior to the Mergers, Carl H. Lindner and certain members of the
Lindner family owned all of the outstanding common stock of AFC.
Stock Options At December 31, 1996, there were 5.4 million shares of AFG
Common Stock reserved for issuance under AFG's Stock Option Plan. Under
the Stock Option Plan, the exercise price of each option equals the market
price of AFG Common Stock at the date of grant. Options become exercisable
at the rate of 20% per year commencing one year after grant; those granted
to non-employee directors of AFG are generally fully exercisable upon
grant. All options expire ten years after the date of grant. No
compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the
fair values at grant dates consistent with the method prescribed by
Statement of Financial Accounting Standards No. 123, AFG's net income and
earnings per share would not have been materially different from amounts
reported. For Statement No. 123 purposes, calculations were determined
using the Black-Scholes option pricing model and the following assumptions:
dividend yield of 2%; expected volatility of 20%; risk-free interest rate
of 6.2%; and expected life of 7.5 years.
F-17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Data for AFG's Stock Option Plan is presented below:
1996 1995
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 3,939,986 $25.72 2,931,948 $22.88
Granted 75,000 $32.47 2,142,681 $27.81
Exercised (664,639) $22.33 (883,974) $21.35
Forfeited (18,400) $30.06 (250,669) $25.79
Outstanding at end of year 3,331,947 $26.53 3,939,986 $25.72
Options exercisable at year-end 1,379,182 $24.60 1,395,175 $22.55
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Average Average Average
Exercise Range of Remaining Exercise
Shares Price Exercise Prices Life Shares Price
211,419 $18.57 $17.24 - $20.00 4.0 years 211,419 $18.57
1,368,791 $23.80 $20.01 - $25.00 6.7 720,245 $23.63
343,637 $27.28 $25.01 - $30.00 7.0 174,218 $27.38
1,408,100 $30.19 $30.01 - $34.31 9.0 273,300 $30.08
3,331,947 $26.53 7.5 1,379,182 $24.60
<PAGE>
K. Income Taxes The following is a reconciliation of income taxes at
the statutory rate of 35% and income taxes as shown in the
Statement of Earnings (in thousands):
1996 1995 1994
Earnings before income taxes
and extraordinary items $353,244 $246,919 $43,568
Extraordinary items before income taxes (35,670) 536 (17,192)
Adjusted earnings before income taxes $317,574 $247,455 $26,376
Income taxes at statutory rate $111,151 $ 86,609 $ 9,232
Effect of:
Losses (utilized) not utilized (43,302) (40,292) 19,267
Dividends received deduction (7,450) (7,823) (8,528)
Minority interest 15,112 11,673 2,998
Amortization of intangibles 3,065 3,015 1,987
Tax exempt interest (597) (897) (689)
Foreign income taxes 3,474 359 6
State income taxes 4,140 81 149
Other (1,319) 3,483 (146)
Total provision 84,274 56,208 24,276
Amounts applicable to extraordinary items 7,003 281 374
Provision for income taxes as shown
on the Statement of Earnings $ 91,277 $ 56,489 $24,650
Adjusted earnings before income taxes consisted of the following (in
thousands):
1996 1995 1994
Subject to tax in:
United States $331,842 $250,423 $28,422
Foreign jurisdictions (14,268) (2,968) (2,046)
$317,574 $247,455 $26,376
F-18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
1996 1995 1994
Current taxes (credits):
Federal $22,450 $38,512 $21,028
Foreign (1,735) (1,213) -
State 6,369 124 226
Deferred taxes:
Federal 56,869 18,233 3,012
Foreign 321 552 10
$84,274 $56,208 $24,276
For income tax purposes, certain members of the AFC consolidated
tax group, including American Premier as of December 31, 1996, had
the following carryforwards available at December 31, 1996 (in
millions):
Expiring Amount
{ 1997 - 2001 $ 20
Operating Loss{ 2002 - 2006 126
{ 2007 - 2011 93
Capital Loss 1997 - 1999 195
Other - Tax Credits 23
Deferred income tax assets and liabilities reflect temporary
differences between the carrying amounts of assets and liabilities
recognized for financial reporting purposes and the amounts
recognized for tax purposes. The significant components of
deferred tax assets and liabilities for AFG's tax groups included
in the Balance Sheet at December 31, were as follows (in millions):
1996 1995
AFC American
AFC Tax Tax Premier
Group (*) Group Tax Group
Deferred tax assets:
Net operating loss carryforwards $ 83.7 $ 93.8 $166.5
Capital loss carryforwards 68.2 - 108.7
Insurance claims and reserves 289.8 195.9 102.9
Other, net 142.2 41.2 91.3
583.9 330.9 469.4
Valuation allowance for deferred
tax assets (131.9) (91.9) (214.0)
452.0 239.0 255.4
Deferred tax liabilities:
Deferred acquisition costs (124.9) (89.8) (31.2)
Investment securities (189.8) (210.8) (23.8)
(314.7) (300.6) (55.0)
Net deferred tax asset (liability) $137.3 ($ 61.6) $200.4
(*) Includes American Premier
<PAGE>
The gross deferred tax asset has been reduced by a valuation allowance
based on an analysis of the likelihood of realization. Factors considered
in assessing the need for a valuation allowance include: (i) recent tax
returns, which show neither a history of large amounts of taxable income
nor cumulative losses in recent years, (ii) opportunities to generate
taxable income from sales of appreciated assets, and (iii) the likelihood
of generating larger amounts of taxable income in the future. The
likelihood of realizing this asset will be reviewed periodically; any
adjustments required to the valuation allowance will be made in the period
in which the developments on which they are based become known. The
aggregate valuation allowance decreased by $174 million in 1996 due
primarily to the expiration of American Premier's loss carryforwards.
Cash payments for income taxes, net of refunds, were $40.2 million,
$14.8 million and $30.0 million for 1996, 1995 and 1994, respectively.
F-19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains and losses related to debt
retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
1996 1995 1994
Subsidiaries:
AFC (parent) ($ 9,672) ($1,713) ($ 6,454)
APU (parent) (3,254) 6,137 -
AAG (7,159) (201) (1,328)
GAHC - (611) -
Other 57 - -
Investee:
Chiquita (8,639) (2,795) (9,036)
($28,667) $ 817 ($16,818)
M. Commitments and Contingencies Loss accruals have been recorded
for various environmental and occupational injury and disease
claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978. Any ultimate liability arising therefrom
in excess of previously established loss accruals would normally
be attributable to pre-reorganization events and circumstances and
accounted for as a reduction in capital surplus. However, under
purchase accounting in connection with the Mergers, any such excess
liability will be charged to earnings in AFG's financial statements.
<PAGE>
American Premier's liability for environmental claims
($50.1 million at December 31, 1996) consists of a number of
proceedings and claims seeking to impose responsibility for
hazardous waste remediation costs at certain railroad sites
formerly owned by PCTC and certain other sites where hazardous
waste was allegedly generated by PCTC's railroad operation. It is
difficult to estimate remediation costs for a number of reasons,
including the number and financial resources of other potentially
responsible parties, the range of costs for remediation
alternatives, changing technology and the time period over which
these matters develop. American Premier's liability is based on
information currently available and is subject to change as
additional information becomes available.
American Premier's liability for occupational injury and disease claims of
$70.1 million (included in other liabilities) at December 31, 1996,
includes pending and expected claims by former employees of PCTC for
injury or disease allegedly caused by exposure to excessive noise, asbestos
or other substances in the railroad workplace. Anticipated recoveries
of $54.1 million on these liabilities are included in other assets.
Recorded amounts are based on the accumulation of estimates of reported
and unreported claims and related expenses and estimates of probable
recoveries from insurance carriers.
AFG has accrued approximately $41 million at December 31, 1996,
for environmental costs and certain other matters associated with
the sales of former operations.
In management's opinion, the outcome of the items discussed under
"Uncertainties" in Management's Discussion and Analysis and the
above claims and contingencies will not, individually or in the
aggregate, have a material adverse effect on AFG's financial condition
or results of operations.
F-20
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. Quarterly Operating Results (Unaudited) The operations of certain
of AFG's business segments are seasonal in nature. While insurance
premiums are recognized on a relatively level basis, claim losses
related to adverse weather (snow, hail, hurricanes, tornadoes, etc.)
may be seasonal. Quarterly results necessarily rely heavily on
estimates. These estimates and certain other factors, such as the
nature of investees' operations and discretionary sales of assets,
cause the quarterly results not to be necessarily indicative of
results for longer periods of time. See Notes A and C for changes
in ownership of companies whose revenues are included in the
consolidated operating results and for the effects of gains on sales
of subsidiaries and investees in individual quarters. The following
are quarterly results of consolidated operations for the two years
ended December 31, 1996 (in millions, except per share amounts).
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1996
Revenues $1,030.9 $1,032.8 $1,163.5 $888.2 $4,115.4
Earnings before
extraordinary items 81.2 58.3 121.6 .9 262.0
Extraordinary items (7.6) (9.9) (8.4) (2.8) (28.7)
Net earnings (loss) 73.6 48.4 113.2 (1.9) 233.3
Earnings per common share:
Before extraordinary
items $1.35 $.96 $2.00 $.02 $4.31
Extraordinary items (.13) (.16) (.14) (.05) (.47)
Net earnings (loss) 1.22 .80 1.86 (.03) 3.84
Average number of Common
Shares 60.3 60.9 61.0 61.0 60.8
1995
Revenues $553.6 $1,006.6 $1,002.7 $1,066.7 $3,629.6
Earnings before
extraordinary items 29.8 33.0 51.0 76.6 190.4
Extraordinary items - .5 2.0 (1.7) .8
Net earnings 29.8 33.5 53.0 74.9 191.2
Earnings per common share:
Before extraordinary
items $.83 $.63 $.95 $1.36 $3.87
Extraordinary items - .01 .04 (.03) .01
Net earnings .83 .64 .99 1.33 3.88
Average number of Common
Shares 28.3 52.7 53.4 56.1 47.6
</TABLE>
<PAGE>
Quarterly earnings per share do not add to year-to-date amounts due
to changes in shares outstanding.
In the third quarter of 1996, AFG increased A&E reserves by
recording a non-cash pretax charge of $80 million. Realized gains
(losses) on sales of securities amounted to (in millions):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1996 $18.7 $2.7 $ 3.2 ($28.1) ($ 3.5)
1995 3.5 7.9 23.6 49.0 84.0
</TABLE>
F-21
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. Insurance Securities owned by insurance subsidiaries having a
carrying value of approximately $1.5 billion at December 31, 1996,
were on deposit as required by regulatory authorities.
GAI recorded a charge of $19 million (included in "Other operating
and general expenses") in 1994 in response to the California court
decision upholding an insurance reform measure passed by
California voters which led to rate rollbacks for most lines of
property and casualty insurance.
Several proposals have been made in recent years to change the federal
income tax system. Some proposals included changes in the method of
treating investment income and tax deferred income. To the extent a new
tax law reduces or eliminates the tax deferred status of AFG's annuity
products, that segment could be materially affected.
Insurance Reserves The liability for losses and loss adjustment
expenses for certain long-term scheduled payments under workers'
compensation, auto liability and other liability insurance has
been discounted at rates ranging from 4% to 8%. As a result, the
total liability for losses and loss adjustment expenses at
December 31, 1996, has been reduced by $64 million.
The following table provides an analysis of changes in the liability for
losses and loss adjustment expenses, net of reinsurance (and grossed up),
over the past three years on a GAAP basis (in millions):
1996 1995 1994
Balance at beginning of period $3,393 $2,187 $2,113
Reserves of American Premier
at date of the Mergers - 1,090 -
Provision for losses and loss
adjustment expenses occurring in
the current year 2,179 2,116 1,027
Net decrease in provision for claims
occurring in prior years (48) (139) (40)
2,131 1,977 987
Payments for losses and loss adjustment
expenses occurring during:
Current year (999) (987) (381)
Prior years (1,121) (874) (532)
(2,120) (1,861) (913)
Balance at end of period $3,404 $3,393 $2,187
Add back reinsurance recoverables 720 704 730
Unpaid losses and loss adjustment
expenses included in Balance Sheet,
gross of reinsurance $4,124 $4,097 $2,917
F-22
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by AFG's
insurance companies.
1996 1995 1994
Insurance group investment income:
Fixed maturities $817.8 $727.3 $560.6
Equity securities 8.2 5.3 8.3
Other 13.5 7.9 6.7
839.5 740.5 575.6
Insurance group investment expenses (*) (38.5) (33.8) (32.0)
$801.0 $706.7 $543.6
(*) Included primarily in "Other operating and general expenses"
in the Statement of Earnings.
Statutory Information AFG's insurance subsidiaries are required
to file financial statements with state insurance regulatory
authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Net earnings and
policyholders' surplus on a statutory basis for the insurance
subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
1996 1995 1994 1996 1995
Property and casualty companies $276 $200 $63 $1,659 $1,595
Life insurance companies 67 76 54 287 273
Reinsurance In the normal course of business, AFG's insurance
subsidiaries assume and cede reinsurance with other insurance
companies. The following table shows (in millions) (i) amounts
deducted from property and casualty premiums in connection with
reinsurance ceded, (ii) amounts included in income for reinsurance
assumed and (iii) reinsurance recoveries deducted from losses and
loss adjustment expenses.
1996 1995 1994
Reinsurance ceded to:
Non-affiliates $518 $476 $402
Affiliates - 33 161
Reinsurance assumed - including
involuntary pools and associations 58 93 83
Reinsurance recoveries 306 304 429
<PAGE>
P. Additional Information Total rental expense for various leases of
office space, data processing equipment and railroad rolling stock
was $34 million, $35 million and $22 million for 1996, 1995 and 1994,
respectively. Sublease rental income related to these leases totaled
$6.1 million in 1996, $6.2 million in 1995 and $6.4 million in 1994.
Future minimum rentals, related principally to office space and
railroad rolling stock, required under operating leases having
initial or remaining noncancelable lease terms in excess of one
year at December 31, 1996, were as follows: 1997 - $39 million,
1998 - $32 million, 1999 - $24 million, 2000 - $15 million, 2001
- $11 million, and $18 million thereafter. At December 31, 1996,
minimum sublease rentals to be received through the expiration of
the leases aggregated $21 million.
Other operating and general expenses included charges for possible
losses on agents' balances, reinsurance recoverables and other
receivables in the following amounts: 1996 - $0, 1995 - $0 and
1994 - $18 million. The aggregate allowance for such losses
amounted to approximately $123 million and $127 million at
December 31, 1996 and 1995, respectively.
F-23
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summary Financial Information of AFC and American Premier
Summarized consolidated financial information for AFC and American
Premier is as follows (in millions):
<TABLE>
<CAPTION>
AFC American Premier
1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments $11,691 $11,391 $1,947 $2,091
Other Assets 3,308 3,460 1,322 1,949
Insurance Claims and
Reserves 11,312 10,981 1,452 1,684
Debt 518 882 169 330
Shareholders' Equity 1,277 1,248 1,045 1,552
Revenues $ 4,114 $ 3,628 $2,104 $1,674 $1,736 $1,759
Income from Continuing
Operations 248 195 19 250 67 1
Discontinued Operations - - - - - (1)
Extraordinary Item - (Loss)
Gain on Prepayment
of Debt (26) 2 (17) (12) (5) -
Net Income 222 197 2 238 62 -
</TABLE>
American Premier's 1996 net income included $49 million in gains from the
sales of securities, real estate and other assets to AFC. These gains
were eliminated in AFC's and AFG's consolidated financial statements.
American Premier's 1994 results included a $75.8 million loss on the
sale of securities of General Cable.
<PAGE>
Fair Value of Financial Instruments The following table presents
(in millions) the carrying value and estimated fair value of AFG's
financial instruments at December 31.
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $9,986 $10,023 $9,538 $9,679
Other stocks 328 328 252 252
Investment in investee
corporations 200 306 307 509
Liabilities:
Annuity benefits
accumulated $5,366 $ 5,180 $5,052 $4,887
Long-term debt:
AFC (parent company) 173 188 311 325
APU (parent company) 167 174 337 344
Other subsidiaries 178 183 234 243
Minority Interest:
TOPrS $ 175 $ 179 $ - $ -
AFC preferred stock 163 264 168 272
Shareholders' Equity $1,554 $ 2,305 $1,440 $1,842
When available, fair values are based on prices quoted in the most
active market for each security. If quoted prices are not
available, fair value is estimated based on present values,
discounted cash flows, fair value of comparable securities, or
similar methods. The fair value of the liability for annuities in
the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates.
Fair value of annuities in the accumulation phase is assumed to be
the policyholders' cash surrender amount.
F-24
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial Instruments with Off-Balance-Sheet Risk On occasion,
AFG and its subsidiaries have entered into financial instrument
transactions which may present off-balance-sheet risks of both a
credit and market risk nature. These transactions include
commitments to fund loans, loan guarantees and commitments to
purchase and sell securities or loans. At December 31, 1996, AFG
and its subsidiaries had commitments to fund credit facilities and
contribute limited partnership capital totaling $16 million.
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by AFG's subsidiaries
are subject to various state laws, federal regulations and debt
covenants which limit the amount of dividends, loans and advances
that can be paid. Under applicable restrictions, the maximum
amount of dividends available to AFG in 1997 from its insurance
subsidiaries without seeking regulatory clearance is approximately
$225 million. Total "restrictions" on intercompany transfers from
AFG's subsidiaries cannot be quantified due to the discretionary
nature of the restrictions.
Benefit Plans AFG expensed $16.3 million in 1996, $16.5 million in 1995
and $6.2 million in 1994 for contributions to its ESORP and employee
savings plans.
Transactions With Affiliates In 1995, a subsidiary of AFC sold a
house to its Chairman for its appraised value of $1.8 million.
Q. Subsequent Event (Unaudited) In February 1997, AFEI and AFG
announced that they are jointly examining the feasibility of a
transaction whereby all 2.3 million shares of AFEI common stock
not owned by AFG would be exchanged on a one-for-one basis for AFG
Common Stock. AFEI and AFG intend that the transaction be
structured so that it is tax-free to AFEI shareholders. The
transaction would be subject to the approval of AFEI's
shareholders other than AFG and other customary approvals.
F-25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment to be signed on its
behalf by the undersigned, duly authorized.
American Financial Group, Inc.
BY: FRED J. RUNK
Fred J. Runk
Senior Vice President and
Treasurer
Dated: October 29, 1997
