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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 2000 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
American Financial Group, Inc.:
Common Stock New York Stock Exchange
7-1/8% Senior Debentures due December 15, 2007 New York Stock Exchange
7-1/8% Senior Debentures due April 15, 2009 New York Stock Exchange
American Financial Capital Trust I (Guaranteed by Registrant):
9-1/8% Trust Originated Preferred Securities New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Other securities for which reports are submitted pursuant to Section 15(d) of
the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and need not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2001, there were 67,444,216 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries. The
aggregate market value of the Common Stock held by nonaffiliates at that date,
was approximately $930 million (based upon nonaffiliate holdings of 38,774,520
shares and a market price of $24.00 per share.)
-------------
Documents Incorporated by Reference:
Proxy Statement for the 2001 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
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AMERICAN FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
----
Item 1 - Business:
Introduction 1
Property and Casualty Insurance Operations 2
Annuity and Life Operations 12
Other Companies 16
Investment Portfolio 16
Foreign Operations 18
Regulation 18
Item 2 - Properties 19
Item 3 - Legal Proceedings 20
Item 4 - Submission of Matters to a Vote of Security Holders (a)
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6 - Selected Financial Data 22
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk 33
Item 8 - Financial Statements and Supplementary Data 33
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
Part III
Item 10 - Directors and Executive Officers of the Registrant 33
Item 11 - Executive Compensation 33
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 33
Item 13 - Certain Relationships and Related Transactions 33
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) The response to this Item is "none".
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AMERICAN FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS
This Form 10-K, chiefly in Items 1, 3, 5, 7 and 8, contains certain
forward-looking statements that are subject to numerous assumptions, risks or
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"believes", "expects", "may", "will", "should", "seeks", "intends", "plans",
"estimates", "anticipates" or the negative version of those words or other
comparable terminology. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including:
o changes in economic conditions, including interest rates, performance of
securities markets, and the availability of capital;
o regulatory actions;
o changes in legal environment;
o tax law changes;
o levels of catastrophes and other major losses;
o adequacy of loss reserves;
o availability of reinsurance; and
o competitive pressures, including the ability to obtain rate increases.
Forward-looking statements speak only as of the date made. AFG undertakes no
obligations to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
PART I
ITEM 1
Business
Please refer to "Forward-Looking Statements" following the Index in front of
this Form 10-K.
INTRODUCTION
American Financial Group, Inc. ("AFG") is a holding company which, through
its subsidiaries, is engaged primarily in private passenger automobile and
specialty property and casualty insurance businesses and in the sale of
tax-deferred annuities and certain life and supplemental health insurance
products. AFG's property and casualty operations originated in the 1800's and
make up one of the thirty largest property and casualty groups in the United
States based on statutory net premiums written. AFG was incorporated as an Ohio
corporation in July 1997. Its address is One East Fourth Street, Cincinnati,
Ohio 45202; its phone number is (513) 579-2121.
AFG's predecessor had been formed in 1994 for the purpose of acquiring
American Financial Corporation ("AFC") and American Premier Underwriters, Inc.
("American Premier" or "APU") in merger transactions completed in April 1995
(the "Mergers").
At December 31, 2000, Carl H. Lindner, members of his immediate family and
trusts for their benefit (collectively the "Lindner Family") beneficially owned
approximately 45% 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 E 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,
---------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
American Financial Corporation 79% 79% 79% 79% 76%
American Premier Underwriters 100% 100% 100% 100% 100%
Great American Insurance Group 100% 100% 100% 100% 100%
Great American Financial Resources 83% 83% 82% 81% 81%
American Financial Enterprises 100% 100% 100% 100% 83%
Chiquita Brands International 36% 36% 37% 39% 43%
The following summarizes the more significant changes in ownership
percentages shown in the above table.
AMERICAN FINANCIAL ENTERPRISES In 1997, AFEI became a wholly-owned
subsidiary of AFG as a result of a transaction whereby AFG purchased all
publicly-held shares of AFEI for cash and AFG Common Stock.
CHIQUITA BRANDS INTERNATIONAL During 1997 and 1998, Chiquita issued an
aggregate of 4.6 million shares and 4.0 million shares of its common stock,
respectively, in connection with the purchase of new businesses.
1
PROPERTY AND CASUALTY INSURANCE OPERATIONS
AFG's property and casualty group is engaged primarily in private
passenger automobile and specialty insurance businesses which are managed as two
major business groups: Personal and Specialty. Each group reports to an
individual senior executive and is comprised of multiple business units which
operate autonomously but with certain strong central controls and full
accountability. Decentralized control allows each unit the autonomy necessary to
respond to local and specialty market conditions while capitalizing on the
efficiencies of centralized investment and administrative support functions.
AFG's property and casualty insurance operations employ approximately 7,900
persons.
In December 2000, AFG agreed to sell its Japanese property and casualty
division to Mitsui Marine & Fire Insurance Company of America for approximately
$22 million in cash. The sale is expected to close at the end of March 2001. At
the same time, a reinsurance agreement under which Great American Insurance
ceded a portion of its pool of insurance to Mitsui will terminate. The Japanese
division generated net written premiums of approximately $60 million per year to
Great American while Great American ceded approximately $45 million per year to
Mitsui.
In September 2000, AFG sold Stonewall Insurance Company for approximately
$31 million. Stonewall was a non-operating property and casualty subsidiary
engaged primarily in the run-off of approximately $170 million in asbestos and
environmental liabilities associated with policies written through 1991.
AFG sold its Commercial lines division to Ohio Casualty Corporation in
December 1998 for approximately $300 million plus warrants to purchase 6 million
(post split) shares of Ohio Casualty common stock. AFG received an additional
$25 million in 2000 under a provision in the sale agreement related to the
retention and growth of the insurance businesses acquired by Ohio Casualty. The
commercial lines business sold generated net written premiums of approximately
$230 million in 1998 prior to the sale.
Over the past few years, AFG has explored opportunities to expand the
variety of distribution channels for its insurance products. The April 1999
acquisition of Worldwide Insurance Company provided AFG with a significant base
for selling private passenger auto insurance and a variety of other insurance
products directly to consumers, including over the Internet.
AFG operates in a highly competitive industry that is affected by many
factors which can cause significant fluctuations in its results of operations.
The industry has historically been subject to pricing cycles characterized by
periods of intense competition and lower premium rates (a "downcycle") followed
by periods of reduced competition, reduced underwriting capacity due to lower
policyholders' surplus and higher premium rates (an "upcycle"). The property and
casualty insurance industry has been in an extended downcycle for over a decade,
although indications of some market firming and price increases are being seen
in certain specialty markets and in the private passenger automobile market.
The primary objective of AFG's property and casualty insurance operations
is to achieve underwriting profitability. Underwriting profitability is measured
by the combined ratio which is a sum of the ratios of underwriting losses, loss
adjustment expenses ("LAE"), underwriting expenses and policyholder dividends to
premiums. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, other income or federal income taxes.
Management's focus on underwriting performance has resulted in a statutory
combined ratio averaging 103.2% for the period 1996 to 2000 (excluding special
charges in 1996 and 1998 to increase reserves for asbestos and other
environmental matters), as compared to 106.3% for the property and casualty
industry over the same period (Source: "Best's Review/Preview -
Property/Casualty" - January 2001 Edition). AFG believes that its product line
diversification and underwriting discipline have contributed to the Company's
ability to consistently outperform the industry's underwriting results.
Management's philosophy is to refrain from writing business that is not expected
to produce an underwriting profit even if it is necessary to limit premium
growth to do so.
2
Generally, while financial data is reported on a statutory basis for
insurance regulatory purposes, it is reported in accordance with generally
accepted accounting principles ("GAAP") for shareholder and other investment
purposes. In general, statutory accounting results in lower capital surplus and
net earnings than result from application of GAAP. Major differences include
charging policy acquisition costs to expense as incurred rather than spreading
the costs over the periods covered by the policies; recording bonds and
redeemable preferred stocks primarily at amortized cost; netting of reinsurance
recoverables and prepaid reinsurance premiums against the corresponding
liability; requiring additional loss reserves; and charging to surplus certain
assets, such as furniture and fixtures and agents' balances over 90 days old.
Unless indicated otherwise, the financial information presented for the
property and casualty insurance operations herein is presented based on GAAP and
includes the Commercial lines division for all periods prior to the 1998 sale
date.
The following table shows (in millions) certain information of AFG's
property and casualty insurance operations.
2000 1999 1998
---- ---- ----
Statutory Basis
Premiums Earned $2,484 $2,197 $ 2,657
Admitted Assets 6,472 6,332 6,463
Unearned Premiums 1,154 1,005 914
Loss and LAE Reserves 3,445 3,525 3,702
Capital and Surplus 1,763 1,664 1,840
GAAP Basis
Premiums Earned $2,495 $2,211 $ 2,699
Total Assets 9,458 9,487 10,053
Unearned Premiums 1,414 1,326 1,233
Loss and LAE Reserves 4,516 4,795 4,773
Shareholder's Equity 3,360 3,158 3,174
The following table shows the segment, independent ratings, and size (in
millions) of AFG's major property and casualty insurance subsidiaries. AFG
continues to focus on growth opportunities in what it believes to be more
profitable specialty and private passenger auto businesses which represented the
bulk of 2000 net written premiums.
Net Written Premiums
-----------------------
Company (Ratings - AM Best/S&P) Personal Specialty
------------------------------------------- -------- ---------
Great American Pool(*) A A+ $ 225 $ 866
Republic Indemnity A A+ - 221
Mid-Continent A A+ - 128
National Interstate A- - - 57
American Empire Surplus Lines A A+ - 46
Atlanta Casualty A- A+ 336 -
Infinity A A+ 352 -
Windsor A A+ 238 -
Leader A- A+ 151 -
Other 9 6
------ ------
$1,311 $1,324
====== ======
(*) The Great American Pool represents approximately 15 subsidiaries,
including Great American Insurance, Great American Insurance of New
York and Worldwide. Fitch assigned the Great American Pool a rating
of AA- (very high).
3
The following table shows the performance of AFG's property and casualty
insurance operations (dollars in millions):
2000 1999 1998
---- ---- ----
Net written premiums $2,638 $2,263 $2,609(a)
====== ====== ======
Net earned premiums $2,495 $2,211 $2,699
Loss and LAE 1,962 1,589 2,001
Special A&E charge - - 214
Underwriting expenses 732 661 764
Policyholder dividends 3 4 9
------ ------ ------
Underwriting loss ($ 202) ($ 43) ($ 289)
====== ====== ======
GAAP ratios:
Loss and LAE ratio 78.6% 71.9% 82.1%
Underwriting expense ratio 29.3 29.9 28.3
Policyholder dividend ratio .1 .2 .3
----- ----- -----
Combined ratio (b) 108.0% 102.0% 110.7%
===== ===== =====
Statutory ratios:
Loss and LAE ratio 80.1% 73.4% 82.7%
Underwriting expense ratio 28.4 30.0 27.9
Policyholder dividend ratio .3 .3 .5
----- ----- -----
Combined ratio (b) 108.8% 103.7% 111.1%
===== ===== =====
Industry statutory combined ratio (c) 110.3% 107.8% 105.6%
(a) Includes $232 million generated by the Commercial lines sold.
(b) The 2000 combined ratios include 1.4 percentage points for reserve
strengthening in AFG's California workers' compensation business.
The 1998 combined ratios include effects of the strengthening of
insurance reserves relating to asbestos and other environmental
matters ("A&E") of 7.9 percentage points (GAAP) and 8.0 percentage
points (statutory).
(c) Ratios are derived from "Best's Review/Preview - Property/Casualty"
(January 2001 Edition).
As with other property and casualty insurers, AFG's operating results can
be adversely affected by unpredictable catastrophe losses. Certain natural
disasters (hurricanes, tornadoes, floods, forest fires, etc.) and other
incidents of major loss (explosions, civil disorder, fires, etc.) are classified
as catastrophes by industry associations. Losses from these incidents are
usually tracked separately from other business of insurers because of their
sizable effects on overall operations. AFG generally seeks to reduce its
exposure to such events through individual risk selection and the purchase of
reinsurance. Major catastrophes in recent years included midwestern hailstorms
and tornadoes and Hurricanes Bonnie and Georges in 1998. Total net losses to
AFG's insurance operations from catastrophes were $8 million in 2000; $24
million in 1999 and $60 million in 1998. These amounts are included in the
tables herein.
PERSONAL
GENERAL The Personal group writes primarily private passenger automobile
liability and physical damage insurance, and to a lesser extent, homeowners'
insurance.
Historically, the majority of AFG's auto premiums has been from sales in
the nonstandard market covering drivers unable to obtain insurance through
standard market carriers due to factors such as age, record of prior accidents,
driving violations, particular occupation or type of vehicle. Though the
Personal group will continue to write coverage in this market, it has launched
an expanded approach making personal automobile coverage available to drivers
across a full spectrum from preferred to nonstandard risks. AFG's approach to
its auto business is to develop tailored rates for its personal automobile
customers based on a variety of factors, including the driving record of the
insureds, the number of and type of vehicles covered, credit history, and other
factors.
4
AFG's approach to homeowners business is to limit exposure in locations
which have significant catastrophic potential (such as windstorms, earthquakes
and hurricanes). Since 1998, AFG has ceded 90% of its homeowners' business
through reinsurance agreements; in 2001, it is ceding 80% of this business.
The Personal group holds licenses to write policies in all states and the
District of Columbia. The U.S. geographic distribution of the Personal group's
statutory direct written premiums in 2000 compared to 1996, was as follows:
2000 1996 2000 1996
---- ---- ---- ----
California 19.3% 6.8% Tennessee 2.4% 2.7%
New York 12.8 3.2 South Carolina 2.4 *
Florida 10.5 10.1 North Carolina * 3.4
Connecticut 8.0 9.8 Indiana * 2.7
Georgia 7.6 7.2 Mississippi * 2.5
Pennsylvania 6.1 9.6 Missouri * 2.5
Texas 3.9 9.3 Oklahoma * 2.4
New Jersey 2.7 2.7 Arizona * 2.3
Kentucky 2.6 * Washington * 2.2
Other 21.7 20.6
----- -----
---------------- 100.0% 100.0%
(*) less than 2% ===== =====
Management believes that the Personal group's underwriting performance in
recent years has benefited, in part, from the refinement of various risk
profiles, thereby dividing the consumer market into more defined segments which
can be underwritten or priced properly. In addition, the Personal group has
implemented cost control measures both in the underwriting and claims handling
areas. Conversely, the Personal group's performance has suffered in the past
year from inadequate premium rates.
The following table shows the performance of AFG's Personal group
insurance operations (dollars in millions):
2000 1999 1998
---- ---- ----
Net written premiums $1,311 $1,154 $1,279
====== ====== ======
Net earned premiums $1,270 $1,163 $1,290
Loss and LAE 1,061 881 958
Underwriting expenses 317 290 298
------ ------ ------
Underwriting profit (loss) ($ 108) ($ 8) $ 34
====== ====== ======
GAAP ratios:
Loss and LAE ratio 83.6% 75.7% 74.2%
Underwriting expense ratio 25.0 25.0 23.1
----- ----- ----
Combined ratio 108.6% 100.7% 97.3%
===== ===== ====
Statutory ratios:
Loss and LAE ratio 83.9% 75.6% 74.3%
Underwriting expense ratio 25.2 25.4 22.4
----- ----- ----
Combined ratio 109.1% 101.0% 96.7%
===== ===== ====
Industry statutory combined ratio (a) 110.0% 105.4% 104.3%
(a) Represents the personal lines industry statutory combined ratio
derived from "Best's Review/Preview - Property/Casualty" (January
2001 Edition).
MARKETING A goal of the Personal group is to be able to provide a full
spectrum of quality, competitively priced products to customers at any time and
in any manner desirable to the customer, whether through independent agents or
direct marketing channels, including over the Internet. AFG currently has the
ability to sell over the Internet in 13 states which together represent the
majority of the U.S. auto market.
The Personal group had approximately 1.2 million policies in force at
December 31, 2000, nearly 75% of which had policy limits of $50,000 or less per
occurrence.
5
COMPETITION A large number of national, regional and local insurers write
private passenger automobile and homeowners' insurance coverage. Insurers in
this market generally compete on the basis of price (including differentiation
on liability limits, variety of coverages offered and deductibles), geographic
presence and ease of enrollment and, to a lesser extent, reputation for claims
handling, financial stability and customer service. Management believes that
sophisticated data analysis for refinement of risk profiles has helped the
Personal group to compete successfully. The Personal group attempts to provide
selected pricing for a wider spectrum of risks and with a greater variety of
payment options, deductibles and limits of liability than are offered by many of
its competitors.
SPECIALTY
GENERAL The Specialty group emphasizes the writing of specialized
insurance coverage where AFG personnel are experts in particular lines of
business or customer groups. The following are examples of such specialty
businesses:
Inland and Ocean Marine Provides coverage primarily
for marine cargo, boat dealers, marina
operators/dealers, excursion vessels,
builder's risk, contractor's equipment,
excess property and motor truck cargo.
Workers' Compensation Writes coverage for prescribed
benefits payable to employees (principally
in California) who are injured on the job.
Agricultural-related Provides federally reinsured multi-peril
crop (allied lines) insurance covering most
perils as well as crop hail, equine
mortality and other coverages for full-time
operating farms/ranches and agribusiness
operations on a nationwide basis.
Executive and Professional Markets liability coverage for attorneys and
Liability for directors and officers of businesses and
not-for-profit organizations.
Fidelity and Surety Bonds Provides surety coverage for various types
of contractors and public and private
corporations and fidelity and crime coverage
for government, mercantile and financial
institutions.
Collateral Protection Provides coverage for insurance risk
management programs for lending and leasing
institutions.
Umbrella and Excess Consists primarily of large liability
coverage in excess of primary layers.
Specialization is the key element to the underwriting success of these
business units. Each unit has independent management with significant operating
autonomy to oversee the important operational functions of its business such as
underwriting, pricing, marketing, policy processing and claims service. These
specialty businesses are opportunistic and their premium volume will vary based
on prevailing market conditions. AFG continually evaluates expansion in existing
markets and opportunities in new specialty markets that meet its profitability
objectives.
6
The U.S. geographic distribution of the Specialty group's statutory direct
written premiums in 2000 compared to 1996 is shown below.
2000 1996 2000 1996
---- ---- ---- ----
California 25.8% 23.6% Michigan 2.6% 2.9%
Texas 7.7 5.6 Pennsylvania 2.3 3.0
New York 5.9 8.1 Georgia 2.3 *
Florida 4.9 3.4 Louisiana 2.0 *
Illinois 4.3 3.8 Massachusetts * 4.7
Oklahoma 3.2 2.8 North Carolina * 3.7
New Jersey 3.0 4.6 Connecticut * 2.7
Ohio 2.7 2.6 Other 33.3 28.5
----- -----
---------------- 100.0% 100.0%
(*) less than 2% ===== =====
The following table sets forth a distribution of statutory net written
premiums for AFG's Specialty group by NAIC annual statement line for 2000
compared to 1996.
2000 1996
---- ----
Workers' compensation 21.3% 29.1%
Other liability 20.4 20.6
Inland marine 11.8 7.1
Auto liability 8.8 8.7
Commercial multi-peril 8.1 15.7
Collateral protection 5.4 *
Auto physical damage 4.9 3.0
Fidelity and surety 4.8 3.2
Allied lines 4.7 4.4
Ocean marine 3.5 3.4
Other 6.3 4.8
----- -----
_______________ 100.0% 100.0%
===== =====
(*) less than 2%
The following table shows the performance of AFG's Specialty group
insurance operations (dollars in millions):
2000 1999 1998
---- ---- ----
Net written premiums $1,324 $1,111 $1,312(a)
====== ====== ======
Net earned premiums $1,223 $1,048 $1,372
Loss and LAE 902 702 979
Underwriting expenses 413 370 451
Policyholder dividends 3 4 9
------ ------ ------
Underwriting profit (loss) ($ 95) ($ 28) ($ 67)
====== ====== ======
GAAP ratios:
Loss and LAE ratio 73.8% 67.0% 71.4%
Underwriting expense ratio 33.8 35.3 32.9
Policyholder dividend ratio .3 .4 .7
----- ----- -----
Combined ratio (b) 107.9% 102.7% 105.0%
===== ===== =====
Statutory ratios:
Loss and LAE ratio 76.5% 70.2% 72.1%
Underwriting expense ratio 31.4 34.8 34.1
Policyholder dividend ratio .5 .5 1.0
----- ----- -----
Combined ratio (b) 108.4% 105.5% 107.2%
===== ===== =====
Industry statutory combined ratio (c) 109.5% 109.8% 107.3%
(a) Includes $232 million generated by the Commercial lines sold.
(b) The 2000 combined ratios include 2.9 percentage points for reserve
strengthening in AFG's California workers' compensation business.
(c) Represents the commercial industry statutory combined ratio derived
from "Best's Review/Preview - Property/Casualty" (January 2001
Edition).
7
MARKETING The Specialty group operations direct their sales efforts
primarily through independent property and casualty insurance agents and
brokers, although portions are written through employee agents. These businesses
write insurance through several thousand agents and brokers and have
approximately 360,000 policies in force.
COMPETITION These businesses compete with other individual insurers, state
funds and insurance groups of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all their profits inure to
their policyholders. They also compete with self-insurance plans, captive
programs and risk retention groups. Because of the specialty nature of these
coverages, competition is based primarily on service to policyholders and
agents, specific characteristics of products offered and reputation for claims
handling. Price, commissions and profit sharing terms are also important
factors. Management believes that sophisticated data analysis for refinement of
risk profiles, extensive specialized knowledge and loss prevention service have
helped AFG's Specialty group compete successfully.
REINSURANCE
Consistent with standard practice of most insurance companies, AFG
reinsures a portion of its business with other insurance companies and assumes a
relatively small amount of business from other insurers. Ceding reinsurance
permits diversification of risks and limits the maximum loss arising from large
or unusually hazardous risks or catastrophic events. The availability and cost
of reinsurance are subject to prevailing market conditions which may affect the
volume and profitability of business that is written. AFG is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers
generally does not relieve AFG of its liability to its insureds until claims are
fully settled.
Reinsurance is provided on one of two bases, facultative or treaty.
Facultative reinsurance is generally provided on a risk by risk basis.
Individual risks are ceded and assumed based on an offer and acceptance of risk
by each party to the transaction. Treaty reinsurance provides for risks meeting
prescribed criteria to be automatically ceded and assumed according to contract
provisions. The following table presents (by type of coverage) the amount of
each loss above the specified retention maximum generally covered by treaty
reinsurance programs (in millions):
Retention Reinsurance
Coverage Maximum Coverage(a)
-------- --------- -----------
California Workers' Compensation $ .5 (b)
Other Workers' Compensation 1.0 49.0
Commercial Umbrella 1.0 49.0
Other Casualty 5.0 25.0
Property - General 5.0 25.0 (c)
Property - Catastrophe 10.0 65.0
(a) Reinsurance covers substantial portions of losses in excess of
retention.
(b) All amounts in excess of $500,000.
(c) Since 1998, AFG has ceded 90% of its homeowners insurance coverage
through a reinsurance agreement. Beginning in 2001, AFG will cede
80% of this business.
AFG also purchases facultative reinsurance providing coverage on a risk by
risk basis, both pro rata and excess of loss, depending on the risk and
available reinsurance markets. Due in part to the limited exposure on individual
policies, the nonstandard auto business is not materially involved in reinsuring
risks with third party insurance companies.
Included in the balance sheet caption "recoverables from reinsurers and
prepaid reinsurance premiums" were approximately $179 million on paid losses and
LAE and $1.3 billion on unpaid losses and LAE at December 31, 2000. The
collectibility of a reinsurance balance is based upon the financial condition of
a reinsurer as well as individual claim considerations. At December 31, 2000,
AFG's insurance subsidiaries had allowances of approximately $20 million for
doubtful collection of reinsurance recoverables, most of which related to unpaid
losses.
8
In connection with the 1998 sale of its Commercial lines division to Ohio
Casualty, AFG agreed to continue to issue and renew policies (in certain states)
related to the business transferred until Ohio Casualty received the required
approvals and licensing to begin writing this business on its own behalf. Under
the agreement, AFG ceded 100% of these premiums to Ohio Casualty. In 2000, 1999
and 1998, AFG ceded premiums of $209 million, $337 million and $170 million
(including transferred unearned premiums), respectively, under the agreement.
In 1999 and 1998, AFG ceded approximately 30% of its California workers'
compensation business through a reinsurance agreement with Reliance Insurance
Company. Due to concerns over Reliance's participation in a reinsurance pool run
by Unicover Managers, Inc., AFG's reinsurance contracts with Reliance were
commuted in January 2000. AFG received cash in exchange for releasing Reliance
from its obligations under the contracts. While amounts have been reserved in
connection with the original insurance policies and the reinsurance agreement,
no significant gain or loss was incurred from the commutation itself.
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. Excluding
business ceded to Ohio Casualty (discussed above), the following companies
assumed nearly half of AFG's 2000 ceded reinsurance: Mitsui Marine and Fire
Insurance Company, General Reinsurance Corporation, American Re-Insurance
Company, Swiss Reinsurance America Corporation, Zurich Reinsurance North
America, Inc., Transatlantic Reinsurance Company, Employers Reinsurance
Corporation, NAC Reinsurance Corporation, Hartford Fire Insurance Company and
Continental Casualty Company.
Premiums written for reinsurance ceded and assumed are presented in the
following table (in millions):
2000 1999 1998
---- ---- ----
Reinsurance ceded $803 $898 $788
Reinsurance assumed - including
involuntary pools and associations 76 48 38
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 provision for 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 businesses, 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 experience matures.
Generally, reserves for reinsurance and involuntary pools and associations
are reflected in AFG's results at the amounts reported by those entities.
9
The following discussion of insurance reserves includes the reserves of
American Premier's subsidiaries for only those periods following the Mergers.
See Note N to the Financial Statements for an analysis of changes in AFG's
estimated liability for losses and LAE, net and gross of reinsurance, over the
past three years on a GAAP basis.
The following table presents the development of 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, 2000. 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. For purposes of this table, reserves of businesses sold are
considered paid at the date of sale. For example, the percentage of the December
31, 1997 reserve liability paid in 1998 includes approximately 10 percentage
points for reserves ceded in connection with the sale of the Commercial lines
division.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid losses and
loss adjustment expenses:
As originally estimated $2,137 $2,129 $2,123 $2,113 $2,187 $3,393 $3,404 $3,489 $3,305 $3,224 $3,192
As re-estimated at
December 31, 2000 2,536 2,452 2,381 2,293 2,372 3,490 3,528 3,589 3,184 3,164 N/A
Liability re-estimated (*):
- --------------------------
One year later 98.6% 99.3% 99.9% 98.1% 95.9% 98.7% 100.9% 104.5% 97.8% 98.1%
Two years later 97.7% 98.7% 98.2% 94.1% 99.3% 98.5% 105.9% 104.6% 96.3%
Three years later 97.4% 98.0% 95.2% 97.4% 99.9% 103.9% 105.2% 102.9%
Four years later 99.2% 97.3% 100.3% 98.9% 109.4% 103.1% 103.6%
Five years later 100.0% 103.0% 102.6% 109.7% 109.0% 102.9%
Six years later 106.3% 105.6% 113.6% 108.8% 108.5%
Seven years later 109.4% 116.9% 112.3% 108.5%
Eight years later 120.9% 115.2% 112.2%
Nine years later 118.8% 115.2%
Ten years later 118.7%
Cumulative deficiency
(redundancy) 18.7% 15.2% 12.2% 8.5% 8.5% 2.9% 3.6% 2.9% (3.7%) (1.9%) N/A
==== ==== ==== === === === === === ==== === ===
Cumulative paid as of:
- ---------------------
One year later 26.1% 26.4% 26.7% 25.2% 26.8% 33.1% 33.8% 41.7% 28.3% 34.8%
Two years later 43.2% 43.0% 43.7% 40.6% 42.5% 51.6% 58.0% 56.6% 51.7%
Three years later 55.3% 55.4% 54.2% 50.9% 54.4% 67.2% 66.7% 70.8%
Four years later 64.8% 63.3% 60.8% 59.1% 66.3% 72.0% 77.3%
Five years later 71.1% 67.8% 67.0% 68.0% 69.8% 80.4%
Six years later 74.5% 72.7% 74.0% 70.8% 80.0%
Seven years later 78.6% 78.6% 76.3% 80.6%
Eight years later 83.9% 80.5% 85.9%
Nine years later 85.5% 89.9%
Ten years later 94.5%
(*) Reflects significant A&E charges and reallocations in 1994, 1996 and 1998
for prior years' losses. Excluding these items, the re-estimated liability
shown above would decrease ranging from approximately 17 percentage points
in 1990 to 6 percentage points in 1997.
The following is a reconciliation of the net liability to the gross
liability for unpaid losses and LAE.
1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
As originally estimated:
Net liability shown above $2,113 $2,187 $3,393 $3,404 $3,489 $3,305 $3,224 $3,192
Add reinsurance recoverables 611 730 704 720 736 1,468 1,571 1,324
------ ------ ------ ------ ------ ------ ------ ------
Gross liability $2,724 $2,917 $4,097 $4,124 $4,225 $4,773 $4,795 $4,516
====== ====== ====== ====== ====== ====== ====== ======
As re-estimated at December 31, 2000:
Net liability shown above $2,293 $2,372 $3,490 $3,528 $3,589 $3,184 $3,164
Add reinsurance recoverables 711 656 913 946 1,041 1,671 1,656
------ ------ ------ ------ ------ ------ ------
Gross liability $3,004 $3,028 $4,403 $4,474 $4,630 $4,855 $4,820 N/A
====== ====== ====== ====== ====== ====== ====== ===
Gross cumulative deficiency
(redundancy) 10.3% 3.8% 7.5% 8.5% 9.6% 1.7% 0.5% N/A
==== === === === === === === ===
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 $214 million special
10
charge for A&E claims related to losses recorded in 1998, but incurred before
1990, is included in the re-estimated liability and cumulative deficiency
(redundancy) percentage for each of the previous years shown. Conditions and
trends that have affected development of the liability in the past may not
necessarily exist in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
The adverse development in the tables is due primarily to A&E exposures
for which AFG has been held liable under general liability policies written
years ago where environmental coverage was not intended. Other factors affecting
development included higher than projected inflation on medical,
hospitalization, material, repair and replacement costs. Additionally, changes
in the legal environment have influenced the development patterns over the past
ten years. For example, changes in the California workers' compensation law in
1993 and subsequent court decisions, primarily in late 1996, greatly limited the
ability of insurers to challenge medical assessments and treatments. These
limitations, together with changes in work force characteristics and medical
delivery costs, are contributing to an increase in claims severity.
The differences between the liability for losses and LAE reported in the
annual statements filed with the state insurance departments in accordance with
statutory accounting principles ("SAP") and that reported in the accompanying
consolidated financial statements in accordance with GAAP at December 31, 2000
are as follows (in millions):
Liability reported on a SAP basis, net of $267 million
of retroactive reinsurance $3,178
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (10)
Reserves of foreign operations 4
Reinsurance recoverables, net of allowance 1,324
Reclassification of allowance for uncollectible
reinsurance 20
------
Liability reported on a GAAP basis $4,516
======
ASBESTOS AND ENVIRONMENTAL RESERVES ("A&E") In defining environmental
exposures, the insurance industry typically includes claims relating to polluted
waste sites and asbestos as well as other mass tort claims such as those
relating to breast implants, repetitive stress on keyboards, DES (a drug used in
pregnancies years ago alleged to cause cancer and birth defects) and other
latent injuries.
Establishing reserves for A&E claims is subject to uncertainties that are
greater than those presented by other types of claims. Factors contributing to
those uncertainties include a lack of sufficiently detailed historical data,
long reporting delays, uncertainty as to the number and identity of insureds
with potential exposure, unresolved legal issues regarding policy coverage, and
the extent and timing of any such contractual liability. Courts have reached
different and sometimes inconsistent conclusions as to when a loss is deemed to
have occurred, what policies provide coverage, what claims are covered, whether
there is an insured obligation to defend, how policy limits are determined and
other policy provisions. Management believes these issues are not likely to be
resolved in the near future.
As part of the continuing process of monitoring appropriate reserve needs
and prompted by the retention of certain A&E exposures under the agreement
covering the sale of its Commercial lines division, AFG began a thorough study
of its A&E exposures in 1998. AFG's study was reviewed by independent actuaries
who used state of the art actuarial techniques that have wide acceptance in the
industry. AFG recorded a charge of $214 million in 1998 to increase A&E reserves
to its best estimate of the ultimate liability.
The survival ratio, which is an industry measure of A&E claim reserves, is
derived by dividing reserves for A&E exposures by annual paid losses. At
December 31, 2000, AFG's three year survival ratio (after adjusting for the sale
of Stonewall) is approximately 10 times paid losses. In October 2000, A.M. Best
reported its estimate that the property and casualty insurance industry's three
year survival ratio was approximately 7.8 times paid losses at December 31,
1999.
11
The following table (in millions) is a progression of A&E reserves. The
increase in payments beginning in 1999 reflects an acceleration of the
settlement process; individual claims were generally paid at projected levels
previously recorded as reserve liabilities. During the review of A&E exposures
in 1998, $13.8 million in reserves recorded prior to 1998 and not identified as
A&E were determined to be A&E reserves. In addition, the allowance for
uncollectible reinsurance applicable to ceded A&E reserves was not reflected in
these reserves prior to 1998.
2000 1999 1998
---- ---- ----
Reserves at beginning of year $576.7 $625.4 $347.9
Incurred losses and LAE (a) (1.9) .1 247.5
Paid losses and LAE (48.7) (48.8) (26.1)
Reserves transferred with sale of:
Stonewall (168.4) - -
Commercial lines - - (11.4)
Reserves not classified as A&E prior to 1998:
Reserves - - 13.8
Allowance for uncollectible reinsurance
applicable to ceded A&E reserves - - 53.7
------ ------ ------
Reserves at end of year, net of
reinsurance recoverable 357.7 576.7 625.4
Reinsurance recoverable, net of
allowance 105.7 219.8 240.7
------ ------ ------
Gross reserves at end of year $463.4 $796.5 $866.1
====== ====== ======
(a) Includes a special charge of $214 million in 1998.
ANNUITY AND LIFE OPERATIONS
GENERAL
AFG's annuity and life operations are conducted through Great American
Financial Resources, Inc. ("GAFRI", formerly known as American Annuity Group,
Inc.), a holding company which markets retirement products, primarily fixed and
variable annuities, and various forms of life and supplemental health insurance
through the following major entities which were acquired in the years shown.
GAFRI and its subsidiaries employ approximately 1,900 persons.
Great American Life Insurance Company ("GALIC") - 1992(*)
Annuity Investors Life Insurance Company ("AILIC") - 1994
Loyal American Life Insurance Company ("Loyal") - 1995
Great American Life Assurance Company of Puerto Rico ("GAPR") - 1997
United Teacher Associates Insurance Company ("UTA") - 1999
(*) Acquired from Great American Insurance.
Acquisitions in recent years have supplemented GAFRI's internal growth as
the assets of the holding company and its operating subsidiaries have increased
from $4.5 billion at the end of 1992 to nearly $8 billion at the end of 2000.
Premiums over the last three years were as follows (in millions):
Insurance Product(*) 2000 1999 1998
----------------- ---- ---- ----
Annuities $ 747 $588 $521
Life, accident and health 261 126 104
------ ---- ----
$1,008 $714 $625
====== ==== ====
----------------
(*) Table does not include premiums of subsidiaries or divisions
until their first full year following acquisition or formation.
All periods exclude premiums of subsidiaries sold.
12
In 1999, GAFRI acquired United Teacher Associates, Consolidated Financial
Corporation and Great American Life Insurance Company of New York. UTA provides
retired and active teachers with supplemental health products and retirement
annuities, and purchases blocks of insurance policies from other insurance
companies. Consolidated Financial is an insurance agency that has been one of
the top 10 sellers of GAFRI's annuity products. Great American Life Insurance
Company of New York was purchased to facilitate GAFRI's entry into the New York
State market.
In 1998, GAFRI sold its Funeral Services division.
ANNUITIES
GAFRI's principal retirement products are Flexible Premium Deferred
Annuities ("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). Annuities
are long-term retirement saving instruments that benefit from income accruing on
a tax-deferred basis. The issuer of the annuity collects premiums, credits
interest or earnings on the policy and pays out a benefit upon death, surrender
or annuitization. FPDAs are characterized by premium payments that are flexible
in both amount and timing as determined by the policyholder. SPDAs are issued in
exchange for a one-time lump-sum premium payment.
The following table (in millions) presents combined financial information
of GAFRI's principal annuity operations.
2000 1999 1998
---- ---- ----
GAAP Basis
Total Assets $7,052 $6,657 $6,549
Fixed Annuity Reserves 5,365 5,349 5,396
Variable Annuity Reserves 534 354 120
Stockholder's Equity 915 801 862
Statutory Basis
Total Assets $6,620 $6,493 $6,159
Fixed Annuity Reserves 5,536 5,564 5,538
Variable Annuity Reserves 534 354 120
Capital and Surplus 362 404 350
Asset Valuation Reserve (a) 77 67 63
Interest Maintenance Reserve (a) 3 10 21
Annuity Receipts:
Flexible Premium:
First Year $ 62 $ 55 $ 45
Renewal 152 145 149
------ ------ ------
214 200 194
Single Premium 513 388 327
------ ------ ------
Total Annuity Receipts $ 727 $ 588 $ 521
====== ====== ======
----------------
(a) Allocation of surplus.
Sales of annuities are affected by many factors, including:
(i) competitive annuity products and rates; (ii) the general level of interest
rates; (iii) the favorable tax treatment of annuities; (iv) commissions paid to
agents; (v) services offered; (vi) ratings from independent insurance rating
agencies; (vii) other alternative investments and (viii) general economic
conditions. In addition, sales of variable and equity-indexed annuities are
affected by the performance of the U.S. and global equity markets. At December
31, 2000, GAFRI had over 285,000 annuity policies in force.
Annuity contracts are generally classified as either fixed rate (including
equity-indexed) or variable. The following table presents premiums by
classification:
Premiums 2000 1999 1998
-------- ---- ---- ----
Traditional fixed 50% 55% 72%
Variable 43 35 17
Equity-indexed 7 10 11
--- --- ---
100% 100% 100%
=== === ===
13
With a traditional fixed rate annuity, the interest crediting rate is
initially set by the issuer and thereafter may be changed from time to time by
the issuer subject to any guaranteed minimum interest crediting rates or any
guaranteed term in the policy.
GAFRI seeks to maintain a desired spread between the yield on its
investment portfolio and the rate it credits to its fixed rate annuities. GAFRI
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. GAFRI designs its
products with certain provisions to encourage policyholders to maintain their
funds with GAFRI for at least five to ten years. Partly due to these features,
annuity surrenders have averaged just over 10% of statutory reserves over the
past five years.
All of GAFRI's traditional fixed rate annuities offer a minimum interest
rate guarantee of 3% or 4%; the majority permit GAFRI to change the crediting
rate at any time (subject to the minimum guaranteed interest rates). In
determining the frequency and extent of changes in the crediting rate, GAFRI
takes into account the economic environment and the relative competitive
position of its products.
In addition to traditional fixed rate annuities, GAFRI offers variable and
equity-indexed annuities. Industry sales of variable annuities have increased
substantially over the last ten years as investors have sought to obtain the
returns available in the equity markets while enjoying the tax-deferred status
of annuities. With a variable annuity, the earnings credited to the policy vary
based on the investment results of the underlying investment options chosen by
the policyholder. Premiums directed to the variable options in policies issued
by GAFRI are invested in funds maintained in separate accounts managed by
various independent investment managers. GAFRI earns a fee on amounts deposited
into variable accounts. Policyholders may also choose to direct all or a portion
of their premiums to various fixed rate options, in which case GAFRI earns a
spread on amounts deposited.
An equity-indexed fixed annuity provides policyholders with a crediting
rate tied, in part, to the performance of an existing stock market index while
protecting them against the related downside risk through a guarantee of
principal. GAFRI purchases call options designed to offset substantially all of
the increase in the liabilities associated with equity-indexed annuities.
Approximately one-fourth of GAFRI's retirement annuity premiums came from
California in 1997 through 2000. No other state accounted for more than 10% of
premiums.
GAFRI's FPDAs are sold primarily to employees of not-for-profit and
commercial organizations who are eligible to save for retirement through
contributions made on a before-tax or after-tax basis. Contributions are made at
the discretion of the participants through payroll deductions or through
tax-free "rollovers" of funds from other qualified investments. Federal income
taxes are not payable on pretax contributions or earnings until amounts are
withdrawn.
Over the past several years, GAFRI's source of new flexible annuity
premiums has shifted to variable annuities. In 2000, variable annuities
represented over 65% of all first year qualified flexible premiums written by
GAFRI compared to just 3% in 1996. Concurrent with this shift in new sales,
GAFRI's renewal premiums on fixed rate flexible premium policies have declined
steadily over the past 5 years, as policyholders opted for equity-based
investments.
Sales of GAFRI's single premium annuities have increased over the past
several years, driven primarily by increased variable annuity sales. In addition
to variable annuities, GAFRI has developed new fixed rate products with
multi-year guarantee periods and certain features designed to assist the
elderly. In 2000, sales of single premium annuities represented 70% of total
premiums sold compared to 60% in 1996. Variable annuity sales represented almost
half of the total single premium in 2000 compared to 1% in 1996.
14
GAFRI distributes its variable annuity products through more than 750
actively producing registered representatives representing approximately 200
broker/dealers. A substantial portion (over one-third in 2000) of GAFRI's
variable annuity sales are made through a wholly-owned subsidiary, Great
American Advisors, Inc. ("GAA"). GAA is a broker/dealer licensed in all 50
states to sell stocks, bonds, options, mutual funds and variable insurance
contracts through independent representatives and financial institutions. GAA
also acts as the principal underwriter and distributor for GAFRI's variable
annuity products.
GAFRI distributes its fixed rate and equity-indexed products primarily
through a network of 120 managing general agents (MGA's) who, in turn, direct
more than 1,200 actively producing independent agents. In addition, GAFRI offers
all of its annuity product lines through financial institutions. Sales of
annuities through financial institutions represented over 7% of total annuity
premiums in 2000.
LIFE, ACCIDENT AND HEALTH PRODUCTS
GAFRI offers a variety of life, accident and health products through
GALIC's life operations, Loyal, GAPR and UTA. This group produced over $280
million of statutory premiums in 2000. It also had in excess of 500,000 policies
and $13 billion face amount of life insurance in force.
In December 1997, GALIC began offering traditional term, universal and
whole life insurance products through national marketing organizations.
Loyal offers a variety of life and supplemental health insurance products
through payroll deduction plans and credit unions. The principal products sold
by Loyal include cancer, accidental injury, short-term disability, hospital
indemnity, universal life and traditional whole life. Loyal's marketing strategy
emphasizes third party sponsorship, including employers and credit unions, to
gain access to the ultimate customer utilizing independent agents.
GAPR sells in-home service life and supplemental health products through a
network of company-employed agents. Ordinary life, cancer, credit and group life
products are sold through independent agents.
In October 1999, GAFRI acquired UTA, a provider of supplemental health
products and annuities to retired and active teachers. UTA's principal product
offerings are annuities and coverage for Medicare supplement, cancer and
long-term care.
In late 1999, GAFRI began offering long-term care products.
SALE OF FUNERAL SERVICES DIVISION
In 1998, GAFRI sold its Funeral Services division for approximately $165
million in cash. The Funeral Services division provided life insurance and
annuities to fund pre-arranged funerals, as well as administrative services for
pre-arranged funeral trusts.
INDEPENDENT RATINGS
GAFRI's principal insurance subsidiaries are rated by Standard & Poor's,
A.M. Best and Fitch. In addition, GALIC is rated A3 (good financial security) by
Moody's. Such ratings are generally based on items of concern to policyholders
and agents and are not directed toward the protection of investors.
Standard
& Poor's A.M. Best Fitch
----------- ------------- ----------------
GALIC A+ (Strong) A (Excellent) AA- (Very high)
AILIC A+ (Strong) A (Excellent) AA- (Very high)
Loyal A+ (Strong) A (Excellent) AA- (Very high)
GAPR Not rated A (Excellent) Not rated
UTA Not rated A- (Excellent) Not rated
15
GAFRI 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. GAFRI
believes that a rating in the "A" category by at least one rating agency is
necessary to successfully market tax-deferred annuities to public education
employees and other not-for-profit groups.
Although GAFRI believes that its insurance companies' ratings are very
stable, those companies' operations could be materially adversely affected by a
downgrade in ratings.
COMPETITION
GAFRI's insurance companies operate in highly competitive markets. They
compete with other insurers and financial institutions based on many factors,
including: (i) ratings; (ii) financial strength; (iii) reputation; (iv) service
to policyholders and agents; (v) product design (including interest rates
credited and premium rates charged); and (vi) commissions. Since policies are
marketed and distributed primarily through independent agents (except at GAPR),
the insurance companies must also compete for agents.
No single insurer dominates the markets in which GAFRI's insurance
companies compete. Competitors include (i) individual insurers and insurance
groups, (ii) mutual funds and (iii) other financial institutions. In a broader
sense, GAFRI's insurance companies compete for retirement savings with a variety
of financial institutions offering a full range of financial services. Financial
institutions have demonstrated a growing interest in marketing investment and
savings products other than traditional deposit accounts.
OTHER COMPANIES
Through subsidiaries, AFG is engaged in a variety of other businesses,
including The Golf Center at Kings Island (golf and tennis facility) in the
Greater Cincinnati area; commercial real estate operations in Cincinnati (office
buildings and The Cincinnatian Hotel), New Orleans (Le Pavillon Hotel), Cape Cod
(Chatham Bars Inn), Austin (Driskill Hotel), Chesapeake Bay (Skipjack Cove
Yachting Resort) and apartments in Lafayette (Louisiana), Louisville,
Pittsburgh, St. Paul and Tampa Bay. These operations employ approximately 800
full-time employees.
INVESTMENT PORTFOLIO
GENERAL
A summary of AFG's December 31, 2000, investment portfolio by business
segment follows (excluding investment in equity securities of investee
corporations) (in millions).
Carrying and Market Value
--------------------------------------
P&C Annuity Other Total
--- ------- ----- -----
Cash and short-term investments $ 336 $ 88 $15 $ 439
Fixed maturities 4,082 6,080 3 10,165
Other stocks, options and
warrants 316 68 1 385
Policy loans - 213 - 213 (a)
Real estate and other investments 113 147 14 274 (a)
------ ------ --- -------
$4,847 $6,596 $33 $11,476
====== ====== === =======
(a) Policy loans and real estate and other investments are carried at cost.
Market values are not readily available.
16
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.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash and Short-term Investments 3.8% 3.5% 2.6% 2.1% 3.9%
Fixed Maturities:
U.S. Government and Agencies 4.7 4.9 4.4 5.0 4.1
State and Municipal 3.6 2.7 1.2 1.3 1.0
Public Utilities 5.5 5.1 6.0 6.8 8.2
Mortgage-Backed Securities 22.7 22.0 20.8 21.4 22.2
Corporate and Other 51.4 55.3 53.0 52.3 51.5
Redeemable Preferred Stocks .5 .6 .5 .6 .5
----- ----- ----- ----- -----
88.4 90.6 85.9 87.4 87.5
Net Unrealized Gains (Losses) on
fixed maturities held
Available for Sale .1 (2.1) 3.5 2.5 1.1
----- ----- ----- ----- -----
88.5 88.5 89.4 89.9 88.6
Other Stocks, Options and Warrants 3.4 3.7 3.7 3.7 2.8
Policy Loans 1.9 1.9 1.9 2.0 2.1
Real Estate and Other Investments 2.4 2.4 2.4 2.3 2.6
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.7% 7.7% 7.8% 7.8% 7.9%
Including realized gains and losses 7.4% 7.6% 8.0% 7.9% 7.7%
Yield on Stocks:
Excluding realized gains and losses 5.0% 5.9% 5.4% 5.6% 5.8%
Including realized gains and losses 3.9% 20.7% (5.3%) 30.2% 15.1%
Yield on Investments (*):
Excluding realized gains and losses 7.6% 7.7% 7.8% 7.8% 7.8%
Including realized gains and losses 7.4% 7.9% 7.8% 8.2% 7.8%
(*) Excludes "Real Estate and Other Investments".
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, 2000 (dollars in
millions).
Market Value
NAIC Amortized ----------------
Rating Comparable S&P Rating Cost Amount %
- ------ --------------------- --------- -------- ---
1 AAA, AA, A $ 7,200 $ 7,312 72%
2 BBB 2,087 2,071 20
------- ------- ---
Total investment grade 9,287 9,383 92
------- ------- ---
3 BB 380 365 4
4 B 370 327 3
5 CCC, CC, C 100 76 1
6 D 11 14 *
------- ------- ---
Total noninvestment grade 861 782 8
------- ------- ---
Total $10,148 $10,165 100%
======= ======= ===
- ---------------
(*) 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.
17
AFG's primary investment objective for fixed maturities 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, 2000, AFG owned 24 million shares of Chiquita
common stock representing 36% of its outstanding shares. The carrying value and
market value of AFG's investment in Chiquita was $24 million at December 31,
2000. Chiquita is a leading international marketer, producer and distributor of
quality fresh fruits and vegetables and processed foods. In addition to bananas,
these products include a wide variety of other fresh fruits and vegetables;
fruit and vegetable juices and beverages; processed bananas and other processed
fruits and vegetables; private-label and branded canned vegetables; fresh cut
and ready-to-eat salads; and edible oil-based consumer products.
In January 2001, Chiquita announced an initiative to restructure its
highly leveraged balance sheet and discontinued making all interest and
principal payments on its public debt. If successful, the restructuring would
result in the conversion of a significant portion of Chiquita's $862 million of
public debt into common equity. Although the intended restructuring would not
impact day-to-day operations, it would adversely affect the holders of
Chiquita's stock, including AFG. Accordingly, AFG wrote down its investment in
Chiquita to quoted market value of $1.00 per share at December 31, 2000.
OTHER STOCKS AFG's $272 million investment in Provident Financial Group,
Inc., a Cincinnati-based commercial banking and financial services company,
comprised approximately three-fourths of the equity investments included in
"Other stocks" in AFG's Balance Sheet at December 31, 2000.
FOREIGN OPERATIONS
AFG sells life and supplemental health products in Puerto Rico and
property and casualty products in Canada, Mexico, Europe and Asia. In addition,
GAFRI has an office in India where employees perform computer programming and
certain back office functions. Less than 3% of AFG's revenues and costs and
expenses are derived from foreign sources.
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 2001 from its
insurance subsidiaries without seeking regulatory clearance is approximately
$160 million.
18
Changes in state insurance laws and regulations have the potential to
materially affect the revenues and expenses of the insurance operations. For
example, between July 1993 and January 1995, the California Commissioner ordered
reductions in workers' compensation insurance premium rates totaling more than
30% and subsequently replaced the workers' compensation insurance minimum rate
law with an "open rating" policy. The Company is unable to predict whether or
when other state insurance laws or regulations may be adopted or enacted or what
the impact of such developments would be on the future operations and revenues
of its insurance businesses.
Most states have created insurance guaranty associations to provide for
the payment of claims of insurance companies that become insolvent. Annual
assessments for 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 less than one percent of AFG's net written premiums
in 2000.
The NAIC is an organization which is comprised of the chief insurance
regulator for each of the 50 states and the District of Columbia. The NAIC model
law for Risk Based Capital applies to both life and property and casualty
companies. The risk-based capital formulas determine the amount of capital that
an insurance company needs to ensure that it has an acceptably low expectation
of becoming financially impaired. The model law provides for increasing levels
of regulatory intervention as the ratio of an insurer's total adjusted capital
and surplus decreases relative to its risk-based capital, culminating with
mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called "mandatory control level". At December 31, 2000, the
capital ratios of all AFG insurance companies substantially exceeded the
risk-based capital requirements.
Legislation adopted in 1999 substantially eliminated restrictions on
affiliations among insurance companies, banks and securities firms. It is too
early to predict what impact this legislation will have in the markets in which
the insurance companies compete. Another portion of the 1999 legislation
obligates insurance companies and other financial services providers to
implement programs to protect confidential customer information. AFG does not
believe this requirement will have a material impact on its operations.
------------------------------------------------------------------------------
ITEM 2
PROPERTIES
----------
Subsidiaries of AFG own several buildings in downtown Cincinnati. AFG and
its affiliates occupy about three-fourths of the aggregate 660,000 square feet
of commercial and office space.
AFG's insurance subsidiaries lease the majority of their office and
storage facilities in numerous cities throughout the United States, including
Great American's and GAFRI's home offices in Cincinnati. A GAFRI subsidiary owns
a 40,000 square foot office building in Austin, Texas, most of which is used by
the company for its operations.
AFG subsidiaries own transferable rights to develop approximately 1.4
million square foot of floor space in the Grand Central Terminal area in New
York City. The development rights were derived from ownership of the land upon
which the terminal is constructed.
19
ITEM 3
LEGAL PROCEEDINGS
-----------------
Please refer to "Forward-Looking Statements" following the Index in front of
this Form 10-K.
AFG and its subsidiaries are involved in various litigation, most of which
arose in the ordinary course of business, including litigation alleging bad
faith in dealing with policyholders and challenging certain business practices
of insurance subsidiaries. Except for the following, management believes that
none of the litigation meets the threshold for disclosure under this Item.
Reference is made to "Legal Proceedings" in AFG's 1999 Form 10-K and
September 30, 2000 Form 10-Q which describe litigation against American Premier
by the USX Corporation. All available appeals in the USX litigation have been
exhausted and the cases have been dismissed in favor of American Premier.
American Premier is a party or named as a potentially responsible party in
a number of proceedings and claims by regulatory agencies and private parties
under various environmental protection laws, including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), seeking to
impose responsibility on American Premier for hazardous waste remediation costs
at certain railroad sites formerly owned by Penn Central Transportation Company
("PCTC") and at certain other sites where hazardous waste allegedly generated by
PCTC's railroad operations is present. It is difficult to estimate American
Premier's liability for remediation costs at these sites for a number of
reasons, including the number and financial resources of other potentially
responsible parties involved at a given site, the varying availability of
evidence by which to allocate responsibility among such parties, the wide range
of costs for possible remediation alternatives, changing technology and the
period of time over which these matters develop. Nevertheless, American Premier
believes that its previously established loss accruals for potential
pre-reorganization environmental liabilities at such sites are adequate to cover
the probable amount of such liabilities, based on American Premier's estimates
of remediation costs and related expenses at such sites and its estimates of the
portions of such costs that will be borne by other parties. Such estimates are
based on information currently available to American Premier and are subject to
future change as additional information becomes available. American Premier
intends to seek reimbursement from certain insurers for portions of whatever
remediation costs it incurs.
In terms of potential liability to American Premier, the company believes
that the most significant such site is the railyard at Paoli, Pennsylvania
("Paoli Yard") which PCTC transferred to Consolidated Rail Corporation
("Conrail") in 1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial action for
clean-up of polychlorinated biphenyls ("PCB's") at Paoli Yard having an
estimated cost of approximately $28 million. American Premier has accrued its
portion of such estimated clean-up costs in its financial statements (in
addition to other expenses) but has not accrued the entire amount because it
believes it is probable that other parties, including Conrail, will be
responsible for substantial percentages of the clean-up costs by virtue of their
operation of electrified railroad cars at Paoli Yard that discharged PCB's at
higher levels than discharged by cars operated by PCTC.
Great American Life Insurance Company ("GALIC") was named a defendant in
purported class action lawsuits (Woodward v. Great American Life Insurance
Company, Hamilton County Court of Common Pleas, Case No. A9900587, filed
February 2, 1999 and Marshak v. Great American Life Insurance Company, Harris
County, Texas filed June 18, 1999). Both cases asserted various claims related
to GALIC's interest crediting practices on its fixed rate annuities as well as
the annuitization feature on such policies. These cases were settled in exchange
for a settlement package which provided benefits of $22 million to the class
members. The settlement was approved by the trial court in November 2000. The
estimated costs of this settlement were included in the year 2000 results.
20
In March 2000, a jury in Dallas, Texas, returned a verdict against GALIC
with total damages of $11.2 million. The case (Martin v. Great American Life
Insurance Company, 191st District Court of Dallas County, Texas, Case No.
96-04843) was brought by two former agents of GALIC who alleged that GALIC had
engaged in fraudulent conduct in connection with the termination of the agency
relationship. GALIC believes that the verdict was contrary to both the facts and
the law and expects to prevail on appeal.
UTA was named a defendant in a purported class action lawsuit. (Peggy
Berry, et al. v. United Teacher Associates Insurance Company, Travis County
District Court, Case No. GN100461, filed February 11, 2001). The complaint seeks
unspecified damages based on the alleged misleading disclosure of UTA's interest
crediting practices on its fixed rate annuities. GAFRI believes that UTA has
meritorious defenses but it is not possible to predict the ultimate outcome.
In management's opinion, the outcome of the foregoing claims and
contingencies will not, individually or in the aggregate, have a material
adverse effect on the financial condition of AFG. In making this assessment,
management has taken into account previously established loss accruals in its
financial statements and probable recoveries from third parties.
- ------------------------------------------------------------------------------
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Please refer to "Forward-Looking Statements" following the Index in front of
this Form 10-K.
AFG Common Stock has been listed and traded on the New York Stock Exchange
under the symbol AFG. The information presented in the table below represents
the high and low sales prices per share reported on the NYSE Composite Tape.
2000 1999
---------------------- -----------------------
High Low High Low
---- --- ---- ---
First Quarter $29 $18 3/8 $43 5/8 $34 1/16
Second Quarter 29 24 3/8 37 3/8 33
Third Quarter 26 5/8 23 1/8 35 7/16 26 9/16
Fourth Quarter 27 3/16 18 11/16 30 1/4 24 1/2
There were approximately 14,200 shareholders of record of AFG Common Stock
at March 1, 2001. In 2000 and 1999, AFG declared and paid quarterly dividends of
$.25 per share. The ability of AFG to pay dividends will be dependent upon,
among other things, the availability of dividends and payments under
intercompany tax allocation agreements from its insurance company subsidiaries.
21
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth certain data for the periods indicated
(dollars in millions, except per share data).
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Earnings Statement Data:
- -----------------------
Total Revenues $3,817 $3,360 $4,082 $4,026 $4,132
Operating Earnings Before Income Taxes 110 302 274 380 418
Earnings (Loss) Before Extraordinary Items
and Accounting Changes (47) 147 125 199 262
Extraordinary Items - (2) (1) (7) (29)
Cumulative Effect of Accounting Changes (9) (4) - - -
Net Earnings (Loss) (56) 141 124 192 233
Basic Earnings (Loss) Per Common Share (a):
Earnings (Loss) Before Extraordinary Items and
Accounting Changes ($.80) $2.46 $2.04 $ .77 $4.31
Net Earnings (Loss) Available to Common Shares (.95) 2.37 2.03 .65 3.84
Diluted Earnings (Loss) Per Common Share (a):
Earnings (Loss) Before Extraordinary Items
and Accounting Changes ($.80) $2.44 $2.01 $ .76 $4.26
Net Earnings (Loss) Available to Common Shares (.95) 2.35 2.00 .64 3.79
Cash Dividends Paid Per Share of
Common Stock $1.00 $1.00 $1.00 $1.00 $1.00
Ratio of Earnings to Fixed Charges (b) 1.63 3.36 3.22 3.98 4.22
Balance Sheet Data:
- ------------------
Total Assets $16,416 $16,054 $15,845 $15,755 $15,051
Long-term Debt:
Holding Companies 585 493 415 387 340
Subsidiaries 195 240 177 194 178
Minority Interest 508 489 522 513 494
Shareholders' Equity 1,549 1,340 1,716 1,663 1,554
(a) Per share results for 1997 are calculated after deducting a premium over
stated value on redemption of a subsidiary's preferred stock of $153.3
million.
(b) Fixed charges are computed on a "total enterprise" basis. For purposes
of calculating the ratios, "earnings" have been computed by adding to
pretax earnings the fixed charges and the minority interest in earnings
of subsidiaries having fixed charges and the undistributed equity in
losses of investees. Fixed charges include interest (excluding interest
on annuity benefits), amortization of debt premium/discount and expense,
preferred dividend and distribution requirements of subsidiaries and a
portion of rental expense deemed to be representative of the interest
factor.
22
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Please refer to "Forward-Looking Statements" following the Index in front of
this Form 10-K.
GENERAL
Following is a discussion and analysis of the financial statements and
other statistical data that management believes will enhance the understanding
of AFG's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-1.
AFG was formed through the combination of AFC and American Premier in
merger transactions completed in April 1995 (the "Mergers").
IT INITIATIVE In 1999, AFG initiated an enterprise-wide study of its
information technology ("IT") resources, needs and opportunities. The initiative
entails extensive effort and costs and has led to substantial changes in the
area, which should result in significant cost savings, efficiencies and
effectiveness in the future. While the costs (most of which are being expensed)
precede the expected savings, management expects benefits to greatly exceed the
costs incurred, all of which have been and will be funded through available
working capital.
LIQUIDITY AND CAPITAL RESOURCES
RATIOS AFG's debt to total capital ratio (at the parent holding company level)
was approximately 25% at December 31, 2000 and 1999.
AFG's ratio of earnings to fixed charges on a total enterprise basis was
1.63 for the year ended December 31, 2000 compared to 3.36 in 1999 and 3.22 in
1998.
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, 2000, the capital ratios of all AFG insurance
companies substantially exceeded the RBC requirements (the lowest capital ratio
of any AFG subsidiary was 2.1 times its authorized control level RBC; weighted
average of all AFG subsidiaries was 5.0 times).
SOURCES OF FUNDS AFG, AFC Holding, AFC and American Premier, are organized as
holding companies with almost all of their operations being conducted by
subsidiaries. These parent corporations, however, have continuing cash needs for
administrative expenses, the payment of principal and interest on borrowings,
shareholder dividends, and taxes. Funds to meet these obligations come primarily
from dividend and tax payments from their subsidiaries.
Management believes these parent holding companies have sufficient
resources to meet their liquidity requirements through operations. If funds
generated from operations, including dividends and tax payments from
subsidiaries, are insufficient to meet fixed charges in any period, these
companies would be required to generate cash through borrowings, sales of
securities or other assets, or similar transactions.
The parent holding companies have a reciprocal Master Credit Agreement
under which these companies make funds available to each other for general
corporate purposes.
AFC has a revolving credit line with several banks under which it can
borrow up to $300 million until December 31, 2002. This credit line provides
ample liquidity and can be used to obtain funds for operating subsidiaries or,
if necessary, for the parent companies. At December 31, 2000, there was $178
million borrowed under the line.
23
In December 2000, AFG issued 8.3 million shares of Common Stock, using the
$155 million in net cash proceeds to make capital contributions to its property
and casualty operations. In April 1999, AFG issued $350 million principal amount
of 7-1/8% senior debentures due 2009, using the proceeds to retire outstanding
holding company public debt and borrowings under AFC's credit line. All
debentures issued by the parent holding companies and GAFRI are rated investment
grade by three nationally recognized rating agencies. Under a currently
effective shelf registration statement, AFG can issue up to an aggregate of
approximately $340 million in additional common stock, debt or trust securities.
The shelf registration 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 during certain
periods in the past. However, the reliance on such dividend payments has been
lessened in recent years by the combination of (i) reductions in the amounts and
cost of debt at the holding companies subsequent to the Mergers (and the related
decrease in ongoing cash needs for interest and principal payments), (ii) AFG's
ability to obtain financing in capital markets, as well as (iii) the sales of
certain noncore investments.
For statutory accounting purposes, equity securities are generally carried
at market value. At December 31, 2000, AFG's insurance companies owned publicly
traded equity securities with a market value of $1.1 billion, including equity
securities of AFG affiliates (including subsidiaries) of $.7 billion. Since
significant amounts of these are concentrated in a relatively small number of
companies, decreases in the market prices could adversely affect the insurance
group's capital, potentially impacting the amount of dividends available or
necessitating a capital contribution. Conversely, increases in the market prices
could have a favorable impact on the group's dividend-paying capability.
Under tax allocation agreements with AFC, its 80%-owned U.S. subsidiaries
generally compute tax provisions as if filing separate returns based on book
taxable income computed in accordance with generally accepted accounting
principles. The resulting provision (or credit) is currently payable to (or
receivable from) AFC.
UNCERTAINTIES
LITIGATION Great American's liability for unpaid losses and loss
adjustment expenses includes amounts for various liability coverages related to
environmental, hazardous product and other mass tort claims. At December 31,
2000, Great American had recorded $463 million (before reinsurance recoverables
of $106 million) for such claims on policies written many years ago where, in
most cases, coverage was never intended. Due to inconsistent court decisions on
many coverage issues and the difficulty in determining standards acceptable for
cleaning up pollution sites, significant uncertainties exist which are not
likely to be resolved in the near future.
AFG's subsidiaries are parties in a number of proceedings relating to
former operations. While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts, circumstances and applicable
laws, management believes that sufficient reserves have been provided. See Note
L to the financial statements.
EXPOSURE TO MARKET RISK Market risk represents the potential economic loss
arising from adverse changes in the fair value of financial instruments. AFG's
exposures to market risk relate primarily to its investment portfolio and
annuity contracts which are exposed to interest rate risk and, to a lesser
extent, equity price risk. AFG's long-term debt is also exposed to interest rate
risk.
24
FIXED MATURITY PORTFOLIO The fair value of AFG's fixed maturity portfolio
is directly impacted by changes in market interest rates. For example, as a
result of increased market rates, AFG's fixed maturity portfolio declined in
value by more than six percent in 1999. AFG's fixed maturity portfolio is
comprised of substantially all fixed rate investments with primarily short-term
and intermediate-term maturities. This practice allows flexibility in reacting
to fluctuations of interest rates. The portfolios of AFG's property and casualty
insurance and life and annuity operations are managed with an attempt to achieve
an adequate risk-adjusted return while maintaining sufficient liquidity to meet
policyholder obligations. AFG's life and annuity operations use various
actuarial models in an attempt to align the duration of their invested assets to
the projected cash flows of policyholder liabilities.
The following table provides information about AFG's fixed maturity
investments at December 31, 2000 and 1999, that are sensitive to interest rate
risk. The table shows principal cash flows (in millions) and related weighted
average interest rates by expected maturity date for each of the five subsequent
years and for all years thereafter. Callable bonds and notes are included based
on call date or maturity date depending upon which date produces the most
conservative yield. Mortgage-backed securities ("MBSs") and sinking fund issues
are included based on maturity year adjusted for expected payment patterns.
Actual cash flows may differ from those expected.
December 31, 2000 December 31, 1999
----------------- --------------------
Principal Principal
Cash Flows Rate Cash Flows Rate
---------- ---- ---------- ----
2001 $ 494.2 8.46% 2000 $ 618.2 7.83%
2002 673.4 7.60 2001 622.6 8.69
2003 1,406.6 7.74 2002 848.4 8.14
2004 835.6 8.01 2003 1,267.6 7.65
2005 1,142.1 7.46 2004 999.2 7.73
Thereafter 5,737.0 7.41 Thereafter 5,871.0 7.50
--------- ---------
Total $10,288.9 7.57% $10,227.0 7.69%
========= =========
Fair Value $10,164.6 $ 9,862.2
========= =========
EQUITY PRICE RISK Equity price risk is the potential economic loss from
adverse changes in equity security prices. Although AFG's investment in "Other
stocks" is less than 4% of total investments, it is concentrated in a relatively
limited number of major positions. While this approach allows management to more
closely monitor the companies and industries in which they operate, it does
increase risk exposure to adverse price declines in a major position.
Included in "Other stocks" at December 31, 2000 were warrants (valued at
$10.1 million) to purchase common stock of various companies. Under Statement of
Financial Accounting Standards ("SFAS") No. 133, which was adopted as of October
1, 2000, these warrants are generally considered derivatives and marked to
market through current earnings as realized gains and losses. Realized gains
(losses) on sales of securities includes $1.5 million in gains recognized during
the fourth quarter of 2000 to adjust the carrying value of these warrants to
market value at December 31, 2000.
ANNUITY CONTRACTS Substantially all of GAFRI's fixed rate annuity
contracts permit GAFRI to change crediting rates (subject to minimum interest
rate guarantees of 3% to 4% per annum) enabling management to react to changes
in market interest rates and maintain an adequate spread. Projected payments (in
millions) in each of the subsequent five years and for all years thereafter on
GAFRI's fixed annuity liabilities at December 31 were as follows.
Fair
First Second Third Fourth Fifth Thereafter Total Value
----- ------ ----- ------ ----- ---------- ------ ------
2000 $700 $610 $530 $480 $470 $2,754 $5,544 $5,426
1999 690 620 550 490 440 2,730 5,520 5,371
25
Nearly half of GAFRI's fixed annuity liabilities at December 31, 2000,
were two-tier in nature in that policyholders can receive a higher amount if
they annuitize rather than surrender their policy, even if the surrender period
has expired. Current stated crediting rates on GAFRI's principal fixed annuity
products range from 3% on equity-indexed annuities (before any equity
participation) to over 8% on certain new policies (including first year bonus
amounts). GAFRI estimates that its effective weighted average crediting rate
over the next five years will approximate 5%. This rate reflects actuarial
assumptions as to (i) deaths, (ii) the number of policyholders who annuitize and
receive higher credited amounts and (iii) the number of policyholders who
surrender. Actual experience and changes in actuarial assumptions may result in
different effective crediting rates than those above.
GAFRI's equity-indexed fixed annuities provide policyholders with a
crediting rate tied, in part, to the performance of an existing stock market
index. GAFRI attempts to mitigate the risk in the equity-based component of
these products through the purchase of call options on the appropriate index.
GAFRI's strategy is designed so that an increase in the liabilities due to an
increase in the market index will be substantially offset by unrealized gains on
the call options. Under SFAS No. 133, both the equity-based component of the
annuities and the related call options are considered derivatives and marked to
market through current earnings as annuity benefits. Annuity benefits includes a
charge of $.2 million during the fourth quarter of 2000 to adjust these
derivatives to market at December 31, 2000.
DEBT AND PREFERRED SECURITIES The following table shows scheduled
principal payments (in millions) on fixed-rate long-term debt of AFG and its
subsidiaries and related weighted average interest rates for each of the
subsequent five years and for all years thereafter.
December 31, 2000 December 31, 1999
----------------- ------------------
Scheduled Scheduled
Principal Principal
Payments Rate Payments Rate
--------- ---- --------- ----
2001 $ 2.9 6.74% 2000 $ 26.9 9.96%
2002 4.7 6.86 2001 *
2003 * 2002 *
2004 14.2 8.38 2003 *
2005 9.7 9.16 2004 14.2 8.38
Thereafter 509.6 7.14 Thereafter 517.4 7.16
------ ------
Total $542.2 7.20% $562.5 7.32%
====== ======
Fair Value $496.3 $520.4
====== ======
(*) Less than $2 million.
At December 31, 2000 and 1999, respectively, AFG and its subsidiaries had
$239 million and $171 million in variable-rate debt maturing primarily in 2002
and 2004. The weighted average interest rate on AFG's variable-rate debt was
7.10% at December 31, 2000 compared to 6.82% at December 31, 1999. There were
$317 million and $320 million of subsidiary trust preferred securities
outstanding at December 31, 2000 and 1999, none of which are scheduled for
maturity or mandatory redemption during the next five years; the weighted
average interest rate on these securities was 8.65% at December 31, 2000 and
8.66% at December 31, 1999.
INVESTMENTS Approximately two-thirds of AFG's consolidated assets are invested
in marketable securities. A diverse portfolio of primarily publicly traded bonds
and notes accounts for over 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, 2000, the average life of AFG's fixed maturities was
about 6 years.
26
Approximately 92% of the fixed maturities held by AFG were rated
"investment grade" (credit rating of AAA to BBB) by nationally recognized rating
agencies at December 31, 2000. Investment grade securities generally bear lower
yields and lower degrees of risk than those that are unrated or noninvestment
grade. Management believes that the high quality investment portfolio should
generate a stable and predictable investment return.
Investments in MBSs represented approximately one-fourth of AFG's fixed
maturities at December 31, 2000. AFG invests primarily in MBSs which have a
reduced risk of prepayment. 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 mitigate the effect of prepayments on earnings over the
anticipated life of the MBS portfolio. Over 90% of AFG's MBSs are rated "AAA"
with substantially all being of investment grade quality. The market in which
these securities trade is highly liquid. Aside from interest rate risk, AFG does
not believe a material risk (relative to earnings or liquidity) is inherent in
holding such investments.
Individual portfolio securities are sold creating gains or losses as
market opportunities exist. Pretax capital gains (losses) recognized upon
disposition of securities, including investees, during the past five years have
been: 2000 - ($27 million); 1999 - $20 million; 1998 - $16 million; 1997 - $57
million and 1996 - $166 million. At December 31, 2000, AFG had a net unrealized
gain on fixed maturities of $16.3 million (before income taxes). The net
unrealized gain on equity securities was $210.4 million (before income taxes) at
that same date.
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 2000
GENERAL Operating earnings before income taxes were $110 million in 2000, $302
million in 1999 and $274 million in 1998. Results for 1998 include a pretax
charge of $214 million for reserve strengthening relating to asbestos and other
environmental matters ("A&E") and $159 million of pretax gains on sales of
subsidiaries.
Pretax operating earnings for 2000 were 64% lower than those of 1999 due
primarily to a decline in property and casualty underwriting results (including
a $35 million charge for reserve strengthening in the California workers'
compensation business), special litigation charges and lower realized gains,
partially offset by $23 million in income from the sale of certain lease rights.
Pretax operating earnings for 1999 were 8% lower than those of 1998
(excluding the above mentioned A&E charge and sales gains) due primarily to
decreased investment income and a fourth quarter charge of $10 million for
estimated expenses related to realignment within the operating units of the
life, health and annuity business. These were partially offset by improved
underwriting results in the property and casualty insurance operations.
Many investors and analysts focus on "core earnings" of companies, setting
aside certain items included in net earnings. Such "core earnings" for AFG,
consisting of net earnings (loss) adjusted to exclude: (i) realized gains
(losses), (ii) equity in investee losses, (iii) extraordinary items, and (iv)
accounting changes, were $42.3 million ($.71 per share, diluted) in 2000
compared to $150.4 million ($2.50 per share) in 1999 and $162 million ($2.60 per
share) in 1998.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and casualty
operations consist of two major business groups: Personal and Specialty.
The Personal group sells nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risks not typically accepted for
standard automobile coverage because of the applicant's driving record, type of
vehicle, age or other criteria.
The Specialty group includes a highly diversified group of business lines.
Some of the more significant areas are inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, fidelity and surety bonds, collateral protection, and
umbrella and excess coverages.
27
To understand the overall profitability of particular lines, the timing of
claims payments and the related impact of investment income must be considered.
Certain "short-tail" lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby limiting investment
income earned thereon. On the other hand, "long-tail" lines of business
(primarily liability coverages and workers' compensation) have payouts that are
either structured over many years or take many years to settle, thereby
significantly increasing investment income earned on related premiums received.
Underwriting profitability is measured by the combined ratio which is a
sum of the ratios of underwriting losses, loss adjustment expenses, underwriting
expenses and policyholder dividends to premiums. When the combined ratio is
under 100%, underwriting results are generally considered profitable; when the
ratio is over 100%, underwriting results are generally considered unprofitable.
The combined ratio does not reflect investment income, other income or federal
income taxes.
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various specialty
businesses listed above), management believes that it is prudent and appropriate
to use conservative assumptions until such time as the data, experience and
projections have more credibility, as evidenced by data volume, consistency and
maturity of the data. While this practice mitigates the risk of adverse
development on this business, it does not eliminate it.
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.
Underwriting results of AFG's insurance operations outperformed the
industry average for the fifteenth consecutive year (excluding the special $214
million A&E charge in 1998). AFG's insurance operations have been able to exceed
the industry's results by focusing on growth opportunities in the more
profitable areas of the specialty and nonstandard auto businesses.
Net written premiums and combined ratios for AFG's property and casualty
insurance subsidiaries were as follows (dollars in millions):
2000 1999 1998
---- ---- ----
Net Written Premiums (GAAP)
---------------------------
Personal $1,311 $1,154 $1,279
Specialty 1,324 1,111 1,312(*)
Other Lines 3 (2) 18
------ ------ ------
$2,638 $2,263 $2,609
====== ====== ======
Combined Ratios (GAAP)
----------------------
Personal 108.6% 100.7% 97.3%
Specialty 107.9 102.7 105.0
Aggregate (including A&E and other lines) 108.0% 102.0% 110.7%
(*) Includes $232 million for the 1998 year generated by the Commercial
lines sold.
SPECIAL 1998 A&E CHARGE Under the agreement covering the sale of its
Commercial lines division in 1998, AFG retained liabilities for certain A&E
exposures. Prompted by this retention and as part of the continuing process of
monitoring reserves, AFG began a thorough study of its A&E exposures. AFG's
study was reviewed by independent actuaries who used state of the art actuarial
techniques that have wide acceptance in the industry. The methods used involved
sampling and statistical modeling incorporating external databases that
supplement the internal information. AFG recorded a fourth quarter charge of
$214 million increasing A&E reserves at December 31, 1998, to approximately $866
million (before deducting reinsurance recoverables of $241 million).
28
PERSONAL The Personal group's increase in net written premiums for 2000
reflects firming market prices in the nonstandard auto market and expanded
writings in certain private passenger automobile markets. These items were
partially offset by the expected decline in volume caused by rate increases
implemented throughout 2000. The combined ratio for 2000 increased due to (i)
increased auto claim frequency and severity (particularly in medical and health
related costs), (ii) the impact of a very competitive pricing environment on
policies written during 1999 and early 2000 and (iii) increased underwriting
expenses associated with the direct and Internet marketing initiatives. In an
effort to alleviate increasing losses, AFG implemented rate increases averaging
approximately 13% in 2000. The full impact of these rate actions on earnings
should take effect in 2001. AFG expects rate increases in excess of 10% in this
business in 2001.
The Personal group's net written premiums for 1999 include $71 million in
net premiums written by Worldwide since its acquisition in April. The decrease
in written premiums reflects continuing strong price competition in the private
passenger automobile market. The combined ratio for 1999 increased as loss and
underwriting expenses declined at a slower rate than premiums.
SPECIALTY The Specialty group's increase in net written premiums reflects
the effect of (i) the January 2000 termination of reinsurance agreements
relating to the California workers' compensation business which were in effect
throughout 1999, (ii) rate increases in certain casualty markets (particularly
California workers' compensation) and (iii) the realization of growth
opportunities in certain commercial markets. Excluding the impact of the
terminated reinsurance agreements, net written premiums were up approximately
14% for 2000.
In response to continuing losses in the California workers' compensation
business, rate increases implemented for this business averaged 25% in 2000 and
will likely be in excess of 40% on renewals in the first quarter of 2001. Rate
increases implemented in the other specialty operations averaged 12% in 2000 and
are expected to be around 15% in the first quarter of 2001.
Due primarily to adverse development in prior year losses, AFG recorded a
$35 million pretax charge in the third quarter of 2000 to strengthen loss
reserves in its California workers' compensation business. The combined ratio
for 2000 reflects this reserve strengthening (a combined ratio effect of 2.9
points) and the effect of a highly competitive pricing environment on policies
written during 1999.
The Specialty group's net written premiums for 1999 increased slightly
compared to the 1998 period, excluding premiums of the Commercial lines division
sold in December 1998. The combined ratio improved as the beneficial effects of
the Commercial lines sale more than offset less favorable underwriting results
in other specialty businesses, in particular the multi-peril crop insurance
program. The Specialty group's underwriting results for 1999 include $28 million
representing amortization of a portion of the deferred gain related to the
Commercial lines business ceded to Ohio Casualty in 1998. In addition,
underwriting margins improved in the California workers' compensation business
as favorable reinsurance agreements executed during 1998 more than offset an
increase in reserves during the fourth quarter of 1999.
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS Life, accident and health
premiums and benefits increased in 2000 and 1999 (excluding Funeral Services
division sold in 1998) due primarily to the acquisition of United Teacher
Associates in October 1999 and increased sales of traditional life insurance by
GALIC's life operations.
START-UP MANUFACTURING BUSINESSES AFG's pretax operating earnings for 2000
include losses of $6.7 million from two start-up manufacturing businesses
acquired in 2000 from their former owners. AFG sold the equity interests in
these businesses in the fourth quarter of 2000 for a nominal cash consideration
plus warrants to repurchase a significant ownership interest. Beginning in the
fourth quarter of 2000, AFG's equity in the results of operations of these
businesses is included in investee earnings. Loans outstanding to these
businesses totaled $61.5 million at December 31, 2000. Because AFG retains the
financial risk in these businesses, it will continue accounting for their
operations on the equity method. The businesses are expected to reach
"break-even" by the latter part of 2001.
29
INVESTMENT INCOME Changes in investment income reflect fluctuations in market
rates and changes in average invested assets. Investment income decreased 4% in
1999 compared to 1998 due primarily to the transfer of investment assets in
connection with the sales of the Commercial lines division and Funeral Services
division in 1998, partially offset by the effect of the purchases of Worldwide
and United Teacher Associates in 1999.
GAIN ON SALE OF OTHER INVESTMENTS In September 2000, GAFRI realized a $27.2
million pretax gain on the sale of its minority ownership in a company engaged
in the production of ethanol. GAFRI's investment was repurchased by the ethanol
company which, following the purchase, became wholly-owned by AFG's Chairman.
GAIN ON SALE OF INVESTEE The gain on sale of investee in 1998 represents pretax
gains to AFG as a result of Chiquita's public issuance of shares of its common
stock.
GAINS ON SALES OF SUBSIDIARIES In 2000, AFG recognized (i) a $25 million pretax
gain representing an earn-out related to the 1998 sale of its Commercial lines
division, (ii) a $10.3 million pretax loss (including post closing adjustments)
on the sale of Stonewall Insurance Company and (iii) a $10.7 million pretax loss
related to the pending sale of its Japanese division. In connection with the
sale of the Japanese division, a gain of approximately $21 million on ceded
insurance will be deferred and subsequently recognized over the estimated
settlement period (weighted average of 4 years) of the claims ceded.
The gains on sales of subsidiaries in 1998 include (i) a pretax gain of
$152.6 million on the sale of the Commercial lines division, (ii) a pretax gain
of $21.6 million on GAFRI's sale of its Funeral Services division and (iii) a
charge of $15.5 million relating to the disposal of other operations.
REAL ESTATE OPERATIONS AFG's subsidiaries are engaged in a variety of real
estate operations including hotels, apartments, office buildings and
recreational facilities; they also own several parcels of land. Revenues and
expenses of these operations, including gains and losses on disposal, are
included in AFG's statement of operations as shown below (in millions).
2000 1999 1998
---- ---- ----
Other income $95.9 $87.4 $103.4
Other operating and general expenses 65.6 62.5 56.8
Interest charges on borrowed money 2.6 2.8 3.4
Minority interest expense, net 1.5 2.0 3.6
Other income includes net pretax gains on the sale of real estate assets
of $12.4 million in 2000, $15.2 million in 1999 and $34.6 million in 1998.
OTHER INCOME
2000 COMPARED TO 1999 Other income increased $78.4 million (45%) in 2000
due primarily to increased fee income generated by certain insurance operations,
income from the sale of lease rights and lease residuals and increased revenues
from real estate operations.
1999 COMPARED TO 1998 Other income increased $5.5 million (3%) in 1999 as
increased fee income generated by certain insurance operations more than offset
a decrease in income from the sale of real estate assets and lease residuals.
ANNUITY BENEFITS For GAAP financial reporting purposes, annuity receipts are
accounted for as interest-bearing deposits ("annuity benefits accumulated")
rather than as revenues. Under these contracts, policyholders' funds are
credited with interest on a tax-deferred basis until withdrawn by the
policyholder. Annuity benefits reflect amounts accrued on annuity policyholders'
funds accumulated. The rate at which GAFRI credits interest on most of its
annuity policyholders' funds is subject to change based on management's judgment
of market conditions. As a result, management has been able to react to changes
in market interest rates and maintain a desired interest rate spread. While
GAFRI believes the interest rate and stock market environment over the last
several years has contributed to an increase in annuitizations and surrenders,
the company's persistency rate remains approximately 90%.
30
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.
Interest expense increased in both 2000 and 1999 due to higher average
indebtedness, partially offset in 1999 by lower average interest rates on AFG's
borrowings.
OTHER OPERATING AND GENERAL EXPENSES
2000 COMPARED TO 1999 Other operating and general expenses for 2000
include second quarter charges of $32.5 million related to an agreement to
settle a lawsuit against a GAFRI subsidiary and $8.8 million for an adverse
California Supreme Court ruling against an AFG property and casualty subsidiary.
Excluding these litigation charges, other operating and general expenses
increased $56.1 million (14%) primarily due to the inclusion of the operations
of UTA following its acquisition in October 1999 and increased expenses from
certain start-up operations.
1999 COMPARED TO 1998 Other operating and general expenses increased $22.8
million (6%) as GAFRI's $10 million realignment charge and increased expenses
from start-up insurance services subsidiaries and real estate operations more
than offset a decrease in franchise taxes, a decrease in amortization of annuity
and life acquisition costs related to the Funeral Services division sold and a
decrease in Year 2000 costs.
During 1999 and 1998, AFG expensed approximately $23 million and $27
million, respectively, to successfully ensure that its systems would function
properly in the year 2000 and beyond. Because a significant portion of the Year
2000 Project was completed using internal staff, these costs do not represent
solely incremental costs.
INCOME TAXES See Note J to the Financial Statements for an analysis of items
affecting AFG's effective tax rate.
INVESTEE CORPORATIONS Equity in net losses of investee corporations includes
AFG's proportionate share of the results of Chiquita Brands International.
Chiquita reported net losses attributable to common shareholders of $112
million, $75.5 million and $35.5 million in 2000, 1999 and 1998, respectively.
Equity in net losses of investees for 2000 includes a $95.7 million pretax
charge to writedown AFG's investment in Chiquita to a market value of
approximately $1 per share. Chiquita's results for 2000 include $20 million in
charges and writedowns of production and sourcing assets in its Fresh Produce
operations.
Chiquita's operating income declined in 1999 from 1998 primarily due to
weak banana pricing, particularly in Europe as a result of the overallocation of
EU banana import licenses early in the year and weakness in demand from Eastern
Europe and Russia. In late 1999, Chiquita underwent a workforce reduction
program that streamlined certain corporate and staff functions in the U.S.,
Central America and Europe. While the program is expected to generate annual
savings of $15 to $20 million, operating income for 1999 includes a $9 million
charge for severance and other costs associated with the program.
Chiquita's results for 1998 include pretax writedowns and costs of $74
million as a result of significant damage in Honduras and Guatemala caused by
Hurricane Mitch.
In 2000, equity in losses of investee corporations also includes $4.1
million in losses of two start-up manufacturing businesses.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE In October 2000, AFG implemented
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires all derivatives to be
recognized in the balance sheet at fair value and that the initial effect of
recognizing derivatives at fair value be reported as a cumulative effect of a
change in accounting principle. Accordingly, AFG recorded a charge of $9.1
million (net of minority interest and taxes) to record its derivatives at fair
value at the beginning of the fourth quarter of 2000.
31
In the first quarter of 1999, GAFRI implemented Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities". The SOP requires that
costs of start-up activities be expensed as incurred and that unamortized
balances of previously deferred costs be expensed and reported as the cumulative
effect of a change in accounting principle. Accordingly, AFG expensed previously
capitalized start-up costs of $3.8 million (net of minority interest and taxes)
in the first quarter of 1999.
RECENT ACCOUNTING STANDARDS The following accounting standards have been
implemented by AFG in 1999 or 2000. The implementation of these standards is
discussed under various subheadings of Note A to the Financial Statements;
effects of each are shown in the relevant Notes.
Accounting
Standard Subject of Standard (Year Implemented) Reference
---------- -------------------------------------- ---------
SOP 98-5 Start-up Costs (1999) "Start-up Costs"
SFAS #133 Derivatives (2000) "Derivatives"
Other standards issued in recent years did not apply to AFG or had only
negligible effects on AFG.
In February 2001, the Financial Accounting Standards Board issued a
proposal to eliminate the amortization of goodwill and require that goodwill be
tested for impairment. Other operating and general expenses include goodwill
amortization of $17.2 million in 2000, $14.3 million in 1999 and $11.9 million
in 1998. The carrying value of AFG's goodwill at December 31, 2000, was $319
million. The proposal requires that an initial assessment for impairment be
performed for all existing reporting units with goodwill within six months of
adoption. Management has not determined the impact of such assessment.
32
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by Item 7A is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 2000 and 1999 F-2
Consolidated Statement of Operations:
Years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note M to the
Consolidated Financial Statements.
Please refer to "Forward-Looking Statements" following the Index in front of
this Form 10-K.
- ------------------------------------------------------------------------------
PART III
The information required by the following Items will be included in AFG's
definitive Proxy Statement for the 2001 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission within 120 days after
the end of Registrant's fiscal year and is incorporated herein by reference.
ITEM 10 Directors and Executive Officers of the Registrant
--------------------------------------------------
ITEM 11 Executive Compensation
----------------------
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
ITEM 13 Certain Relationships and Related Transactions
----------------------------------------------
33
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of American
Financial Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. Our audits also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
February 9, 2001
F-1
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
---------------------------------
2000 1999
---- ----
Assets:
Cash and short-term investments $ 438,670 $ 390,630
Investments:
Fixed maturities - at market
(amortized cost - $10,148,348 and $10,101,105) 10,164,648 9,862,205
Other stocks - at market
(cost - $174,959 and $229,201) 385,359 409,701
Investment in investee corporations 23,996 159,984
Policy loans 213,469 217,171
Real estate and other investments 273,994 269,032
----------- -----------
Total investments 11,061,466 10,918,093
Recoverables from reinsurers and prepaid
reinsurance premiums 1,845,171 2,105,818
Agents' balances and premiums receivable 700,215 656,924
Deferred acquisition costs 763,097 660,672
Other receivables 240,731 223,753
Variable annuity assets (separate accounts) 533,655 354,371
Prepaid expenses, deferred charges and other assets 513,616 411,742
Cost in excess of net assets acquired 318,920 332,072
----------- -----------
$16,415,541 $16,054,075
=========== ===========
Liabilities and Capital:
Unpaid losses and loss adjustment expenses $ 4,515,561 $ 4,795,449
Unearned premiums 1,414,492 1,325,766
Annuity benefits accumulated 5,543,683 5,519,528
Life, accident and health reserves 599,360 520,644
Long-term debt:
Holding companies 584,869 492,923
Subsidiaries 195,087 239,733
Variable annuity liabilities (separate accounts) 533,655 354,371
Accounts payable, accrued expenses and other
liabilities 972,271 976,413
----------- -----------
Total liabilities 14,358,978 14,224,827
Minority interest 508,033 489,270
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 67,410,091 and 58,419,952 shares outstanding 67,410 58,420
Capital surplus 898,066 742,220
Retained earnings 442,454 557,538
Unrealized gain (loss) on marketable
securities, net 140,600 (18,200)
----------- -----------
Total shareholders' equity 1,548,530 1,339,978
----------- -----------
$16,415,541 $16,054,075
=========== ===========
See notes to consolidated financial statements.
F-2
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
Year ended December 31,
-------------------------------------------
2000 1999 1998
---- ---- ----
Income:
Property and casualty insurance premiums $2,494,892 $2,210,819 $2,698,738
Life, accident and health premiums 230,441 119,160 165,485
Investment income 834,288 835,375 874,018
Realized gains (losses) on sales of:
Securities (26,581) 20,152 6,275
Investee - - 9,420
Subsidiaries 4,032 - 158,673
Other investments 27,230 - -
Other income 253,025 174,601 169,120
---------- ---------- ----------
3,817,327 3,360,107 4,081,729
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,961,538 1,588,651 2,215,283
Commissions and other underwriting expenses 735,241 665,109 772,917
Annuity benefits 278,927 262,632 261,666
Life, accident and health benefits 175,174 86,439 131,652
Interest charges on borrowed money 67,642 63,672 57,682
Other operating and general expenses 488,912 391,543 368,779
---------- ---------- ----------
3,707,434 3,058,046 3,807,979
---------- ---------- ----------
Operating earnings before income taxes 109,893 302,061 273,750
Provision for income taxes 29,041 98,198 94,067
---------- ---------- ----------
Net operating earnings 80,852 203,863 179,683
Minority interest expense, net of tax (35,366) (39,085) (45,935)
Equity in net losses of investees, net of tax (92,449) (17,783) (8,578)
---------- ---------- ----------
Earnings (loss) before extraordinary items
and accounting changes (46,963) 146,995 125,170
Extraordinary items - loss on prepayment of debt - (1,701) (770)
Cumulative effect of accounting changes (9,072) (3,854) -
---------- ---------- ----------
Net Earnings (Loss) ($ 56,035) $ 141,440 $ 124,400
========== ========== ==========
Basic earnings (loss) per Common Share:
Before extraordinary items and
accounting changes ($.80) $2.46 $2.04
Loss on prepayment of debt - (.03) (.01)
Cumulative effect of accounting changes (.15) (.06) -
---- ----- -----
Net earnings (loss) available to Common Shares ($.95) $2.37 $2.03
==== ===== =====
Diluted earnings (loss) per Common Share:
Before extraordinary items and
accounting changes ($.80) $2.44 $2.01
Loss on prepayment of debt - (.03) (.01)
Cumulative effect of accounting changes (.15) (.06) -
---- ----- -----
Net earnings (loss) available to Common Shares ($.95) $2.35 $2.00
==== ===== =====
Average number of Common Shares:
Basic 58,905 59,732 61,222
Diluted 59,074 60,210 62,185
Cash dividends per Common Share $1.00 $1.00 $1.00
See notes to consolidated financial statements.
F-3
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars In Thousands)
Common Stock Unrealized
Common and Capital Retained Gain (Loss)
Shares Surplus Earnings on Securities Total
---------- ------------ -------- ------------- ----------
Balance at December 31, 1997 61,048,904 $836,738 $477,071 $348,900 $1,662,709
Net earnings - - 124,400 - 124,400
Change in unrealized - - - 8,600 8,600
----------
Comprehensive income 133,000
Dividends on Common Stock - - (61,222) - (61,222)
Shares issued:
Exercise of stock options 296,416 8,288 - - 8,288
Dividend reinvestment plan 11,021 432 - - 432
Employee stock purchase plan 68,177 2,689 - - 2,689
Retirement plan contributions 44,035 1,783 - - 1,783
Portion of bonuses paid in stock 20,300 816 - - 816
Directors fees paid in stock 2,280 90 - - 90
Shares repurchased (562,811) (7,768) (13,221) - (20,989)
Tax effect of intercompany dividends - (11,703) - - (11,703)
Other - 284 - - 284
---------- -------- -------- -------- ----------
Balance at December 31, 1998 60,928,322 $831,649 $527,028 $357,500 $1,716,177
========== ======== ======== ======== ==========
Net earnings - - 141,440 - $ 141,440
Change in unrealized - - - (375,700) (375,700)
----------
Comprehensive income (loss) (234,260)
Dividends on Common Stock - - (59,754) - (59,754)
Shares issued:
Exercise of stock options 79,762 2,200 - - 2,200
Dividend reinvestment plan 6,099 222 - - 222
Employee stock purchase plan 63,794 2,136 - - 2,136
Retirement plan contributions 57,888 2,171 - - 2,171
Portion of bonuses paid in stock 38,640 1,439 - - 1,439
Directors fees paid in stock 2,683 90 - - 90
Shares repurchased (2,757,236) (37,726) (51,176) - (88,902)
Tax effect of intercompany dividends - (6,400) - - (6,400)
Other - 4,859 - - 4,859
---------- -------- -------- -------- ----------
Balance at December 31, 1999 58,419,952 $800,640 $557,538 ($ 18,200) $1,339,978
========== ======== ======== ======== ==========
Net earnings (loss) - - (56,035) - ($ 56,035)
Change in unrealized - - - 158,800 158,800
----------
Comprehensive income 102,765
Dividends on Common Stock - - (58,571) - (58,571)
Shares issued:
Public offering 8,337,500 154,783 - - 154,783
Exercise of stock options 68,523 1,376 - - 1,376
Dividend reinvestment plan 285,694 5,731 - - 5,731
Employee stock purchase plan 70,621 1,694 - - 1,694
Retirement plan contributions 274,716 6,242 - - 6,242
Portion of bonuses paid in stock - - - - -
Directors fees paid in stock 3,813 96 - - 96
Shares repurchased (50,728) (695) (656) - (1,351)
Tax effect of intercompany dividends - (6,400) - - (6,400)
Repurchase of trust preferred securities - - 178 - 178
Other - 2,009 - - 2,009
---------- -------- -------- -------- ----------
Balance at December 31, 2000 67,410,091 $965,476 $442,454 $140,600 $1,548,530
========== ======== ======== ======== ==========
See notes to consolidated financial statements.
F-4
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Year ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net earnings (loss) ($ 56,035) $ 141,440 $ 124,400
Adjustments:
Extraordinary items - 1,701 770
Cumulative effect of accounting changes 9,072 3,854 -
Equity in net losses of investees 92,449 17,783 8,578
Depreciation and amortization 117,388 94,984 106,041
Annuity benefits 278,927 262,632 261,666
Changes in reserves on assets 3,795 (8,285) 14,020
Realized gains on investing activities (25,173) (37,988) (205,659)
Deferred annuity and life policy acquisition
costs (146,686) (119,382) (117,202)
Decrease (increase) in reinsurance and
other receivables 70,433 (112,558) (439,183)
Decrease (increase) in other assets (87,501) 58,404 (5,575)
Increase in insurance claims and reserves 189,587 112,721 480,052
Increase (decrease) in other liabilities (14,604) (50,590) 158,523
Increase in minority interest 4,957 11,112 5,731
Dividends from investees - 4,799 4,799
Other, net 4,856 8,588 (8,970)
---------- ---------- ----------
441,465 389,215 387,991
---------- ---------- ----------
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,635,578) (2,049,536) (2,155,192)
Equity securities (45,800) (80,624) (78,604)
Subsidiaries - (285,971) (30,325)
Real estate, property and equipment (88,371) (74,063) (66,819)
Maturities and redemptions of fixed maturity
investments 689,691 1,047,169 1,248,775
Sales of:
Fixed maturity investments 810,942 1,226,111 795,520
Equity securities 84,147 100,076 28,850
Investees and subsidiaries 30,694 - 164,589
Real estate, property and equipment 30,150 31,354 53,962
Cash and short-term investments of acquired
(former) subsidiaries, net (132,163) 54,331 (21,141)
Decrease (increase) in other investments 5,637 21,439 (15,135)
---------- ---------- ----------
(250,651) (9,714) (75,520)
---------- ---------- ----------
Financing Activities:
Fixed annuity receipts 496,742 446,430 480,572
Annuity surrenders, benefits and withdrawals (731,856) (698,281) (688,226)
Net transfers from fixed to variable annuities (50,475) (19,543) (4,708)
Additional long-term borrowings 182,462 614,638 262,537
Reductions of long-term debt (141,577) (478,657) (251,837)
Issuances of Common Stock 157,295 3,459 10,236
Repurchases of Common Stock - (88,597) (20,651)
Repurchases of trust preferred securities (2,479) (5,509) -
Cash dividends paid (52,886) (59,532) (60,790)
---------- ---------- ----------
(142,774) (285,592) (272,867)
---------- ---------- ----------
Net Increase in Cash and Short-term Investments 48,040 93,909 39,604
Cash and short-term investments at beginning of
period 390,630 296,721 257,117
---------- ---------- ----------
Cash and short-term investments at end of period $ 438,670 $ 390,630 $ 296,721
========== ========== ==========
See notes to consolidated financial statements.
F-5
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEX TO NOTES
--------------
A. Accounting Policies H. Minority Interest
B. Acquisitions and Sales of Subsidiaries I. Shareholders' Equity
and Investees J. Income Taxes
C. Segments of Operations K. Extraordinary Items
D. Investments L. Commitments and Contingencies
E. Investment in Investee Corporations M. Quarterly Operating Results
F. Cost in Excess of Net Assets Acquired N. Insurance
G. Long-Term Debt O. Additional Information
- --------------------------------------------------------------------------------
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of American Financial Group, Inc. ("AFG") and its subsidiaries.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Changes in circumstances could cause actual
results to differ materially from those estimates.
INVESTMENTS All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses reported
as a separate component of shareholders' equity. Short-term investments
are carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. Premiums and discounts on mortgage-backed
securities are amortized over their expected average lives using the
interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the carrying value of that investment is reduced.
INVESTMENT IN INVESTEE CORPORATIONS Investments in securities of 20%- to
50%-owned companies are generally carried at cost, adjusted for AFG's
proportionate share of their undistributed earnings or losses.
Due to Chiquita's announced intention to pursue a plan to restructure its
public debt, AFG wrote down its investment in Chiquita common stock to
market value at December 31, 2000, and may suspend accounting for Chiquita
under the equity method pending resolution of the current uncertainty.
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 periods of 20 to 40 years. In February 2001, the
Financial Accounting Standards Board issued a proposal to eliminate the
amortization of goodwill and require that goodwill be tested for
impairment.
INSURANCE As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable. To the extent that unrealized gains (losses) from
securities classified as "available for sale" would result in adjustments
to deferred acquisition costs and policyholder liabilities had those gains
(losses) actually been realized, such balance sheet amounts are adjusted,
net of deferred taxes.
F-6
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 reinsured
policies. AFG's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. 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, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against
income ratably over the terms of the related policies. DPAC related to
annuities and universal life insurance products is amortized, with
interest, in relation to the present value of expected gross profits on
the policies. DPAC related to traditional life and health insurance is
amortized over the expected premium paying period of the related policies,
in proportion to the ratio of annual premium revenues to total anticipated
premium revenues.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities
stated for unpaid claims and for expenses of investigation and adjustment
of unpaid claims are based upon (a) the accumulation of case estimates for
losses reported prior to the close of the accounting period on the direct
business written; (b) estimates received from ceding reinsurers and
insurance pools and associations; (c) estimates of unreported losses based
on past experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of the law
and coverage litigation. These liabilities are subject to the impact of
changes in claim amounts and frequency and other factors. In spite of the
variability inherent in such estimates, management believes that the
liabilities for unpaid losses and loss adjustment expenses are adequate.
Changes in estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the period in which
determined.
ANNUITY BENEFITS ACCUMULATED Annuity receipts and benefit payments
are recorded as increases or decreases in "annuity benefits accumulated"
rather than as revenue and expense. Increases in this liability for
interest credited are charged to expense and decreases for surrender
charges are credited to other income.
LIFE, ACCIDENT AND HEALTH RESERVES Liabilities for future policy
benefits under traditional life, accident and health policies are computed
using the net level premium method. Computations are based on anticipated
investment yield, mortality, morbidity and surrenders and include
provisions for unfavorable deviations. Reserves established for accident
and health claims are modified as necessary to reflect actual experience
and developing trends.
VARIABLE ANNUITY ASSETS AND LIABILITIES Separate accounts related to
variable annuities represent deposits invested in underlying investment
funds on which Great American Financial Resources, Inc. ("GAFRI", formerly
American Annuity Group, Inc.), an 83%-owned subsidiary, earns a fee. The
investment funds are selected and may be changed only by the policyholder.
PREMIUM RECOGNITION Property and casualty premiums are earned over
the terms of the policies on a pro rata basis. Unearned premiums represent
that portion of premiums written which is applicable to the unexpired
terms of policies in
F-7
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
force. On reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are based on
reports received from such companies and organizations. For traditional
life, accident and health products, premiums are recognized as revenue
when legally collectible from policyholders. For interest-sensitive life
and universal life products, premiums are recorded in a policyholder
account which is reflected as a liability. Revenue is recognized as
amounts are assessed against the policyholder account for mortality
coverage and contract expenses.
POLICYHOLDER DIVIDENDS Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other liabilities" and
represent estimates of amounts payable on participating policies which
share in favorable underwriting results. The estimate is accrued during
the period in which the related premium is earned. Changes in estimates
are included in income in the period determined. Policyholder dividends do
not become legal liabilities unless and until declared by the boards of
directors of the insurance companies.
MINORITY INTEREST For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries,
including American Financial Corporation ("AFC") preferred stock and
preferred securities 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 and accrued distributions on the trust preferred
securities.
ISSUANCES OF STOCK BY SUBSIDIARIES AND INVESTEES Changes in AFG's equity
in a subsidiary or an investee caused by issuances of the subsidiary's or
investee's stock are accounted for as gains or losses where such issuance
is not a part of a broader reorganization.
INCOME TAXES AFC files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. Because holders of AFC Preferred
Stock hold in excess of 20% of AFC's voting rights, AFG (parent) and its
direct subsidiary, AFC Holding Company ("AFC Holding" or "AFCH") own less
than 80% of AFC, and therefore, file separate returns.
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.
STOCK-BASED COMPENSATION As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," AFG accounts for stock options and other stock-based
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees."
BENEFIT PLANS AFG provides retirement benefits to qualified employees of
participating companies through contributory and noncontributory defined
contribution plans contained in AFG's Retirement and Savings Plan. Under
the retirement portion of the plan, company contributions are invested
primarily in securities of AFG and affiliates. Under the savings portion
of the plan, AFG matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in the year
for which they are declared.
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 earn
such benefits.
F-8
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
DERIVATIVES Effective October 1, 2000, AFG implemented SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
(including derivative instruments that are embedded in other contracts)
and for hedging activities. Prior year financial statements were not
restated. SFAS No. 133 generally requires that derivatives (both assets
and liabilities) be recognized in the balance sheet at fair value with
changes in fair value included in current earnings. The cumulative effect
of implementing SFAS No. 133, which resulted from the initial recognition
of AFG's derivatives at fair value, was a loss of $9.1 million (net of
minority interest and taxes) or $.15 per diluted share.
Derivatives included in AFG's Balance Sheet consist primarily of
investments in common stock warrants (included in other stocks), the
equity-based component of certain annuity products (included in annuity
benefits accumulated) and call options (included in other investments)
used to mitigate the risk embedded in the equity-indexed annuity products.
START-UP COSTS Prior to 1999, GAFRI deferred certain costs associated with
introducing new products and distribution channels and amortized them on a
straight-line basis over 5 years. In 1999, GAFRI implemented Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities."
The SOP requires that (i) costs of start-up activities be expensed as
incurred and (ii) unamortized balances of previously deferred costs be
expensed and reported as the cumulative effect of a change in accounting
principle. Accordingly, AFG expensed previously capitalized start-up costs
of $3.8 million (net of minority interest and taxes) or $.06 per diluted
share, effective January 1, 1999.
EARNINGS PER SHARE Basic earnings per share is calculated using the
weighted average number of shares of common stock outstanding during the
period. The calculation of diluted earnings per share includes the
following dilutive effects of common stock options: 2000 - 169,000 shares;
1999 - 478,000 shares and 1998 - 963,000 shares.
STATEMENT OF CASH FLOWS For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include obtaining resources from owners and providing them with a return
on their investments, borrowing money and repaying amounts borrowed.
Annuity receipts, benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating". Short-term
investments having original maturities of three months or less when
purchased are considered to be cash equivalents for purposes of the
financial statements.
B. ACQUISITIONS AND SALES OF SUBSIDIARIES AND INVESTEES
JAPANESE DIVISION In December 2000, AFG agreed to sell its Japanese
property and casualty division to Mitsui Marine & Fire Insurance Company
of America for approximately $22 million in cash and recorded a $10.7
million pretax loss on the sale. Upon completion of the sale, a gain of
approximately $21 million on ceded insurance will be deferred and
subsequently recognized over the estimated settlement period (weighted
average of 4 years) of the ceded claims. The sale is expected to be
completed at the end of March 2001. At the same time, a reinsurance
agreement under which Great American Insurance ceded a portion of its pool
of insurance to Mitsui will terminate. The Japanese division generated net
written premiums of approximately $60 million per year to Great American
while Great American ceded approximately $45 million per year to Mitsui.
F-9
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STONEWALL INSURANCE COMPANY In September 2000, AFG sold Stonewall
Insurance Company for $31.2 million (net of post closing adjustments),
realizing a pretax loss of $10.3 million. Stonewall was a non-operating
property and casualty subsidiary with approximately $320 million in
assets, engaged primarily in the run-off of approximately $170 million in
asbestos and environmental liabilities associated with policies written
through 1991.
COMMERCIAL LINES DIVISION In December 1998, AFG sold its Commercial lines
division to Ohio Casualty Corporation for $300 million plus warrants to
purchase 6 million (post split) shares of Ohio Casualty common stock. AFG
deferred a gain of $103 million on the insurance ceded to Ohio Casualty
and recognized a pretax gain of $153 million on the sale of the other net
assets. The deferred gain is being recognized over the estimated remaining
settlement period (weighted average of 4.25 years) of the claims ceded.
AFG received an additional $25 million in August 2000 under a provision in
the sale agreement related to the retention and growth of the insurance
businesses acquired by Ohio Casualty. The commercial lines sold generated
net written premiums of approximately $230 million in 1998 (11 months).
START-UP MANUFACTURING BUSINESSES Since 1998, AFG subsidiaries have made
loans to two start-up manufacturing businesses which were previously owned
by unrelated third-parties. During 2000, the former owners chose to
forfeit their equity interests to AFG rather than invest additional
capital. Total loans extended to these businesses prior to forfeiture
amounted to $49.7 million and the accumulated losses of the two businesses
were approximately $29.7 million.
During the fourth quarter of 2000, AFG sold the equity interests to a
group of employees for nominal cash consideration plus warrants to
repurchase a significant ownership interest. Due to the absence of
significant financial investment by the buyers relative to the amount of
debt ($61.5 million at December 31, 2000) owed to AFG subsidiaries, the
sale was not recognized as a divestiture for accounting purposes. Assets
of the businesses transferred ($55.3 million at December 31, 2000) are
included in other assets; liabilities of the businesses transferred ($7.5
million at December 31, 2000, after elimination of loans from AFG
subsidiaries) are included in other liabilities. AFG's equity in the
losses of these two companies during the fourth quarter of 2000 of $4.1
million is included in investee losses in the statement of operations.
WORLDWIDE INSURANCE COMPANY In April 1999, AFG acquired Worldwide
Insurance Company for $157 million in cash. Worldwide is a provider of
direct response private passenger automobile insurance.
UNITED TEACHER ASSOCIATES In October 1999, GAFRI acquired United Teacher
Associates Insurance Company of Austin, Texas ("UTA") for $81 million in
cash. UTA provides supplemental health products and retirement annuities,
and purchases blocks of insurance policies from other insurers.
GREAT AMERICAN LIFE INSURANCE COMPANY OF NEW YORK AND CONSOLIDATED
FINANCIAL In February 1999, GAFRI acquired Great American Life Insurance
Company of New York, formerly Old Republic Life Insurance Company of New
York, for $27 million in cash. In July 1999, GAFRI acquired Consolidated
Financial Corporation, an insurance agency, for $21 million in cash.
FUNERAL SERVICES DIVISION In September 1998, GAFRI sold its Funeral
Services division for approximately $165 million in cash. The division
held assets of approximately $1 billion at the sale date. AFG realized a
pretax gain of $21.6 million, before $2.7 million of minority interest, on
this sale.
CHIQUITA During 1998, Chiquita issued shares of its common stock in
acquisitions of operating businesses. AFG recorded pretax gains of $9.4
million in 1998 representing the excess of AFG's equity in Chiquita
following the issuances of its common stock over AFG's previously recorded
carrying value.
F-10
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. SEGMENTS OF OPERATIONS AFG's property and casualty group is engaged
primarily in private passenger automobile and specialty insurance
businesses. The Personal group writes nonstandard and preferred/standard
private passenger auto and other personal insurance coverage. The
Specialty group includes a highly diversified group of specialty business
units. Some of the more significant areas are inland and ocean marine,
California workers' compensation, agricultural-related coverages,
executive and professional liability, fidelity and surety bonds,
collateral protection, and umbrella and excess coverages. AFG's annuity
and life business markets primarily retirement products as well as life
and supplemental health insurance. AFG's businesses operate throughout the
United States. In 2000, 1999 and 1998, AFG derived less than 2% of its
revenues from the sale of life and supplemental health products in Puerto
Rico and less than 1% of its revenues from the sale of property and
casualty insurance in Canada, Mexico, Europe and Asia. In addition, AFG
owns a significant portion of the voting equity securities of Chiquita
Brands International, Inc. (an investee corporation - see Note E).
The following tables (in thousands) show AFG's assets, revenues and
operating profit (loss) by significant business segment. Operating profit
(loss) represents total revenues less operating expenses.
2000 1999 1998
---- ---- ----
Assets
Property and casualty insurance (a) $ 8,200,683 $ 8,158,371 $ 8,278,898
Annuities and life 7,934,851 7,523,570 7,174,544
Other 256,011 212,150 199,623
----------- ----------- -----------
16,391,545 15,894,091 15,653,065
Investment in investees 23,996 159,984 192,138
----------- ----------- -----------
$16,415,541 $16,054,075 $15,845,203
=========== =========== ===========
Revenues (b)
Property and casualty insurance:
Premiums earned:
Personal $ 1,270,328 $ 1,163,223 $ 1,289,689
Specialty 1,223,435 1,047,858 1,371,509
Other lines 1,129 (262) 37,540
----------- ----------- -----------
2,494,892 2,210,819 2,698,738
Investment and other income 450,537 450,829 643,106
----------- ----------- -----------
2,945,429 2,661,648 3,341,844
Annuities and life (c) 823,586 665,661 748,351
Other 48,312 32,798 (8,466)
----------- ----------- -----------
$ 3,817,327 $ 3,360,107 $ 4,081,729
=========== =========== ===========
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Personal ($ 108,372) ($ 7,685) $ 34,029
Specialty (94,857) (28,015) (67,131)
Other lines (d) 1,342 (7,241) (256,360)
----------- ----------- -----------
(201,887) (42,941) (289,462)
Investment and other income 289,549 282,440 501,190
----------- ----------- -----------
87,662 239,499 211,728
Annuities and life 96,211 110,750 163,126
Other (e) (73,980) (48,188) (101,104)
----------- ----------- -----------
$ 109,893 $ 302,061 $ 273,750
=========== =========== ===========
[FN]
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other
income earned by the respective segments.
(c) Represents primarily investment income.
(d) Includes a charge of $214 million in 1998 related to asbestos and
other environmental matters ("A&E").
(e) Includes holding company expenses.
F-11
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. INVESTMENTS Fixed maturities and other stocks at December 31 consisted of
the following (in millions):
2000 1999
----------------------------------------- -----------------------------------------
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
---------------- ----------------
Cost Value Gains Losses Cost Value Gains Losses
--------- ------ ----- ------ --------- ------ ----- ------
Fixed maturities:
United States Government
and government agencies
and authorities $ 537.9 $ 553.5 $ 16.9 ($ 1.3) $ 549.1 $ 539.1 $ 2.4 ($ 12.4)
States, municipalities and
political subdivisions 416.6 426.9 12.2 (1.9) 303.2 292.4 .8 (11.6)
Foreign government 84.1 86.5 2.7 (.3) 64.4 63.3 .2 (1.3)
Public utilities 634.7 637.3 11.5 (8.9) 567.8 556.6 2.4 (13.6)
Mortgage-backed securities 2,604.2 2,670.1 79.4 (13.5) 2,457.6 2,420.9 28.4 (65.1)
All other corporate 5,809.4 5,734.6 87.7 (162.5) 6,088.1 5,922.3 34.3 (200.1)
Redeemable preferred stocks 61.4 55.7 .2 (5.9) 70.9 67.6 1.1 (4.4)
--------- -------- ------ ------ --------- -------- ------ ------
$10,148.3 $10,164.6 $210.6 ($194.3) $10,101.1 $9,862.2 $ 69.6 ($308.5)
========= ========= ====== ====== ========= ======== ====== ======
Other stocks $ 175.0 $ 385.4 $224.6 ($ 14.2) $ 229.2 $ 409.7 $204.4 ($ 23.9)
========= ========= ====== ====== ========= ======== ====== ======
The table below sets forth the scheduled maturities of fixed maturities
based on market value as of December 31, 2000. Data based on amortized
cost is generally the same. Mortgage-backed securities had an average life
of approximately 5 1/2 years at December 31, 2000.
Maturity
------------------------------
One year or less 3%
After one year through five years 26
After five years through ten years 28
After ten years 17
---
74
Mortgage-backed securities 26
---
100%
===
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates, and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
The only investment which exceeds 10% of Shareholders' Equity is an equity
investment in Provident Financial Group, Inc., having a market value of
$272 million and $231 million at December 31, 2000 and 1999, respectively.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments are
summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
---------- ---------- ------- -----
2000
----
Realized ($ 24,186) ($ 2,395) $ 9,303 ($ 17,278)
Change in Unrealized 255,200 29,900 (98,200) 186,900
1999
----
Realized (13,092) 33,244 (7,053) 13,099
Change in Unrealized (641,900) (42,500) 237,500 (446,900)
1998
----
Realized (*) 25,841 (19,566) (2,196) 4,079
Change in Unrealized 4,982 (69,900) 24,000 (40,918)
[FN]
(*) Includes $6.8 million in realized gains on fixed maturities
transferred to Ohio Casualty in connection with the sale of the
Commercial lines division.
F-12
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
--------- ----------- -------- ----- ------
2000
----
Available for Sale $1,635.6 $ 689.7 $ 810.9 $15.9 ($40.1)
======== ======== ======== ===== =====
1999
----
Available for Sale $2,049.5 $1,047.2 $1,226.1 $29.2 ($42.3)
======== ======== ======== ===== =====
1998
----
Held to Maturity (*) $ .8 $ 585.0 $ 45.3 $12.1 ($ .5)
Available for Sale 2,154.4 663.8 750.2 24.9 ( 17.5)
-------- -------- -------- ----- -----
Total $2,155.2 $1,248.8 $ 795.5 $37.0 ($18.0)
======== ======== ======== ===== =====
[FN]
(*) Prior to reclassification to available for sale at December 31, 1998.
Securities classified as "held to maturity" having amortized cost of $41.8
million were sold for gains of $603,000 in 1998 due to significant
deterioration in the issuers' creditworthiness.
E. INVESTMENT IN INVESTEE CORPORATIONS Investment in investee corporations
reflects AFG's ownership of 24 million shares (36%) of Chiquita common
stock. The market value of this investment was $24 million and $114
million at December 31, 2000 and 1999, respectively. Chiquita is a leading
international marketer, producer and distributor of quality fresh fruits
and vegetables and processed foods.
Summarized financial information for Chiquita at December 31, is shown
below (in millions).
2000 1999 1998
---- ---- ----
Current Assets $ 845 $ 903
Noncurrent Assets 1,570 1,693
Current Liabilities 611 488
Noncurrent Liabilities 1,221 1,403
Shareholders' Equity 583 705
Net Sales $2,254 $2,556 $2,720
Operating Income 27 42 79
Net Loss (95) (58) (18)
Net Loss Attributable to Common Shares (112) (75) (36)
Chiquita's results for 2000 include $20 million in charges and writedowns
of production and sourcing assets; 1999 results include a $9 million
charge resulting from a workforce reduction program. Operating results for
1998 include $74 million of fourth quarter write-offs and costs resulting
from widespread flooding in Honduras and Guatemala caused by Hurricane
Mitch.
In January 2001, Chiquita announced a restructuring initiative that
included discontinuing all interest and principal payments on its public
debt. If successful, the restructuring would result in the conversion of a
significant portion of Chiquita's $862 million in public debt into common
equity. As a result, AFG recorded a fourth quarter pretax charge of $95.7
million to write down its investment in Chiquita to quoted market value of
$1.00 per share at the end of 2000.
F. COST IN EXCESS OF NET ASSETS ACQUIRED Amortization expense for the excess
of cost over net assets of purchased subsidiaries was $17.2 million in
2000, $14.3 million in 1999 and $11.9 million in 1998. At December 31,
2000 and 1999, accumulated amortization amounted to approximately $168
million and $157 million, respectively.
F-13
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. LONG-TERM DEBT Long-term debt consisted of the following at December 31,
(in thousands):
2000 1999
---- ----
Holding Companies:
AFG 7-1/8% Senior Debentures due April 2009,
less discount of $1,919 and $2,084
(imputed rate - 7.2%) $300,931 $300,766
AFG 7-1/8% Senior Debentures due December 2007 79,600 79,600
AFC notes payable under bank line 178,000 68,000
American Premier Underwriters, Inc. ("APU")
10-5/8% Subordinated Notes, including premium
of $119 - 23,786
APU 10-7/8% Subordinated Notes due May 2011,
including premium of $890 and $940
(imputed rate - 9.6%) 11,611 11,661
Other 14,727 9,110
-------- --------
$584,869 $492,923
======== ========
Subsidiaries:
GAFRI 6-7/8% Senior Notes due June 2008 $100,000 $100,000
GAFRI notes payable under bank line 48,500 97,000
Notes payable secured by real estate 31,201 31,704
Other 15,386 11,029
-------- --------
$195,087 $239,733
======== ========
In April 1999, AFG issued $350 million principal amount of 7-1/8%
Debentures due 2009. The proceeds from this offering were used primarily
to redeem or repurchase other debt. During the second half of 1999, AFG
repurchased $47.2 million of its 7-1/8% Debentures due 2009 for $44
million in cash.
In January 2001, GAFRI replaced its existing bank line with a $155 million
unsecured credit agreement. At December 31, 2000, sinking fund and other
scheduled principal payments on debt for the subsequent five years (as
adjusted to reflect GAFRI's new credit agreement) were as follows (in
millions):
Holding
Companies Subsidiaries Total
--------- ------------ -----
2001 $ 1.7 $ 1.6 $ 3.3
2002 188.1 1.6 189.7
2003 - 1.7 1.7
2004 - 63.1 63.1
2005 - 10.0 10.0
Debentures purchased in excess of scheduled payments may be applied to
satisfy any sinking fund requirement. The scheduled principal payments
shown above assume that debentures previously purchased are applied to the
earliest scheduled retirements.
AFC and GAFRI each have an unsecured credit agreement with a group of
banks under which they can borrow up to $300 million and $155 million,
respectively. Borrowings bear interest at floating rates based on prime or
Eurodollar rates. Loans mature in December 2002 under the AFC credit
agreement and in December 2004 under the GAFRI credit agreement. At
December 31, 2000, the weighted average interest rates on amounts borrowed
under the AFC and GAFRI bank credit lines were 6.86% and 7.31%,
respectively.
Cash interest payments of $56 million, $55 million and $49 million were
made on long-term debt in 2000, 1999 and 1998, respectively.
F-14
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. MINORITY INTEREST Minority interest in AFG's balance sheet is comprised of
the following (in thousands):
2000 1999
---- ----
Interest of noncontrolling shareholders
in subsidiaries' common stock $119,216 $ 97,516
Preferred securities issued by
subsidiary trusts 316,663 319,600
AFC preferred stock 72,154 72,154
-------- --------
$508,033 $489,270
======== ========
PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFG and GAFRI have
issued $325 million of preferred securities and, in turn, purchased a like
amount of subordinated debt which provides interest and principal payments
to fund the respective trusts' obligations. The preferred securities must
be redeemed upon maturity or redemption of the subordinated debt. AFG and
GAFRI effectively provide unconditional guarantees of their respective
trusts' obligations.
The preferred securities consisted of the following (in thousands):
Date of Optional
Issuance Issue (Maturity Date) 2000 1999 Redemption Dates
------------- ------------------------ ---- ---- ----------------------
October 1996 AFCH 9-1/8% TOPrS (2026) $98,750 $100,000 On or after 10/22/2001
November 1996 GAFRI 9-1/4% TOPrS (2026) 72,913 74,600 On or after 11/7/2001
March 1997 GAFRI 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007
May 1997 GAFRI 7-1/4% ROPES (2041) 75,000 75,000 After 9/28/2001
In 2000, AFG and GAFRI repurchased $1.3 million and $1.7 million of their
preferred securities for $1.1 million and $1.4 million in cash,
respectively. In 1999, GAFRI repurchased $5.4 million of its preferred
securities for $5.5 million in cash.
AFC PREFERRED STOCK AFC's Preferred Stock is voting, cumulative, and
consists of the following:
SERIES J, no par value; $25.00 liquidating value per share; annual
dividends per share $2.00; redeemable at AFC's option at $25.75 per
share beginning December 2005 declining to $25.00 at December 2007
and thereafter; 2,886,161 shares (stated value $72.2 million)
outstanding at December 31, 2000 and 1999.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
2000 1999 1998
---- ---- ----
Interest of noncontrolling shareholders
in earnings of subsidiaries $11,775 $15,308 $21,845
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities, net of tax 17,819 18,005 18,318
AFC preferred stock 5,772 5,772 5,772
------- ------- -------
$35,366 $39,085 $45,935
======= ======= =======
F-15
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. SHAREHOLDERS' EQUITY At December 31, 2000, there were 67,410,091 shares of
AFG Common Stock outstanding, including 1,364,099 shares held by American
Premier for possible distribution to certain creditors and other claimants
upon proper claim presentation and settlement pursuant to the 1978 plan of
reorganization of American Premier's predecessor, The Penn Central
Corporation. Shares being held for distribution are not eligible to vote
but otherwise are accounted for as issued and outstanding. In December
2000, AFG issued 8.3 million Common Shares at $19.625 per share in a
public offering. 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.
STOCK OPTIONS At December 31, 2000, there were 6.8 million shares of AFG
Common Stock reserved for issuance under AFG's Stock Option Plan. Options
are granted with an exercise price equal to the market price of AFG Common
Stock at the date of grant. Options generally become exercisable at the
rate of 20% per year commencing one year after grant; those granted to
nonemployee directors of AFG are fully exercisable upon grant. All options
expire ten years after the date of grant. Data for AFG's Stock Option Plan
is presented below:
2000 1999 1998
---------------------- ----------------------- -----------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 4,664,108 $31.28 3,808,369 $30.25 3,687,635 $28.73
Granted 1,997,000 $19.81 948,001 $34.92 466,250 $41.13
Exercised (68,523) $18.22 (79,762) $24.42 (296,416) $27.96
Forfeited (140,089) $31.65 (12,500) $37.62 (49,100) $33.79
--------- --------- ---------
Outstanding at end of year 6,452,496 $27.86 4,664,108 $31.28 3,808,369 $30.25
========= ========= =========
Options exercisable at year-end 3,226,294 $29.38 2,616,170 $28.19 2,085,873 $27.06
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Average Average Average
Range of Exercise Remaining Exercise
Exercise Prices Shares Price Life Shares Price
--------------- --------- -------- --------- --------- --------
$18.56 - $20.00 1,992,215 $19.79 9.5 years 16,065 $19.07
$20.00 - $25.00 1,228,635 $23.98 3.2 " 1,228,635 $23.98
$25.00 - $30.00 326,770 $26.98 4.4 " 270,370 $27.01
$30.00 - $35.00 1,043,250 $30.57 5.3 " 966,800 $30.33
$35.00 - $40.00 1,572,626 $36.83 7.3 " 624,724 $37.30
$40.00 - $45.19 289,000 $42.41 7.2 " 119,700 $42.48
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 SFAS No. 123 purposes, calculations were determined using
the Black-Scholes option pricing model and the following assumptions:
dividend yield of 3% for 2000 and 1999 and 2% for 1998; expected
volatility of 24% for 2000, 22% for 1999 and 21% for 1998; weighted
average risk-free interest rate of 6% for 2000, 5.4% for 1999 and 4.8% for
1998; and expected life of 7.4 years for 2000 and 7.3 years for 1999 and
1998.
F-16
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES, NET The change in
unrealized gain (loss) on marketable securities included the following (in
millions):
Tax Minority
Pretax Effects Interest Net
------ ------- -------- -----
2000
-----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period $221.1 ($ 75.8) ($14.5) $130.8
Reclassification adjustment resulting
from the adoption of SFAS No. 133 15.0 (5.3) - 9.7
Reclassification adjustment for realized
gains included in net income and
unrealized losses of subsidiary sold 31.3 (10.9) (2.1) 18.3
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net $267.4 ($ 92.0) ($16.6) $158.8
====== ====== ===== ======
1999
-----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($612.1) $212.1 $38.4 ($361.6)
Reclassification adjustment for
realized gains included in net income (20.2) 7.1 (1.0) (14.1)
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net ($632.3) $219.2 $37.4 ($375.7)
====== ====== ===== ======
1998
-----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($ 50.5) $ 19.0 $ .6 ($ 30.9)
Unrealized gain on securities transferred
from held to maturity 87.0 (30.4) (7.0) 49.6
Reclassification adjustment for realized
gains included in net income and
unrealized gains of subsidiaries sold (20.4) 7.1 3.2 (10.1)
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net $ 16.1 ($ 4.3) ($ 3.2) $ 8.6
====== ====== ===== ======
J. 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
Operations (in thousands):
2000 1999 1998
---- ---- ----
Earnings (loss) before income taxes:
Operating $109,893 $302,061 $273,750
Minority interest expense (44,961) (48,780) (55,798)
Equity in net losses of investees (142,230) (27,357) (13,198)
Extraordinary items - (2,617) (1,265)
Accounting changes (13,882) (6,370) -
-------- -------- --------
Total ($ 91,180) $216,937 $203,489
======== ======== ========
Income taxes at statutory rate ($ 31,913) $ 75,928 $ 71,221
Effect of:
Losses utilized (7,000) (5,250) (6,572)
Tax credits (5,757) - -
Amortization of intangibles 5,495 4,686 4,482
Minority interest 6,187 7,093 9,438
Dividends received deduction (2,378) (2,783) (2,189)
Other 221 (4,177) 2,709
-------- -------- --------
Total Provision (Credit) (35,145) 75,497 79,089
Amounts applicable to:
Minority interest expense 9,595 9,695 9,863
Equity in net losses of investees 49,781 9,574 4,620
Extraordinary items - 916 495
Accounting changes 4,810 2,516 -
-------- -------- --------
Provision for income taxes as shown
on the Statement of Operations $ 29,041 $ 98,198 $ 94,067
======== ======== ========
F-17
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Total earnings before income taxes include income subject to tax in
foreign jurisdictions of $10.6 million in 2000, $8.1 million in 1999 and
$7.5 million in 1998.
The total income tax provision (credit) consists of (in thousands):
2000 1999 1998
---- ---- ----
Current taxes:
Federal $13,880 ($ 5,434) $63,368
Foreign 1,106 32 94
State 459 511 652
Deferred taxes:
Federal (50,070) 81,419 14,553
Foreign (520) (1,031) 422
------- ------- -------
($35,145) $75,497 $79,089
======= ======= =======
For income tax purposes, certain members of the AFC consolidated tax group
had the following carryforwards available at December 31, 2000 (in
millions):
Expiring Amount
----------- ------
{ 2001 - 2005 $ 98
Operating Loss { 2006 - 2010 1
{ 2011 - 2015 1
{ 2016 - 2020 140
Other - Tax Credits 14
Deferred income tax assets and liabilities reflect temporary differences
between the carrying amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax purposes.
The significant components of deferred tax assets and liabilities included
in the Balance Sheet at December 31, were as follows (in millions):
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 78.8 $ 32.6
Insurance claims and reserves 214.3 236.5
Other, net 120.0 117.6
------ ------
413.1 386.7
Valuation allowance for deferred
tax assets (39.6) (48.9)
------ ------
373.5 337.8
Deferred tax liabilities:
Deferred acquisition costs (205.8) (172.3)
Investment securities (121.1) (67.0)
------ ------
(326.9) (239.3)
------ ------
Net deferred tax asset $ 46.6 $ 98.5
====== ======
The gross deferred tax asset has been reduced by a valuation allowance
based on an analysis of the likelihood of realization. Factors considered
in assessing the need for a valuation allowance include: (i) recent tax
returns, which show neither a history of large amounts of taxable income
nor cumulative losses in recent years, (ii) opportunities to generate
taxable income from sales of appreciated assets, and (iii) the likelihood
of generating larger amounts of taxable income in the future. The
likelihood of realizing this asset will be reviewed periodically; any
adjustments required to the valuation allowance will be made in the period
in which the developments on which they are based become known. The
aggregate valuation allowance decreased by $9.3 million in 2000 due
primarily to the utilization of loss carryforwards previously reserved.
Cash payments for income taxes, net of refunds, were $24.7 million,
$9.2 million and $45.9 million for 2000, 1999 and 1998, respectively.
F-18
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. 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 taxes (in
thousands):
1999 1998
---- ----
Holding Companies:
AFG (parent) $2,295 $ -
AFC (parent) (2,993) (77)
APU (parent) (1,003) (44)
Subsidiary:
GAFRI - (649)
------ ----
($1,701) ($770)
====== ====
L. COMMITMENTS AND CONTINGENCIES Loss accruals (included in other
liabilities) have been recorded for various environmental and occupational
injury and disease claims and other contingencies arising out of the
railroad operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978 and certain manufacturing operations disposed of by
American Premier. Under purchase accounting in connection with the
Mergers, any such excess liability will be charged to earnings in AFG's
financial statements.
At December 31, 2000, American Premier had liabilities for environmental
and personal injury claims aggregating $94 million. The environmental
claims consist of a number of proceedings and claims seeking to impose
responsibility for hazardous waste remediation costs related to certain
sites formerly owned or operated by the railroad and manufacturing
operations. Remediation costs are difficult to estimate 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.
The personal injury claims include pending and expected claims, primarily
by former employees of PCTC, for injury or disease allegedly caused by
exposure to excessive noise, asbestos or other substances in the
workplace. At December 31, 2000, American Premier had $66.9 million of
offsetting recovery assets (included in other assets) for such
environmental and personal injury claims based upon estimates of probable
recoveries from insurance carriers.
AFG has accrued approximately $9.8 million at December 31, 2000, for
environmental costs and certain other matters associated with the sales of
former operations.
In management's opinion, the outcome of the items discussed in this note
will not, individually or in the aggregate, have a material adverse effect
on AFG's financial condition or results of operations.
M. 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.
Historically, Chiquita's operations are significantly stronger in the
first and second quarters than in the third and fourth quarters. Quarterly
results necessarily rely heavily on estimates. These estimates and certain
other factors, such as the nature of investees' operations and
discretionary sales of assets, cause the quarterly results not to be
necessarily indicative of results for longer periods of time.
F-19
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following are quarterly results of consolidated operations for the two
years ended December 31, 2000 (in millions, except per share amounts).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
2000
-----------------------------------------
Revenues $884.1 $959.2 $1,012.6 $961.4 $3,817.3
Earnings (loss) before accounting change 44.7 16.3 (22.2) (85.7) (46.9)
Cumulative effect of accounting change - - - (9.1) (9.1)
Net earnings (loss) 44.7 16.3 (22.2) (94.8) (56.0)
Basic earnings (loss) per common share:
Before accounting change $.76 $.28 ($.38) ($1.43) ($.80)
Cumulative effect of accounting change - - - (.15) (.15)
Net earnings (loss) available to
Common Shares .76 .28 (.38) (1.58) (.95)
Diluted earnings (loss) per common share:
Before accounting change $.76 $.28 ($.38) ($1.43) ($.80)
Cumulative effect of accounting change - - - (.15) (.15)
Net earnings (loss) available to
Common Shares .76 .28 (.38) (1.58) (.95)
Average number of Common Shares:
Basic 58.5 58.5 58.6 60.0 58.9
Diluted 58.5 58.9 58.8 60.1 59.1
1999
-----------------------------------------
Revenues $801.4 $836.1 $876.9 $845.7 $3,360.1
Earnings before extraordinary items and
accounting change 59.1 45.1 28.6 14.1 146.9
Extraordinary items - gain (loss) on
prepayment of debt - (3.8) 1.5 .6 (1.7)
Cumulative effect of accounting change (3.8) - - - (3.8)
Net earnings 55.3 41.3 30.1 14.7 141.4
Basic earnings per common share:
Before extraordinary items and
accounting change $.97 $.75 $.48 $.24 $2.46
Gain (loss) on prepayment of debt - (.06) .02 .01 (.03)
Cumulative effect of accounting change (.06) - - - (.06)
Net earnings available to Common Shares .91 .69 .50 .25 2.37
Diluted earnings per common share:
Before extraordinary items and
accounting change $.96 $.74 $.48 $.24 $2.44
Gain (loss) on prepayment of debt - (.06) .02 .01 (.03)
Cumulative effect of accounting change (.06) - - - (.06)
Net earnings available to Common Shares .90 .68 .50 .25 2.35
Average number of Common Shares:
Basic 61.0 60.0 59.6 58.4 59.7
Diluted 61.7 60.6 60.0 58.6 60.2
Quarterly earnings per share do not add to year-to-date amounts due to
changes in shares outstanding.
The 2000 second quarter results include pretax charges of $32.5 million
related to an agreement to settle a lawsuit against a GAFRI subsidiary and
$8.8 million for an adverse California Supreme Court ruling against an AFG
property and casualty subsidiary. The 2000 third quarter results include a
$35 million pretax charge for reserve strengthening in the California
workers' compensation business, partially offset by $11.2 million in
income from the sale of certain lease rights. Fourth quarter 2000 results
include a $95.7 million pretax writedown of AFG's Chiquita investment,
partially offset by $11.8 million in income from the sale of certain lease
rights.
The 1999 fourth quarter results include a pretax charge of $10 million for
expenses related to realignment within the operating units of the life and
annuity business.
F-20
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG has realized substantial gains (losses) on sales of subsidiaries and
investees in recent years (see Note B). Realized gains (losses) on sales
of securities, affiliates and other investments amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
2000 ($1.4) $21.1 $6.0 ($21.0) $ 4.7
1999 4.4 7.3 (5.7) 14.2 20.2
N. INSURANCE Securities owned by insurance subsidiaries having a carrying
value of about $900 million at December 31, 2000, were on deposit as
required by regulatory authorities.
INSURANCE RESERVES The liability for losses and loss adjustment expenses
for certain long-term scheduled payments under workers' compensation, auto
liability and other liability insurance has been discounted at about 8%,
an approximation of long-term investment yields. As a result, the total
liability for losses and loss adjustment expenses at December 31, 2000,
has been reduced by $33 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):
2000 1999 1998
---- ---- ----
Balance at beginning of period $3,224 $3,305 $3,489
Provision for losses and LAE occurring
in the current year 2,056 1,691 2,059
Net increase (decrease) in provision for
claims of prior years (60) (74) 156
------ ------ ------
Total losses and LAE incurred (*) 1,996 1,617 2,215
Payments for losses and LAE of:
Current year (905) (780) (885)
Prior years (936) (986) (1,110)
------ ------ ------
Total payments (1,841) (1,766) (1,995)
Reserves of businesses acquired or sold, net (187) 57 (481)
Reclassification of allowance for
uncollectible reinsurance - 11 77
------ ------ ------
Balance at end of period $3,192 $3,224 $3,305
====== ====== ======
Add back reinsurance recoverables, net
of allowance 1,324 1,571 1,468
------ ------ ------
Gross unpaid losses and LAE included
in the Balance Sheet $4,516 $4,795 $4,773
====== ====== ======
(*) Before amortization of deferred gains on retroactive reinsurance
of $34 million in 2000 and $28 million in 1999.
F-21
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.
2000 1999 1998
---- ---- ----
Insurance group investment income:
Fixed maturities $815.5 $806.1 $849.6
Equity securities 10.4 12.2 9.1
Other 4.3 .9 2.2
------ ------ ------
830.2 819.2 860.9
Insurance group investment expenses (*) (41.4) (39.6) (35.6)
------ ------ ------
$788.8 $779.6 $825.3
====== ====== ======
(*) Included primarily in "Other operating and general expenses" in the
Statement of Operations.
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
------------------- ----------------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Property and casualty companies $10 $170 $261 $1,763 $1,664
Life insurance companies 40 37 41 384 421
Effective January 1, 2001, AFG's insurance companies are required to adopt
certain new statutory accounting standards. The cumulative effect of these
changes will be reported as an adjustment to policyholders' surplus at
that date. Management believes that the cumulative effect of these changes
at adoption will increase the surplus of the property and casualty
companies by approximately $40 million; the effect on surplus of the life
insurance companies is not expected to be material.
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
written and earned premiums in connection with reinsurance ceded, (ii)
written and earned premiums included in income for reinsurance assumed and
(iii) reinsurance recoveries deducted from losses and loss adjustment
expenses.
2000 1999 1998
---- ---- ----
Direct premiums written $3,365 $3,113 $3,221
Reinsurance assumed 76 48 38
Reinsurance ceded (803) (898) (788)
------ ------ ------
Net written premiums $2,638 $2,263 $2,471
====== ====== ======
Direct premiums earned $3,306 $3,056 $3,320
Reinsurance assumed 45 45 42
Reinsurance ceded (856) (890) (663)
------ ------ ------
Net earned premiums $2,495 $2,211 $2,699
====== ====== ======
Reinsurance recoveries $ 567 $ 811 $ 651
====== ====== ======
F-22
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. ADDITIONAL INFORMATION Total rental expense for various leases of office
space, data processing equipment and railroad rolling stock was $44
million, $39 million and $41 million for 2000, 1999 and 1998,
respectively. Sublease rental income related to these leases totaled $2.5
million in 2000, $2.6 million in 1999 and $5.4 million in 1998.
Future minimum rentals, related principally to office space, required
under operating leases having initial or remaining noncancelable lease
terms in excess of one year at December 31, 2000, were as follows: 2001 -
$50 million; 2002 - $45 million; 2003 - $37 million; 2004 - $24 million;
2005 - $16 million; and $28 million thereafter. At December 31, 2000,
minimum sublease rentals to be received through the expiration of the
leases aggregated $3 million.
Other operating and general expenses included charges for possible losses
on agents' balances, other receivables and other assets in the following
amounts: 2000 - $9.7 million; 1999 - $5.1 million; and 1998 - $2.8
million. Losses and loss adjustment expenses included charges for possible
losses on reinsurance recoverables of $.4 million in 1999. The aggregate
allowance for all such losses amounted to approximately $74 million and
$148 million at December 31, 2000 and 1999, respectively.
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.
2000 1999
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Assets:
Fixed maturities $10,165 $10,165 $9,862 $9,862
Other stocks 385 385 410 410
Investment in investees 24 24 160 114
Liabilities:
Annuity benefits
accumulated $ 5,544 $ 5,426 $5,520 $5,371
Long-term debt:
Holding companies 585 548 493 462
Subsidiaries 195 187 240 230
Minority Interest:
Trust preferred securities $ 317 $ 304 $ 320 $ 297
AFC preferred stock 72 58 72 69
Shareholders' Equity $ 1,549 $ 1,791 $1,340 $1,541
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. Fair value of shareholders' equity
is based on the quoted market price of AFG's Common Stock.
F-23
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES, NET In addition to
adjusting equity securities and fixed maturity securities classified as
"available for sale" to fair value, SFAS 115 requires that certain other
balance sheet amounts be adjusted to the extent that unrealized gains and
losses from securities would result in adjustments had those gains or
losses actually been realized. The components of the Consolidated Balance
Sheet caption "Unrealized gain (loss) on marketable securities, net" in
shareholders' equity are summarized as follows (in millions):
Unadjusted Adjusted
Asset Effect of Asset
(Liability) SFAS 115 (Liability)
----------- --------- -----------
2000
Fixed maturities $10,148.3 $ 16.3 $10,164.6
Other stocks 175.0 210.4 385.4
Deferred acquisition costs 763.1 - 763.1
Annuity benefits accumulated (5,543.7) - (5,543.7)
------
Pretax unrealized 226.7
Deferred taxes 125.2 (78.6) 46.6
Minority interest (500.5) (7.5) (508.0)
------
Unrealized gain $140.6
======
1999
Fixed maturities $10,101.1 ($238.9) $9,862.2
Other stocks 229.2 180.5 409.7
Deferred acquisition costs 656.1 4.6 660.7
Annuity benefits accumulated (5,532.6) 13.1 (5,519.5)
------
Pretax unrealized (40.7)
Deferred taxes 85.1 13.4 98.5
Minority interest (498.4) 9.1 (489.3)
------
Unrealized loss ($ 18.2)
======
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,
2000, AFG and its subsidiaries had commitments to fund credit facilities
and contribute limited partnership capital totaling up to $21 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 2001
from its insurance subsidiaries without seeking regulatory clearance is
approximately $160 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 approximately $22 million in 2000, $13 million
in 1999 and $22 million in 1998 for its retirement and employee savings
plans.
F-24
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
TRANSACTIONS WITH AFFILIATES AFG owns a $3.7 million minority interest in
a residential homebuilding company. Brothers of AFG's Chairman own the
remaining interests. GAFRI has extended a line of credit to this company
under which the homebuilder may borrow up to $8 million at 13%. At
December 31, 2000 and 1999, $8 million was due under the credit line.
In September 2000, GAFRI's minority ownership in a company engaged in the
production of ethanol was repurchased by that company for $7.5 million in
cash and $21.9 million liquidation value of non-voting redeemable
preferred stock. Following the repurchase, AFG's Chairman beneficially
owns 100% of the ethanol company. In December 2000, the ethanol company
retired $3 million of the preferred stock at liquidation value plus
accrued dividends and issued an $18.9 million subordinated note in
exchange for the remaining preferred stock. The subordinated note bears
interest at 12-1/4% with scheduled repayments through 2005. During 1998,
the ethanol company borrowed $4.0 million from GAFRI under a subordinated
note bearing interest at 14% and paid a $6.3 million capital distribution,
including $3.1 million to GAFRI. In addition, Great American has extended
a $10 million line of credit to this company; no amounts have been
borrowed under the credit line.
F-25
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note M
to the Consolidated Financial Statements.
B. Schedules filed herewith for 2000, 1999 and 1998:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in
the applicable regulation of the Securities and
Exchange Commission have been omitted as they are not
applicable, not required, or the information required
thereby is set forth in the Financial Statements or the
notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Item Reported
-------------- -------------
November 14, 2000 Third quarter 2000 Earnings Release and additional
material presented at an insurance industry investor
conference on November 15, 2000.
S-1
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
CONDENSED BALANCE SHEET
-----------------------
December 31,
-------------------------
2000 1999
---- ----
Assets:
Cash and short-term investments $ 1,407 $ 1,612
Receivables from affiliates 438,807 370,218
Investment in subsidiaries 1,534,280 1,404,653
Other assets 63,557 53,935
---------- ----------
$2,038,051 $1,830,418
========== ==========
Liabilities and Shareholders' Equity:
Accounts payable, accrued expenses and other
liabilities $ 5,185 $ 4,995
Payables to affiliates 103,805 105,079
Long-term debt 380,531 380,366
Shareholders' equity 1,548,530 1,339,978
---------- ----------
$2,038,051 $1,830,418
========== ==========
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
Year Ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
Income:
Dividends from subsidiaries $ 282 $ 282 $ 282
Equity in undistributed earnings (losses)
of subsidiaries (57,796) 242,850 209,453
Investment and other income 27,563 27,436 22,367
-------- -------- --------
(29,951) 270,568 232,102
Costs and Expenses:
Interest charges on borrowed money 39,912 34,707 18,748
Other operating and general expenses 7,435 9,937 8,600
-------- -------- --------
47,347 44,644 27,348
-------- -------- --------
Earnings (loss) before income taxes,
extraordinary items and accounting changes (77,298) 225,924 204,754
Provision (credit) for income taxes (30,335) 78,929 79,584
-------- -------- --------
Earnings (loss) before extraordinary items
and accounting changes (46,963) 146,995 125,170
Extraordinary items - loss on prepayment
of debt - (1,701) (770)
Cumulative effect of accounting changes (9,072) (3,854) -
-------- -------- --------
Net Earnings (Loss) ($ 56,035) $141,440 $124,400
======== ======== ========
[FN]
(*) The Parent Only Financial Statements include the accounts of AFG and its
predecessor, AFC Holding Company, a wholly-owned subsidiary.
S-2
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
---------------------------------
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net earnings (loss) ($ 56,035) $141,440 $124,400
Adjustments:
Extraordinary items - 1,701 770
Cumulative effect of accounting changes 9,072 3,854 -
Equity in losses (earnings) of subsidiaries 34,225 (158,067) (128,317)
Change in balances with affiliates (64,511) (110,243) 76,116
Increase in other assets (10,987) (8,844) (2,972)
Increase (decrease) in payables 190 3,336 (2,612)
Dividends from subsidiaries 282 282 282
Other 602 15 90
-------- -------- --------
(87,162) (126,526) 67,757
-------- -------- --------
Investing Activities:
Purchases of investments - (14,894) -
Sales of investments - 13,903 -
-------- -------- --------
- (991) -
-------- -------- --------
Financing Activities:
Additional long-term borrowings - 344,938 -
Reductions of long-term debt - (63,179) -
Issuances of common stock 159,562 7,389 13,238
Repurchases of common stock - (88,597) (20,651)
Repurchases of trust preferred securities (1,052) - -
Cash dividends paid (71,553) (78,199) (79,457)
-------- -------- --------
86,957 122,352 (86,870)
-------- -------- --------
Net Decrease in Cash and Short-term Investments (205) (5,165) (19,113)
Cash and short-term investments at beginning
of period 1,612 6,777 25,890
-------- -------- --------
Cash and short-term investments at end
of period $ 1,407 $ 1,612 $ 6,777
======== ======== ========
(*) The Parent Only Financial Statements include the accounts of AFG and its
predecessor, AFC Holding Company, a wholly-owned subsidiary.
S-3
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 2000
(IN MILLIONS)
---------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------------------------------------------
(a)
RESERVES FOR
DEFERRED UNPAID CLAIMS (b)
AFFILIATION POLICY AND CLAIMS DISCOUNT (c)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
---------------------------------------------------------------------------
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
2000 $275 $4,516 $33 $1,414
==== ====== === ======
1999 $254 $4,795 $30 $1,326
==== ====== === ======
---------------------------------------------------------------------------------------------------
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
---------------------------------------------------------------------------------------------------
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES AMORTIZATION PAID
INCURRED RELATED TO OF DEFERRED CLAIMS
NET POLICY AND CLAIM
EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
PREMIUMS INCOME YEARS YEARS COSTS EXPENSES WRITTEN
---------------------------------------------------------------------------------------------------
2000 $2,495 $298 $2,056 ($ 60) $560 $1,841 $2,638
====== ==== ====== ==== ==== ====== ======
1999 $2,211 $292 $1,691 ($ 74) $498 $1,766 $2,263
====== ==== ====== ==== ==== ====== ======
1998 $2,699 $325 $2,059 $156 $589 $1,995 $2,471
====== ==== ====== ==== ==== ====== ======
(a) Grossed up for reinsurance recoverables of $1,324 and $1,571 at
December 31, 2000 and 1999, respectively.
(b) Discounted at approximately 8%.
(c) Grossed up for prepaid reinsurance premiums of $267 and $320 at
December 31, 2000 and 1999, respectively.
S-4
Signatures
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, American Financial Group, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, duly authorized.
American Financial Group, Inc.
Signed: March 28, 2001 BY:s/CARL H. LINDNER
-----------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
s/CARL H. LINDNER Chairman of the Board March 28, 2001
- ----------------------- of Directors
Carl H. Lindner
s/THEODORE H. EMMERICH Director* March 28, 2001
- -----------------------
Theodore H. Emmerich
s/JAMES E. EVANS Director March 28, 2001
- -----------------------
James E. Evans
s/THOMAS M. HUNT Director* March 28, 2001
- -----------------------
Thomas M. Hunt
s/CARL H. LINDNER III Director March 28, 2001
- -----------------------
Carl H. Lindner III
s/KEITH E. LINDNER Director March 28, 2001
- -----------------------
Keith E. Lindner
s/S. CRAIG LINDNER Director March 28, 2001
- -----------------------
S. Craig Lindner
s/WILLIAM R. MARTIN Director* March 28, 2001
- -----------------------
William R. Martin
s/FRED J. RUNK Senior Vice President and March 28, 2001
- ----------------------- Treasurer (principal
Fred J. Runk financial and accounting officer)
* Member of the Audit Committee
INDEX TO EXHIBITS
AMERICAN FINANCIAL GROUP, INC.
Number Exhibit Description
- ------ -------------------
3(a) Amended and Restated Articles of
Incorporation, filed as Exhibit 3(a)
to AFG's Form 10-K for 1997. (*)
3(b) Code of Regulations, filed as
Exhibit 3(b) to AFG's Form 10-K
for 1997. (*)
4 Instruments defining the rights of Registrant has no
security holders. outstanding debt issues
exceeding 10% of the
assets of Registrant and
consolidated subsidiaries.
Management Contracts:
10(a) Stock Option Plan, filed as Exhibit 10(a) to AFG's
Form 10-K for 1998. (*)
10(b) Form of stock option agreements, filed as Exhibit 10(b) to
AFG's Form 10-K for 1998. (*)
10(c) 2000 Annual Bonus Plan. -----
10(d) Nonqualified Auxiliary RASP, filed as Exhibit 10(d) to AFG's
Form 10-K for 1998. (*)
10(e) Retirement program for outside directors, filed as Exhibit
10(e) to AFG's Form 10-K for 1995. (*)
10(f) Directors' Compensation Plan, filed as Exhibit 10(f) to
AFG's Form 10-K for 1995. (*)
10(g) Deferred Compensation Plan, filed as Exhibit 10 to AFG's
Registration Statement on Form S-8 on December 2, 1999.
(*)
12 Computation of ratios of earnings
to fixed charges. -----
21 Subsidiaries of the Registrant. -----
23 Consent of independent auditors. -----
(*) Incorporated herein by reference.
E-1
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Pretax income (loss) ($ 77,298) $223,307 $203,489 $308,323 $317,574
Minority interest in subsidiaries
having fixed charges (*) 44,961 48,780 55,646 54,163 46,689
Less undistributed equity in
losses of investees 142,230 32,156 17,997 10,363 31,353
Fixed charges:
Interest expense 67,638 64,544 58,925 53,578 78,048
Debt discount (premium) and expense 763 (129) (504) (701) (1,174)
One-third of rentals 13,963 12,226 11,883 10,152 9,279
-------- -------- -------- -------- --------
EARNINGS $192,257 $380,884 $347,436 $435,878 $481,769
======== ======== ======== ======== ========
Fixed charges:
Interest expense $ 67,638 $ 64,544 $ 58,925 $ 53,578 $ 78,048
Debt discount (premium) and expense 763 (129) (504) (701) (1,174)
One-third of rentals 13,963 12,226 11,883 10,152 9,279
Pretax preferred dividend requirements
of subsidiaries 35,648 36,566 37,628 46,578 27,970
-------- -------- -------- -------- --------
FIXED CHARGES $118,012 $113,207 $107,932 $109,607 $114,123
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 1.63 3.36 3.22 3.98 4.22
==== ==== ==== ==== ====
Earnings in Excess of Fixed Charges $ 74,245 $267,677 $239,504 $326,271 $367,646
======== ======== ======== ======== ========
(*) Amounts include subsidiary preferred dividends and accrued distributions on
trust preferred securities.
E-2
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFG at December 31, 2000. All
corporations are subsidiaries of AFG and, if indented, subsidiaries of the
company under which they are listed.
Percentage of
Common Equity
Name of Company Incorporated Ownership
- --------------- ------------ -------------
AFC Holding Company Ohio 100
American Financial Capital Trust I Delaware 100
American Financial Corporation Ohio 100
American Money Management Corporation Ohio 100
American Premier Underwriters, Inc. Pennsylvania 100
Pennsylvania Company Delaware 100
Atlanta Casualty Company Ohio 100
Infinity Insurance Company Indiana 100
Leader Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Windsor Insurance Company Indiana 100
Great American Insurance Company Ohio 100
AFC Coal Properties, Inc. Ohio 100
American Custom Insurance Services, Inc. Ohio 100
American Dynasty Surplus Lines Insurance Company Delaware 100
American Empire Surplus Lines Insurance Company Delaware 100
American Empire Insurance Company Ohio 100
Fidelity Excess and Surplus Insurance Company Ohio 100
Brothers Property Corporation Ohio 80
Eden Park Insurance Company Indiana 100
Great American Alliance Insurance Company Ohio 100
Great American Assurance Company Ohio 100
Great American E&S Insurance Company Delaware 100
Great American Financial Resources, Inc. Delaware 83
AAG Holding Company, Inc. Ohio 100
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
Great American Life Insurance Company Ohio 100
Annuity Investors Life Insurance Company Ohio 100
Great American Life Insurance Company
of New York New York 100
Loyal American Life Insurance Company Ohio 100
United Teacher Associates Insurance Company Texas 100
Great American Life Assurance Company
of Puerto Rico, Inc. Puerto Rico 100
Great American Insurance Company of New York New York 100
Great American Management Services, Inc. Ohio 100
Mid-Continent Casualty Company Oklahoma 100
National Interstate Corporation Ohio 58
Seven Hills Insurance Company New York 100
Worldwide Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries in
the aggregate would not constitute a significant subsidiary.
E-3
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following
Registration Statements and related prospectuses of American Financial Group,
Inc. of our report dated February 9, 2001, with respect to the consolidated
financial statements and schedules of American Financial Group, Inc. included in
the Annual Report on Form 10-K for the year ended December 31, 2000.
Registration
Form Number Description
---- ------------ -----------
S-8 33-58825 Stock Option Plan
S-8 33-58827 Employee Stock Purchase Plan
S-3 33-62459 Dividend Reinvestment Plan
S-8 333-10853 Nonemployee Directors' Compensation Plan
S-8 333-14935 Retirement and Savings Plan
S-3 333-81903 $450 million of Debt Securities,
Common Stock and Trust Securities
S-8 333-91945 Deferred Compensation Plan
ERNST & YOUNG LLP
Cincinnati, Ohio
March 26, 2001
E-4
AMERICAN FINANCIAL GROUP, INC.
2000 ANNUAL BONUS PLAN
Adopted on April 5, 2000
AMERICAN FINANCIAL GROUP, INC.
2000 ANNUAL BONUS PLAN
1. PURPOSE
The purpose of the Annual Bonus Plan (the "Plan") is to further the
profitability of American Financial Group, Inc. (the "Company") to the benefit
of the shareholders of the Company by providing incentive to the Plan
participants.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan shall be
administered by the Compensation Committee or a successor committee or
subcommittee (the "Committee") of the Board of Directors of the Company (the
"Board") composed solely of two or more "outside directors" as defined pursuant
to Section 162(m) of the Internal Revenue Code. No member of the Committee while
serving as such shall be eligible to be granted a bonus under the Plan. Subject
to the provisions of the Plan (and to the approval of the Board where specified
in the Plan), the Committee shall have exclusive power to determine the
conditions (including performance requirements) to which the payment of the
bonuses may be subject and to certify that performance goals are attained.
Subject to the provisions of the Plan, the Committee shall have the authority to
interpret the Plan and establish, adopt or revise such rules and regulations and
to make all determinations relating to the Plan as it may deem necessary or
advisable for the administration of the Plan. The Committee's interpretation of
the Plan and all of its actions and decisions with respect to the Plan shall be
final, binding and conclusive on all parties.
3. PLAN TERM AND BONUS YEARS
The term of the Plan is one year, commencing January 1, 2000, which
term shall be renewed from year to year unless and until the Plan shall be
terminated or suspended as provided in Section 9. As used in the Plan the term
"Bonus Year" shall mean a calendar year.
4. PARTICIPATION
Subject to the approval of the Committee and the Board of Directors
(based on the recommendation of the Committee), the Chief Executive Officer and
each of the Co-Presidents shall participate in the Plan (the "Participants").
The Executive Committee may designate other employees of the Company or its
subsidiaries to be governed by the terms of the Plan, including consideration
that a portion of payments made to such employees be in shares of common stock
of the Company.
5. ESTABLISHMENT OF INDIVIDUAL BONUS TARGETS AND PERFORMANCE CRITERIA
The Committee shall approve the individual target amount of bonus (the
"Bonus Target") that may be awarded to each Participant and recommend that the
Board adopt such action. In no event shall the establishment of any
Participant's Bonus Target give a Participant any right to be paid all or any
part of such amount unless and until a bonus is actually awarded pursuant to
Section 6.
The Committee shall establish the performance criteria, both subjective
and objective, (the "Performance Criteria") that will apply to the determination
of the bonus of the Chief Executive Officer and each of the Co-Presidents for
that Bonus Year and recommend that the Board adopt such action. The Bonus
Targets and Performance Criteria set forth on Schedules I and II have been
recommended by the Committee and approved by the Board.
6. DETERMINATION OF BONUSES AND TIME OF PAYMENT
As soon as practicable after the end of 2000, the Committee shall
certify whether or not the performance criteria of the Chief Executive Officer
and each of the Co-Presidents has been attained and shall recommend to the
Board, and the Board shall determine, the amount of the bonus, if any, to be
awarded to each Participant for 2000 according to the terms of this Plan. Such
bonus determinations shall be based on achievement of the Performance Criteria
for 2000.
Once the bonus is so determined for the Chief Executive Officer and
each of the Co-Presidents, it shall be paid seventy-five percent in cash and
twenty-five percent in Company Common Stock to the Participant (less any
applicable withholding and employment taxes) as soon as practicable. The number
of shares of Company Common Stock to be issued to a Participant shall be
determined by dividing twenty-five percent of the bonus payable (before
applicable taxes and deductions) by the average of the per share Fair Market
Value of the Common Stock for all of the trading days of January 2001; the
resulting number shall then be rounded up to the next hundred. Any shares of
Company Common Stock issued pursuant to this Plan will be "restricted."
In lieu of issuing certificates to the Chief Executive Officer and each
of the Co-Presidents representing the Company Common Stock portion of a payment
under the Plan, they may elect to defer the Company Common Stock payment portion
to the "Company Stock Election" account of the Company's Deferred Compensation
Plan adopted December 1, 1999.
"Fair Market Value" means the last sale price reported on the New York
Stock Exchange composite tape or, if no last sales price is reported, the
average of the closing bid and asked prices for a share of Common Stock on a
specified date. If no sale has been made on any date, then prices on the last
preceding day on which any such sale shall have been made shall be used in
determining Fair Market Value under either method prescribed in the previous
sentence.
7. TERMINATION OF EMPLOYMENT
If a Participant's employment with the Company or a subsidiary, as the
case may be, is terminated for any reason other than discharge for cause, he may
be entitled to such bonus, if any, as the Committee, in its sole discretion, may
determine.
In the event of a Participant's discharge for cause from the employ of
the Company or a Subsidiary, as the case may be, he shall not be entitled to any
amount of bonus unless the Committee, in its sole discretion, determines
otherwise.
8. MISCELLANEOUS
A. Government and Other Regulations. The obligation of the
Company to make payment of bonuses shall be subject to all applicable
laws, rules and regulations and to such approvals by governmental
agencies as may be required.
B. Tax Withholding. The Company or a Subsidiary, as
appropriate, shall have the right to deduct from all bonuses paid in
cash any federal, state or local taxes required by law to be withheld
with respect to such cash payments.
C. Claim to Bonuses and Employment Rights. The designation of
persons to participate in the Plan shall be wholly at the discretion of
the Board. Neither this Plan nor any action taken hereunder shall be
construed as giving any Participant any right to be retained in the
employ of the Company or a Subsidiary.
D. Beneficiaries. Any bonuses awarded under this Plan to a
Participant who dies prior to payment shall be paid to the beneficiary
designated by the Participant on a form filed with the Company. If no
such beneficiary has been designated or survives the Participant,
payment shall be made to the Participant's legal representative. A
beneficiary designation may be changed or revoked by a Participant at
any time provided the change or revocation is filed with the Company.
E. Nontransferability. A person's rights and interests under
the Plan may not be assigned, pledged or transferred except, in the
event of
a Participant's death, to his designated beneficiary as provided in the
Plan or, in the absence of such designation, by will or the laws of
descent and distribution.
F. Indemnification. Each person who is or shall have been a
member of the Committee or of the Board shall be indemnified and held
harmless by the Company (to the extent permitted by the Articles of
Incorporation and Code of Regulations of the Company and applicable
law) against and from any loss, cost, liability or expense that may be
imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to which he may be
a party or in which they may be involved by reason of any action taken
or failure to act under the Plan and against and from any and all
amounts paid by him in settlement thereof, with the Company's approval,
or paid by him, in satisfaction of judgment in any such action, suit or
proceeding against him. He shall give the Company an opportunity, at
its own expense, to handle and defend the same before he undertakes to
handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such person may be entitled under the
Company's Articles of Incorporation or Code of Regulations, as a matter
of law or otherwise or of any power that the Company may have to
indemnify him or hold him harmless.
G. Reliance on Reports. Each member of the Committee and each
member of the Board shall be fully justified in relying or acting in
good faith upon any report made by the independent certified public
accountants of the Company or of its Subsidiaries or upon any other
information furnished in connection with the Plan by any officer or
director of the Company or any of its Subsidiaries. In no event shall
any person who is or shall have been a member of the Committee or of
the Board be liable for any determination made or other action taken or
any omission to act in reliance upon any such report or information or
for any action taken, including the furnishing of information, or
failure to act, if in good faith.
H. Expenses. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries in such proportions as shall
be agreed upon by them from time to time.
I. Pronouns. Masculine pronouns and other words of masculine
gender shall refer to both men and women.
J. Titles and Headings. The titles and headings of the
sections in the Plan are for convenience of reference only, and, in the
event of any conflict between any such title or heading and the text of
the Plan, such text shall control.
9. AMENDMENT AND TERMINATION
The Board may at any time terminate the Plan. The Board may at any
time, or from time to time, amend or suspend and, if suspended, reinstate the
Plan in whole or in part. Notwithstanding the foregoing, the Plan shall continue
in effect to the extent necessary to settle all matters relating to the payment
of bonuses awarded prior to any such termination or suspension.
Schedule I
Annual Bonus Plan
for 2000
Participants and
Bonus Targets
Total Company
Bonus EPS Performance
Name Position Target Component Component
- --------- -------- ------ --------- ---------
Carl H. Lindner Chairman of the Board $950,000 50% 50%
& Chief Executive Officer
Carl H. Lindner III Co-President $950,000 50% 50%
Keith E. Lindner Co-President $950,000 50% 50%
S. Craig Lindner Co-President $950,000 50% 50%
Schedule II
Annual Bonus Plan
2000 Performance Criteria for Participants
The overall bonus for 2000 for each Participant will be the sum of such
Participant's bonuses for the following two Performance Criteria components:
Weighting of Dollar Amount of Bonus Target
------------------------------------------
(Assuming Schedule I indicates $950,000 Bonus Target)
Earnings Per Share ("EPS") - 50% $475,000
Company Performance - 50% $475,000
A. EPS Component.
Each participant's bonus will range from 0% to 175% of the dollar
amount of the Bonus Target allocated to the EPS Component, based on the
following levels of reported earnings per common share achieved by the
Company and its consolidated subsidiaries for 2000:
Percentage of Bonus Target to be paid
Operating EPS for EPS Component
------------- -------------------------------------
$1.98 or less 0
$2.65 100%
more than $2.65 more than 100% up to 175%
Where the Operating EPS is equal to or greater than $1.99 and less than
$2.65, the bonus will be determined by straight line interpolation; if
it is above $2.65, the Committee, in its discretion, shall determine
the percentage of bonus above 100%.
The Operating EPS to be considered is diluted EPS from the Company's
insurance operations and not including investee results, realized gains
and losses in the investment portfolio and unusual or non-recurring
items. Additionally, the Committee shall have the power and authority,
in its discretion, to adjust reported EPS upward or downward for
purposes of the Plan to the extent the Committee deems equitable.
B. Company Performance Component
Each participant's bonus could range up to 175% of the dollar amount of
the Bonus Target allocated to the Company Performance Component and
will be determined by the Board, upon the Compensation Committee's
recommendation, based on the Compensation Committee's subjective rating
of the Company's relative overall performance for 2000. Such rating
shall include a consideration of all factors deemed relevant, including
financial (and non-financial) and strategic factors.
When determining the Company's performance for 2000, the Committee
intends to take into consideration the factors it believes are relevant
to such performance. For 2000, it may be appropriate to consider
factors including, but not limited to: earnings per share, including a
specific review of the impact of any extraordinary transactions and
investees results; return on equity; per share price of common stock
relative to prior periods and comparable companies as well as financial
markets; status of credit ratings on outstanding debt and claims paying
ability of the Company's subsidiaries; status of debt-to-capital ratio;
combined ratio of the Company's subsidiaries; investment portfolio
performance including realized gains and losses; and other operating
criteria.
