UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ____)
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Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-
12
AMERICAN FINANCIAL CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
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[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
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computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined)
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
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(4) Date Filed:
AMERICAN FINANCIAL CORPORATION
[LOGO]
One East Fourth Street
Cincinnati, Ohio 45202
Notice of Annual Meeting of Shareholders
and Proxy Statement
To be Held on May 24, 2001
Dear Shareholder:
We invite you to attend our Annual Meeting of Shareholders on Thursday,
May 24, 2001, in Cincinnati, Ohio. At the meeting, you will hear a report on our
operations and have an opportunity to meet your Company's directors and
executives.
This booklet includes the formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how your Board of Directors operates and
provides information about the director candidates.
We want your shares to be represented at the meeting and we urge you
either to use our telephone voting system, or promptly to complete, sign, date
and return your proxy form.
Sincerely,
BY:s/CARL H. LINDNER
----------------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Cincinnati, Ohio
April 12, 2001
- -------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
- -------------------------------------------------------------------------------
OF AMERICAN FINANCIAL CORPORATION
Date: Thursday, May 24, 2001
Time: 10:30 a.m. Eastern Daylight Savings Time
Place: The Cincinnatian Hotel
Second Floor -- Filson Room
601 Vine Street
Cincinnati, Ohio
Purpose: o Elect Directors
o Conduct other business if properly raised
Record Date: March 31, 2001 - Shareholders of record on
that date are entitled to receive notice of and
to vote at the meeting.
Mailing Date: The approximate mailing date of this proxy
statement and accompanying proxy form is
April 16, 2001.
AFG Meeting: The meeting will be held concurrently
with the meeting of shareholders of
American Financial Group, Inc. ("AFG"),
the Company's parent company.
Your vote is important. Whether or not you attend the meeting, you may vote your
shares (1) using the toll-free telephone voting system described on page 1
below, or (2) by mailing a signed proxy form, which is the bottom portion of the
enclosed perforated form. If you do attend the meeting, you may either vote by
proxy or revoke your proxy and vote in person. You may also revoke your proxy at
any time before the vote is taken at the meeting by written revocation, using
the telephone voting system or by submitting a later-dated proxy form.
i
Table Of Contents
-----------------
Page
----
GENERAL INFORMATION......................................... 1
ELECTION OF DIRECTORS....................................... 2
PRINCIPAL SHAREHOLDERS...................................... 2
MANAGEMENT.................................................. 3
COMPENSATION................................................ 5
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS........... 10
INDEPENDENT AUDITORS........................................ 11
NOMINATIONS AND SHAREHOLDER PROPOSALS....................... 12
REQUESTS FOR FORM 10-K...................................... 12
CERTAIN FINANCIAL INFORMATION............................... F-1
ii
GENERAL INFORMATION
Record Date; Shares Outstanding
As of March 31, 2001, the record date for determining shareholders
entitled to notice of and to vote at the meeting, the Company had outstanding
two classes of voting securities, its common stock, no par value and its Series
J Preferred Stock. At the Record Date, 10,593,000 shares of Common Stock were
outstanding, all of which were held by AFG, and 2,886,161 shares of Preferred
Stock were outstanding. Each share of outstanding common stock and preferred
stock is entitled to one vote on each matter to be presented at the Meeting.
Abstentions and broker non-votes will have no effect on any item voted on at the
Meeting.
Cumulative Voting
Shareholders have cumulative voting rights in the election of directors
and one vote per share on all other matters. Cumulative voting allows a
shareholder to multiply the number of shares owned on the record date by the
number of directors to be elected and to cast the total for one nominee or
distribute the votes among the nominees as the shareholder desires. Nominees who
receive the greatest number of votes will be elected. In order to invoke
cumulative voting, notice of cumulative voting must be given in writing to an
executive officer of the Company not less than 48 hours before the time fixed
for the holding of the meeting.
Proxies and Voting Procedures
Registered shareholders may vote by using a toll-free telephone number,
by completing a proxy form and mailing it to the proxy tabulator, or by
attending the meeting and voting in person. The telephone voting facilities will
open on April 16, 2001, and close at 9:00 a.m. Eastern Daylight Savings Time on
the meeting date. The telephone voting facilities are open Monday through Friday
from 8:00 a.m. until 10:30 p.m. and on Saturdays from 8:00 a.m. until 4:30 p.m.
Eastern Daylight Savings Time. The telephone voting procedures are designed to
authenticate shareholders by use of a proxy control number and personal
identification number ("PIN") to allow shareholders to confirm that their
instructions have been properly recorded.
Shareholders whose shares are held in the name of a broker, bank or
other nominee should refer to their proxy card or the information forwarded by
such broker, bank or other nominee to see what voting options are available.
To vote by telephone, shareholders should call 1-877-298-0570,
toll-free, using any touch-tone telephone and have their proxy form at hand.
Shareholders will be asked to enter the proxy control number and PIN, then
follow simple recorded instructions. To vote by mail, shareholders should
complete and sign the bottom portion of the proxy form and return only that
portion to the proxy tabulator in the reply envelope provided.
Solicitation of proxies through the mail, in person and otherwise, is
being made by management at the direction of the Company's Board of Directors,
without additional compensation. AFC will pay all costs of soliciting proxies.
In addition, the Company will request brokers and other custodians, nominees and
fiduciaries to forward proxy soliciting material to the beneficial owners of
shares held of record by such persons, and AFC will reimburse them for their
expenses.
The execution of a proxy or vote by phone does not affect the right to
vote in person at the meeting, and a proxy or vote by phone may be revoked by
the person giving it prior to the exercise of the powers conferred by it. A
shareholder may revoke a prior vote by writing to the Secretary of AFC at the
Company's principal offices or by properly executing and delivering a proxy
bearing a later date (or recording a later telephone vote). In addition, persons
attending the meeting in person may withdraw their proxies.
If a choice is specified on a properly executed proxy form, the shares
will be voted accordingly. If a proxy form is signed without a preference
indicated, those shares will be voted "FOR" the election of the eight nominees
proposed by the Board of Directors. The authority solicited by this Proxy
Statement includes discretionary authority to cumulate votes in the election of
directors. If any other matters properly come before the meeting or any
adjournment thereof, each properly executed proxy form will be voted in the
discretion of the proxies named therein.
Adjournment and Other Matters
Approval of a motion for adjournment or other matters brought before
the meeting requires the affirmative vote of a majority of the shares voting at
the meeting. Management knows of no other matters to be presented at the meeting
other than those stated in this document.
PROPOSAL -- ELECTION OF DIRECTORS
The Board of Directors has nominated eight directors to hold office
until the next annual meeting of Shareholders and until their successors are
elected and qualified. If any of the nominees should become unable to serve as a
director, the proxies will be voted for any substitute nominee designated by the
Board of Directors but, in any event, no proxy may be voted for more than eight
nominees. The eight nominees who receive the greatest number of votes will be
elected.
The nominees for election to the Board of Directors are:
Carl H. Lindner Keith E. Lindner
S. Craig Lindner Carl H. Lindner III
Theodore H. Emmerich Thomas M. Hunt
James E. Evans William R. Martin
All of these nominees were elected directors at the last annual meeting
of shareholders of the Company held on May 9, 2000. See "Management" and
"Compensation" below for information concerning the background, securities
holdings, remuneration and other matters relating to the nominees.
The Board of Directors recommends that shareholders vote FOR the
election of these eight nominees as directors.
PRINCIPAL SHAREHOLDERS
The following shareholders are the only persons known by the Company to
own beneficially 5% or more of its outstanding voting securities as of March 31,
2001:
---------------------------------- --------------------- -----------------
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Voting Securities
================================== ===================== =================
American Financial Group, Inc. (a) 10,593,000 shares 78.6%
One East Fourth Street of Common Stock
Cincinnati, Ohio 45202
---------------------------------- --------------------- -----------------
(a) Carl H. Lindner, S. Craig Lindner, Carl H. Lindner III, Keith E. Lindner
and trusts for their benefit (collectively, the "Lindner Family") were
the beneficial owners of approximately 44.2% of the voting stock of AFG
at March 31, 2001. AFG and the Lindner Family may be deemed to be
controlling persons of the Company.
-2-
MANAGEMENT
The directors, nominees and executive officers of the Company are:
Director or
Age* Position Executive Since
---- -------- ---------------
Carl H. Lindner 81 Chairman of the Board and Chief Executive Officer 1959
S. Craig Lindner 46 Co-President and a Director 1979
Keith E. Lindner 41 Co-President and a Director 1981
Carl H. Lindner III 47 Co-President and a Director 1980
Theodore H. Emmerich 74 Director 1988
James E. Evans 55 Senior Vice President and General Counsel
and a Director 1976
Thomas M. Hunt 77 Director 1982
William R. Martin 72 Director 1994
Keith A. Jensen 50 Senior Vice President 1999
Thomas E. Mischell 53 Senior Vice President - Taxes 1985
Fred J. Runk 58 Senior Vice President and Treasurer 1978
- ---------------------
*As of March 31, 2001
Carl H. Lindner (Chairman of the Executive Committee) Mr. Lindner is
the Chairman of the Board and Chief Executive Officer of the Company. During the
past five years, Mr. Lindner has also been Chairman of the Board and Chief
Executive Officer of AFG. He is Chairman of the Board of Directors of Great
American Financial Resources, Inc. and Chiquita Brands International, Inc. Mr.
Lindner is the father of Carl H. Lindner III, S. Craig Lindner and Keith E.
Lindner.
S. Craig Lindner (Member of the Executive Committee) For more than five
years, Mr. Lindner has served as Co-President and a director of the Company and
AFG. He is also President of Great American Financial Resources, Inc., an
83%-owned subsidiary of AFC that markets tax-deferred annuities principally to
employees of educational institutions and offers life and health insurance
products. Mr. Lindner is also President of American Money Management
Corporation, a subsidiary which provides investment services for the Company and
its affiliated companies. Mr. Lindner is also a director of Great American
Financial Resources.
Keith E. Lindner (Member of the Executive Committee) For more than five
years, Mr. Lindner has served as Co-President and a director of the Company and
AFG. In March 1997, Mr. Lindner was named Vice Chairman of the Board of
Directors of Chiquita Brands International, a worldwide marketer and producer of
bananas and other food products in which the Company has a 36% ownership
interest. For more than five years prior to that time, Mr. Lindner had been
President and Chief Operating Officer and a director of Chiquita.
Carl H. Lindner III (Member of the Executive Committee) For more than
five years, Mr. Lindner has served as Co-President and a director of the Company
and AFG. For over ten years, Mr. Lindner has been principally responsible for
the Company's property and casualty insurance operations.
Theodore H. Emmerich (Chairman of the Audit Committee; Member of the
Compensation Committee) Prior to his retirement in 1986, Mr. Emmerich was
managing partner of the Cincinnati office of the independent accounting firm of
Ernst & Whinney. He is also a director of AFG, Carillon Fund, Inc., Carillon
Investment Trust, Gradison Custodial Trust, Gradison-McDonald Municipal
Custodial Trust, Gradison-McDonald Cash Reserve Trust and Summit Investment
Trust.
James E. Evans For more than five years, Mr. Evans has served as Senior
Vice President and General Counsel of the Company and AFG. Mr. Evans is also a
director of AFG.
Thomas M. Hunt (Member of the Compensation and Audit Committees) During
the past five years, Mr. Hunt has been Chairman of the Board of Hunt Petroleum
Corporation, an oil and gas production company. He is also a director of AFG.
-3-
William R. Martin (Chairman of the Compensation Committee; Member of
the Audit Committee) During the past five years, Mr. Martin has been Chairman of
the Board of MB Computing, Inc., a computer software and services company. Mr.
Martin is also a director of Great American Financial Resources and AFG.
Keith A. Jensen was named a Senior Vice President of the Company and
AFG in February 1999. Since February 1997, he has also been Senior Vice
President of Great American Financial Resources. For more than five years prior
thereto he was a partner with Deloitte & Touche LLP, an independent accounting
firm.
Thomas E. Mischell has served as Senior Vice President - Taxes of the
Company for over five years.
Fred J. Runk has served as Senior Vice President and Treasurer of the
Company for more than five years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires AFC's executive officers,
directors and persons who own more than ten percent of AFC's voting stock to
file reports of ownership with the Securities and Exchange Commission and to
furnish the Company with copies of these reports. The Company believes that all
filing requirements were met during 2000.
Securities Ownership
The following table sets forth information, as of March 31, 2001,
concerning the beneficial ownership of equity securities of the Company and its
parent and subsidiaries by each director, nominee for director, the executive
officers named in the Summary Compensation Table (see "Compensation" below) and
by all directors and executive officers as a group. Such information is based on
data furnished by the persons named. Except as set forth in the following table,
no director or executive officer beneficially owned 1% or more of any class of
equity security of the Company, its parent or any of its subsidiaries
outstanding at March 31, 2001.
Amount and Nature of Beneficial Ownership (a)
------------------------------------------------
Name of Shares of Common Shares of Preferred
Beneficial Owner Stock Held Stock Held
- --------------------------- ----------------- ------------------------
Carl H. Lindner 10,593,000 (b) ---
Carl H. Lindner III 10,593,000 (b) ---
S. Craig Lindner 10,593,000 (b) ---
Keith E. Lindner 10,593,000 (b) ---
Theodore H. Emmerich --- ---
James E. Evans --- ---
Thomas M. Hunt --- ---
William R. Martin --- 40,126 (c)
All directors and executive 10,593,000 (b) 60,830 (d)
officers as a group
(11 persons)
(a) Does not include the following ownership interests in certain
affiliates of the Company: Messrs. Emmerich, Evans, Hunt, S.C. Lindner
and Martin, and all directors and executive officers as a group
beneficially own 1,561; 11,138; 382; 105,158; 10,547 and 272,120
shares, respectively, of the common stock of Great American Financial
Resources. Also excludes the following ownership of Chiquita common
stock: Messrs. Emmerich, C.H. Lindner and K.E. Lindner, and all
directors and executive officers as a group beneficially own 1,000;
2,128,625 (3.2%); 17,326 and 2,363,099 (3.6%) shares, respectively.
-4-
(b) Represents shares held by AFG. The Lindner Family may be deemed to be
the beneficial owners of these shares, which represent 100% of AFC
common stock outstanding.
(c) Represents 1.4% of the preferred stock outstanding.
(d) Represents 2.1% of the preferred stock outstanding.
COMPENSATION
The following table summarizes the aggregate cash compensation for
2000, 1999 and 1998 of the Company's Chairman of the Board and Chief Executive
Officer and its four other most highly compensated executive officers during
2000 (the "Named Executive Officers") as reported in the proxy statement for
AFG's 2001 annual meeting. Such compensation includes amounts paid by AFC and
AFG as well as its subsidiaries and certain affiliates during the years
indicated.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
------------------------------------ ---------------------
Name Other Annual Securities Underlying All Other
And Compensation Options Granted Compensation
Principal Position Year Salary (a) Bonus (b) (c) (# of Shares) (d) (e)
-------------------------------------------------------------------------------------------------------------------
2000 $950,500 $0 $54,000 --- $106,500
Carl H. Lindner 1999 968,000 600,000 65,000 --- 68,000
Chairman of the Board and 1998 968,000 697,000 190,000 --- 73,000
Chief Executive Officer
2000 950,500 0 35,000 110,000 34,000
Keith E. Lindner 1999 968,000 600,000 56,000 50,000 44,000
Co-President 1998 968,000 697,000 22,000 40,000 47,000
2000 950,500 0 79,000 110,000 29,000
Carl H. Lindner III 1999 968,000 600,000 106,000 50,000 34,000
Co-President 1998 968,000 697,000 128,000 40,000 34,000
2000 950,500 0 99,000 110,000 28,000
S. Craig Lindner 1999 968,000 600,000 75,000 50,000 33,000
Co-President 1998 968,000 697,000 184,000 40,000 33,000
2000 950,500 290,000 500 100,000 30,000
James E. Evans 1999 968,000 580,000 2,000 45,000 36,000
Senior Vice President and 1998 968,000 670,000 4,000 35,000 787,000
General Counsel
(a) This column includes salaries paid by Chiquita to Keith E. Lindner of
$47,500 in 2000, and to each of Carl H. Lindner and Keith E. Lindner of
$50,000 in 1999, and $100,000 in 1998.
(b) Bonuses are for the year shown, regardless of when paid. Approximately
one-fourth of the bonuses for each individual was paid in shares of AFG
common stock.
-5-
(c) This column includes amounts for personal homeowners and automobile
insurance coverage, and the use of corporate aircraft and automobile
service as follows.
Name Year Insurance Aircraft & Automobile
-------------------- ---- --------- ---------------------
Carl H. Lindner 2000 $25,000 $ 29,000
1999 21,000 44,000
1998 16,000 174,000
Keith E. Lindner 2000 21,000 14,000
1999 42,000 14,000
1998 11,000 11,000
Carl H. Lindner III 2000 32,000 47,000
1999 29,000 77,000
1998 28,000 100,000
S. Craig Lindner 2000 44,000 54,000
1999 32,000 43,000
1998 43,000 141,000
James E. Evans 2000 -- 500
1999 -- 2,000
1998 -- 4,000
(d) The number of options shown as granted during 2000 includes the 2001
grant, which was made in late December 2000.
(e) Includes Company or subsidiary contributions or allocations under the
(i) defined contribution retirement plans and (ii) employee savings
plan in which the following Named Executive Officers participate (and
related accruals for their benefit under the Company's benefit
equalization plan which generally makes up certain reductions caused by
Internal Revenue Code limitations in the Company's contributions to
certain of the Company's retirement plans) and Company paid group life
insurance as set forth below. For Mr. Evans only, this column also
includes a special 1998 cash bonus of $750,000.
AFG
Auxiliary Retirement Savings Plan Directors'
Name Year RASP Plan Fees Term Life
----------------------- --------- ------------ --------------- ------------- --------------- --------------
Carl H. Lindner 2000 $16,500 $8,500 -- $62,500 $19,000
1999 20,400 9,600 -- 15,000 23,000
1998 20,400 9,600 -- 15,000 28,000
Keith E. Lindner 2000 16,500 8,500 $8,000 -- 1,000
1999 20,400 9,600 12,000 -- 2,000
1998 20,400 9,600 16,000 -- 1,000
Carl H. Lindner III 2000 16,500 8,500 2,000 -- 2,000
1999 20,400 9,600 2,000 -- 2,000
1998 20,400 9,600 2,000 -- 2,000
S. Craig Lindner 2000 16,500 8,500 2,000 -- 1,000
1999 20,400 9,600 2,000 -- 1,000
1998 20,400 9,600 2,000 -- 1,000
James E. Evans 2000 16,500 8,500 2,000 -- 3,000
1999 20,400 9,600 2,000 -- 4,000
1998 20,400 9,600 2,000 -- 5,000
-6-
Stock Options
The tables set forth below disclose AFG stock options granted to, or
exercised by, the Named Executive Officers during 2000, and the number and value
of unexercised options held by them at December 31, 2000.
OPTION GRANTS IN 2000
------------------------------------------------------------- ----------------------------------
Individual Grants Potential Realizable
-------------------- -------------- ------------- -----------
Number of Percent of Exercise Value at Assumed Annual Rates of
Securities Total Price per Stock Price
Underlying Options Options Share Appreciation for Option
Granted to (fair market Term (b)
Granted (a) Employees in value at Expiration ---------------- -----------------
Name (# of shares) 2000 date of Date 5% 10%
grant)
- ---------------------------------------------------------------------------------------------------------------------
Carl H. Lindner - - - - - - -
Keith E. Lindner AFG 55,000 2.75% $19.84 2/21/10 $686,250 $1,739,092
55,000 2.75% 19.75 12/17/10 683,137 1,731,203
S. Craig Lindner AFG 55,000 2.75% $19.84 2/21/10 $686,250 $1,739,092
55,000 2.75% 19.75 12/17/10 683,137 1,731,203
Carl H. Lindner III AFG 55,000 2.75% $19.84 2/21/10 $686,250 $1,739,092
55,000 2.75% 19.75 12/17/10 683,137 1,731,203
James E. Evans AFG 50,000 2.5% $19.84 2/21/10 $623,863 $1,580,993
50,000 2.5% 19.75 12/17/10 621,033 1,573,821
Stock Appreciation
for All AFG
Shareholders
66,045,992 shares (c) $1,103,299,190 $2,795,976,766
(a) The options were granted under AFG's Stock Option Plan and cover AFG
common stock. They vest (become exercisable) to the extent of 20% per
year, beginning one year from the respective dates of grant, and become
fully exercisable in the event of death or disability or in the event
of involuntary termination of employment without cause within one year
after a change of control of AFG.
(b) Represents the hypothetical future values that would be realizable if
all of the options were exercised immediately prior to their expiration
in 2010 and assuming that the market price of AFG's common stock had
appreciated in value through the year 2010 at the annual rate of 5% (to
$32.32 per share for the February grant and to $32.17 per share for the
December grant) or 10% (to $51.46 per share for the February grant and
to $51.23 per share for the December grant). Such hypothetical future
values have not been discounted to their respective present values,
which are lower.
(c) On December 31, 2000, the price of AFG common stock on the New York
Stock Exchange was $26.5625. The gain shown for All AFG Shareholders
assumes that the market price of AFG's common stock appreciates in
value through the year 2010 at the annual rate of 5% (to $43.27 per
share) or 10% (to $68.90 per share).
AGGREGATED OPTION EXERCISES IN 2000 AND 2000 YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities
Shares Underlying Value of Unexercised
Acquired on Unexercised Options In-the-Money Options
Exercise at Year End at Year End (a)
(# of Value ---------------------------------------------------------
Name Company Shares) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Carl H. Lindner AFG - - - - - -
Carl H. Lindner III AFG 1,091 $4,904 448,363 194,000 $1,015,203 $744,425
S. Craig Lindner AFG 1,091 $7,154 448,363 194,000 $1,019,254 $744,425
Keith E. Lindner AFG 1,091 $4,635 448,363 194,000 $1,017,201 $744,425
James E. Evans AFG - - 169,000 192,000 $ -0- $676,750
(a) The value of unexercised in-the-money options is calculated based on
the New York Stock Exchange closing market price of AFG's common stock
at year-end 2000. This price was $26.5625 per share.
-7-
Compensation Committee Report
The Compensation Committee of the Board of Directors consists of three
directors, none of whom is an employee of the Company, AFG or any of its
subsidiaries. This Committee also acts as the Compensation Committee for AFG.
The Committee's functions include reviewing and making recommendations to the
Board of Directors with respect to the compensation of the Company's senior
executive officers, as defined from time to time by the Board. The term "senior
executive officers" currently includes the Chairman of the Board and Chief
Executive Officer (the "CEO") and the Co-Presidents. The Compensation Committee
has the exclusive authority to grant stock options under AFG's Stock Option Plan
to employees of the Company and its subsidiaries, including senior executive
officers.
Compensation of Executive Officers. The Company's compensation policy
for all executive officers of the Company has three principal components: annual
base salary, annual incentive bonuses and stock option grants. Before decisions
were made regarding 2000 compensation for senior executives, the Committee had
discussions with Company executives to solicit their thoughts regarding
compensation. Based in part on such discussions as well as the Committee's
review of the Company's financial results for the preceding year, the Committee
deliberated, formed its recommendations, and presented its determinations
regarding salary and bonus to the full Board for its review and approval. The
compensation decisions discussed in this report conformed with recommendations
made by the Committee, the CEO and the Co-Presidents.
Annual Base Salaries. The Committee approved annual base salaries and
salary increases for senior executive officers that were appropriate, in the
Committee's subjective judgment, for their respective positions and levels of
responsibilities. The Committee approved the 2000 salaries of the CEO and the
Co-Presidents, noting that such salaries would be substantially the same rates
in 2000 as in 1999, 1998 and the latter part of 1997.
Annual Bonuses. As was the case for the past four years, the Committee
developed an annual bonus plan for 2000 for the CEO and the Co-Presidents that
would make a substantial portion of their total compensation dependent on the
Company's performance, including achievement of pre-established earnings per
share targets. Other executive officers of the Company were included in the
annual bonus plan for 2000 by action of the Executive Committee.
The annual bonus plan for 2000 made 50% of each participant's annual
bonus dependent on the Company attaining certain earnings per share targets. The
other 50% is based on the Company's overall performance, as subjectively
determined by the Committee. A significant aspect of the 2000 annual bonus plan
(as in prior years) was that it provided that 25% of any bonuses be paid in
AFG's common stock. As in the grant of stock options discussed below, the
Committee believes that payment of a substantial portion of annual bonuses in
common stock align further the interests of the Company's senior executives with
those of its shareholders.
Under the 2000 annual bonus plan, the bonus target amount for the CEO
and each of the Co-Presidents was $950,000 with 0% to 175% of $475,000 (50% of
$950,000) to be paid depending on AFG achieving certain 2000 earnings per share
allocable to insurance operations (the "EPS Component") and 0% to 175% of
$475,000 to be paid based on AFG's overall performance, as subjectively
determined by the Committee (the "Company Performance Component"). The earnings
per share target which would result in the payment of 100% of the EPS Component
bonus was set by the Committee at $2.65. In recommending the 2000 annual bonus
plan to the Board for adoption, the Committee noted that no bonus should be paid
under the plan if 2000 earnings per share from insurance operations are less
than $1.98 (75% of the 2000 EPS target). AFG's 2000 earnings per share from
insurance operations were less than 75% of the EPS target and no amount was
earned attributable to the EPS Component.
The Committee then evaluated the Company's performance during 2000. The
Committee considered a number of factors in discussions of such performance with
senior executives and noted that each requested that no bonus be paid for 2000.
In agreeing with the CEO and the Co-Presidents that they not be awarded an
amount attributable to the Company Performance Component, the Committee
considered several factors. Included among those factors were the successful
redeployment of resources in the Company's Specialty Group, a successful AFG
common stock offering, the proceeds of which were contributed to the capital of
operating subsidiaries, and the maintenance of AFG's debt-to-capital ratio in a
range desirable for investment grade companies. Notwithstanding these positive
developments, the Committee noted that AFG's stock price trailed an index
composed of many other insurance holding companies during 2000. The Board
adopted all of the Committee's recommendations resulting in no 2000 bonuses
being paid to the Chief Executive Officer and Co-Presidents.
The annual base salary and bonus target amounts of the CEO and the
Co-Presidents are virtually identical because the Committee reviews them as
working as a management team whose skills and areas of expertise complement each
other.
-8-
Stock Option Grants. Stock options represent an important part of the
Company's performance-based compensation system. The Committee believes that
Company shareholders' interests are well served by aligning the Company's senior
executives' interests with those of its shareholders through the grant of stock
options in addition to paying a portion of any annual bonus in common stock.
Options under AFG's Stock Option Plan are granted at exercise prices equal to
the fair market value of common stock on the date of grant and vest at the rate
of 20% per year. The Committee believes that these features provide an optionee
with substantial incentive to maximize the Company's long-term success. Options
for 55,000 shares were granted to each of the Co-Presidents and additional
options were granted to the other senior executives of the Company in early
2000. In December 2000, management recommended that the Committee consider
granting stock options near the public offering of AFG common stock rather than
in the first quarter of 2001 to senior executives and others whose annual
compensation reviews typically include stock option grants. The Committee agreed
that it may be beneficial to shareholders of the Company and AFG to grant
options with an exercise price close to the public offering price. As a result,
the Co-Presidents were granted options for 55,000 shares in December 2000. It is
expected that no options will be granted to them in 2001. No options were
granted to the CEO in 2000.
Members of the Compensation Committee: William R. Martin, Chairman
Theodore H. Emmerich
Thomas M. Hunt
Certain Transactions
The Company and its subsidiaries have had and expect to continue to
have transactions with AFG's directors, officers, principal shareholders, their
affiliates and members of their families. The Company believes that the
financial terms of these transactions are comparable to those that would apply
to unrelated parties and are fair to AFC.
Members of the Lindner Family are the principal owners of Provident
Financial Group, Inc. ("Provident"). AFC provides security guard and
surveillance services at the main office of Provident for which Provident paid
$100,000 in 2000. Provident leases its main banking and corporate office from
AFG for which Provident paid rent of $2,951,000 in 2000. A subsidiary of
Provident leases equipment to subsidiaries of AFG for which Provident was paid
an aggregate of $710,000 during 2000.
Coupons redeemable for ice cream, and certificates redeemable for
tickets to a home Cincinnati Reds Major League Baseball game, were given as
gifts to employees at the Company Christmas party. During 2000, AFG paid
$121,000 to United Dairy Farmers, Inc. for the ice cream coupons and related
items. UDF is owned by one of Carl H. Lindner's brothers and his family. AFG
paid the Reds $53,200 for the Christmas gift tickets and $128,000 for other
tickets during 2000. Carl H. Lindner is the Chief Executive Officer of the Reds.
In addition, a subsidiary of AFG, and a company owned by Carl H. Lindner, Carl
H. Lindner III, Keith E. Lindner and S. Craig Lindner, are part owners of the
Reds.
In July 2000, a subsidiary of AFC entered into a thirty-year agreement
with the Reds, pursuant to which the Reds' home stadium will be named "Great
American Ball Park" upon its expected completion in time for the 2003 baseball
season. The AFC subsidiary paid the Reds $2 million during 2000, and will pay
the Reds an aggregate of $72.7 million over the term of the agreement which also
includes premium seating and related sponsorship rights.
During 2000, AFG and its subsidiaries chartered an aircraft from an
entity owned by one of Carl H. Lindner's brothers. The total charges for such
aircraft usage were $445,000.
In July 1997, Carl H. Lindner and Great American Financial Resources,
Inc. (an 83%-owned subsidiary of AFG) purchased 51% and 49%, respectively, of
the outstanding common stock of a newly incorporated entity formed to acquire
the assets of a company engaged in the production of ethanol. GAFRI invested
$4.9 million and Mr. Lindner invested $5.1 million; the asset purchase was
completed in December 1997. Another AFG subsidiary has a working capital credit
facility in place under which the ethanol company may borrow up to $10 million
at a rate of prime plus 3%. There were no borrowings outstanding under this
facility in 2000. In September 1998, GAFRI made a loan to the ethanol company in
the amount of $4 million, bearing interest at the rate of 14% and maturing in
September 2008. In September 2000, the ethanol company repurchased the 49%
interest from GAFRI for $7.5 million cash plus 219,000 shares of newly issued
preferred stock. As a result of this transaction, GAFRI recognized a $17.7
million after-tax-gain. In December 2000, the ethanol company acquired the
219,000 shares of preferred stock in exchange for $3 million cash plus an $18.9
million subordinated debenture bearing interest at 12-1/4% with scheduled
repayments through 2005.
-9-
An AFG subsidiary is the lender under a credit agreement with American
Heritage Holding Corporation, a Florida-based homebuilder which is 49% owned by
AFG and 51% owned by brothers of Carl H. Lindner. The homebuilder may borrow up
to $8 million at 13% per annum, with interest deferred and added to principal.
The highest outstanding balance owed to the AFG subsidiary during 2000 and the
balance at year-end was $8 million million.
Performance Graph
No performance graph is included as the Company's common stock is not
publicly traded.
Directors' Compensation
AFC's Board of Directors receives no annual compensation from AFC.
However, they are paid as directors of AFG, as follows:
Pursuant to AFG's Non-Employee Directors' Compensation Plan (the
"Directors' Plan"), all directors who are not officers or employees of AFG are
paid the following fees: an annual retainer of $40,000; an additional annual
retainer of $12,000 for each Board Committee on which the non-employee director
serves; and an attendance fee of $1,000 for each Board or Committee meeting
attended. Non-employee directors who become directors during the year receive a
pro rata portion of these annual retainers. The retainers and fees to be paid
under the Directors' Plan are reviewed by the Board of Directors from time to
time and are subject to change at its discretion.
In order to align further the interests of AFG's non-employee directors
with the interests of shareholders, the Directors' Plan provides that a minimum
of 50% of such directors' annual retainers are paid through the issuance of
shares of AFG common stock.
The Board of Directors has a program under which a retiring director
(other than an officer or employee of AFG or any of its subsidiaries) will, if
the director has met certain eligibility requirements, receive upon retirement
(in a lump sum or, if elected, in deferred payments) an amount equal to five
times the then current annual director's fee. For purposes of this program,
retirement means resignation as a director or not being nominated for reelection
by shareholders as a director. To be eligible for the retirement benefit, a
person must have served as a director for at least four years while not an
officer or employee of AFG or any of its subsidiaries. In addition, a director
will not become eligible for the retirement benefit until reaching age 55. A
director who receives a retirement benefit must provide consulting services to
AFG on request for five years following retirement without further compensation
(except reimbursement for expenses). Under the program, a death benefit equal to
the retirement benefit will be paid (in lieu of any retirement benefit under the
program) to the designated beneficiary or legal representative of any person who
dies while serving as a director, whether or not eligible for a retirement
benefit at time of death. This death benefit will not be available to a director
who at any time during the two years immediately preceding death was an officer
or employee of AFG or any of its subsidiaries.
In addition to providing for the grant of stock options to key
employees, AFG's Stock Option Plan provides for automatic annual grants of
options to each non-employee director of AFG. During 2000, each non-employee
director was granted an option under the foregoing provisions of the Stock
Option Plan to purchase 1,000 shares at an exercise price of $28.22 per share on
June 1, 2000, the exercise price being the fair market value of AFG's common
stock on the date of grant. At their annual meeting (which is concurrent with
the AFC annual shareholders meeting), AFG shareholders are considering
amendments to AFG's stock option plan, including a proposal to increase the
amount of the annual grant of options to non-employee directors from 1,000
shares to 2,500 shares.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Company's Board of Directors held four meetings in 2000. The
Company's Board of Directors has an Executive Committee, an Audit Committee and
a Compensation Committee. There is no Nominating Committee.
Executive Committee: The Executive Committee consists of Carl H.
Lindner (Chairman), Carl H. Lindner III, S. Craig Lindner and Keith E. Lindner.
The Committee's functions include analyzing the future development of the
business affairs and operations of the Company, including further expansion of
businesses in which the Company is engaged and acquisitions and dispositions of
businesses. With certain exceptions, the Executive Committee is generally
authorized to exercise the powers of the Board of Directors between meetings of
the Board of Directors. The Executive Committee consulted among themselves
informally many times throughout the year and took action in writing on eight
occasions in 2000.
Compensation Committee. The Compensation Committee met four times and
took action in writing on four occasions in 2000.
-10-
Audit Committee. The Audit Committee met eight times in 2000.
Audit Committee Report
The Audit Committee is comprised of three directors, each of whom is
experienced with financial statements and two of whom have past accounting or
related financial management experience. Each of the members of the Audit
Committee is independent as defined by the New York Stock Exchange listing
standards. A copy of the Audit Committee Charter, adopted in 2000, is attached
to this Proxy Statement as Appendix A.
The primary function of the Audit Committee is to assist the Board in
fulfilling its oversight responsibilities by reviewing the financial information
which will be provided to shareholders and others, the systems of internal
controls which management has established, and the audit process. The members of
the Committee are Theodore H. Emmerich (Chairman), William R. Martin and Thomas
M. Hunt.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent accountants are responsible for
performing an independent audit of the Company's consolidated financial
statements in accordance with generally accepted auditing standards and to issue
a report thereon. The Committee's responsibility is to monitor and oversee these
processes. Additionally, the Audit Committee recommends to the Board an
accounting firm to be engaged as the Company's independent accountants.
The Committee has met and held discussions with management and the
independent accountants. Management represented to the Committee that the
Company's consolidated financial statements were prepared in accordance with
generally accepted accounting principles, and the Committee has reviewed and
discussed the consolidated financial statements with management and the
independent accountants. The Committee discussed with the independent
accountants matters required to be discussed by Statement on Auditing Standards
No. 61 (Communications with Audit Committees).
The Company's independent accountants also provided to the Committee
the written disclosures and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees) and disclosures
required by the Audit Committee Charter, and the Committee discussed with the
independent accountants that firm's independence.
Based on the Committee's discussions with management and the
independent accountants and the Committee's review of the representation of
management and the report of the independent accountants to the Committee, the
Committee recommended that the audited consolidated financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000 filed with the Securities and Exchange Commission.
Members of the Audit Committee: Theodore H. Emmerich, Chairman
William R. Martin
Thomas M. Hunt
INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP served as AFG's as well as the
Company's independent auditors for the fiscal year ended December 31, 2000.
Representatives of that firm will attend the meeting and will be given the
opportunity to comment, if they so desire, and to respond to appropriate
questions that may be asked by shareholders. No auditor has yet been selected
for the current year because it is generally the practice of the Company not to
select independent auditors prior to the annual shareholders meeting.
Audit Fees, Financial Information Systems Design and Implementation Fees and All
Other Fees. Ernst and Young's aggregate fees to AFG and the Company for services
related to the audits of financial statements for the year ended December 31,
2000, and for quarterly reviews within that period amounted to approximately
$2.1 million. While they were not billed separately, we estimate that fees for
statutory audits for insurance regulatory purposes and similar audit related
services amounted to approximately one-fourth of the aggregate audit fees.
In addition, during 2000 Ernst & Young billed approximately $725,000
for services related to actuarial reviews, approximately $450,000 for tax
services and approximately $400,000 for all other miscellaneous services. There
were no Ernst & Young fees in 2000 for financial information systems design and
implementation. The Audit Committee considered the non-audit services provided
in satisfying itself as to Ernst & Young's independence.
-11-
NOMINATIONS AND SHAREHOLDER PROPOSALS
In accordance with the Company's Code of Regulations (the
"Regulations"), the only candidates eligible for election at a meeting of
shareholders are candidates nominated by or at the direction of the Board of
Directors and candidates nominated at the meeting by a shareholder who has
complied with the procedures set forth in the Regulations. Shareholders will be
afforded a reasonable opportunity at the meeting to nominate candidates for the
office of director. However, the Regulations require that a shareholder wishing
to nominate a director candidate must have first given the Secretary of the
Company at least five and not more than thirty days prior written notice setting
forth or accompanied by (1) the name and residence of the shareholder and of
each nominee specified in the notice, (2) a representation that the shareholder
was a holder of record of the Company's voting stock and intended to appear, in
person or by proxy, at the meeting to nominate the persons specified in the
notice and (3) the consent of each such nominee to serve as director if so
elected.
The Proxy Form used by the Company for the annual meeting typically
grants authority to management's proxies to vote in their discretion on any
matters that come before the meeting as to which adequate notice has not been
received. In order for a notice to be deemed adequate for the 2002 annual
meeting, it must be received by December 1, 2001. In order for a proposal to be
considered for inclusion in AFC's proxy statement for that meeting, it must be
received by February 28, 2002.
REQUESTS FOR FORM 10-K
The Company will send, upon written request, without charge, a copy of
the Company's current Annual Report on Form 10-K to any shareholder who writes
to Fred J. Runk, Senior Vice President and Treasurer, American Financial Group,
Inc., One East Fourth Street, Cincinnati, Ohio 45202.
-----------------------------------------------
Pages F-1 though F-35 which follow are taken from AFC's Annual Report on Form
10-K for the year ended December 31, 2000. This information is being included
herein in accordance with Rule 14a-3 promulgated under the Securities Act of
1934.
AMERICAN FINANCIAL CORPORATION
Proxy for Annual Meeting
Registration Name and Address
The undersigned hereby appoints James C. Kennedy and Karl J. Grafe, and either
of them, attorneys and proxies, with the power of substitution to each, to vote
all shares of Common Stock or Series J Preferred Stock (collectively "Voting
Stock") of the Company that the undersigned may be entitled to vote at the
Annual Meeting of Shareholders of the Company to be held on May 24, 2001 at
10:30 A.M., in the election of directors (and at their discretion to cumulate
votes if cumulative voting is invoked by a shareholder through proper notice to
the Company), and on such other matters as may properly come before the meeting
or any adjournment thereof.
The Board of Directors recommends a vote FOR the
following Proposals:
1. Proposal to Elect Directors
/ / FOR AUTHORITY to elect the / / WITHHOLD AUTHORITY to nominees
listed below (except vote for every nominee those whose names have
been listed below crossed out)
Carl H. Lindner Carl H. Lindner III S. Craig Lindner
Keith E. Lindner Theodore H. Emmerich James E. Evans
Thomas M. Hunt William R. Martin
DATE: , 2001 SIGNATURE:
------------------- -------------------------
SIGNATURE:
-------------------------
(if held jointly) Important: Please
sign exactly as name appears hereon
indicating, where proper, official
position or representative capacity.
In case of joint holders, all should
sign.
- 2 -
PLEASE INDICATE YOUR VOTE ON THE PROPOSAL(S) BY MARKING THE APPROPRIATE BOX(ES)
ON THE VOTE CARD AT RIGHT. PLEASE SIGN, DATE, DETACH AND RETURN.
This proxy form is designed to enable the shareholder to detach and mail the
vote card without a return envelope. This is intended to reduce processing
costs, to maintain confidentiality, and to provide added shareholder
convenience.
Information pertaining to shareholder registration (account number and shares
held) appears only on this section of the card, which you retain. Information on
the part of the card mailed is encoded and is used solely to enable vote
tabulation.
If you have any questions about voting your shares with this form,
please call 1-800-368-3417 or 513-579-2414
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The named proxy holders will vote the shares represented by this proxy in
the manner indicated. Unless a contrary direction is indicated, the proxy
holders vote such shares "FOR" the proposal. If any further matters
properly come before the meeting, such shares shall be voted on such
matters in accordance with the best judgment of the proxy holders.
TO VOTE BY TELEPHONE
Call TOLL-FREE using a Touch-Tone Phone
1-877-298-0570
(Cincinnati Area use 579-6707)
Follow these easy steps:
1. Review the accompanying Proxy Statement and Proxy Form and have them
nearby when you call.
2. Call the Toll Free number 1-877-298-0570 or the Cincinnati area local
number 579-6707.
3. Enter the 6 digit Proxy Number located in the gray shaded area above the
list of proposals on your proxy form.
4. Enter the 6 digit PIN Number located in the same gray shaded area.
5. Follow the recorded instructions.
Telephone voting is available Monday - Friday, 8:00 a.m. to 10:30 p.m.
Eastern Time and Saturday 8:00 a.m. to 4:30 p.m. Eastern Time.
Telephone voting will close at 9:00 a.m. Eastern Time on the
meeting date.
FORWARD-LOOKING STATEMENTS This document 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. AFC undertakes no
obligations to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
AFC is a holding company which, through its subsidiaries, is engaged
primarily in private passenger automobile and specialty property and casualty
insurance businesses and in the sale of tax-deferred annuities and certain life
and supplemental health insurance products. AFC's property and casualty
operations originated in the 1800's and make up one of the thirty largest
property and casualty groups in the United States based on statutory net
premiums written.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Not applicable - Registrant's Common Stock is owned by American Financial
Group, Inc. See the Consolidated Financial Statements for information regarding
dividends.
F-1
SELECTED FINANCIAL DATA
-----------------------
The following table sets forth certain data for the periods indicated
(dollars in millions).
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Earnings Statement Data:
- -----------------------
Total Revenues $3,826 $3,368 $4,091 $4,058 $4,131
Operating Earnings Before Income Taxes 120 310 269 385 411
Earnings (Loss) Before Extraordinary Items
and Accounting Changes (23) 153 130 208 250
Extraordinary Items - (4) (1) (7) (28)
Cumulative Effect of Accounting Changes (9) (4) - - -
Net Earnings (Loss) (32) 145 129 201 222
Ratio of Earnings to Fixed Charges (a) 2.02 4.01 3.44 4.20 4.99
Ratio of Earnings to Fixed Charges
and Preferred Dividends (a) 1.87 3.67 3.15 3.52 3.96
Balance Sheet Data:
- ------------------
Total Assets $16,407 $16,024 $15,848 $15,738 $14,999
Long-term Debt:
Holding Companies 204 113 315 287 340
Subsidiaries 195 240 177 194 178
Minority Interest 510 490 524 510 307
Shareholders' Equity 1,454 1,324 1,531 1,393 1,277
(a) Fixed charges are computed on a "total enterprise" basis. For purposes
of calculating the ratios, "earnings" have been computed by adding to
pretax earnings the fixed charges and the minority interest in earnings
of subsidiaries having fixed charges and 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.
F-2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
GENERAL
Following is a discussion and analysis of the financial statements and
other statistical data that management believes will enhance the understanding
of AFC's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-12.
IT INITIATIVE In 1999, AFC 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 AFC's debt to total capital ratio at the parent holding company level
(excluding amounts due AFG) was approximately 12% and 8% at December 31, 2000
and 1999. Including amounts due AFG, the ratio was 31% at the end of 2000 and
27% at the end of 1999.
AFC's ratio of earnings to fixed charges, excluding and including
preferred dividends, on a total enterprise basis for the year ended December 31,
2000, was 2.02 and 1.87 respectively.
The National Association of Insurance Commissioners' model law for risk
based capital ("RBC") applies to both life and property and casualty companies.
RBC formulas determine the amount of capital that an insurance company needs to
ensure that it has an acceptable expectation of not becoming financially
impaired. At December 31, 2000, the capital ratios of all AFC insurance
companies substantially exceeded the RBC requirements (the lowest capital ratio
of any AFC subsidiary was 2.1 times its authorized control level RBC; weighted
average of all AFC subsidiaries was 5.0 times).
SOURCES OF FUNDS AFC and American Premier are organized as holding companies
with almost all of their operations being conducted by subsidiaries. These
parent corporations, however, have continuing cash needs for administrative
expenses, the payment of principal and interest on borrowings, shareholder
dividends, and taxes. Funds to meet these obligations come primarily from
dividend and tax payments from their subsidiaries.
Management believes these parent holding companies have sufficient
resources to meet their liquidity requirements through operations. If funds
generated from operations, including dividends and tax payments from
subsidiaries, are insufficient to meet fixed charges in any period, these
companies would be required to generate cash through borrowings, sales of
securities or other assets, or similar transactions.
AFC has a reciprocal Master Credit Agreement with various AFG holding
companies 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.
F-3
In December 2000, AFC borrowed $155 million under its credit agreement
with AFG to make capital contributions to its property and casualty operations.
In April 1999, AFC used funds borrowed under its credit agreement with AFG to
retire outstanding holding company public debt and borrowings under its credit
line.
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 from historical levels (and the related
decrease in ongoing cash needs for interest and principal payments), (ii) the
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, AFC's insurance companies owned publicly
traded equity securities with a market value of $1.1 billion, including equity
securities of AFC affiliates (including subsidiaries) of $.7 billion. Since
significant amounts of these are concentrated in a relatively small number of
companies, decreases in the market prices could adversely affect the insurance
group's capital, potentially impacting the amount of dividends available or
necessitating a capital contribution. Conversely, increases in the market prices
could have a favorable impact on the group's dividend-paying capability.
Under tax allocation agreements with AFC, its 80%-owned U.S. subsidiaries
generally compute tax provisions as if filing separate returns based on book
taxable income computed in accordance with generally accepted accounting
principles. The resulting provision (or credit) is currently payable to (or
receivable from) AFC.
UNCERTAINTIES
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.
AFC's subsidiaries are parties in a number of proceedings relating to
former operations. While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts, circumstances and applicable
laws, management believes that sufficient reserves have been provided. See Note
M to the financial statements.
EXPOSURE TO MARKET RISK Market risk represents the potential economic loss
arising from adverse changes in the fair value of financial instruments. AFC's
exposures to market risk relate primarily to its investment portfolio and
annuity contracts which are exposed to interest rate risk and, to a lesser
extent, equity price risk. AFC's long-term debt is also exposed to interest rate
risk.
FIXED MATURITY PORTFOLIO The fair value of AFC's fixed maturity portfolio
is directly impacted by changes in market interest rates. For example, as a
result of increased market rates, AFC's fixed maturity portfolio declined in
value by more than six percent in 1999. AFC's fixed maturity portfolio is
comprised of substantially all fixed rate investments with primarily short-term
and intermediate-term maturities. This practice allows flexibility in reacting
to fluctuations of interest rates. The portfolios of AFC's property and casualty
insurance and life and annuity operations are managed with an attempt to achieve
an adequate risk-adjusted return while maintaining sufficient liquidity to meet
policyholder obligations. AFC's life and annuity operations use various
actuarial models in an attempt to align the duration of their invested assets to
the projected cash flows of policyholder liabilities.
F-4
The following table provides information about AFC'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 AFC's investment in "Other
stocks" is less than 4% of total investments, it is concentrated in a relatively
limited number of major positions. While this approach allows management to more
closely monitor the companies and industries in which they operate, it does
increase risk exposure to adverse price declines in a major position.
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
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
F-5
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 AFC 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 127.2 7.17 Thereafter 135.0 7.25
------ ------
Total $159.8 7.38% $180.1 7.74%
====== ======
Fair Value $152.9 $171.6
====== ======
(*) Less than $2 million.
At December 31, 2000 and 1999, respectively, AFC 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 AFC's variable-rate debt was
7.10% at December 31, 2000 compared to 6.82% at December 31, 1999. There were
$218 million and $220 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 8.44% at December 31, 2000 and
8.45% at December 31, 1999.
INVESTMENTS Approximately two-thirds of AFC's consolidated assets are invested
in marketable securities. A diverse portfolio of primarily publicly traded bonds
and notes accounts for over 95% of these securities. AFC attempts to optimize
investment income while building the value of its portfolio, placing emphasis
upon long-term performance. AFC's goal is to maximize return on an ongoing basis
rather than focusing on short-term performance.
Fixed income investment funds are generally invested in securities with
short-term and intermediate-term maturities with an objective of optimizing
total return while allowing flexibility to react to changes in market
conditions. At December 31, 2000, the average life of AFC's fixed maturities was
about 6 years.
Approximately 92% of the fixed maturities held by AFC were rated
"investment grade" (credit rating of AAA to BBB) by nationally recognized rating
agencies at December 31, 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 AFC's fixed
maturities at December 31, 2000. AFC invests primarily in MBSs which have a
reduced risk of prepayment. In addition, the majority of MBSs held by AFC were
purchased at a discount. Management believes that the structure and discounted
nature of the MBSs will mitigate the effect of prepayments on earnings over the
anticipated life of the MBS portfolio. Over 90% of AFC's MBSs are rated "AAA"
with substantially all being of investment grade quality. The market in which
these securities trade is highly liquid. Aside from interest rate risk, AFC does
not believe a material risk (relative to earnings or liquidity) is inherent in
holding such investments.
F-6
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, AFC had a net unrealized
gain on fixed maturities of $16.4 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 $120 million in 2000, $310
million in 1999 and $269 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 61% 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 4% 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.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFC's property and casualty
operations consist of two major business groups: Personal and Specialty.
The Personal group sells nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risks not typically accepted for
standard automobile coverage because of the applicant's driving record, type of
vehicle, age or other criteria.
The Specialty group includes a highly diversified group of business lines.
Some of the more significant areas are inland and ocean marine, California
workers' compensation, agricultural-related coverages, executive and
professional liability, fidelity and surety bonds, collateral protection, and
umbrella and excess coverages.
To understand the overall profitability of particular lines, the timing of
claims payments and the related impact of investment income must be considered.
Certain "short-tail" lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby limiting investment
income earned thereon. On the other hand, "long-tail" lines of business
(primarily liability coverages and workers' compensation) have payouts that are
either structured over many years or take many years to settle, thereby
significantly increasing investment income earned on related premiums received.
Underwriting profitability is measured by the combined ratio which is a
sum of the ratios of underwriting losses, loss adjustment expenses, underwriting
expenses and policyholder dividends to premiums. When the combined ratio is
under 100%, underwriting results are generally considered profitable; when the
ratio is over 100%, underwriting results are generally considered unprofitable.
The combined ratio does not reflect investment income, other income or federal
income taxes.
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.
F-7
While AFC desires and seeks to earn an underwriting profit on all of its
business, it is not always possible to do so. As a result, AFC attempts to
expand in the most profitable areas and control growth or even reduce its
involvement in the least profitable ones.
Underwriting results of AFC's insurance operations outperformed the
industry average for the fifteenth consecutive year (excluding the special $214
million A&E charge in 1998). AFC's insurance operations have been able to exceed
the industry's results by focusing on growth opportunities in the more
profitable areas of the specialty and nonstandard auto businesses.
Net written premiums and combined ratios for AFC's property and casualty
insurance subsidiaries were as follows (dollars in millions):
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, AFC retained liabilities for certain A&E
exposures. Prompted by this retention and as part of the continuing process of
monitoring reserves, AFC began a thorough study of its A&E exposures. AFC's
study was reviewed by independent actuaries who used state of the art actuarial
techniques that have wide acceptance in the industry. The methods used involved
sampling and statistical modeling incorporating external databases that
supplement the internal information. AFC recorded a fourth quarter charge of
$214 million increasing A&E reserves at December 31, 1998, to approximately $866
million (before deducting reinsurance recoverables of $241 million).
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, AFC implemented rate increases averaging
approximately 13% in 2000. The full impact of these rate actions on earnings
should take effect in 2001. AFC 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.
F-8
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, AFC 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 AFC'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. AFC 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, AFC'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 AFC 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.
INVESTMENT INCOME Changes in investment income reflect fluctuations in market
rates and changes in average invested assets. Investment income decreased 5% 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 AFC's Chairman.
GAIN ON SALE OF INVESTEE The gain on sale of investee in 1998 represents pretax
gains to AFC as a result of Chiquita's public issuance of shares of its common
stock.
GAINS ON SALES OF SUBSIDIARIES In 2000, AFC 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.
F-9
REAL ESTATE OPERATIONS AFC'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 AFC'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 1.9 2.1 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 $76.3 million (42%) 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 $6.7 million (4%) 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%.
INTEREST ON BORROWED MONEY Changes in interest expense result from fluctuations
in market rates as well as changes in borrowings. AFC has generally financed its
borrowings on a long-term basis which has resulted in higher current costs.
Interest expense increased in 2000 due primarily to higher average indebtedness
and decreased in 1999 due primarily to lower average indebtedness.
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 AFC property and casualty subsidiary.
Excluding these litigation charges, other operating and general expenses
increased $56.5 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 $23.1
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, AFC 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.
F-10
INCOME TAXES See Note K to the Financial Statements for an analysis of items
affecting AFC's effective tax rate.
INVESTEE CORPORATIONS Equity in net losses of investee corporations includes
AFC'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 AFC'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, AFC 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, AFC 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.
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, AFC expensed previously
capitalized start-up costs of $3.8 million (net of minority interest and taxes)
in the first quarter of 1999.
RECENT ACCOUNTING STANDARDS The following accounting standards have been
implemented by AFC in 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 AFC or had only
negligible effects on AFC.
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 $17.3 million in 2000, $14.4 million in 1999 and $12.2 million
in 1998. The carrying value of AFC's goodwill at December 31, 2000, was $322
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.
F-11
FINANCIAL STATEMENTS
--------------------
Page
----
Report of Independent Auditors F-13
Consolidated Balance Sheet:
December 31, 2000 and 1999 F-14
Consolidated Statement of Operations:
Years ended December 31, 2000, 1999 and 1998 F-15
Consolidated Statement of Changes in Shareholders' Equity
Years ended December 31, 2000, 1999 and 1998 F-16
Consolidated Statement of Cash Flows:
Years ended December 31, 2000, 1999 and 1998 F-17
Notes to Consolidated Financial Statements F-18
"Selected Quarterly Financial Data" has been included in Note N to the
Consolidated Financial Statements.
F-12
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Financial Corporation
We have audited the accompanying consolidated balance sheet of American
Financial Corporation and subsidiaries as of December 31, 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
Corporation 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-13
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
December 31,
---------------------------------
2000 1999
---- ----
Assets:
Cash and short-term investments $ 437,263 $ 389,018
Investments:
Fixed maturities - at market
(amortized cost - $10,148,248 and $10,101,005) 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 270,250 265,288
----------- -----------
Total investments 11,057,722 10,914,349
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 239,806 222,438
Variable annuity assets (separate accounts) 533,655 354,371
Prepaid expenses, deferred charges and other assets 508,163 384,567
Cost in excess of net assets acquired 322,380 335,652
----------- -----------
$16,407,472 $16,023,809
=========== ===========
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
Payable to American Financial Group, Inc. 439,371 370,965
Long-term debt:
Holding companies 204,338 112,557
Subsidiaries 195,087 239,733
Variable annuity liabilities (separate accounts) 533,655 354,371
Accounts payable, accrued expenses and other
liabilities 998,104 970,495
----------- -----------
Total liabilities 14,443,651 14,209,508
Minority interest 509,705 490,194
Shareholders' Equity:
Preferred Stock (liquidation value $72,154) 72,154 72,154
Common Stock, no par value
- 20,000,000 shares authorized
- 10,593,000 shares outstanding 9,625 9,625
Capital surplus 974,766 960,782
Retained earnings 258,371 296,246
Unrealized gain (loss) on marketable
securities, net 139,200 (14,700)
----------- -----------
Total shareholders' equity 1,454,116 1,324,107
----------- -----------
$16,407,472 $16,023,809
=========== ===========
See notes to consolidated financial statements.
F-14
AMERICAN FINANCIAL CORPORATION 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 $2,698,738
Life, accident and health premiums 230,441 119,160 165,485
Investment income 837,361 834,889 875,909
Realized gains (losses) on sales of:
Securities (26,581) 20,053 6,275
Investee - - 9,420
Subsidiaries 4,032 - 158,673
Other investments 27,230 - -
Other income 258,975 182,683 176,026
---------- ---------- ----------
3,826,350 3,367,604 4,090,526
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,961,538 1,588,651 2,215,283
Commissions and other underwriting expenses 735,241 665,109 772,917
Annuity benefits 278,927 262,632 261,666
Life, accident and health benefits 175,174 86,439 131,652
Interest charges on borrowed money 67,310 64,888 72,625
Other operating and general expenses 487,901 390,143 367,085
---------- ---------- ----------
3,706,091 3,057,862 3,821,228
---------- ---------- ----------
Operating earnings before income taxes 120,259 309,742 269,298
Provision for income taxes 32,812 101,020 92,699
---------- ----------- ----------
Net operating earnings 87,447 208,722 176,599
Minority interest expense, net of tax (18,051) (38,436) (38,618)
Equity in net losses of investees, net of tax (92,449) (17,783) (8,578)
---------- ---------- ----------
Earnings (loss) before extraordinary items
and accounting changes (23,053) 152,503 129,403
Extraordinary items - loss on prepayment of debt - (3,849) (763)
Cumulative effect of accounting changes (9,072) (3,854) -
---------- ---------- ----------
Net Earnings (Loss) ($ 32,125) $ 144,800 $ 128,640
========== ========== ==========
See notes to consolidated financial statements.
F-15
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars In Thousands)
Common Stock Unrealized
Preferred and Capital Retained Gain (Loss)
Stock Surplus Earnings on Securities Total
---------- ------------ -------- ------------- ----------
Balance at December 31, 1997 $72,154 $945,779 $34,350 $341,200 $1,393,483
Net earnings - - 128,640 - 128,640
Change in unrealized - - - 7,100 7,100
----------
Comprehensive income 135,740
Dividends on Preferred Stock - - (5,772) - (5,772)
Capital contribution from parent - 6,963 - - 6,963
Other - 242 - - 242
------- -------- -------- -------- ----------
Balance at December 31, 1998 $72,154 $952,984 $157,218 $348,300 $1,530,656
======= ======== ======== ======== ==========
Net earnings - - 144,800 - $ 144,800
Change in unrealized - - - (363,000) (363,000)
----------
Comprehensive income (loss) (218,200)
Dividends on Preferred Stock - - (5,772) - (5,772)
Capital contribution from parent - 12,267 - - 12,267
Other - 5,156 - - 5,156
------- -------- -------- -------- ----------
Balance at December 31, 1999 $72,154 $970,407 $296,246 ($ 14,700) $1,324,107
======= ======== ======== ======== ==========
Net earnings (loss) - - (32,125) - ($32,125)
Change in unrealized - - - 153,900 153,900
----------
Comprehensive income 121,775
Dividends on Preferred Stock - - (5,772) - (5,772)
Capital contribution from parent - 12,267 - - 12,267
Other - 1,717 22 - 1,739
------- -------- -------- -------- ----------
Balance at December 31, 2000 $72,154 $984,391 $258,371 $139,200 $1,454,116
======= ======== ======== ======== ==========
See notes to consolidated financial statements.
F-16
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Year ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net earnings (loss) ($ 32,125) $ 144,800 $ 128,640
Adjustments:
Extraordinary items - 3,849 763
Cumulative effect of accounting changes 9,072 3,854 -
Equity in net losses of investees 92,449 17,783 8,578
Depreciation and amortization 117,063 94,829 106,280
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) (37,889) (205,659)
Deferred annuity and life policy acquisition
costs (146,686) (119,382) (117,202)
Decrease (increase) in reinsurance and other
receivables 71,090 (100,824) (432,394)
Decrease (increase) in other assets (87,387) 66,302 (9,433)
Increase in insurance claims and reserves 189,587 112,721 480,052
Increase (decrease) in other liabilities (6,049) (51,773) 158,973
Increase (decrease) in minority interest (445) 22,224 10,175
Dividends from investees - 4,799 4,799
Other, net 1,927 4,643 (12,105)
---------- ---------- ----------
466,045 420,283 397,153
---------- ---------- ----------
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,635,578) (2,034,642) (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 1,248,626
Sales of:
Fixed maturity investments 810,942 1,212,208 795,520
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) (8,723) (75,669)
--------- ---------- ----------
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 182,462 269,700 262,537
Reductions of long-term debt (141,577) (415,478) (251,837)
Borrowings from AFG 174,500 266,100 6,000
Payments to AFG (108,413) (168,800) (80,000)
Repurchases of trust preferred securities (1,427) (5,509) -
Capital contribution 18,667 18,667 18,667
Cash dividends paid (5,772) (5,772) (5,772)
---------- ---------- ----------
(167,149) (312,486) (262,767)
---------- ---------- ----------
Net Increase in Cash and Short-term Investments 48,245 99,074 58,717
Cash and short-term investments at beginning of
period 389,018 289,944 231,227
---------- ---------- ----------
Cash and short-term investments at end of period $ 437,263 $ 389,018 $ 289,944
========== ========== ==========
See notes to consolidated financial statements.
F-17
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEX TO NOTES
--------------
A. Accounting Policies I. Minority Interest
B. Acquisitions and Sales of Subsidiaries J. Shareholders' Equity
and Investees K. Income Taxes
C. Segments of Operations L. Extraordinary Items
D. Investments M. Commitments and Contingencies
E. Investment in Investee Corporations N. Quarterly Operating Results
F. Cost in Excess of Net Assets Acquired O. Insurance
G. Payable to American Financial Group P. Additional Information
H. Long-Term Debt
- --------------------------------------------------------------------------------
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of American Financial Corporation ("AFC") and its subsidiaries.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Changes in circumstances could cause actual
results to differ materially from those estimates.
INVESTMENTS All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses reported
as a separate component of shareholders' equity. Short-term investments
are carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. Premiums and discounts on mortgage-backed
securities are amortized over their expected average lives using the
interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the carrying value of that investment is reduced.
INVESTMENT IN INVESTEE CORPORATIONS Investments in securities of 20%- to
50%-owned companies are generally carried at cost, adjusted for AFC's
proportionate share of their undistributed earnings or losses.
Due to Chiquita's announced intention to pursue a plan to restructure its
public debt, AFC 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 AFC'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
F-18
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
REINSURANCE In the normal course of business, AFC's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFC's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured
policies. AFC's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. AFC's insurance subsidiaries
also assume reinsurance from other companies. Income on reinsurance
assumed is recognized based on reports received from ceding reinsurers.
DEFERRED ACQUISITION COSTS Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses) related to the
production of new business are deferred ("DPAC"). For the property and
casualty companies, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against
income ratably over the terms of the related policies. 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.
F-19
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 Corporation), 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 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
(i) the interests of noncontrolling shareholders in AFC subsidiaries,
including preferred securities issued by trust subsidiaries of GAFRI and
(ii) American Financial Group, Inc.'s ("AFG") direct ownership interest in
American Premier Underwriters, Inc. ("American Premier" or "APU") and
American Financial Enterprises, Inc. For income statement purposes,
minority interest expense represents those shareholders' interest in the
earnings of AFC subsidiaries as well as accrued distributions on the trust
preferred securities.
ISSUANCES OF STOCK BY SUBSIDIARIES AND INVESTEES Changes in AFC's equity
in a subsidiary or an investee caused by issuances of the subsidiary's or
investee's stock are accounted for as gains or losses where such issuance
is not a part of a broader reorganization.
INCOME TAXES AFC files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries, except for certain life insurance
subsidiaries and their subsidiaries. Deferred income taxes are calculated
using the liability method. Under this method, deferred income tax assets
and liabilities are determined based on differences between financial
reporting and tax bases and are measured using enacted tax rates. Deferred
tax assets are recognized if it is more likely than not that a benefit
will be realized.
BENEFIT PLANS AFC provides retirement benefits to qualified employees of
participating companies through contributory and noncontributory defined
contribution plans contained in AFG's Retirement and Savings Plan. Under
the retirement portion of the plan, company contributions are invested
primarily in securities of AFG and affiliates. Under the savings portion
of the plan, AFC matches a specific portion of employee contributions.
Contributions to benefit plans are charged against earnings in the year
for which they are declared.
AFC and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. AFC also provides postemployment benefits
to former or inactive employees (primarily those on disability) who were
not deemed retired under other company plans. The projected future cost of
providing these benefits is expensed over the period the employees earn
such benefits.
F-20
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DERIVATIVES Effective October 1, 2000, AFC 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 AFC'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 AFC'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, AFC expensed previously capitalized start-up costs
of $3.8 million (net of minority interest and taxes) or $.06 per diluted
share, effective January 1, 1999.
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, AFC 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.
STONEWALL INSURANCE COMPANY In September 2000, AFC 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, AFC 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. AFC
deferred a gain of $103 million on the insurance ceded to Ohio Casualty
and recognized a
F-21
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
pretax gain of $153 million on the sale of the other net assets. The
deferred gain is being recognized over the estimated remaining settlement
period (weighted average of 4.25 years) of the claims ceded. AFC 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, AFC 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 AFC 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, AFC 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 AFC 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 AFC
subsidiaries) are included in other liabilities. AFC'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, AFC 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. AFC 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. AFC recorded pretax gains of $9.4
million in 1998 representing the excess of AFC's equity in Chiquita
following the issuances of its common stock over AFC's previously recorded
carrying value.
C. SEGMENTS OF OPERATIONS AFC's property and casualty group is engaged
primarily in private passenger automobile and specialty insurance
businesses. The Personal group writes nonstandard and preferred/standard
private passenger auto and other personal insurance coverage. The
Specialty group includes a highly diversified group of specialty business
units. Some of the more significant areas are inland and ocean marine,
California workers' compensation, agricultural-related coverages,
executive and professional liability, fidelity and surety bonds,
collateral protection, and umbrella and excess coverages. AFC's annuity
and life business markets primarily retirement products as well as life
and
F-22
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
supplemental health insurance. AFC's businesses operate throughout the
United States. In 2000, 1999 and 1998, AFC derived less than 2% of its
revenues from the sale of life and supplemental health products in Puerto
Rico and less than 1% of its revenues from the sale of property and
casualty insurance in Canada, Mexico, Europe and Asia. In addition, AFC
owns a significant portion of the voting equity securities of Chiquita
Brands International, Inc. (an investee corporation - see Note E).
The following tables (in thousands) show AFC's assets, revenues and
operating profit (loss) by significant business segment. Operating profit
(loss) represents total revenues less operating expenses.
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 247,942 181,884 202,287
----------- ----------- -----------
16,383,476 15,863,825 15,655,729
Investment in investees 23,996 159,984 192,138
----------- ----------- -----------
$16,407,472 $16,023,809 $15,847,867
=========== =========== ===========
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 57,335 40,295 331
----------- ----------- -----------
$ 3,826,350 $ 3,367,604 $ 4,090,526
=========== =========== ===========
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) (63,614) (40,507) (105,556)
----------- ----------- -----------
$ 120,259 $ 309,742 $ 269,298
=========== =========== ===========
[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.
</FN>
F-23
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. INVESTMENTS Fixed maturities and other stocks at December 31 consisted of
the following (in millions):
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 5,809.3 5,734.6 87.7 (162.4) 6,088.0 5,922.3 34.3 (200.0)
Redeemable preferred stocks 61.4 55.7 .2 (5.9) 70.9 67.6 1.1 (4.4)
--------- -------- ----- ------ --------- -------- ------ ------
$10,148.2 $10,164.6 $210.6 ($194.2) $10,101.0 $9,862.2 $ 69.6 ($308.4)
========= ========= ====== ====== ========= ======== ====== ======
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 Corporation, 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 (13,191) 33,244 (7,019) 13,034
Change in Unrealized (641,800) (42,500) 237,500 (446,800)
1998
----
Realized (*) 25,841 (19,566) (2,196) 4,079
Change in Unrealized 4,982 (69,900) 24,000 (40,918)
(*) 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-24
AMERICAN FINANCIAL CORPORATION 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 $2,034.6 $1,047.2 $1,212.2 $29.1 ($42.3)
======== ======== ======== ===== =====
1998
----
Held to Maturity (*) $ .8 $ 584.8 $ 45.3 $12.1 ($ .5)
Available for Sale 2,154.4 663.8 750.2 24.9 ( 17.5)
-------- -------- -------- ----- -----
Total $2,155.2 $1,248.6 $ 795.5 $37.0 ($18.0)
======== ======== ======== ===== =====
(*) 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 AFC'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, AFC 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 $17.3 million in
2000, $14.4 million in 1999 and $12.2 million in 1998. At December 31,
2000 and 1999, accumulated amortization amounted to approximately $168
million and $157 million, respectively.
F-25
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. PAYABLE TO AMERICAN FINANCIAL GROUP AFC has a reciprocal Master Credit
Agreement with various AFG holding companies under which these companies
make funds available to each other for general corporate purposes.
H. LONG-TERM DEBT Long-term debt consisted of the following at December 31,
(in thousands):
2000 1999
---- ----
Holding Companies:
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
-------- --------
$204,338 $112,557
======== ========
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, AFC used funds borrowed under its credit agreement with AFG
to redeem its 9-3/4% Debentures, repurchase APU Subordinated Notes and
repay a portion of its bank line.
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 aggregating $58 million, $59 million and $73
million were made on long-term debt and the payable to AFG in 2000, 1999
and 1998, respectively.
F-26
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. MINORITY INTEREST Minority interest in AFC's balance sheet is comprised
of the following (in thousands):
2000 1999
---- ----
Interest of AFG (parent) and
noncontrolling shareholders
in subsidiaries' common stock $291,792 $270,594
Preferred securities issued by
subsidiary trusts 217,913 219,600
-------- --------
$509,705 $490,194
======== ========
TRUST ISSUED PREFERRED SECURITIES Wholly-owned subsidiary trusts of GAFRI
have issued $225 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. GAFRI effectively provides unconditional guarantees of
its trusts' obligations.
The preferred securities consisted of the following (in thousands):
Date of Optional
Issuance Issue (Maturity Date) 2000 1999 Redemption Dates
------------- ------------------------ ---- ---- ---------------------------
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, GAFRI repurchased $1.7 million of its preferred securities for
$1.4 million in cash. In 1999, GAFRI repurchased $5.4 million of its
preferred securities for $5.5 million in cash.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
2000 1999 1998
---- ---- ----
Interest of AFG (parent) and
noncontrolling shareholders
in earnings of subsidiaries $ 6,092 $26,362 $26,248
Accrued distributions by subsidiaries
on trust issued preferred securities,
net of tax 11,959 12,074 12,370
------- ------- -------
$18,051 $38,436 $38,618
======= ======= =======
J. SHAREHOLDERS' EQUITY At December 31, 2000 and 1999, American Financial
Group beneficially owned all of the outstanding shares of AFC's Common
Stock.
PREFERRED STOCK Under provisions of both the Nonvoting (4.0 million shares
authorized) and Voting (4.0 million shares authorized) Cumulative
Preferred Stock, the Board of Directors may divide the authorized stock
into series and set specific terms and conditions of each series. At
December 31, 2000 and 1999, the outstanding voting shares of AFC's
Preferred Stock consisted of the following:
SERIES J, no par value; $25.00 liquidating value per share; annual
dividends per share $2.00; redeemable at AFC's option at $25.75
per share beginning December 2005 declining to $25.00 at December
2007 and thereafter; 2,886,161 shares (stated value $72.2 million)
outstanding at December 31, 2000 and 1999.
F-27
AMERICAN FINANCIAL CORPORATION 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) ($18.8) $126.5
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) (2.7) 17.7
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net $267.4 ($ 92.0) ($21.5) $153.9
====== ====== ===== ======
1999
----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($612.1) $212.1 $47.7 ($352.3)
Reclassification adjustment for
realized gains included in net income (20.1) 7.1 2.3 (10.7)
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net ($632.2) $219.2 $50.0 ($363.0)
====== ====== ===== ======
1998
----------------------------------------
Unrealized holding gains (losses) on
securities arising during the period ($ 50.5) $ 19.0 $ 1.2 ($ 30.3)
Unrealized gain on securities transferred
from held to maturity 87.0 (30.4) (7.8) 48.8
Reclassification adjustment for realized
gains included in net income and
unrealized gains of subsidiaries sold (20.4) 7.1 1.9 (11.4)
------ ------ ----- ------
Change in unrealized gain (loss) on
marketable securities, net $ 16.1 ($ 4.3) ($ 4.7) $ 7.1
====== ====== ===== ======
K. INCOME TAXES The following is a reconciliation of income taxes at the
statutory rate of 35% and income taxes as shown in the Statement of
Operations (in thousands):
2000 1999 1998
---- ---- ----
Earnings (loss) before income taxes:
Operating $120,259 $309,742 $269,298
Minority interest expense (24,491) (44,937) (45,279)
Equity in net losses of investees (142,230) (27,357) (13,198)
Extraordinary items - (6,001) (1,258)
Accounting changes (13,882) (6,370) -
-------- -------- --------
Total ($ 60,344) $225,077 $209,563
======== ======== ========
Income taxes at statutory rate ($ 21,120) $ 78,777 $ 73,347
Effect of:
Losses utilized (7,000) (5,250) (6,572)
Tax credits (5,757) - -
Amortization of intangibles 5,537 4,728 4,566
Minority interest 2,177 8,891 9,055
Dividends received deduction (2,378) (2,783) (2,189)
Tax exempt interest (1,571) (1,721) (521)
Nondeductible meals, etc. 1,149 665 864
Other 744 (3,030) 2,373
-------- -------- --------
Total Provision (Credit) (28,219) 80,277 80,923
Amounts applicable to:
Minority interest expense 6,440 6,501 6,661
Equity in net losses of investees 49,781 9,574 4,620
Extraordinary items - 2,152 495
Accounting changes 4,810 2,516 -
-------- -------- --------
Provision for income taxes as shown
on the Statement of Operations $ 32,812 $101,020 $ 92,699
======== ======== ========
F-28
AMERICAN FINANCIAL CORPORATION 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 $10,324 ($ 7,454) $61,501
Foreign 1,106 32 94
State 459 511 652
Deferred taxes:
Federal (39,588) 88,219 18,254
Foreign (520) (1,031) 422
------- ------- -------
($28,219) $80,277 $80,923
======= ======= =======
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 $21.2 million, $10.2
million and $41.4 million for 2000, 1999 and 1998, respectively.
F-29
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. EXTRAORDINARY ITEMS Extraordinary items represent AFC's proportionate
share of gains and losses related to debt retirements by the following
companies. Amounts shown are net of minority interest and income taxes (in
thousands):
1999 1998
---- ----
Holding Companies:
AFC (parent) ($2,993) ($77)
APU (parent) (856) (37)
Subsidiary:
GAFRI - (649)
------ ----
($3,849) ($763)
====== ====
M. COMMITMENTS AND CONTINGENCIES Loss accruals (included in other
liabilities) have been recorded for various environmental and occupational
injury and disease claims and other contingencies arising out of the
railroad operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978 and certain manufacturing operations disposed of by
American Premier. Under purchase accounting in connection with the
acquisition of American Premier, any such excess liability will be charged
to earnings in AFC'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.
AFC 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 AFC's financial condition or results of operations.
N. QUARTERLY OPERATING RESULTS (UNAUDITED) The operations of certain of AFC's
business segments are seasonal in nature. While insurance premiums are
recognized on a relatively level basis, claim losses related to adverse
weather (snow, hail, hurricanes, tornadoes, etc.) may be seasonal.
Historically, Chiquita's operations are significantly stronger in the
first and second quarters than in the third and fourth quarters. Quarterly
results necessarily rely heavily on estimates. These estimates and certain
other factors, such as the nature of investees' operations and
discretionary sales of assets, cause the quarterly results not to be
necessarily indicative of results for longer periods of time.
F-30
AMERICAN FINANCIAL CORPORATION 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).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
2000
-----------------------------------------
Revenues $886.3 $961.8 $1,014.2 $964.1 $3,826.4
Earnings (loss) before accounting change 48.4 21.2 (13.5) (79.1) (23.0)
Cumulative effect of accounting change - - - (9.1) (9.1)
Net earnings (loss) 48.4 21.2 (13.5) (88.2) (32.1)
1999
-----------------------------------------
Revenues $804.7 $837.1 $877.5 $848.3 $3,367.6
Earnings before extraordinary items and
accounting change 58.2 46.3 30.9 17.1 152.5
Extraordinary items - gain (loss) on
prepayment of debt - (3.9) - - (3.9)
Cumulative effect of accounting change (3.8) - - - (3.8)
Net earnings 54.4 42.4 30.9 17.1 144.8
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 AFC
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 AFC'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.
AFC 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) 14.1 20.1
O. 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.
F-31
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
NET INVESTMENT INCOME The following table shows (in millions) investment
income earned and investment expenses incurred by AFC'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 AFC's insurance subsidiaries are required to file
financial statements with state insurance regulatory authorities prepared
on an accounting basis prescribed or permitted by such authorities
(statutory basis). Net earnings and policyholders' surplus on a statutory
basis for the insurance subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
------------------- ----------------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Property and casualty companies $10 $170 $261 $1,763 $1,664
Life insurance companies 40 37 41 384 421
F-32
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Effective January 1, 2001, AFC'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, AFC's insurance subsidiaries
assume and cede reinsurance with other insurance companies. The following
table shows (in millions) (i) amounts deducted from property and casualty
written and earned premiums in connection with reinsurance ceded, (ii)
written and earned premiums included in income for reinsurance assumed and
(iii) reinsurance recoveries deducted from losses and loss adjustment
expenses.
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
====== ====== ======
P. 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.
F-33
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents (in
millions) the carrying value and estimated fair value of AFC's financial
instruments at December 31.
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 204 204 113 113
Subsidiaries 195 187 240 230
Trust preferred securities 218 211 220 205
AFC preferred stock 72 58 72 69
When available, fair values are based on prices quoted in the most active
market for each security. If quoted prices are not available, fair value
is estimated based on present values, discounted cash flows, fair value of
comparable securities, or similar methods. The fair value of the liability
for annuities in the payout phase is assumed to be the present value of
the anticipated cash flows, discounted at current interest rates. Fair
value of annuities in the accumulation phase is assumed to be the
policyholders' cash surrender amount.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES, NET 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 $10,148.2 $ 16.4 $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 226.8
Deferred taxes 125.2 (78.6) 46.6
Minority interest (500.7) (9.0) (509.7)
------
Unrealized gain $139.2
======
1999
----
Fixed maturities $10,101.0 ($238.8) $9,862.2
Other stocks 229.2 180.5 409.7
Deferred acquisition costs 656.1 4.6 660.7
Annuity benefits accumulated (5,532.6) 13.1 (5,519.5)
------
Pretax unrealized (40.6)
Deferred taxes 85.1 13.4 98.5
Minority interest (502.7) 12.5 (490.2)
------
Unrealized loss ($ 14.7)
======
F-34
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK On occasion, AFC and its
subsidiaries have entered into financial instrument transactions which may
present off-balance-sheet risks of both a credit and market risk nature.
These transactions include commitments to fund loans, loan guarantees and
commitments to purchase and sell securities or loans. At December 31,
2000, AFC 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 AFC's subsidiaries are subject to various
state laws, federal regulations and debt covenants which limit the amount
of dividends, loans and advances that can be paid. Under applicable
restrictions, the maximum amount of dividends available to AFC in 2001
from its insurance subsidiaries without seeking regulatory clearance is
approximately $160 million. Total "restrictions" on intercompany transfers
from AFC's subsidiaries cannot be quantified due to the discretionary
nature of the restrictions.
BENEFIT PLANS AFC expensed approximately $22 million in 2000, $13 million
in 1999 and $22 million in 1998 for its retirement and employee savings
plans.
TRANSACTIONS WITH AFFILIATES AFG owns a $3.7 million minority interest in
a residential homebuilding company. Brothers of AFC'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, AFC'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-35
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202