Significant accounting policies are summarized in Note A to the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. Management believes that the establishment of insurance reserves, especially asbestos and environmental-related reserves, and the determination of "other than temporary" impairment on investments are the two areas where the degree of judgment required to determine amounts recorded in the financial statements make the accounting policies critical. For further discussion of these policies, see "Liquidity and Capital Resources - Investments" and "Liquidity and Capital Resources - Uncertainties."
RATIOS AFG's debt to total capital ratio (at the parent holding company level) was approximately 25% at December 31, 2002, compared to 27% at December 31, 2001. AFG used a portion of the proceeds from the Infinity sale in February 2003 to repay parent debt. Adjusting to reflect this repayment reduces the ratio to 21% at December 31, 2002.
AFG's ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.37 for the year ended December 31, 2002. Excluding annuity benefits, this ratio was 2.42 for 2002. Although not required to be disclosed, the ratio excluding interest on annuities is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.
SOURCES OF FUNDS AFG, 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.
For statutory accounting purposes, equity securities of non-affiliates are generally carried at market value. At December 31, 2002, AFG's insurance companies owned publicly traded equity securities with a market value of $297 million. In addition, Great American owns GAFRI common stock with a market value of $603 million and a carrying value of $422 million. 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.
INVESTMENTS Approximately two-thirds of AFG's consolidated assets are invested in marketable securities. AFG's investment portfolio at December 31, 2002, contained $12 billion in "Fixed maturities" and $300 million in "Other stocks", all carried at market value with unrealized gains and losses reported as a separate component of shareholders' equity on an after-tax basis. At December 31, 2002, AFG had pretax net unrealized gains of $457.2 million on fixed maturities and $125.8 million on other stocks. AFG attempts to optimize investment income while building the value of its portfolio, placing emphasis upon long-term performance. AFG's goal is to maximize return on an ongoing basis rather than focusing on short-term performance.
Approximately 93% of the fixed maturities held by AFG were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies at December 31, 2002. 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.
OTHER STOCKS ------------ Market value of securities $ 261 $ 18 Cost of securities $ 130 $ 23 Gross unrealized gain (loss) $ 131 ($ 5) Market value as % of cost 201% 78% Number individually exceeding $2 million gain or loss 3 1
The table below sets forth the scheduled maturities of fixed maturity securities at December 31, 2002, based on their market values. Asset backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Net Realized Gains (Losses) Charges for on Sales Impairment Other(a) Total -------------- ----------- ----- ------ 2002 $112.7 ($179.4) ($12.4) ($79.1) 2001 89.8 (125.5) (b) 11.6 (24.1) 2000 (1.7) (27.5) 2.6 (26.6) 1999 31.1 (13.0) 2.1 20.2 1998 40.2 (32.2) (1.7) 6.3
Increased impairment charges in recent years reflect a rise in corporate defaults in the marketplace resulting from the weakened economy.
December 31, ------------------ 2002 2001 ---- ---- Specialty $3,712 $3,295 Personal 838 843 Other lines (including asbestos and environmental) 654 640 ------ ------ $5,204 $4,778 ====== ======
While management believes that AFG's reserves for A&E claims are a reasonable estimate of ultimate liability for such claims, actual results may vary materially from the amounts currently recorded due to the difficulty in predicting the number of future claims and the impact of recent bankruptcy filings, and unresolved issues such as whether coverage exists, whether policies are subject to aggregate limits on coverage, whether claims are to be allocated among triggered policies and implicated years, and whether claimants who exhibit no signs of illness will be successful in pursuing their claims.
The settlement is subject to a number of contingencies, including the approval of the bankruptcy court supervising the reorganization of A.P. Green and subsequent confirmation of a plan of reorganization that includes an injunction prohibiting the assertion against Great American of any present or future asbestos personal injury claims under policies issued to A.P. Green and related companies. This process could take a year or more and no assurance can be made that all of these consents and approvals will be obtained; no payments are required until completion of the process. If not obtained, the outcome of this litigation will again be subject to the complexities and uncertainties associated with a Chapter 11 proceeding and asbestos coverage litigation.
The payments, reserve balances and policy count information for asbestos, environmental and other mass torts were as follows (dollars in millions):
Of the open asbestos accounts, approximately 270 are holders of policies written by AFG subsidiaries and approximately 200 represent assumed reinsurance business. The direct policyholders with asbestos claims consist of limited exposures, dominated by small to mid-sized commercial entities that are mostly regional policyholders with few national target defendants. With respect to non-products exposures, there are few accounts with potentially significant exposure, none of which is considered to be material to the Company.
FIXED MATURITY PORTFOLIO The fair value of AFG's fixed maturity portfolio is directly impacted by changes in market interest rates. AFG's fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily intermediate-term maturities. This practice allows flexibility in reacting to fluctuations of interest rates. The portfolios of AFG's insurance operations are managed with an attempt to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations. AFG's life and annuity operations attempt to align the duration of their invested assets to the projected cash flows of policyholder liabilities.
December 31, 2002 December 31, 2001 ----------------- ----------------- Principal Principal Cash Flows Rate Cash Flows Rate ---------- ----- ---------- ---- 2003 $ 1,301 10.09% 2002 $ 956 8.62% 2004 848 8.31 2003 1,407 7.84 2005 1,035 7.05 2004 860 8.56 2006 1,135 6.69 2005 1,082 7.50 2007 1,158 6.12 2006 1,110 6.89 Thereafter 5,939 6.13 Thereafter 5,263 7.08 ------- -------
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 as determined by applicable law) enabling management to react to changes in market interest rates and maintain an adequate spread. Nonetheless, due to the sharp drop in interest rates in 2002, GAFRI's spreads have narrowed and will likely continue to narrow through at least 2003. Actuarial assumptions used to estimate DPAC and Annuity Benefits, as well as GAFRI's ability to maintain spread, could be impacted if the current interest rate environment continues for an extended period and causes policyholder behavior to be altered.
DILUTED PER SHARE AMOUNTS: NET EARNINGS (LOSS) $1.22 ($ .22) ($ .95) Asbestos litigation settlement (.28) - - Tax resolution benefits .44 - - A&E charge and WTC losses - (1.19) - Net losses from investee corporations (.13) (.24) (1.55) Realized investment gains (losses) (.64) (.19) .04 Cumulative effect of accounting changes (.59) (.15) (.15)
Aside from the asbestos charges and losses from the World Trade Center, underwriting results improved in 2001 but were partially offset by a $15 million charge to increase reserves for environmental costs related to certain former operations.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and casualty operations have consisted of two major business groups: Specialty and Personal. See Note O, "Subsequent Events", to the Financial Statements for a discussion of the sale of nearly all of the Personal group.
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.
2002 2001 2000 ---- ---- ---- Gross Written Premiums (GAAP) ----------------------------- Specialty $2,713 $2,236 $1,889 Personal 1,221 1,284 1,339 Other Lines 1 - 3 ------ ------ ------ $3,935 $3,520 $3,231 ====== ====== ====== Net Written Premiums (GAAP) --------------------------- Specialty $1,577 $1,542 $1,324 Personal 836 (a) 1,040 (a) 1,311 Other Lines 1 - 3 ------ ------ ------ $2,414 $2,582 $2,638 ====== ====== ====== Combined Ratios (GAAP) ---------------------- Specialty 98.4% 101.7%(b) 107.9% Personal 99.8 107.9 108.6 Aggregate (including discontinued lines) 101.1%(c) 108.8%(c) 108.0%
As shown in Note M under "Insurance Reserves," AFG's property and casualty operations recorded loss development of $171 million in 2002 and $163 million in 2001 related to prior accident years. Major areas of adverse development were as follows (in millions):
"Executive liability" development resulted primarily from claim severity on policy coverages for 1999 and 2000. Both settlement costs and defense costs related to shareholder lawsuits have increased beyond estimates.
ASBESTOS LITIGATION SETTLEMENT CHARGE As more fully discussed under "Uncertainties -Asbestos and Environmental-related Reserves," AFG recorded a fourth quarter 2002 pretax charge of $30 million related to the settlement of asbestos-related coverage litigation.
GAINS ON SALES OF SUBSIDIARIES See Note O, to the financial statements for a discussion of the anticipated loss in connection with the 2003 public offering of Infinity.
GAIN ON SALE OF OTHER INVESTMENTS In September 2002, AFG realized a $9.3 million pretax gain on the sale of its minority ownership in a residential homebuilding company.
2002 COMPARED TO 2001 Other income increased $39.4 million (18%) in 2002 due primarily to higher income from real estate operations (including the effect of property sales and a hotel acquired in May 2002), increased fees earned by the Specialty group's new warranty business and higher fee income in certain other specialty insurance operations.
INTEREST ON BORROWED MONEY Changes in interest expense result from fluctuations in market rates as well as changes in borrowings. AFG has generally financed its borrowings on a long-term basis which has resulted in higher current costs.
INCOME TAXES The 2002 provision for income taxes includes $31 million in tax benefits for the reduction of previously accrued amounts due to the resolution of certain tax matters. See Note I to the Financial Statements for an analysis of items affecting AFG's effective tax rate.
START-UP MANUFACTURING BUSINESSES AFG's pretax operating earnings for 2000 include losses of $6.7 million from two start-up manufacturing businesses acquired in 2000 from their former owners. AFG sold the equity interests in these businesses in the fourth quarter of 2000 for a nominal cash consideration plus warrants to repurchase a significant ownership interest. Due to the absence of significant financial investment by the buyers relative to the amount of loans ($61.5 million at December 31, 2000) owed to AFG subsidiaries, AFG retained the financial risk in these businesses and continued accounting for their operations under the equity method as investees.
Investee losses in 2001 include litigation judgments of $4.7 million against one of these companies. In December 2002, this company sold its fixed assets, ceased operations and transferred approximately $30 million in cash and other assets to AFG. The amount transferred approximated AFG's carrying value of loans to this business. Amounts included in equity in net losses of investee corporations for this business were $5.4 million in 2002, $13.7 million in 2001 and $3.1 million in 2000.
CHIQUITA Equity in net losses of investee corporations for 2000 includes AFG's proportionate share of the results of Chiquita Brands International. Chiquita reported net losses attributable to common shareholders of $112 million in 2000.
Equity in net losses of investees for 2000 includes a $95.7 million pretax charge to writedown AFG's investment in Chiquita to a market value of approximately $1 per share. In 2001, AFG suspended accounting for Chiquita under the equity method due to Chiquita's pending restructuring. In March 2002, Chiquita completed its reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the restructuring, AFG's ownership percentage of Chiquita was reduced to less than one-half of 1%.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES Effective January 1, 2002, AFG implemented Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", under which goodwill is no longer amortized, but is subject to an impairment test at least annually. The initial impairment testing resulted in a charge of $40.4 million (net of minority interest and taxes) for the cumulative effect of a change in accounting principle.
In October 2000, AFG implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivatives to be recognized in the balance sheet at fair value and that the initial effect of recognizing derivatives at fair value be reported as a cumulative effect of a change in accounting principle. Accordingly, AFG recorded a charge of $9.1 million (net of minority interest and taxes) to record its derivatives at fair value at the beginning of the fourth quarter of 2000.
PROPOSED ACCOUNTING STANDARD GAFRI's variable annuity contracts contain a guaranteed minimum death benefit ("GMDB") (which may exceed the value of the policyholder's account) to be paid if the annuityholder dies before the annuity payout period commences. At December 31, 2002, the aggregate GMDB values (assuming every policyholder died on that date) exceeded the market value of the underlying variable
annuities by $233 million. Industry practice varies, but GAFRI does not establish GAAP reserves for this mortality risk. If a proposed accounting standard becomes effective, GAFRI would be required to record a liability for the present value of expected GMDB payments. Initial recognition of a GAAP liability (estimated to be less than 4% of the difference between the underlying market value of thevariable annuities and GMDB value) would be accounted for as the cumulativeeffect of a change in accounting principles. Death benefits paid in excess of the variable annuity account balances were $1.1 million in 2002.
The information required by the following Items will be provided within 120 days after the end of Registrant's fiscal year.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT AND RELATED STOCKHOLDER MATTERS ------------------------------------------
We have audited the accompanying consolidated balance sheet of American Financial Group, Inc. and subsidiaries as of December 31, 2002 and 2001, 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, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15(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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Group, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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.
BASIS OF PRESENTATION The consolidated financial statements include the accounts of American Financial Group, Inc. ("AFG") and its subsidiaries. Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.
INVESTMENT IN INVESTEE CORPORATIONS Investments in securities of 20%- to 50%-owned companies are generally carried at cost, adjusted for AFG's proportionate share of their undistributed earnings or losses.
REINSURANCE Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG's insurance subsidiaries report as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums retained by AFG's insurance subsidiaries under contracts to fund ceded losses as they become due. AFG's insurance subsidiaries also assume reinsurance from other companies. Income on reinsurance assumed is recognized based on reports received from ceding companies.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon (a) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (b) estimates received from ceding reinsurers and insurance pools and associations; (c) estimates of unreported losses based on past experience; (d) estimates based on experience of expenses for investigating and adjusting claims and (e) the current state of the law and coverage litigation. Establishing reserves for asbestos and environmental claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.
DERIVATIVES Effective October 1, 2000, AFG implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and for hedging activities. Prior year financial statements were not restated. SFAS No. 133 generally requires that derivatives (both assets and liabilities) be recognized in the balance sheet at fair value with changes in fair value included in current earnings. The cumulative effect of implementing SFAS No. 133, which resulted from the initial recognition of AFG's derivatives at fair value, was a loss of $9.1 million (net of minority interest and taxes) or $.15 per diluted share.
Derivatives are included in AFG's Balance Sheet and consist primarily of investments in common stock warrants (valued at $13.8 million at December 31, 2002; included in other stocks), the equity-based component of certain annuity products (included in annuity benefits accumulated) and related call options (included in other investments) designed to be consistent with the characteristics of the liabilities and used to mitigate the risk embedded in those annuity products.
EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted earnings per share includes the following dilutive effects of common stock options: 2002 - 403,000 shares; 2001 - 440,000 shares and 2000 - 169,000 shares.
STATEMENT OF CASH FLOWS For cash flow purposes, "investing activities" are defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. "Financing activities" include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, benefits and withdrawals are also reflected as financing activities. All other activities are considered "operating". Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.
NEW JERSEY PRIVATE PASSENGER AUTOMOBILE INSURANCE BUSINESS In September 2002, an AFG subsidiary entered into an agreement under which an unrelated insurer will assume the subsidiary's obligations to renew its private passenger automobile insurance business written in New Jersey. AFG recognized a $10.8 million pretax loss on the transaction. As of September 9, 2002, AFG no longer accepts any new private passenger automobile insurance in that state.
During the fourth quarter of 2000, AFG sold the equity interests to a group of employees for nominal cash consideration plus warrants to repurchase a significant ownership interest. Due to the absence of significant financial investment by the buyers relative to the amount of loans ($61.5 million at December 31, 2000) owed to AFG subsidiaries, the sale was not recognized as a divestiture for accounting purposes and AFG continued accounting for their operations under the equity method as investees. In December 2002, one of the businesses sold substantially all of its assets for $29.5 million, which proceeds and approximately $675,000 in receivables and other assets were transferred to AFG. The amount transferred approximated AFG's carrying value of loans to this business. At December 31, 2001, $41.6 million in assets of this business were included in other assets and $9.8 million in liabilities of this business (after consolidation and elimination of loans from AFG subsidiaries) were included in other liabilities in AFG's consolidated balance sheet.
AFG's equity in the losses of these two companies during 2002, 2001 and the fourth quarter of 2000 was $9.0 million, $16.6 million and $4.1 million, respectively, and is included in investee losses in the Statement of Operations.
The following tables (in thousands) show AFG's assets, revenues and operating profit (loss) by significant business segment. Operating profit (loss) represents total revenues less operating expenses.
The table below sets forth the scheduled maturities of fixed maturities based on market value as of December 31, 2002. Asset-backed securities and other securities with sinking funds are reported at average maturity. Data based on amortized cost is generally the same. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. Mortgage-backed securities had an average life of approximately five years at December 31, 2002.
2002 2001 2000 ---- ---- ---- Gross Gains $155.3 $108.9 $15.9 Gross Losses ($216.5) ($124.2) ($40.1)
If the goodwill amortization of $13.7 million ($.20 per share, basic and diluted) and $16.4 million ($.28 per share, basic and diluted) in the years 2001 and 2000, respectively, had not been expensed, net losses for the periods would have been $1.2 million ($.02 per share) and $39.7 million ($.67 per share).
F. LONG-TERM DEBT Long-term debt consisted of the following at December 31, (in thousands): 2002 2001 ---- ---- HOLDING COMPANIES: AFG 7-1/8% Senior Debentures due April 2009, less discount of $1,552 and $1,742 (imputed rate - 7.2%) $301,298 $301,108 AFG 7-1/8% Senior Debentures due December 2007 79,600 79,600 AFC notes payable under bank line 248,000 203,000 American Premier Underwriters, Inc. ("APU") 10-7/8% Subordinated Notes due May 2011, including premium of $777 and $836 (imputed rate - 9.6%) 11,498 11,557 Other 8,014 13,695 -------- --------
At December 31, 2002, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in millions):
G. MINORITY INTEREST Minority interest in AFG's balance sheet is comprised of the following (in thousands): 2002 2001 ---- ---- Interest of noncontrolling shareholders in subsidiaries' common stock $157,207 $140,913 Preferred securities issued by subsidiary trusts 241,663 241,663 AFC preferred stock 72,154 72,154 -------- -------- $471,024 $454,730 ======== ======== PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFG and GAFRI have issued preferred securities and, in turn, purchased a like amount of subordinated debt which provides interest and principal payments to fund the respective trusts' obligations. The preferred securities must be redeemed upon maturity or redemption of the subordinated debt. AFG and GAFRI effectively provide unconditional guarantees of their respective trusts' obligations.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in thousands): 2002 2001 2000 ---- ---- ---- Interest of noncontrolling shareholders in earnings of subsidiaries $ 6,096 $11,366 $11,775 Accrued distributions by subsidiaries on preferred securities: Trust issued securities, net of tax 14,281 16,932 17,819 AFC preferred stock 5,772 5,772 5,772 ------- ------- ------- $26,149 $34,070 $35,366 ======= ======= =======
STOCK OPTIONS At December 31, 2002, there were 9.7 million shares of AFG Common Stock reserved for issuance under AFG's Stock Option Plan. Options are granted with an exercise price equal to the market price of AFG Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant; those granted to nonemployee directors of AFG are fully exercisable upon grant. Options generally expire ten years after the date of grant. Data for AFG's Stock Option Plan is presented below:
I. 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):
2002 2001 2000 ---- ---- ---- Current taxes: Federal $17,535 $44,715 $13,880 Foreign 2,293 - 1,106 State 236 1,201 459 Deferred taxes: Federal (33,762) (59,042) (50,070) Foreign 1,692 (733) (520) ------- ------- ------- ($12,006) ($13,859) ($35,145) ======= ======= =======
AFG's insurance subsidiaries continue to receive claims related to environmental exposures, asbestos and other mass tort claims. Establishing reserves for these claims is subject to uncertainties that are significantly greater than those presented by other types of claims. The liability for asbestos and environmental reserves at December 31, 2002 and 2001, respectively, was $572 million and $548 million; related recoverables from reinsurers (net of allowances for doubtful accounts) at those dates were $105 million and $101 million, respectively.
L. QUARTERLY OPERATING RESULTS (UNAUDITED) The operations of certain of AFG's business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, tornadoes, etc.) may be seasonal. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the nature of investees' operations and discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time.
The 2001 third quarter results include a $100 million pretax charge to strengthen asbestos and environmental insurance reserves and pretax losses of $25 million resulting from the World Trade Center terrorist attack.
AFG has realized gains (losses) on sales of subsidiaries in recent years (see Note B). Realized gains (losses) on securities, affiliates and other investments amounted to (in millions):
1st 2nd 3rd 4th Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------ 2002 ($17.8) ($47.6) ($24.6) $9.4 ($80.6) 2001 (8.5) (26.4) 7.0 3.9 (24.0)
M. INSURANCE Securities owned by insurance subsidiaries having a carrying value of just over $1 billion at December 31, 2002, were on deposit as required by regulatory authorities.
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). Adverse development recorded in 2002 and 2001 in prior year reserves related primarily to charges for asbestos and certain Specialty lines in run-off.
(*) Before amortization of deferred gains on retroactive reinsurance of $20 million in 2002, $33 million in 2001 and $34 million in 2000.
2002 2001 2000 ---- ---- ---- Direct premiums written $4,027 $3,573 $3,365 Reinsurance assumed 80 94 76 Reinsurance ceded (1,693) (1,114) (803) ------ ------ -- ----
---- Fixed maturities $10,593.3 $155.3 $10,748.6 Other stocks 187.8 125.9 313.7 Deferred acquisition costs 827.3 (9.0) 818.3 Annuity benefits accumulated (5,827.9) (4.2) (5,832.1) ------ Pretax unrealized 268.0
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK On occasion, AFG and its subsidiaries have entered into financial instrument transactions which may present off-balance-sheet risks of both a credit and market risk nature. These transactions include commitments to fund loans, loan guarantees and commitments to purchase and sell securities or loans. At December 31, 2002, AFG and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totaling up to $18 million.
RESTRICTIONS ON TRANSFER OF FUNDS AND ASSETS OF SUBSIDIARIES Payments of dividends, loans and advances by AFG's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. Under applicable restrictions, the maximum amount of dividends available to AFG in 2003 from its insurance subsidiaries without seeking regulatory clearance is approximately $24 million. Additional amounts of dividends, loans and advances require regulatory approval.
INFINITY PROPERTY AND CASUALTY CORPORATION On December 31, 2002, AFG transferred to Infinity Property and Casualty Corporation ("Infinity", a newly formed subsidiary) the following subsidiaries involved primarily in the issuance of nonstandard auto policies: Atlanta Casualty Company, Infinity Insurance Company, Leader Insurance Company and Windsor Insurance Company. Effective January 1, 2003, Great American Insurance Company, an AFG subsidiary, transferred to Infinity its personal insurance business written through independent agents. In February 2003, AFG sold 61% of Infinity in a public offering. The businesses transferred generated aggregate net written premiums of approximately $690 million, $900 million and $1.2 billion for the years ended December 31, 2002, 2001, and 2000, respectively. AFG expects to realize a pretax loss of about $40 million on the sale in the first quarter of 2003. In addition, a substantial tax benefit related to AFG's book versus tax basis in Infinity stock may be available.
2. Financial Statement Schedules: A. Selected Quarterly Financial Data is included in Note L to the Consolidated Financial Statements.
December 31 --------------------------- 2002 2001 ---- ---- ASSETS: Cash and short-term investments $ 306 $ 529 Receivables from affiliates 308,563 359,582 Investment in subsidiaries 1,835,079 1,562,550 Investment in securities 1,312 - Other investments 32,500 36,244 Other assets 37,758 28,970 ---------- ----------
Earnings (loss) before income taxes and accounting changes 130,350 (12,751) (77,298) Provision (credit) for income taxes 5,350 (7,951) (30,335) ------- ------- -------
(*)The Parent Only Financial Statements include the accounts of AFG and its predecessor, AFC Holding Company, a wholly-owned subsidiary.
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS THREE YEARS ENDED DECEMBER 31, 2002 (IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------- ---------------- --------------- ------------- ----------- (a) RESERVES FOR DEFERRED UNPAID CLAIMS (b) AFFILIATION POLICY AND CLAIMS DISCOUNT (c) WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS --------------- ---------------- --------------- ------------- -----------
SIGNATURES ---------- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, American Financial Group, Inc. has duly caused this Report to be signed on its behalf by the undersigned, duly authorized.
s/CARL H. LINDNER Chairman of the Board March 27, 2003 - ----------------------- Carl H. Lindner of Directors
s/JAMES E. EVANS Director March 27, 2003 - ----------------------- James E. Evans
s/KEITH E. LINDNER Director March 27, 2003 - ----------------------- Keith E. Lindner
s/WILLIAM R. MARTIN Director* March 27, 2003 - ----------------------- William R. Martin
s/FRED J. RUNK Senior Vice President and March 27, 2003 - ----------------------- Fred J. Runk Treasurer (principal financial and accounting officer)
1. I have reviewed this annual report on Form 10-K of American Financial Group, Inc.;
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
March 27, 2003 BY: s/Carl H. Lindner ---------------------------------- Carl H. Lindner Chairman of the Board and Chief Executive Officer (principal executive officer)
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
4 Instruments defining the rights of Registrant has no security holders. outstanding debt issues exceeding 10% of the assets of Registrant and consolidated subsidiaries.
10(b) Form of stock option agreements, filed as Exhibit 10(b) to AFG's Form 10-K for 1998. (*)
10(c) 2002 Annual Bonus Plan, filed as Exhibit 10 to AFG's March 31, 2002 Form 10-Q. (*)
10(e) Retirement program for outside directors, filed as Exhibit 10(e) to AFG's Form 10-K for 1995. (*)
10(h) Credit Agreement, dated as of November 25, 2002, among American Financial Group, Inc., as Guarantor, AFC Holding Company, as Guarantor, American Financial Corporation, as Borrower, Fleet National Bank, Bank of America, N.A. and KeyBank National Association filed as Exhibit 10 to AFG's Registration Statement on Form S-3 on February 4, 2003. (*)
99 Certification of Chief Executive Officer and Chief Financial Officer -----