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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 2002 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
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
As of November 1, 2002, there were 69,073,102 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 30
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AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
September 30, December 31,
2002 2001
------------ -----------
ASSETS:
Cash and short-term investments $ 883,202 $ 544,173
Investments:
Fixed maturities - at market
(amortized cost - $11,314,846 and $10,593,305) 11,777,646 10,748,605
Other stocks - at market
(cost - $173,002 and $187,810) 279,502 313,710
Policy loans 215,003 211,288
Real estate and other investments 244,531 266,545
----------- -----------
Total investments 12,516,682 11,540,148
Recoverables from reinsurers and prepaid
reinsurance premiums 2,678,900 2,286,509
Agents' balances and premiums receivable 790,144 666,171
Deferred acquisition costs 902,114 818,323
Other receivables 288,904 254,255
Variable annuity assets (separate accounts) 437,000 529,590
Prepaid expenses, deferred charges and other assets 478,645 453,718
Goodwill 309,254 308,794
----------- -----------
$19,284,845 $17,401,681
=========== ===========
LIABILITIES AND CAPITAL:
Unpaid losses and loss adjustment expenses $ 5,006,795 $ 4,777,580
Unearned premiums 1,908,904 1,640,955
Annuity benefits accumulated 6,233,334 5,832,120
Life, accident and health reserves 939,878 638,522
Payable to reinsurers 465,449 296,462
Long-term debt:
Holding companies 542,994 608,960
Subsidiaries 270,723 270,752
Variable annuity liabilities (separate accounts) 437,000 529,590
Amounts due brokers for securities purchased 249,151 31,417
Accounts payable, accrued expenses and other
liabilities 1,031,051 822,214
----------- -----------
Total liabilities 17,085,279 15,448,572
Minority interest 475,135 454,730
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 68,973,532 and 68,491,610 shares outstanding 68,974 68,492
Capital surplus 920,017 911,074
Retained earnings 414,540 359,513
Unrealized gain on marketable securities, net 320,900 159,300
----------- -----------
Total shareholders' equity 1,724,431 1,498,379
----------- -----------
$19,284,845 $17,401,681
=========== ===========
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data)
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
INCOME:
Property and casualty insurance
premiums $605,012 $ 664,381 $1,827,855 $1,988,667
Life, accident and health premiums 80,972 69,116 224,616 208,807
Investment income 215,607 217,516 647,635 638,755
Realized gains (losses) on:
Securities (23,096) (22) (88,530) (33,328)
Subsidiaries (10,769) 7,065 (10,769) 5,479
Other investments 9,253 - 9,253 -
Other income 66,450 56,780 177,175 171,945
-------- ---------- ---------- ----------
943,429 1,014,836 2,787,235 2,980,325
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses 443,625 626,642 1,345,575 1,649,269
Commissions and other underwriting
expenses 158,848 189,327 495,803 567,203
Annuity benefits 68,685 74,016 215,226 213,996
Life, accident and health benefits 69,579 53,952 184,891 160,246
Interest charges on borrowed money 15,647 14,924 44,486 45,883
Other operating and general expenses 135,642 118,404 375,076 345,187
-------- ---------- ---------- ----------
892,026 1,077,265 2,661,057 2,981,784
-------- ---------- ---------- ----------
Operating earnings (loss) before
income taxes 51,403 (62,429) 126,178 (1,459)
Provision (credit) for income taxes 15,447 (22,152) 19,376 (4,547)
-------- ---------- ---------- ----------
Net operating earnings (loss) 35,956 (40,277) 106,802 3,088
Minority interest expense, net of tax (6,330) (9,028) (18,189) (27,346)
Equity in net losses of
investees, net of tax (2,746) (6,395) (7,833) (12,042)
-------- ---------- ---------- ----------
Earnings (loss) before cumulative
effect of accounting change 26,880 (55,700) 80,780 (36,300)
Cumulative effect of accounting change - - - (10,040)
-------- ---------- ---------- ----------
NET EARNINGS (LOSS) $ 26,880 ($ 55,700) $ 80,780 ($ 46,340)
======== ========== ========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before accounting change $.39 ($.82) $1.18 ($.53)
Cumulative effect of accounting change - - - (.15)
---- ---- ----- ----
Net earnings (loss) available to
Common Shares $.39 ($.82) $1.18 ($.68)
==== ==== ===== ====
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before accounting change $.39 ($.81) $1.17 ($.52)
Cumulative effect of accounting change - - - (.15)
---- ---- ----- ----
Net earnings (loss) available to
Common Shares $.39 ($.81) $1.17 ($.67)
==== ==== ===== ====
Average number of Common Shares:
Basic 68,873 68,028 68,717 67,799
Diluted 69,155 68,494 69,177 68,312
Cash dividends per Common Share $.125 $.25 $.375 $.75
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Common Stock Unrealized
Common and Capital Retained Gain on
Shares Surplus Earnings Securities Total
---------- ------------ -------- ---------- ----------
BALANCE AT JANUARY 1, 2002 68,491,610 $979,566 $359,513 $159,300 $1,498,379
Net earnings - - 80,780 - 80,780
Change in unrealized - - - 161,600 161,600
----------
Comprehensive income 242,380
Dividends on Common Stock - - (25,744) - (25,744)
Shares issued:
Exercise of stock options 26,537 608 - - 608
Dividend reinvestment plan 201,051 4,410 - - 4,410
Employee stock purchase plan 33,699 858 - - 858
Retirement plan contributions 216,740 5,599 - - 5,599
Deferred compensation distributions 1,809 45 - - 45
Directors fees paid in stock 2,875 72 - - 72
Shares acquired and retired (789) (11) (9) - (20)
Tax effect of intercompany dividends - (2,400) - - (2,400)
Other - 244 - - 244
---------- -------- -------- -------- ----------
BALANCE AT SEPTEMBER 30, 2002 68,973,532 $988,991 $414,540 $320,900 $1,724,431
========== ======== ======== ======== ==========
BALANCE AT JANUARY 1, 2001 67,410,091 $965,654 $442,276 $140,600 $1,548,530
Net loss - - (46,340) - (46,340)
Change in unrealized - - - 118,700 118,700
----------
Comprehensive income 72,360
Dividends on Common Stock - - (50,819) - (50,819)
Shares issued:
Exercise of stock options 54,435 1,289 - - 1,289
Employee stock purchase plan 39,642 1,046 - - 1,046
Retirement plan contributions 711,477 17,007 - - 17,007
Directors fees paid in stock 2,874 72 - - 72
Deferred compensation distributions 331 9 - - 9
Shares acquired and retired (3,538) (51) (49) - (100)
Tax effect of intercompany dividends - (4,800) - - (4,800)
Capital transactions of subsidiaries - (375) - - (375)
Other - (1,249) - - (1,249)
---------- -------- -------- -------- ----------
BALANCE AT SEPTEMBER 30, 2001 68,215,312 $978,602 $345,068 $259,300 $1,582,970
========== ======== ======== ======== ==========
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended
September 30,
-------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net earnings (loss) $ 80,780 ($ 46,340)
Adjustments:
Cumulative effect of accounting change - 10,040
Equity in net losses of investees 7,833 12,042
Depreciation and amortization 150,841 111,608
Annuity benefits 215,226 213,996
Realized losses on investing activities 82,206 1,106
Deferred annuity and life policy acquisition costs (121,160) (111,377)
Increase in reinsurance and other receivables (514,206) (382,233)
Increase in other assets (75,299) (32,858)
Increase in insurance claims and reserves 561,134 589,761
Increase in payable to reinsurers 168,987 120,443
Increase in other liabilities 100,615 56,490
Increase in minority interest 2,905 9,509
Other, net 1,428 16,173
---------- ----------
661,290 568,360
---------- ----------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments (3,718,410) (1,609,151)
Equity securities (9,217) (5,556)
Subsidiary (48,500) -
Real estate, property and equipment (37,870) (43,660)
Maturities and redemptions of fixed maturity
investments 1,256,037 579,916
Sales of:
Fixed maturity investments 2,057,781 666,593
Equity securities 20,144 11,978
Subsidiaries - 40,395
Real estate, property and equipment 12,731 46,683
Cash and short-term investments of acquired
(former) subsidiaries, net 4,392 (134,237)
Decrease (increase) in other investments 26,432 (4,711)
---------- ----------
(436,480) (451,750)
---------- ----------
FINANCING ACTIVITIES:
Fixed annuity receipts 599,174 454,189
Annuity surrenders, benefits and withdrawals (410,561) (482,997)
Net transfers from variable annuity assets 12,318 3,252
Additional long-term borrowings 79,000 185,668
Reductions of long-term debt (145,655) (102,067)
Issuances of Common Stock 1,317 2,078
Repurchase of trust preferred securities - (75,000)
Cash dividends paid (21,374) (50,819)
---------- ----------
114,219 (65,696)
---------- ----------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 339,029 50,914
Cash and short-term investments at beginning
of period 544,173 438,670
---------- ----------
Cash and short-term investments at end of period $ 883,202 $ 489,584
========== ==========
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for American Financial Group, Inc. ("AFG") and subsidiaries are unaudited;
however, management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein) necessary for
fair presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
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 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 a period based on estimated future principal
payments and adjusted to reflect actual payments.
Gains or losses on securities are 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 cost basis of that investment is reduced.
Emerging Issues Task Force Issue No. 99-20 established a new standard for
recognizing interest income and impairment on certain asset-backed
investments. Interest income on these investments is recorded at a yield
based on projected cash flows. The yield is adjusted prospectively to
reflect actual cash flows and changes in projected amounts. Impairment
losses on these investments must be recognized when (i) the fair value of
the security is less than its cost basis and (ii) there has been an
adverse change in the expected cash flows. The new standard became
effective on April 1, 2001. Impairment losses on initial application of
this rule were recognized as the cumulative effect of an accounting
change. Subsequent impairments are recognized as a component of net
realized gains and losses.
GOODWILL Goodwill represents the excess of cost of subsidiaries over AFG's
equity in their underlying net assets. Through December 31, 2001, goodwill
was being amortized over periods of 20 to 40 years. Effective January 1,
2002, AFG implemented Statement of Financial Accounting Standards ("SFAS")
No. 142, under which goodwill is no longer amortized but is subject to an
impairment test at least annually. As required under SFAS No. 142, AFG
will complete the transitional test for goodwill impairment (as of January
1, 2002) by the end of 2002. Any resulting write-down will be reported by
restating first quarter 2002 results for the cumulative effect of a change
in accounting principle.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INSURANCE As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
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 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. Payable to reinsurers
includes ceded premiums retained by AFG's insurance subsidiaries under
contracts to fund ceded losses as they become due. AFG's insurance
subsidiaries also assume reinsurance from other companies. Income on
reinsurance assumed is recognized based on reports received from ceding
companies.
DEFERRED ACQUISITION COSTS ("DPAC") Policy acquisition costs
(principally commissions, premium taxes and other marketing and
underwriting expenses) related to the production of new business are
deferred. 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
deferred to the extent deemed recoverable and amortized, with interest, in
relation to the present value of expected gross profits on the policies.
To the extent that realized gains and losses result in adjustments to the
amortization of DPAC related to annuities, such adjustments are reflected
as components of realized gains. DPAC related to annuities is also
adjusted, net of tax, for the change in amortization that would have been
recorded if the unrealized gains (losses) from securities had actually
been realized. This adjustment is included in unrealized gains (losses) on
marketable securities.
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 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. Establishing reserves for asbestos and
environmental claims involves considerably more judgment than other types
of claims due to, among other things, inconsistent court decisions, an
increase in bankruptcy filings as a result of asbestos-related
liabilities, novel theories of coverage, and judicial interpretations that
often expand theories of recovery and broaden the scope of coverage.
Loss reserve liabilities are subject to the impact of changes in claim
amounts and frequency and other factors. Changes in estimates of the
liabilities for losses and loss adjustment expenses are reflected in the
Statement of Operations in the period in which determined. In spite of the
variability inherent in such
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
estimates, management believes that the liabilities for unpaid losses and
loss adjustment expenses are adequate.
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 the original
projections of investment yields, 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"), an
83%-owned subsidiary, earns a fee. Investment funds are selected and may
be changed only by the policyholder, who retains all investment risk.
Accordingly, GAFRI's liability for these accounts equals the value of the
account assets.
PREMIUM RECOGNITION Property and casualty premiums are earned over
the terms of the policies on a pro rata basis. Unearned premiums represent
that portion of premiums written which is applicable to the unexpired
terms of policies in force. On reinsurance assumed from other insurance
companies or written through various underwriting organizations, unearned
premiums are based on reports received from such companies and
organizations. For traditional life, accident and health products,
premiums are recognized as revenue when legally collectible from
policyholders. For interest-sensitive life and universal life products,
premiums are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against the
policyholder account for mortality coverage and contract expenses.
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. Estimates are accrued during the
period in which premiums are 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.
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"), are not
eligible to file consolidated returns with AFC, and therefore, file
separately.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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." 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.
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. The
Company makes all contributions to the retirement fund and matches a
portion of employee contributions to the savings fund. Employees have been
permitted to direct the investment of their contributions to independently
managed investment funds, while Company contributions have been invested
primarily in securities of AFG and affiliates. Employees are being
afforded the flexibility to direct the investment of a portion of their
vested retirement fund account balances (increasing from 12.5% in July
2002 to 100% in April 2004) from securities of AFG and its affiliates to
independently managed investment funds. As of September 30, 2002, the Plan
owned 12% of AFG's outstanding Common Stock. Company contributions 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 employees earn such
benefits.
DERIVATIVES 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.
Changes in the fair value of derivatives are included in current earnings.
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 effect of common stock options: third quarter of 2002
and 2001 - 282,000 shares and 466,000 shares; nine months of 2002 and 2001
- 460,000 shares and 513,000 shares, respectively.
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
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
equivalents for purposes of the financial statements.
B. ACQUISITIONS AND SALES OF SUBSIDIARIES
NEW JERSEY PRIVATE PASSENGER AUTOMOBILE INSURANCE BUSINESS In September
2002, an AFG subsidiary entered into an agreement under which Palisades
Safety and Insurance Association and Palisades Insurance Company will
assume the subsidiary's obligations to renew its private passenger
automobile insurance business written in New Jersey. AFG recognized a
$10.8 million pretax loss on the transaction. As of September 9, 2002, AFG
no longer accepts any new private passenger automobile insurance in that
state.
MANHATTAN NATIONAL LIFE INSURANCE On June 28, 2002, GAFRI acquired
Manhattan National Life Insurance Company ("MNL") from Conseco, Inc. for
$48.5 million in cash. At June 30, 2002, MNL had approximately $290
million of assets and statutory capital and surplus of $27.5 million.
SEVEN HILLS INSURANCE COMPANY In July 2001, AFG sold Seven Hills Insurance
Company for $18.4 million, realizing a pretax gain of $7.1 million. As a
part of the sale, AFG assumed all liability for Seven Hills' business
prior to the date of the sale.
JAPANESE DIVISION In December 2000, AFG agreed to sell its Japanese
property and casualty division to Mitsui Marine & Fire Insurance Company
of America for $22 million in cash and recorded an estimated $10.7 million
pretax loss. Upon completion of the sale in March 2001, AFG realized an
additional pretax loss of $1.6 million and deferred a gain of
approximately $21 million on ceded insurance; the deferred gain is being
recognized over the estimated settlement period (weighted average of 4
years) of the ceded claims.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. SEGMENTS OF OPERATIONS AFG's property and casualty group is engaged
primarily in specialty and private passenger automobile insurance
businesses. 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. The
Personal group writes nonstandard and preferred/standard private passenger
auto and other personal insurance coverage. AFG's annuity, life and health
business markets primarily retirement products as well as life and
supplemental health insurance.
The following table (in thousands) shows AFG's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES (a)
Property and casualty insurance:
Premiums earned:
Specialty $403,738 $ 390,254 $1,130,439 $1,062,749
Personal 201,290 273,905 697,110 924,166
Other lines (16) 222 306 1,752
-------- ---------- ---------- ----------
605,012 664,381 1,827,855 1,988,667
Investment and other income 99,196 117,233 275,133 331,008
-------- ---------- ---------- ----------
704,208 781,614 2,102,988 2,319,675
Annuities, life and health (b) 225,787 228,044 650,829 647,636
Other 13,434 5,178 33,418 13,014
-------- ---------- ---------- ----------
$943,429 $1,014,836 $2,787,235 $2,980,325
======== ========== ========== ==========
OPERATING PROFIT (LOSS)
Property and casualty insurance:
Underwriting:
Specialty $ 4,706 ($ 32,119) $ 17,377 ($ 38,958)
Personal (2,223) (21,104) (10,116) (84,681)
Other lines (c) 56 (98,365) (20,784) (104,166)
-------- ---------- ---------- ----------
2,539 (151,588) (13,523) (227,805)
Investment and other income 45,259 73,115 141,433 217,464
-------- ---------- ---------- ----------
47,798 (78,473) 127,910 (10,341)
Annuities, life and health 7,387 36,959 40,476 84,417
Other (d) (3,782) (20,915) (42,208) (75,535)
-------- ---------- ---------- ----------
$ 51,403 ($ 62,429) $ 126,178 ($ 1,459)
======== ========== ========== ==========
(a) Revenues include sales of products and services as well as other
income earned by the respective segments.
(b) Represents primarily investment income.
(c) Represents development of lines in "run-off"; AFG has ceased
underwriting new business in these operations.
(d) Includes holding company expenses.
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. GOODWILL Effective January 1, 2002, goodwill is no longer amortized but
is subject to annual impairment testing under a two step process. Under
the first step, an entity's net assets are broken down into reporting
units and compared to their fair value. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if
any. AFG has completed the first step of its transitional impairment test
and has identified potential impairment of goodwill in its annuities and
life insurance segment and the personal lines segment of its property and
casualty insurance business. The second step of the impairment test, that
will measure the amount of impairment loss, will be completed by the end
of the year with any resulting impairment charge reported by restating
first quarter 2002 results for the cumulative effect of a change in
accounting principle. Management believes that while an impairment charge
may be as much as 15% of the carrying value of goodwill at September 30,
2002, it may be as little as half of that amount.
If the goodwill amortization of $3.4 million ($.05 per share, diluted) in
the third quarter and $10.3 million ($.15 per share) in the first nine
months of 2001 had not been expensed, net losses for the periods would
have been $52.3 million ($.76 per share) and $36.1 million ($.53 per
share), respectively.
E. LONG-TERM DEBT The carrying value of long-term debt consisted of the
following (in thousands):
September 30, December 31,
2002 2001
------------ -----------
HOLDING COMPANIES:
AFG 7-1/8% Senior Debentures due April 2009 $301,251 $301,108
AFG 7-1/8% Senior Debentures due December 2007 79,600 79,600
AFC notes payable under bank line 140,000 203,000
APU 10-7/8% Subordinated Notes due May 2011 11,512 11,557
Other 10,631 13,695
-------- --------
$542,994 $608,960
======== ========
SUBSIDIARIES:
GAFRI 6-7/8% Senior Notes due June 2008 $100,000 $100,000
GAFRI notes payable under bank line 121,100 121,100
Notes payable secured by real estate 35,779 36,253
Other 13,844 13,399
-------- --------
$270,723 $270,752
======== ========
At September 30, 2002, scheduled principal payments on debt for the
balance of 2002 and the subsequent five years were as follows (in
millions):
Holding
Companies Subsidiaries Total
--------- ------------ ------
2002 $147.6 $ 1.4 $149.0
2003 - 2.1 2.1
2004 - 123.3 123.3
2005 - 11.3 11.3
2006 - 19.6 19.6
2007 79.7 .2 79.9
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. AFC's
management expects to complete a replacement bank agreement by the end of
November.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. MINORITY INTEREST Minority interest in AFG's balance sheet is comprised
of the following (in thousands):
September 30, December 31,
2002 2001
------------ -----------
Interest of noncontrolling shareholders
in subsidiaries' common stock $161,318 $140,913
Preferred securities issued by
subsidiary trusts 241,663 241,663
AFC preferred stock 72,154 72,154
-------- --------
$475,135 $454,730
======== ========
PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFG and GAFRI have
issued 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 September 30, December 31, Optional
Issuance Issue (Maturity Date) 2002 2001 Redemption Dates
------------- ------------------------ ------------ ----------- --------------------
October 1996 AFCH 9-1/8% TOPrS (2026) $98,750 $98,750 Currently redeemable
November 1996 GAFRI 9-1/4% TOPrS (2026) 72,913 72,913 Currently redeemable
March 1997 GAFRI 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007
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.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
Nine months ended
September 30,
-------------------
2002 2001
---- ----
Interest of noncontrolling shareholders
in earnings of subsidiaries $ 5,666 $ 9,656
Effect of basis difference in realized gains
(losses) of subsidiaries (2,517) -
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities, net of tax 10,711 13,361
AFC preferred stock 4,329 4,329
------- -------
$18,189 $27,346
======= =======
G. SHAREHOLDERS' EQUITY At September 30, 2002, there were 68,973,532 shares
of AFG Common Stock outstanding, including 1,361,958 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. 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.
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At September 30, 2002, there were 9.7 million shares of AFG Common Stock
reserved for issuance upon exercise of stock options. As of that date,
options for 7 million shares were outstanding. Options generally become
exercisable at the rate of 20% per year commencing one year after grant;
those granted to non-employee directors of AFG are fully exercisable upon
grant. Options generally expire ten years after the date of grant.
The change in unrealized gain on marketable securities for the nine months
ended September 30 included the following (in millions):
Minority
Pretax Taxes Interest Net
------ ----- -------- ------
2002
--------------------------------------
Unrealized holding gains on securities
arising during the period $184.1 ($62.7) ($10.1) $111.3
Realized losses included in net income 88.5 (30.8) (7.4) 50.3
------ ----- ----- ------
Change in unrealized gain on
marketable securities, net $272.6 ($93.5) ($17.5) $161.6
====== ===== ===== ======
2001
---------------------------------------
Unrealized holding gains on securities
arising during the period $158.5 ($54.9) ($14.8) $ 88.8
Adoption of EITF 99-20 16.9 (6.0) (0.9) 10.0
Realized losses included in net income
and unrealized gains of subsidiary sold 33.1 (11.6) (1.6) 19.9
------ ----- ----- ------
Change in unrealized gain on
marketable securities, net $208.5 ($72.5) ($17.3) $118.7
====== ===== ===== ======
H. EQUITY IN LOSSES OF INVESTEES 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.
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
loans ($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 ($53.5 million at September 30, 2002 and
$57.1 million at December 31, 2001) are included in other assets;
liabilities of the businesses transferred ($9.9 million at September 30,
2002 and $11.8 million at December 31, 2001, after consolidation and
elimination of loans from AFG subsidiaries) are included in other
liabilities. Investee losses in the Statement of Operations represents
AFG's equity in the losses of these two companies. One of the businesses
is involved in litigation impacting its operations; see "Investee
Corporations" in Management's Discussion and Analysis.
I. COMMITMENTS AND CONTINGENCIES There have been no significant changes to
the matters discussed and referred to in AFG's Quarterly Report on Form
10-Q for June 30, 2002 and in Note L "Commitments and Contingencies" of
AFG's Annual Report on Form 10-K for 2001.
J. SUBSEQUENT EVENT In October 2002, AFG announced that its newly-formed
subsidiary, Infinity Property and Casualty Corporation ("Infinity"), filed
a registration statement with the Securities and Exchange Commission with
respect to an initial public offering of its common stock. All of the
offered shares would be sold by AFG which will own approximately 30% of
Infinity after the offering. Prior to the offering, AFG will transfer to
Infinity the following subsidiaries involved primarily in the issuance of
nonstandard auto policies: Atlanta
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Casualty Company, Infinity Insurance Company, Leader Insurance Company
and Windsor Insurance Company. In addition, Great American Insurance
Company, an AFG subsidiary, will transfer to Infinity its personal
insurance business written through independent agents. The businesses
being transferred generated aggregate net written premiums of
approximately $550 million and $710 million for the nine months ended
September 30, 2002 and 2001, respectively, and $900 million for the year
ended December 31, 2001. AFG expects to realize a gain on the sale,
depending on the pricing of the shares being offered. The proceeds will
be used primarily to reduce outstanding bank debt and to provide
additional capital to AFG's remaining subsidiaries.
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
AFG and its subsidiaries, AFC and American Premier, are organized as
holding companies with almost all of their operations being conducted by
subsidiaries. These parent corporations, however, have continuing cash
needs for administrative expenses, the payment of principal and interest
on borrowings, shareholder dividends, and taxes. Therefore, certain
analyses are best done on a parent only basis while others are best done
on a total enterprise basis. In addition, since most of its businesses are
financial in nature, AFG does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
IT INITIATIVE In 1999, AFG initiated an enterprise-wide project to study
its information technology ("IT") resources, needs and opportunities. The
initiative, involving improvements in physical infrastructure and business
support systems, entails extensive effort and costs over a period of
several years. While the costs precede the expected savings, management
believes the benefits will exceed the costs incurred, all of which have
been and will be funded through available working capital.
INDEPENDENT RATINGS In October 2002, the independent ratings of AFG's
property and casualty subsidiaries were affirmed (at A) by Standard &
Poor's and (at A+) by Fitch. The ratings of AFG's life and annuity
subsidiaries were affirmed (at A+) by Fitch, but downgraded (from A to A-)
by Standard & Poor's. Management of AFG's subsidiaries which market
annuity products believes that a rating in the "A" category by at least
one rating agency is necessary to successfully compete in certain annuity
markets. Management intends to maintain the capital of its significant
subsidiaries at levels currently indicated by the rating agencies as
appropriate for their current ratings.
FORWARD-LOOKING STATEMENTS 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", "could", "expects", "may", "will", "should",
"seeks", "intends", "plans", "estimates", "anticipates" or the negative
version of those words or other comparable terminology. Examples of such
forward-looking statements include statements relating to: expectations
concerning market and other conditions and their effect on future
premiums, revenues, earnings and investment activities; recoverability of
asset values; expected losses and the adequacy of reserves for asbestos,
environmental pollution and mass tort claims; rate increases, improved
loss experience and expected expense savings resulting from recent
initiatives.
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 natural catastrophes, terrorist events, incidents of war
and other major losses;
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
o the ultimate amount of liabilities associated with certain
asbestos and environmental-related claims;
o adequacy of insurance reserves;
o trends in mortality and morbidity;
o availability of reinsurance and ability of reinsurers to pay their
obligations;
o competitive pressures, including the ability to obtain rate
increases; and
o changes in debt and claims paying ratings.
The forward-looking statements herein are made only as of the date of this
report. AFG assumes no obligation to publicly update any forward-looking
statements.
LIQUIDITY AND CAPITAL RESOURCES
RATIOS AFG's debt to total capital ratio (at the parent holding company
level) was approximately 22% at September 30, 2002, and 27% at December
31, 2001.
SOURCES OF FUNDS Management believes the parent holding companies have
sufficient resources to meet their liquidity requirements, primarily
through funds generated by their subsidiaries' operations. If funds
provided by subsidiaries through dividends and tax payments are
insufficient to meet fixed charges in any period, the holding companies
would be required to generate cash through borrowings, sales of securities
or other assets, or similar transactions.
AFC has a revolving credit agreement with several banks under which it can
borrow up to $300 million until December 31, 2002. At September 30, 2002,
$140 million of the credit line had been used. On November 13, 2002, AFC
borrowed an additional $55 million on the credit line. These funds were
used to provide additional capital to AFC's insurance subsidiaries.
Management expects to complete a replacement bank agreement by the end of
November. The new agreement will run for three years and be similar in
size and terms to the old agreement. The interest rate on borrowings will
be about 1% higher than under the old line.
INVESTMENTS AFG's investment portfolio at September 30, 2002, contained
$11.8 billion in "Fixed maturities" and $279.5 million in "Other stocks",
all carried at market value with unrealized gains and losses reported as a
separate component of shareholders' equity on an after-tax basis. At
September 30, 2002, AFG had pretax net unrealized gains of $462.8 million
on fixed maturities and $106.5 million on other stocks.
Approximately 94% of the fixed maturities held by AFG at September 30,
2002, were rated "investment grade" (credit rating of AAA to BBB) by
nationally recognized rating agencies. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated and noninvestment grade. Management believes that a high quality
investment portfolio is more likely to generate a stable and predictable
investment return.
Individual portfolio securities are sold creating gains or losses as
market opportunities exist. Since all of these securities are carried at
market value in the balance sheet, there is virtually no effect on
liquidity or financial condition upon the sale and ultimate realization of
unrealized gains and losses.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Summarized information for the unrealized gains and losses recorded in
AFG's balance sheet at September 30, 2002, is shown in the following table
(dollars in millions). Approximately $329 million of "Fixed maturities"
and $30 million of "Other stocks" had no unrealized gains or losses at
September 30, 2002.
Securities Securities
with With
Unrealized Unrealized
Gains Losses
---------- ----------
Fixed Maturities
----------------
Market value of securities $10,162 $1,287
Amortized cost of securities $ 9,525 $1,461
Gross unrealized gain or loss $ 637 $ 174
Market value as % of amortized cost 107% 88%
Number of security positions 1,719 374
Number individually exceeding
$2 million gain or loss 37 26
Concentration of gains or losses by
type or industry (exceeding 5% of
unrealized):
Mortgage-backed securities $ 175.9 $ 8.4
U.S. government and government agencies 58.7 .9
Banks 53.7 -
State and municipal 46.0 3.8
Electric services 34.2 12.9
Asset-backed securities 19.9 9.6
Telephone communications 6.4 10.0
Air transportation 6.0 54.5
Cable television 2.3 9.2
Percentage rated investment grade 98% 68%
Other Stocks
------------
Market value of securities $ 228 $ 22
Cost of securities $ 109 $ 34
Gross unrealized gain or loss $ 119 $ 12
Market value as % of cost 209% 65%
Number individually exceeding
$2 million gain or loss 3 1
AFG's investment in equity securities of Provident Financial Group, a
Cincinnati-based commercial banking and financial services company,
represents $110 million of the $119 million in unrealized gains on other
stocks at September 30, 2002.
The table below sets forth the scheduled maturities of fixed maturity
securities at September 30, 2002, based on their market values.
Securities Securities
with With
Unrealized Unrealized
Maturity Gains Losses
-------- ---------- ----------
One year or less 6% 3%
After one year through five years 16 30
After five years through ten years 27 38
After ten years 14 15
--- ---
63 86
Mortgage-backed securities 37 14
--- ---
100% 100%
=== ===
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
AFG realized aggregate losses of $9.2 million during the third quarter of
2002 on $59.6 million in sales of fixed maturity securities (12 issues; 11
issuers) that had unrealized losses at June 30, 2002. Market values of
five of the issues increased an aggregate of $804,000 from June 30 to date
of sale. Two of the securities were AAA-rated interest-only
mortgage-backed securities ("IOs") that decreased in value by $3.8 million
from June 30 to the date of sale due to the decline in market interest
rates. Market values of the remaining five securities decreased an
aggregate of $1.4 million from June 30 to the sale date. Four of the
twelve issues had unrealized losses greater than $500,000 at June 30.
Actual losses on sale of these four securities were $131,000 less than the
unrealized loss at June 30. Although AFG had the ability to continue
holding these investments, its intent to hold them changed due primarily
to deterioration in the issuer's credit, decisions to lessen exposure to a
particular credit or industry, or to modify asset allocation within the
portfolio.
The table below (dollars in millions) summarizes the length of time
securities have been in an unrealized gain or loss position at September
30, 2002.
Market
Aggregate Aggregate Value as
Market Unrealized % of Cost
Value Gain (Loss) Basis
---------- ----------- ---------
FIXED MATURITIES
---------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $500,000 at 9/30/02 and for:
Less than one year (380 issues) $ 4,679 $359 108.3%
More than one year (74 issues) 912 105 113.0
Less than $500,000 at 9/30/02 (1,265 issues) 4,571 173 103.9
------- ----
$10,162 $637 106.7
======= ====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $500,000 at 9/30/02 and for:
Less than one year (71 issues) $ 474 ($108) 81.4%
More than one year (15 issues) 99 (35) 73.8
Less than $500,000 at 9/30/02 (288 issues) 714 (31) 96.1
------- ----
$ 1,287 ($174) 88.1
======= ====
OTHER STOCKS
----------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $500,000 at 9/30/02 and for:
Less than one year (1 issue) $ 6 $ 1 120.0%
More than one year (4 issues) 201 115 233.7
Less than $500,000 at 9/30/02 (57 issues) 21 3 116.7
------- ----
$ 228 $119 209.2
======= ====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $500,000 at 9/30/02 and for:
Less than one year (3 issues) $ 4 $ (7) 36.4%
More than one year (0 issues) - - -
Less than $500,000 at 9/30/02 (78 issues) 18 (5) 78.3
------- ----
$ 22 ($ 12) 64.7
======= ====
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
(accounted for as a realized loss) and the cost basis of that investment
is reduced. The determination of whether unrealized losses are "other than
temporary" requires judgment based on subjective as well as objective
factors. A listing of factors considered and resources used is contained
in the discussion of "Investments" under Management's Discussion and
Analysis in AFG's 2001 Form 10-K.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Based on its analysis, management believes (i) AFG will recover its cost
basis in the securities with unrealized losses and (ii) that AFG has the
ability and intent to hold the securities until they mature or recover in
value. Should either of these beliefs change with regard to a particular
security, a charge for impairment would likely be required. While it is
not possible to accurately predict if or when a specific security will
become impaired, charges for other than temporary impairment could be
material to results of operations in a future period. Management believes
it is not likely that future impairment charges will have a significant
effect on AFG's liquidity.
UNCERTAINTIES As more fully explained in the following paragraphs,
management believes that the areas posing the greatest risk of material
loss are the adequacy of its insurance reserves and American Premier's
contingencies arising out of its former operations.
PROPERTY AND CASUALTY INSURANCE RESERVES 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.
ASBESTOS AND ENVIRONMENTAL-RELATED ("A&E") Reserves Establishing
reserves for A&E claims is subject to uncertainties that are significantly
greater than those presented by other types of claims. Estimating ultimate
liability for asbestos claims presents unique and difficult challenges to
the insurance industry due to, among other things, inconsistent court
decisions, an increase in bankruptcy filings as a result of
asbestos-related liabilities, novel theories of coverage, and judicial
interpretations that often expand theories of recovery and broaden the
scope of coverage. The casualty insurance industry is engaged, as is AFG,
in extensive litigation over these coverage and liability issues as the
volume and severity of claims against asbestos defendants continue to
increase.
While management believes that AFG's reserves for A&E claims are a
reasonable estimate of ultimate liability for such claims, actual results
may vary materially from the amount currently recorded due to outstanding
issues and uncertainties such as whether coverage exists, whether claims
are to be allocated among triggered policies and implicated years, whether
claimants who exhibit no signs of illness will be successful in pursuing
their claims, predicting the number of future claims, and the impact of
recent bankruptcy filings.
Further, certain policyholders assert that each bodily injury claim should
be treated as a separate occurrence under the policy, and that their
claims are not subject to aggregate limits on coverage because either
their policies did not contain aggregate limits with respect to products
liability coverage or, faced with exhaustion of products coverage limits,
their asbestos claims fall within non-products liability coverage which is
not subject to any aggregate limit. These claims are now being contested
in insurance coverage litigation in various jurisdictions. In rejecting
the claims that are the basis of this litigation, AFG believes its
coverage defenses are substantial and intends to continue to vigorously
defend its position. Nonetheless, the outcome of disputes related to
asbestos and environmental matters, whether through litigation or
negotiation, may result in liabilities exceeding current related reserves
by amounts that
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
could have a material adverse effect upon AFG's results of operations and
financial condition.
For further discussion of uncertainties and litigation involving AFG, see
"Legal Proceedings" in AFG's Annual Report on Form 10-K for 2001 and
Quarterly Report on Form 10-Q for June 30, 2002.
RESULTS OF OPERATIONS
GENERAL Results of operations as shown in the accompanying financial
statements are prepared in accordance with generally accepted accounting
principles. Many investors and analysts focus on "core earnings" of
companies, setting aside certain items included in net earnings.
Nonetheless, these items are significant components of AFG's overall
financial results.
The following table reconciles AFG's operating earnings before income
taxes as shown in the Statement of Operations to "core earnings" as
generally referred to in quarterly news releases and independent financial
analysts' reports (in millions, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Operating earnings (loss) before income taxes $51.4 ($ 62.4) $126.2 ($ 1.5)
Adjustments for normal items:
Eliminate net realized (gains) losses 24.6 (7.0) 90.0 27.8
Include minority interest (10.6) (11.0) (32.3) (36.0)
Adjustments for unusual items:
Add back special A&E charge - 100.0 - 100.0
Add back World Trade Center losses - 25.0 - 25.0
----- ------ ------ ------
65.4 44.6 183.9 115.3
Provision for income taxes 22.1 16.7 44.9 41.7
----- ------ ------ ------
Core earnings from insurance businesses $43.3 $ 27.9 $139.0 $ 73.6
===== ====== ====== ======
Core earnings per Common Share (diluted) $.62 $.41 $2.01 $1.08
==== ==== ===== =====
"Core earnings" for the first nine months of 2002 include a $16 million
($.23 per share) first quarter tax benefit resulting from the reduction of
previously accrued amounts due to the resolution of certain tax matters.
"Core earnings" for 2001 include goodwill amortization expense of $3.4
million ($.05 per share) in the third quarter and $10.3 million ($.15 per
share) for the first nine months.
The special A&E charge and World Trade Center losses recorded in 2001 are
segregated as "unusual items" in the above table due to their significance
in size and infrequency in occurrence. Nonetheless, these items (as well
as the other items in the table above) are significant components of AFG's
overall financial results for the year.
The improvement in "core earnings" in the comparable third quarter and
nine month results was due primarily to significantly improved property
and casualty underwriting results.
21
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and
casualty group consists of two major business groups: Specialty and
Personal.
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.
The Personal group sells nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risk not typically accepted for
standard automobile coverage because of an applicant's driving record,
type of vehicle, age or other criteria.
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.
Premiums and combined ratios for AFG's property and casualty insurance
subsidiaries were as follows (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
-------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Gross Written Premiums (GAAP)
-----------------------------
Specialty $ 839.5 $653.3 $2,050.8 $1,663.9
Personal 280.7 295.9 956.6 975.8
Other lines - - .3 .2
-------- ------ -------- --------
$1,120.2 $949.2 $3,007.7 $2,639.9
======== ====== ======== ========
Net Written Premiums (GAAP)
---------------------------
Specialty $ 474.2 $417.3 $1,254.7 $1,167.7
Personal (a) 150.9 190.6 652.2 813.1
Other lines - - .3 -
-------- ------ -------- --------
$ 625.1 $607.9 $1,907.2 $1,980.8
======== ====== ======== ========
Combined Ratios (GAAP)
----------------------
Specialty (b) 98.8% 108.3% 98.4% 103.7%
Personal 101.2 107.7 101.5 109.2
Aggregate (including
discontinued lines)(c) 99.6 122.8 100.8 111.4
(a) Reflects the ceding of $127 million and $298 million in premiums
in the third quarter and nine months of 2002 compared to
$98 million and $148 million in the comparable 2001 periods
under a reinsurance agreement (effective April 1, 2001).
(b) Includes 6.5% and 2.3% for the three and nine month periods of
2001 relating to the attack on the World Trade Center.
(c) Includes an aggregate of 18.8% and 6.2% for the three and nine
month periods of 2001 relating to the A&E charge and the attack
on the World Trade Center.
22
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SPECIAL A&E CHARGE During the third quarter of 2001, AFG recorded an
A&E charge of $100 million after experiencing an increase in the number
and severity of asbestos claims and observing the developments of adverse
trends in the property and casualty insurance industry concerning asbestos
losses. This charge, accompanied by a transfer of $36 million from excess
reserves for other environmental claims, resulted in an increase of $136
million in asbestos reserves. For a discussion of the uncertainties
relative to asbestos and environmental claims, see MD&A - "Uncertainties -
Asbestos and Environmental-related Reserves."
SPECIALTY The Specialty group's gross written premiums increased 28% for
the third quarter and 23% for the nine months of 2002 over the comparable
2001 periods. These increases reflect the impact of rate increases and the
realization of growth opportunities in certain commercial markets,
partially offset by the decision to discontinue certain lines of business
(during 2001) that were not achieving adequate returns. Specialty rate
increases averaged over 30% during the first nine months of 2002 and are
expected to be in excess of 30% for the year. Net written premiums
increased 14% for the third quarter and 7% for the nine months over the
comparable 2001 periods. Strong growth in gross written premiums was
offset by increased reinsurance coverage in certain lines.
Excluding the effect of the attack on the World Trade Center, the
Specialty group's combined ratio improved 3 points for both the third
quarter and first nine months of 2002. The improvement reflects strategic
changes in the mix of specialty businesses and the impact of rate
increases.
PERSONAL The Personal group's gross written premiums for the third quarter
decreased 5% compared to the third quarter of 2001 due primarily to
intentional reductions in new business volume in certain markets and
through the direct channel, partially offset by the effect of continuing
rate increases. Rate increases implemented in the first nine months of
2002 were 10% and are expected to be slightly above 10% for the year.
Effective April 1, 2001, AFG began reinsuring 80% of the automobile
physical damage business written by three of its insurance subsidiaries.
In July 2001, the agreement was amended to increase the level of
reinsurance to 90% and to add an additional insurance subsidiary. In
September 2002, our use of the existing agreement was expanded to include
physical damage business written by agents of Great American Insurance
pool companies. This agreement enables AFG to reallocate some of its
capital to the more profitable specialty operations. The decline in net
written premiums for the third quarter and nine months reflects the impact
of this reinsurance agreement.
As a result of rate increases implemented over the last year, the Personal
group's combined ratio improved by 6.5 points for the third quarter and
7.7 points for the nine months compared to the 2001 periods. Nearly 90% of
the Personal group's business is written through independent agents.
Business written through this distribution channel achieved an
underwriting profit for the fourth consecutive quarter with a combined
ratio of about 98% for the first nine months of 2002. This business
comprises the insurance operations to be included in the recently
announced proposed public offering of Infinity Property and Casualty
Corporation.
23
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIFE, ACCIDENT AND HEALTH PREMIUMS AND BENEFITS Life, accident and health
premiums increased for the third quarter and first nine months of 2002
compared to the 2001 periods due primarily to the acquisition of Manhattan
National Life in June 2002 and growth in GAFRI's existing operations. In
addition to this growth, life, accident and health benefits for the 2002
periods reflect the effects of adverse mortality in GAFRI's life insurance
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).
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Other income $26.0 $24.3 $70.9 $85.7
Other operating and general expenses 19.8 17.9 52.0 49.5
Interest charges on borrowed money .6 .3 1.9 1.6
Minority interest expense, net .6 .2 1.0 3.5
Other income includes net pretax gains on the sale of real estate assets
of $87,000 in the third quarter and $7.7 million in the first nine months
of 2002 compared to $2.0 million and $26.6 million for the 2001 periods.
OTHER INCOME Excluding gains on sales of real estate assets (discussed
above), other income increased $11.6 million (21%) for the third quarter
and $24.1 million (17%) for the first nine months of 2002 compared to 2001
due primarily to higher income from real estate operations (including the
effect of a hotel acquired in May 2002), fees earned by the Specialty
group's new warranty business and higher fee income in certain other
specialty insurance operations.
REALIZED GAINS Realized capital gains have been an important part of the
return on investments. Individual assets are sold creating gains and
losses as market opportunities exist.
LOSSES ON SECURITIES Realized losses on securities include provisions for
other than temporary impairment of securities still held as follows: third
quarter of 2002 and 2001 - $49.8 million and $22.9 million; nine months of
2002 and 2001 - $138.2 million and $60.1 million, respectively. Increased
impairment charges in recent years reflect a rise in corporate defaults in
the marketplace. The increase in impairment charges in 2002 reflects
primarily the downturn in the communications and airline industries and
writedowns of certain asset-backed securities.
Warrants to purchase common stock of publicly traded companies are
generally considered derivatives and marked to market through current
earnings as realized gains and losses. Realized losses on securities
include losses of $7.5 million in the third quarter of 2002 and $6.9
million for the first nine months of 2002 compared to gains of $60,000 and
$2.4 million in the 2001 periods to adjust the carrying value of AFG's
investment in warrants to market value ($18.8 million at September 30,
2002).
GAINS (LOSSES) ON SUBSIDIARIES In September 2002, AFG recognized a $10.8
million pretax loss on the disposal of its New Jersey private passenger
auto business. In 2001, AFG recognized a third quarter pretax gain of $7.1
million on the sale
24
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
of Seven Hills Insurance Company and a first quarter $1.6 million pretax
loss in connection with the sale of the Japanese division.
GAIN ON OTHER INVESTMENTS In September 2002, AFG realized a $9.3 million
pretax gain on the sale of its minority ownership in a residential
homebuilding company.
ANNUITY BENEFITS Annuity benefits reflect amounts accrued on annuity
policyholders' funds accumulated. The majority of GAFRI's fixed rate
annuity products permit GAFRI to change the crediting rate at any time
(subject to minimum interest rate guarantees of 3% or 4% per annum).
Historically, management has been able to react to changes in market
interest rates and maintain a desired interest rate spread. The recent
interest rate environment has resulted in spread compression which could
continue through 2003.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
for the third quarter and first nine months of 2001 include goodwill
amortization of $3.4 million and $10.3 million, respectively. Under SFAS
No. 142, which was implemented January 1, 2002, goodwill is no longer
amortized. Excluding 2001 goodwill amortization, other operating and
general expenses increased $20.7 million (18%) for the third quarter and
$40.2 million (12%) for the first nine months compared to 2001. Expenses
of the Specialty group's new warranty business, higher expenses in real
estate operations (due primarily to the acquisition of a new hotel in May
2002), higher expenses related to growth in certain other Specialty
operations and increased amortization of annuity and life deferred policy
acquisition costs ("DPAC") were partially offset by lower IT-related
expenses. The increase in amortization of annuity and life DPAC in the
third quarter and the first nine months of 2002 compared to the same
periods in 2001 reflects (i) the accelerated write-off of variable annuity
DPAC due to the effect of the decline in the stock market and (ii) higher
average DPAC balances due to internal growth and acquisitions.
INCOME TAXES The 2002 provision for income taxes includes a $16 million
first quarter tax benefit for the reduction of previously accrued amounts
due to the resolution of certain tax matters.
INVESTEE CORPORATIONS Equity in losses of investee corporations represents
losses of two start-up manufacturing businesses (see Note H). In November
2001, an injunction was issued against one of the companies which would
prohibit it from using equipment subject to litigation alleging the
misappropriation of a trade secret and would effectively close the plant.
The injunction was subsequently modified to permit operations to continue
and require certain escrow payments. Since the injunction was imposed, the
investee manufactured and has installed equipment that it believes does
not misappropriate a trade secret; the equipment subject to the injunction
was destroyed. As a result, the injunction no longer affects plant
operations and escrow payments are no longer required. Even so, if the
investee's operating results fail to improve, a substantial portion of
AFG's investment ($30.4 million as of September 30, 2002), may be written
off.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE The cumulative effect of accounting
change represents the implementation of a new accounting standard (EITF
99-20) which resulted in a write down of $16.9 million ($10.0 million or
$.15 per share after tax and minority interest) of the carrying value of
certain collateralized debt obligations as of April 1, 2001.
PROPOSED ACCOUNTING STANDARD GAFRI's variable annuity contracts contain a
guaranteed minimum death benefit ("GMDB") (which may exceed the value of
the
25
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
policyholder's account) to be paid if the annuityholder dies before the
annuity payout period commences. At September 30, 2002, and December 31,
2001, the aggregate GMDB values (assuming every policyholder died on those
dates) exceeded the market value of the underlying variable annuities by
$253 million and $136 million, respectively. Industry practice varies, but
GAFRI does not establish GAAP reserves for this mortality risk. If a
proposed accounting standard becomes effective, GAFRI would be required to
record a liability for the present value of expected GMDB payments.
Initial recognition of a GAAP liability (estimated to be between 2% and 4%
of the aggregate difference) would be accounted for as the cumulative
effect of a change in accounting principles.
--------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As of September 30, 2002, there were no material changes to the
information provided in AFG's Form 10-K for 2001 under the caption
"Exposure to Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
--------------------------------------------------
ITEM 4
CONTROLS AND PROCEDURES
AFG's chief executive officer and chief financial officer, with assistance
from management, have evaluated AFG's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days
prior to filing this report. Based on that evaluation, they concluded that
the controls and procedures are effective. There have been no significant
changes in AFG's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
26
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99 - Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Date of Report Item Reported
-------------- -------------
August 12, 2002 Statement Under Oath of Principal Executive Officer
and Principal Financial Officer Regarding Facts and
Circumstances Relating to Exchange Act Filings
October 9, 2002 Registration Statement filed - Infinity Property and
Casualty Corporation (new subsidiary)
-------------------------------------------
SIGNATURE
Pursuant to the requirements 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.
November 13, 2002 BY: Fred J. Runk
-----------------------------------
Fred J. Runk
Senior Vice President and Treasurer
27
AMERICAN FINANCIAL GROUP, INC. 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS
I, Carl H. Lindner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 BY: /s/Carl H. Lindner
-------------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
28
AMERICAN FINANCIAL GROUP, INC. 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS - CONTINUED
I, Fred J. Runk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 BY: /s/Fred J. Runk
-----------------------------------
Fred J. Runk
Senior Vice President and Treasurer
(principal financial officer)
29
AMERICAN FINANCIAL GROUP, INC. 10-Q
EXHIBIT 99
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of American Financial Group, Inc. (the "Company") on Form 10-Q
for the period ended September 30, 2002 (the "Report"), the undersigned officers
of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their
knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
November 13, 2002 BY: Carl H. Lindner
- ----------------------------- -----------------------------------
Date Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
November 13, 2002 BY: Fred J. Runk
- ----------------------------- -----------------------------------
Date Fred J. Runk
Senior Vice President and Treasurer
30