Subsidiaries of AFC own several buildings in downtown Cincinnati. AFC and its affiliates occupy about three-fifths of the aggregate 650,000 square feet of commercial and office space.
AFC's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States, including GAI's and AAG's home offices in Cincinnati. Two AAG subsidiaries own office buildings in Rapid City, South Dakota and Mobile, Alabama. The office building in Rapid City contains about 52,000 square feet, approximately three- fourths of which is utilized for company purposes. The building in Mobile is being marketed for sale or lease; one-fifth of its 82,000 square feet is company occupied.
AFC subsidiaries own transferable rights to develop approximately one million square feet of floor space in the Grand Central Terminal area in New York City. The development rights were derived from ownership of the land upon which the terminal is constructed.
1997 1996 1995 1994 1993 Earnings Statement Data: Total Revenues $ 4,053 $ 4,114 $ 3,628 $ 2,104 $ 2,721 Earnings Before Income Taxes and Extraordinary Items 334 340 252 44 262 Earnings Before Extraordinary Items 208 250 195 19 225 Extraordinary Items (7) (28) 2 (17) (5) Net Earnings 201 222 197 2 220
Ratio of Earnings to Fixed Charges (a) 4.20 4.99 3.10 1.69 2.62 Ratio of Earnings to Fixed Charges and Preferred Dividends (a) 3.52 3.96 2.60 1.40 2.26
(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 deducting (adding) the undistributed equity in earnings (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.
AFC's ratio of earnings to fixed charges, excluding and including preferred dividends, on a total enterprise basis for the three years ended December 31, 1997, are shown below.
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, 1997, the capital ratios of all AFC insurance companies substantially exceeded the RBC requirements (the lowest capital ratio of any AFC subsidiary was 3.5 times its authorized control level RBC; weighted average of all AFC subsidiaries was 5.2 times).
Prior to the Mergers, American Premier had substantial cash and short- term investments at the parent company level. Subsequent to the Mergers, AFC and two of its subsidiaries entered into separate credit agreements with American Premier. Funds borrowed from American Premier under these agreements were used for debt retirements, capital contributions to subsidiaries, and other corporate purposes. In December 1996, American Premier paid a dividend to AFG in the form of a $675 million note receivable from AFC under the credit agreement plus $18.7 million of related accrued interest. AFG then contributed $450 million of the note (without accrued interest) to the capital of AFC. Subsequent to the Mergers, American Premier entered into a credit agreement with AFG under which American Premier and AFG made loans of up to $250 million available to each other.
The AFC and APU credit agreements with AFG were replaced in December 1997 with a reciprocal Master Credit Agreement among the various AFG holding companies under which funds are made available to each other for general corporate purposes. Amounts due AFG under the above agreements were $377 million and $401 million at December 31, 1997 and 1996, respectively.
In 1996, three nationally recognized rating agencies issued or upgraded ratings on AFC, American Premier and AAG public debentures. All of the AFC and AAG senior debentures are now rated investment grade; the APU and AAG subordinated debentures are rated investment grade by two of the agencies. Generally, the upgrades reflect the expectation that AFC's consolidated debt to total capital will remain conservative and that coverage ratios will benefit from higher subsidiary earnings and a lower level of fixed charges at AFG's subsidiaries.
For statutory accounting purposes, equity securities are generally carried at market value. At December 31, 1997, AFC's insurance companies owned publicly traded equity securities with a market value of $1.5 billion, including equity securities of AFC affiliates (including subsidiaries) of $1.1 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.
Most businesses utilizing computing technology are facing a problem with the year 2000. The Year 2000 problem is caused by the widespread use of computer programs that lack the ability to properly interpret two-digit codes representing the year 2000 and beyond. This program flaw can cause computation errors, faulty information processing and reporting and, in some instances, complete shutdown of critical applications.
During the early 1990's Great American designed and developed software to automate the Year 2000 conversion process. In 1995 Great American formed Millennium Dynamics, Inc. ("MDI") to publicly market its software and consultative services worldwide. In connection with the sale of MDI in the fourth quarter of 1997, AFC retained licenses to utilize MDI's software internally.
Each segment of AFC's operations is comprised of multiple business units most of which utilize stand-alone computer programs. These businesses are in the process of either (i) modifying their programs utilizing the MDI software along with
Investments Approximately 70% of AFC's consolidated assets are invested in marketable securities. A diverse portfolio of primarily publicly traded bonds and notes accounts for 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, 1997, the average life of AFC's bonds and redeemable preferred stocks was just over 6 years.
Approximately 93% of the bonds and redeemable preferred stocks held by AFC were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies at December 31, 1997. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high quality investment portfolio should generate a stable and predictable investment return.
Investments in mortgage-backed securities ("MBSs") represented approximately one-fourth of AFC's bonds and redeemable preferred stocks at December 31, 1997. 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 MBSs portfolio. More than 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.
Because most income of the property and casualty insurance subsidiaries has been sheltered from income taxes through 1997, non-taxable municipal bonds represent only a small portion (less than 1%) of the portfolio.
AFC's equity securities are concentrated in a relatively limited number of major positions. This approach allows management to more closely monitor the companies and industries in which they operate.
Prior to the Mergers, the realization of capital gains, primarily through sales of equity securities, was an integral part of AFC's investment program. Individual securities are sold creating gains or losses as market opportunities exist. Pretax capital gains recognized upon disposition of securities, including investees, during the past five years have been: 1997 - $57 million; 1996 - $166 million; 1995 - $84 million; 1994 - $50 million and 1993 - $165 million. At December 31, 1997, the net unrealized gain on AFC's bonds and redeemable preferred stocks was $389 million; the net unrealized gain on equity securities was $293 million.
General As previously noted, financial statements for periods subsequent to the April 1995 Mergers include the accounts of American Premier. AFC had accounted for American Premier as an investee from the second quarter of 1993 through the first quarter of 1995. Accordingly, income statement components for 1997 and 1996 are not comparable to prior years.
In addition to the earnings contribution resulting from the Mergers, results for 1995 include $84 million in pretax gains on the sale of securities.
Property and Casualty Insurance - Underwriting AFC manages and operates its property and casualty business as three major sectors. The nonstandard automobile insurance companies (the "NSA Group") insure risks not typically accepted for standard automobile coverage because of the applicant's driving record, type of vehicle, age or other criteria. The specialty lines are a diversified group of over twenty-five business lines that offer a wide variety of specialty insurance products. Some of the more significant areas are California workers' compensation, executive liability, inland and ocean marine, U.S.-based operations of Japanese companies, agricultural- related coverages, non-profit liability, general aviation coverages, fidelity and surety bonds, and umbrella and excess. The commercial and personal lines provide coverages in worker's compensation, commercial multi-peril, umbrella and commercial automobile, standard private passenger automobile and homeowners insurance.
In 1997, underwriting results of AFC's insurance operations outperformed the industry average for the twelfth consecutive year. 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 lines and nonstandard auto businesses.
Comparisons made in the following discussion of AFC's insurance operations include American Premier's insurance operations even though they were not consolidated in the financial statements prior to the Mergers.
1997 1996 1995 Net Written Premiums (GAAP) NSA Group $1,248 $1,135 $1,277 Specialty Operations 1,103 993 1,097 Commercial and Personal Operations 507 660 717 Other Lines - - 1 $2,858 $2,788 $3,092
Combined Ratios (GAAP) NSA Group 97.2% 99.9% 105.2% Specialty Operations 99.0 84.1 94.8 Commercial and Personal Operations 106.0 110.6 99.1 Aggregate (including A&E and other lines) 101.4 102.9 101.2
Operating results for 1996 were adversely impacted by two unusual items: (i) higher than normal catastrophe losses including approximately $30 million in losses due to Hurricane Fran and (ii) increases in A&E reserves (exposures for which AFC may be liable under general liability policies written years ago). A standard insurance measure used in analyzing the adequacy of A&E reserves is the "survival ratio" (reserves divided by three-year average annual paid losses). Due in part to the greater uncertainties inherent in estimating A&E claims, management evaluates its survival ratio in relation to those published for the industry. Based primarily on industry survival ratios published in mid-1996, AFC increased A&E reserves of its discontinued insurance lines by $120 million by recording a third quarter, non-cash pretax charge of $80 million and reallocating $40 million, or approximately 2%, of reserves from its Specialty Operations. Reserves for unpaid losses and loss adjustment expenses of the Specialty Lines were approximately $2.0 billion, $2.1 billion and $2.2 billion at December 31, 1997, 1996 and 1995, respectively. A&E reserves at December 31, 1997, were approximately $348 million, an amount equal to approximately 10 times the preceding three years' average claim payments.
Net written premiums for the specialty operations declined 9% during 1996 due primarily to a decrease in the California workers' compensation business and withdrawal from an unprofitable pool at the end of 1995, partially offset by increases in other specialty niche lines. The decline in California workers' compensation premiums reflects (i) extremely competitive pricing in the marketplace as a result of the repeal of the California workers' compensation minimum rate law effective January 1, 1995 and (ii) the impact of mandatory premium rate reductions which took effect a year earlier.
Commercial and Personal Operations Net written premiums for the commercial and personal operations decreased 23% in 1997 due primarily to a reinsurance agreement, effective January 1, 1997, under which 80% of all AFC's homeowners' business was reinsured, and reduced writings of personal automobile coverages in certain states. Excluding the impact of the reinsurance agreement, premiums decreased 10%. Even though underwriting results for 1997 were impacted by several current year commercial casualty losses as well as adverse development in certain prior year claims, improvements in personal lines contributed to a lower combined ratio.
1997 compared to 1996 AFC recorded equity in net losses of investee corporations of $5.6 million in 1997 and $17 million in 1996. Chiquita's loss attributable to common shareholders was $17 million for 1997; results were adversely affected by a stronger dollar in relation to major European currencies (mitigated in part by the company's foreign currency hedging program) and by increased banana production costs resulting primarily from widespread flooding in 1996. These factors more than offset the benefit of higher local currency banana pricing in Europe during the second half of the year. For 1996, the loss attributable to common shareholders was $63 million and included pretax writedowns and costs of $70 million resulting from (i) industry-wide flooding in Costa Rica, Guatemala and Honduras, (ii) certain strategic undertakings designed to achieve further long-term reductions in the delivered product cost of Chiquita bananas and (iii) certain claims relating to prior European Union quota restructuring actions.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in 1997 include (i) a pretax gain of $49.9 million on the sale of MDI and (ii) a charge of $17 million relating to operations expected to be sold or otherwise disposed of in 1998.
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 represent primarily interest related to annuity policyholders' funds held. The rate at which AAG credits interest on most of its annuity policyholders' funds is subject to change based on management's judgment of market conditions.
1997 compared to 1996 Interest expense increased $1.0 million (1%) from 1996. The increase reflects increased borrowings from AFG, partially offset by the effect of significant debt reductions during 1996.
Other Operating and General Expenses Operating and general expenses in 1997 include third quarter charges of $5.5 million relating to an arbitration settlement and $4.0 million relating to relocating a subsidiary's operations to Cincinnati. These charges were more than offset by a reduction caused by the absence of expenses from a non-insurance subsidiary which was sold in the first quarter of 1997.
SFAS No. 130 establishes standards for the reporting of a company's change in equity during the period from non-owner sources. For AFC, comprehensive income will principally consist of net income and the change in net unrealized gains on marketable securities. SFAS No. 131 establishes standards for the way companies report information about operating segments, products and services, geographic areas and major customers. Implementation of these standards will not have a significant effect on AFC's financial position, net income or reported segments.
Shareholders' Equity: Preferred Stock (liquidation value - $72,154 and $258,638) 72,154 162,760 Common Stock, no par value - 20,000,000 and 53,500,000 shares authorized - 10,593,000 and 45,000,000 shares outstanding 9,625 9,625 Capital surplus 936,154 919,746 Retained earnings 34,350 1,364 Net unrealized gain on marketable securities, net of deferred income taxes 341,200 183,400 Total shareholders' equity 1,393,483 1,276,895
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.
Life, Accident and Health Reserves Liabilities for future policy benefits under traditional ordinary life, accident and health policies are computed using a net level premium method. Computations are based on anticipated investment yield (primarily 7%), mortality, morbidity and surrenders and include provisions for unfavorable deviations. Reserves are modified as necessary to reflect actual experience and developing trends.
D. Segments of Operations AFC operates its property and casualty insurance business in three major segments: nonstandard automobile, specialty lines, and commercial and personal lines. AFC's annuity and life business primarily sells tax-deferred annuities to employees of primary and secondary educational institutions and hospitals. These insurance businesses operate throughout the United States. In addition, AFC has owned significant portions of the voting equity securities of certain companies (investee corporations - see Note F).
Operating Profit (Loss) Property and casualty insurance: Underwriting: Nonstandard automobile $ 33,456 $ 1,015 ($ 60,316) Specialty lines 10,888 154,329 50,690 Commercial and personal lines (33,882) (72,513) 5,315 Other lines (d) (52,021) (163,540) (31,721) (41,559) (80,709) (36,032) Investment and other income 311,169 359,002 357,617 269,610 278,293 321,585 Annuities and life 93,794 77,119 79,579 Other (e) (24,076) 1,086 (164,503) 339,328 356,498 236,661 Equity in net earnings (losses) of investees (5,564) (16,955) 15,237
(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) Represents primarily losses related to asbestos and other environmental matters ("A&E"). (e) Includes holding company expenses.
E. Investments Bonds, redeemable preferred stocks and other stocks at December 31, consisted of the following (in millions):
Held to Maturity Amortized Market Gross Unrealized Cost Value Gains Losses Bonds and redeemable preferred stocks: United States Government and government agencies and authorities $ - $ - $ - $ - States, municipalities and political subdivisions 72.0 73.6 1.8 (.2) Foreign government 8.3 8.9 .6 - Public utilities 459.7 466.7 8.3 (1.3) Mortgage-backed securities 868.9 899.4 30.6 (.1) All other corporate 1,711.2 1,753.7 43.6 (1.1) Redeemable preferred stocks - - - - $3,120.1 $3,202.3 $84.9 ($2.7)
Available for Sale Amortized Market Gross Unrealized Cost Value Gains Losses Bonds and redeemable preferred stocks: United States Government and government agencies and authorities $ 600.8 $ 618.6 $ 18.1 ($ .3) States, municipalities and political subdivisions 86.7 89.3 2.6 - Foreign government 55.9 57.9 2.1 (.1) Public utilities 359.3 374.7 15.7 (.3) Mortgage-backed securities 1,715.7 1,779.4 65.5 (1.8) All other corporate 4,336.9 4,536.9 200.0 - Redeemable preferred stocks 70.4 76.0 5.9 (.3) $7,225.7 $7,532.8 $309.9 ($ 2.8)
Available for Sale Amortized Market Gross Unrealized Cost Value Gains Losses Bonds and redeemable preferred stocks: United States Government and government agencies and authorities $ 472.2 $ 475.7 $ 7.3 ($ 3.8) States, municipalities and political subdivisions 39.6 39.7 .5 (.4) Foreign government 94.5 94.3 .8 (1.0) Public utilities 443.8 453.6 13.1 (3.3) Mortgage-backed securities 1,626.3 1,637.9 28.1 (16.5) All other corporate 3,624.4 3,733.0 122.2 (13.6) Redeemable preferred stocks 61.8 60.4 1.5 (2.9) $6,362.6 $6,494.6 $173.5 ($41.5) Other stocks $ 142.4 $ 327.7 $191.6 ($ 6.3)
Fixed Equity Tax Maturities Securities Effects Total Realized $ 11,542 $ 34,464 ($ 16,102) $ 29,904 Change in Unrealized 220,320 107,600 (114,772) 213,148
In December 1997, AFG's credit agreements with AFC and APU were replaced with a ten-year reciprocal Master Credit Agreement among AFG, three AFG subsidiary holding companies including APU, AFC and AFC's direct parent, AFC Holding Company, under which funds are made available to each other at one percent over LIBOR.
At December 31, 1997 and 1996, the weighted average interest rate on amounts borrowed under AAG's bank credit lines was 6.80% and 6.68%, respectively. In January 1998, AAG replaced its existing bank lines with a new $200 million unsecured credit agreement. Loans under the credit agreement mature from 2000 to 2003 and bear interest at floating rates based on prime or LIBOR. In February 1998, AAG borrowed $50 million under the line and retired its 11-1/8% Notes (including $24.3 million principal amount held by AAG entities).
1997 1996 Interest of AFG (parent) and non-controlling shareholders in subsidiaries' common stock $284,619 $231,858 Preferred securities issued by subsidiary trusts 225,000 75,000
1997 1996 1995 Interest of AFG (parent) and non-controlling shareholders in earnings of subsidiaries $29,978 $53,717 $28,165 Accrued distributions on trust issued preferred securities 15,499 1,031 -
K. 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, 1997, the outstanding 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 $25.75 per share beginning December 2005 declining to $25.00 at December 2007; 2,886,161 shares (stated value $72.2 million) outstanding at December 31, 1997.
AFC has accrued approximately $14.2 million at December 31, 1997, for environmental costs and certain other matters associated with the sales of former operations.
1st 2nd 3rd 4th Total Quarter Quarter Quarter Quarter Year Revenues $ 945.6 $ 987.5 $1,034.7 $1,085.1 $4,052.9 Earnings before extraordinary items 62.0 60.7 34.9 50.9 208.5 Extraordinary items (.1) - (6.9) (.1) (7.1) Net earnings 61.9 60.7 28.0 50.8 201.4
Provision for losses and loss adjustment expenses occurring in the current year 2,045 2,179 2,116 Net increase (decrease) in provision for claims occurring in prior years 31 (48) (139) 2,076 2,131 1,977 Payments for losses and loss adjustment expenses occurring during: Current year (840) (999) (987) Prior years (1,151) (1,121) (874) (1,991) (2,120) (1,861)
1997 1996 1995 Insurance group investment income: Fixed maturities $830.6 $817.8 $727.3 Equity securities 6.4 8.2 5.3 Other 10.6 13.5 7.9 847.6 839.5 740.5 Insurance group investment expenses (*) (37.3) (38.5) (33.8) $810.3 $801.0 $706.7
R. Additional Information Total rental expense for various leases of office space, data processing equipment and railroad rolling stock was $36 million, $34 million and $35 million for 1997, 1996 and 1995, respectively. Sublease rental income related to these leases totaled $5.4 million in 1997, $6.1 million in 1996 and $6.2 million in 1995.
Liabilities: Annuity benefits accumulated $ 5,528 $ 5,319 $ 5,366 $ 5,180 Long-term debt: Holding companies 287 301 340 362 Subsidiaries 194 195 178 183 Trust preferred securities 225 230 75 77
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 1998 from its insurance subsidiaries without seeking regulatory clearance is approximately $221 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
Transactions With Affiliates In December 1997, AFC recognized a gain of $32.5 million on the sale of development rights to AFG at their appraised value. In 1995, a subsidiary of AFC sold a house to its Chairman for its appraised value of $1.8 million.
Cash and short-term investments at end of period $ 10,793 $ 46,493 $ 5,098
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K CLAIMS AND CLAIM ADJUSTMENT EXPENSES AMORTIZATION PAID INCURRED RELATED TO OF DEFERRED CLAIMS NET POLICY AND CLAIM INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUM INCOME YEARS YEARS COST EXPENSE WRITTEN
s/Fred J. Runk Senior Vice President and March 26, 1998 Fred J. Runk Treasurer (principal financial and accounting officer)
(*) Incorporated herein by reference. (**) Copy included in Report filed electronically with the Securities and Exchange Commission. E-1
Consolidated Statement of Earnings: Years ended December 31, 1997, 1996 and 1995
We have audited the accompanying consolidated balance sheet of American Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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.
Recoverables from reinsurers and prepaid reinsurance premiums 998,743 942,450 Agents' balances and premiums receivable 691,005 609,403 Deferred acquisition costs 521,898 452,041 Other receivables 261,454 272,766 Deferred tax asset 41,413 137,284 Assets held in separate accounts 300,491 247,579 Prepaid expenses, deferred charges and other assets 364,385 368,114 Cost in excess of net assets acquired 299,408 278,581
AFC continues to be a separate SEC reporting company with publicly traded debentures and preferred stock. Holders of AFC Series F and G Preferred Stock were granted voting rights equal to approximately 21% of the total voting power of AFC shareholders immediately prior to the Mergers.
The preparation of the financial statements in conformity with g enerally 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.
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.
Assets Held In and Liabilities Related to Separate Accounts Investment annuity deposits and related liabilities represent primarily deposits maintained by several banks under a previously offered tax-deferred annuity program. AAG receives an annual fee from each bank for sponsoring the program; if depositors elect to purchase an annuity from AAG, funds are transferred to AAG.
Income Taxes AFC and American Premier have each filed consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries, except for certain life insurance subsidiaries and their subsidiaries. At the close of business on December 31, 1996, AFG contributed 81% of the common stock of American Premier to AFC. Accordingly, AFC and American Premier will file a consolidated return for 1997.
Included in equity securities at December 31, 1997 and 1996 are $313 million and $220 million, respectively, of securities of Provident Financial Group, Inc. which exceeded 10% of Shareholders' Equity.
Realized (16,545) 13,075 8,199 4,729 Change in Unrealized (272,583) 70,000 70,904 (131,679)
Held to Maturity $ 5.6 $422.3 $ 8.0 $ .5 ($ 1.0) Available for Sale 2,549.5 475.5 1,399.6 37.7 (25.7) Total $2,555.1 $897.8 $1,407.6 $38.2 ($26.7)
Held to Maturity $ 774.8 $175.2 $ 12.9 $ 1.9 ($ 2.3) Available for Sale 1,603.6 133.3 2,297.9 88.0 (9.6) Total $2,378.4 $308.5 $2,310.8 $89.9 ($11.9)
At December 31, 1997 and 1996, AFC and APU had outstanding borrowings due AFG and AFC Holding under the above agreements of $344.5 million (plus accrued interest of $8.3 million) and $400.4 million (plus accrued interest of $21.6 million), respectively.
I. Other Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands): 1997 1996 Holding Companies: AFC 9-3/4% Debentures due April 2004, less discount of $737 and $1,146 (imputed rate - 9.8%) $ 79,792 $164,368 APU 9-3/4% Subordinated Notes due August 1999, including premium of $1,224 and $1,912 (imputed rate - 8.8%) 92,127 93,604 APU 10-5/8% Subordinated Notes due April 2000, including premium of $1,559 and $2,629 (imputed rate - 8.8%) 43,889 54,595 APU 10-7/8% Subordinated Notes due May 2011, including premium of $1,584 and $1,642 (imputed rate - 9.6%) 17,586 18,496 GAHC notes payable under bank line 45,000 - Other 8,267 8,441
AAG Notes 1996 78.0 84.2 1997 40.8 42.5 1998 (2 mos) 24.1 24.8
November 1996 9-1/4% TOPrS (2026) $75,000,000 On or after 11/7/2001 March 1997 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007 May 1997 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and after 9/28/2001
At December 31, 1996, AFC's outstanding 11,900,725 shares of Series F Preferred Stock had a stated value of $145.4 million; its 1,964,158 shares of Series G Preferred Stock had a stated value of $17.4 million.
In December 1996, AFC redeemed 1.6 million shares of its Series F Preferred Stock for $31.9 million and, in October 1996, purchased 250,000 shares of Series F from its ESORP for $5.0 million. In December 1996, AFC issued 1.6 million shares of its Series G Preferred Stock to its ESORP for $16.8 million. During 1995, AFC retired its mandatory redeemable preferred stock for an aggregate of $2.9 million.
M. 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 Earnings (in thousands):
Adjusted earnings before income taxes consisted of the following (in thousands): 1997 1996 1995 Subject to tax in: United States $331,855 $318,919 $256,417 Foreign jurisdictions (9,292) (14,268) (2,968)
P. 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. The following are quarterly results of consolidated operations for the two years ended December 31, 1997 (in millions):
Reserves of American Premier at date of the Mergers - - 1,090
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 1997 1996 1995 1997 1996
Property and casualty companies $159 $276 $200 $1,916 $1,659 Life insurance companies 74 67 76 324 287
Future minimum rentals, related principally to office space and railroad rolling stock, required under operating leases having initial or remaining noncancelable lease terms in excess of one year at December 31, 1997, were as follows: 1998 - $37 million; 1999 - $31 million; 2000 - $22 million; 2001 - $18 million; 2002 - $13 million; and $30 million thereafter. At December 31, 1997, minimum sublease rentals to be received through the expiration of the leases aggregated $14 million.
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 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, 1997, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totaling $29 million.
Year ended December 31, Income: 1997 1996 1995 Dividends from: Subsidiaries $ 1,247 $861,178 $195,578 Investees 177 177 1,012 1,424 861,355 196,590 Equity in undistributed earnings of subsidiaries and investees 358,816 (470,879) 154,346 Realized gains (losses) on sales of: Securities (2,618) 963 2,389 Investees 421 33,950 (5,034) Subsidiaries 731 - - Investment and other income 55,404 46,980 35,226 414,178 472,369 383,517 Costs and Expenses: Interest charges on intercompany borrowings 28,772 81,623 4,198 Interest charges on other borrowings 15,250 21,796 86,655 Other operating and general expenses 36,392 29,407 40,766 80,414 132,826 131,619 Earnings before income taxes and extraordinary items 333,764 339,543 251,898 Provision for income taxes 125,227 89,658 56,447
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (In Thousands)
Year ended December 31, 1997 1996 1995 Operating Activities: Net earnings $201,390 $221,996 $197,283 Adjustments: Extraordinary items 7,147 27,889 (1,832) Equity in earnings of subsidiaries (224,949) (291,270) (235,448) Equity in net (earnings) losses of investees 212 379 (4,254) Depreciation and amortization 1,086 505 492 Realized losses (gains) on sales of subsidiaries and investments 2,262 (34,913) 2,797 Change in receivables from and payables to affiliates 69,603 (10,497) (103,634) Increase (decrease) in payables 57,017 12,790 (50,718) Dividends from subsidiaries and investees 1,424 105,485 166,337 Other 841 7,522 38,421 116,033 39,886 9,444 Investing Activities: Purchases of subsidiaries and other investments (122,969) (43,491) (154,404) Sales of subsidiaries and other investments 143,728 104,967 46,831 Other, net 250 265 (73) 21,009 61,741 (107,646) Financing Activities: Additional long-term borrowings 150 75 98,828 Reductions of long-term debt (94,049) (177,899) (252,880) Borrowings from affiliates 315,000 407,500 785,876 Repayments of borrowings from affiliates (153,500) (263,564) (523,197) Issuance of Preferred Stock - 16,800 - Repurchases of Preferred Stock (243,939) (36,912) (2,880) Exercise of stock options - - 8,721 Capital contributions from parent 18,667 18,666 9,333 Cash dividends paid (15,071) (24,898) (25,397) (172,742) (60,232) 98,404
Net Increase (Decrease) in Cash and Short-term Investments (35,700) 41,395 202
12 Computation of ratios of earnings to fixed charges and fixed charges and preferred dividends. ____