AFG's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States, including Great American's and GAFRI's home offices in Cincinnati. A GAFRI subsidiary owns a 40,000 square foot office building in Austin, Texas, most of which is used by the company for its operations.
Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2002, the average life of AFG's fixed maturities was about six years.
AFG's investment in equity securities of Provident Financial Group, a Cincinnati-based commercial banking and financial services company, represents $117 million of the $131 million in unrealized gains on other stocks at December 31, 2002. At March 14, 2003, the unrealized gain on Provident was approximately $86 million.
Securities Securities with With Unrealized Unrealized MATURITY Gains Losses -------- ---------- ---------- One year or less 6% 5% After one year through five years 22 27 After five years through ten years 33 39 After ten years 10 17 --- --- 71 88 Mortgage-backed securities 29 12 --- --- 100% 100% === ===
GENERAL Results of operations as shown in the accompanying financial statements are prepared in accordance with generally accepted accounting principles. Many investors and analysts focus on "core earnings" of companies, setting aside certain items included in net earnings such as realized gains and losses, the cumulative effect of accounting changes and certain other unusual items. Realized gains and losses are excluded from "core earnings" because they are unpredictable and not necessarily indicative of current operating fundamentals. Other items such as the 2002 asbestos litigation settlement and tax resolution benefits and the 2001 special A&E charge and World Trade Center losses are excluded to assist investors in analyzing their impact on the trend in operating results. Nonetheless, these items are significant components of AFG's overall financial results.
In September 2000, GAFRI realized a $27.2 million pretax gain on the sale of its minority ownership in a company engaged in the production of ethanol. GAFRI's investment was repurchased by the ethanol company which, following the purchase, became wholly-owned by AFG's Chairman.
On its deferred annuities (annuities in the accumulation phase), GAFRI generally credits interest to policyholders' accounts at their current stated "surrender" interest rates. Furthermore, for "two-tier" deferred annuities (annuities under which a higher interest amount can be earned if a policy is annuitized rather than surrendered), GAFRI accrues an additional liability to provide for expected deaths and annuitizations. Changes in crediting rates, actual surrender, death and annuitization experience or modifications in actuarial assumptions can affect this accrual. In 2002, this accrual was reduced by approximately $2 million due to decreases in crediting rates on certain fixed annuity products, partially offset by a modification in projected investment yields. Significant changes in projected investment yields could result in additional benefits or charges to earnings.
2001 COMPARED TO 2000 Excluding the 2000 litigation charges discussed below, other operating and general expenses increased $13.2 million (3%) due primarily to a $14.8 million increase in environmental reserves related to former operations.
A. Accounting Policies H. Shareholders' Equity B. Acquisitions and Sales of I. Income Taxes Subsidiaries and Investees J. Equity in Losses of Investees C. Segments of Operations K. Commitments and Contingencies D. Investments L. Quarterly Operating Results E. Goodwill and Other Intangibles M. Insurance F. Long-Term Debt N. Additional Information G. Minority Interest O. Subsequent Events --------------------------------------------------------------------------
B. ACQUISITIONS AND SALES OF SUBSIDIARIES AND INVESTEES See Note O, "Subsequent Events" for information on the 2003 sales of Infinity and the direct-to-consumer auto business.
For income tax purposes, AFG and certain members of the AFC consolidated tax group had the following carryforwards available at December 31, 2002 (in millions): Expiring Amount ----------- ------ { 2003 - 2007 $ 11 Operating Loss { 2008 - 2017 - { 2018 - 2022 189 Other - Tax Credits 11
BENEFIT PLANS AFG expensed approximately $20 million in 2002, $19 million in 2001 and $22 million in 2000 for its retirement and employee savings plans.
TRANSACTIONS WITH AFFILIATES AFG purchased a $3.7 million minority interest in a residential homebuilding company from an unrelated party in 1995. At that same time, a brother of AFG's chairman purchased a minority interest in the company for $825,000. In 2000, that brother and another brother of AFG's chairman acquired the remaining shares from the third parties. In addition, GAFRI had extended a line of credit to this company under which the homebuilder could borrow up to $8 million at 13%. At December 31, 2001, $6.4 million was due under the credit line. In September 2002, the homebuilding company was sold to an unrelated party for a gain of $9.3 million (included in realized gains on other investments) and GAFRI's line of credit was repaid and terminated.
In 2001, an AFG subsidiary purchased a 29% interest in an aircraft for $1.6 million (fair value as determined by independent third party) from a company owned by a brother of AFG's chairman. The remaining interests in the aircraft are owned by AFG's chairman and his two brothers. Costs of operating the aircraft are being borne proportionately.
Signed: March 27, 2003 BY:s/CARL H. LINDNER --------------------------------- Carl H. Lindner Chairman of the Board and Chief Executive Officer