Subsidiaries of AFC own several buildings in downtown Cincinnati. AFC and its affiliates occupy about 70% of the aggregate 660,000 square feet of commercial and office space.
AFC subsidiaries own transferable rights to develop approximately 1.0 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.
1998 1997 1996 1995 1994 Earnings Statement Data: Total Revenues $4,059 $4,053 $4,114 $3,628 $2,104 Earnings Before Income Taxes and Extraordinary Items 211 334 340 252 44 Earnings Before Extraordinary Items 130 208 250 195 19 Extraordinary Items (1) (7) (28) 2 (17) Net Earnings 129 201 222 197 2
Balance Sheet Data: Total Assets $15,848 $15,738 $14,999 $14,851 $10,593 Long-term Debt: Holding Companies 315 287 340 648 849 Subsidiaries 177 194 178 234 258 Minority Interest 524 510 307 327 106 Capital Subject to Mandatory Redemption - - - - 3 Other Capital 1,531 1,393 1,277 1,248 396
AFC's ratio of earnings to fixed charges, excluding and including preferred dividends, on a total enterprise basis for the year ended December 31, 1998, was 3.44 and 3.15, 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, 1998, 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).
In 1996 and 1997, wholly-owned trust subsidiaries of AAG sold preferred securities for cash proceeds totaling $225 million. Proceeds were used to retire outstanding debt and preferred stock of subsidiaries and for general corporate purposes, including a capital contribution to a subsidiary.
Dividend payments from subsidiaries have been very important to the liquidity and cash flow of the individual holding companies in the past. However, the reliance on such dividend payments has been lessened by the combination of (i) strong capital at AFC's insurance subsidiaries (and the related decreased likelihood of a need for investment in those companies), (ii) the reductions of debt at the holding companies (and the related decrease in ongoing cash needs for interest and principal payments), (iii) AFC's ability to obtain financing in capital markets, as well as (iv) the sales of noncore investments.
For statutory accounting purposes, equity securities are generally carried at market value. At December 31, 1998, AFC's insurance companies owned publicly traded equity securities with a market value of $1.4 billion, including equity securities of AFC affiliates (including subsidiaries) of $1.0 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.
Uncertainties Two lawsuits were filed in 1994 against American Premier by USX Corporation ("USX") and a former USX subsidiary. The lawsuits seek contribution from American Premier for all or a portion of a $600 million final antitrust judgment entered against a USX subsidiary in 1994. The lawsuits argue that USX's liability for that judgment is attributable to the alleged activities of American Premier's predecessor in an unlawful antitrust conspiracy among certain railroad companies. In May 1998, the largest and last of the lawsuits was dismissed in state court. All of USX's claims against
To address the Year 2000 issue, AFC's operations have been divided into separate systems groups. During 1998, these groups were in the process of either (i) modifying their software programs or (ii) replacing programs with new software that is Year 2000 compliant. A majority of the groups have met AFC's goal of having program modifications and new software installations substantially completed by the end of 1998, with testing continuing in and through 1999. About 40% of the groups are being "closely watched" because there is some degree of risk that critical dates in the project schedule may be missed with a potential for some disruption of normal business operations. AFC's goal is to have program modifications and new installations for these groups completed during mid-1999. One group, which has significantly missed internal project deadlines, now has been reorganized and staffing levels were increased. This group is expected to be completed during the third quarter of 1999.
Contingency plans have been developed for certain systems deemed most critical to operations. These plans provide a documented order of actions necessary to keep the business functions operating for these systems. Such plans typically include procedures and workflow processes for developing and operating contingent databases. Contingency planning for other systems deemed critical to operations and reasonably likely not to be modified on schedule began in the fourth quarter of 1998 and will be completed by mid-1999.
Many of the systems being replaced were planned replacements which were accelerated due to the Year 2000 considerations. In addition, a significant portion of AFC's Year 2000 Project is being completed using internal staff. Therefore, cost estimates for the Year 2000 Project do not represent solely incremental costs.
From the inception of the Year 2000 project in the early 1990's through December 31, 1998, AFC estimates that it has incurred approximately $46 million in costs related to the project, including capitalized costs of $10 million for new systems. During 1998, $27 million in such costs have been expensed. AFC estimates that it will incur an additional $26 million of such costs in completing the Project, about two-thirds of which is projected to be expensed.
AFC's operations could also be affected by the inability of third parties such as agents and vendors to become Year 2000 compliant. While assessments of independent agents and evaluations of third party vendors are progressing slowly, efforts are being intensified to complete these assessments in the second quarter of 1999. In addition, AFC's property and casualty insurance subsidiaries are reviewing the potential impact of the Year 2000 issue on insureds as part of their underwriting process. They are also reviewing policy forms, issuing clarifying endorsements where appropriate and examining coverage issues for Year 2000 exposures. While it is possible that Year 2000 claims may emerge in future periods, it is not possible to estimate any such amounts.
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. AFC's investments in derivatives were not significant at December 31, 1998.
The following table provides information about AFC's fixed maturity investments at December 31, 1998, that are sensitive to interest rate risk. The table shows principal cash flows (in millions) and related weighted-average interest rates by expected maturity dates. 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.
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.
Annuity Contracts Substantially all of AAG's fixed rate annuity contracts permit AAG 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. Sales of variable rate annuities have not been significant. Projected payments (in millions) of AAG's fixed annuity liabilities at December 31, 1998, were as follows.
About half of AAG's fixed annuity liabilities at December 31, 1998, 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 AAG's principal fixed annuity products range from 3% on equity-indexed annuities (before any equity participation) to over 7% on certain new policies (including first year bonus amounts). AAG estimates that its effective weighted-average crediting rate over the next five years will range from 5% to 5.2%. This range 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.
Fixed-Rate Debt Variable-Rate Debt Weighted Weighted Scheduled Average Scheduled Average Principal Interest Principal Interest Payments Rate Payments Rate 1999 $ 90.7 9.69% $ .3 5.86% 2000 49.1 9.85 .2 5.80 2001 1.2 7.13 .1 5.58 2002 1.1 6.81 85.7 5.95 2003 1.1 6.68 27.2 6.09 Thereafter 233.3 8.26 .2 5.58
At December 31, 1998, the fair value of fixed-rate debt and variable-rate debt was approximately $388.9 million and $113.7 million, respectively.
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 nearly 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.
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, 1998. 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.
General Pretax earnings before extraordinary items were $211 million in 1998, $334 million in 1997 and $340 million in 1996.
Results for 1998 include a pretax charge in the fourth quarter of $214 million attributable to an increase in loss reserves relating to asbestos and environmental coverages ("A&E"), $180 million in pretax gains, primarily from the sale of substantially all of AFC's Commercial lines division and the Funeral Services division, and a $34 million decline in the underwriting results in AFC's property and casualty insurance business (excluding the special A&E charge) due primarily to increased catastrophe losses.
The Personal group consists of the nonstandard auto group along with the preferred/standard private passenger auto and other personal insurance business, formerly included in the Commercial and Personal lines. The nonstandard automobile insurance companies 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 group includes a highly diversified group of business lines (formerly, Specialty lines) plus the commercial business previously included in the Commercial and Personal lines. Some of the more significant areas are executive liability, inland and ocean marine, U.S.-based operations of Japanese companies, agricultural- related coverages, California workers' compensation, nonprofit liability, general aviation coverages, fidelity and surety bonds, and umbrella and excess coverages. Commercial lines businesses sold included certain coverages in workers' compensation, commercial multi- peril, commercial automobile, and umbrella.
Excluding the special $214 million A&E charge in the fourth quarter of 1998, underwriting results of AFC's insurance operations outperformed the industry average for the thirteenth 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 and nonstandard auto businesses.
quarter charge of $214 million increasing A&E reserves at December 31, 1998, to approximately $866 million (before deducting reinsurance recoverables of $241 million), an amount which, in the opinion of management, makes a reasonable provision for AFC's ultimate liability for A&E claims.
The Personal group's net written premiums decreased $39.6 million (3%) during 1997 due primarily to a reinsurance agreement, effective January 1, 1997, under which 80% of all AFC's homeowners' business was reinsured. Excluding the impact of the reinsurance agreement, premiums increased 4%. Volume increases in the California nonstandard auto business resulting from enactment of legislation which
Specialty The Specialty group's net written premiums decreased $156 million (11%) during 1998 due primarily to the impact of a reinsurance agreement whereby approximately 30% of AFC's California workers' compensation premiums were ceded and the sale of the Commercial lines division. Excluding these operations, the net written premiums of the other specialty businesses were essentially the same as a year ago. Underwriting results worsened from the comparable period in 1997 due to losses from the midwestern storms in the second quarter of 1998 compared to milder weather conditions during 1997 and unusually good results in 1997 in certain other lines.
1997 compared to 1996 Investment income increased $23.4 million (3%) from 1996 due primarily to an increase in the average amount of investments held partially offset by decreasing market interest rates.
Gains on Sales of Subsidiaries 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 AAG's sale of its Funeral Services division and (iii) a charge of $15.5 million relating to operations expected to be sold or otherwise disposed of. 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. The gains on sales of subsidiaries in 1996 include a pretax gain of $33.9 million on the sale of Buckeye Management Company and the settlement of litigation related to a subsidiary sold in 1993.
1997 compared to 1996 Other income increased $18.0 million (13%) in 1997 compared to 1996 due primarily to the above mentioned sale of development rights, partially offset by the absence of revenues from a noninsurance subsidiary which was sold in the first quarter of 1997.
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 AAG 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 AAG believes the recent 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 88%. However, a continuation of the current interest rate environment could adversely affect this rate.
1997 compared to 1996 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 noninsurance subsidiary which was sold in the first quarter of 1997.
Recent Accounting Standards The following accounting standards have been implemented by AFC in 1997 or 1998 or will be implemented in 1999 or 2000. The implementation of these standards is discussed under various subheadings of Note A to the Financial Statements (segment information is discussed in Note C); effects of each are shown in the relevant Notes. Implementation of Statement of Position ("SOP") 98-5 in the first quarter of 1999 and Statement of Financial Account Standard ("SFAS") No. 133 in the first quarter of 2000 is not expected to have a significant effect on AFC.
Consolidated Statement of Earnings: Years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows: Years ended December 31, 1998, 1997 and 1996
The information required by the following Items will be included in AFC's definitive Proxy Statement for the 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission within 120 days after the end of Registrant's fiscal year and is incorporated herein by reference.
December 31, 1998 1997 Assets: Cash and short-term investments $ 289,944 $ 231,227 Investments: Fixed maturities: Available for sale - at market (amortized cost - $9,920,407 and $7,225,736) 10,323,407 7,532,836 Held to maturity - at amortized cost (market - $3,417,900) - 3,326,996 Other stocks - principally at market (cost - $207,345 and $153,322) 430,345 446,222 Investment in investee corporation 192,138 200,714 Policy loans 220,496 240,955 Real estate and other investments 268,171 280,235 Total investments 11,434,557 12,027,958
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 943,359 936,154 Retained earnings 157,218 34,350 Net unrealized gain on marketable securities, net of deferred income taxes 348,300 341,200 Total shareholders' equity 1,530,656 1,393,483
The consolidated financial statements include the accounts of 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. With the exception of the acquisition of American Premier, 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.
Investments Debt securities are classified as "held to maturity" and reported at amortized cost if AFC has the positive intent and ability to hold them to maturity. Debt and equity securities are classified as "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity if the securities are not classified as held to maturity or bought and held principally for selling in the near term. At December 31, 1998, AFC reclassified "held to maturity" securities with an amortized cost of $2.6 billion to "available for sale" to give management greater flexibility to react to changing market conditions. This reclassification resulted in an increase of $98.8 million in the carrying value of fixed maturity investments and (after effects of income taxes, minority interest, and adjustments related to deferred policy acquisition costs) an increase of $48.8 million in shareholders' equity. The transfer had no effect on net earnings.
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 are modified as necessary to reflect actual experience and developing trends.
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.
Minority Interest For balance sheet purposes, minority interest represents the interests of noncontrolling shareholders in AFC subsidiaries, including preferred securities issued by trust subsidiaries of AAG, and AFG's direct ownership interest in American Premier and American Financial Enterprises, Inc. ("AFEI"). 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.
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 (approximately [6%] of covered compensation in 1998) 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.
Derivatives The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," during the second quarter of 1998. SFAS No. 133 is effective for fiscal periods (both years and quarters) beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments that are embedded in other contracts, and for hedging activities. SFAS No. 133 requires the recognition of all derivatives (both assets and liabilities) in the statement of financial position at fair value. Changes in fair value of derivative instruments are included in current income or as a component of comprehensive income (outside current income) depending on the type of derivative. Implementation of SFAS No. 133 is not expected to have a material effect on AFC's financial position or results of operations.
Comprehensive Income Effective January 1, 1998, AFC implemented SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 uses the term "comprehensive income" to describe the total of net earnings plus other comprehensive income. For AFC, other comprehensive income represents the change in net unrealized gain on marketable securities net of deferred taxes. Implementation of this statement had no impact on net earnings or shareholders' equity. Appropriate data for prior periods has been added to conform to the current presentation.
Commercial Lines Division In December 1998, AFC completed the sale of substantially all of its commercial lines division to Ohio Casualty Corporation for $300 million plus warrants to purchase 3 million shares of Ohio Casualty common stock. AFC retained $300 million in securities it would otherwise have transferred to Ohio Casualty in connection with the reinsurance of business assumed by Ohio Casualty. For accounting purposes, the insurance liabilities ceded to Ohio Casualty and the deferred a gain of $103 million on the insurance ceded to Ohio Casualty and recognized sale of the other net assets are required to be accounted for separately. AFC a 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 may receive up to an additional $40 million in the year 2000 based upon the retention and growth of the insurance businesses acquired by Ohio Casualty. The commercial lines sold generated net written premiums of approximately $250 million in 1998 (11 months), $315 million in 1997 and $314 million in 1996.
Citicasters In 1996, AFC sold its investment in Citicasters to Jacor Communications for approximately $220 million in cash plus warrants to purchase Jacor common stock. AFC realized a pretax gain of approximately $169 million, before minority interest of $6.5 million, on the sale.
C. Segments of Operations Following the sale of substantially all of its Commercial lines division, AFC's property and casualty group is engaged primarily in private passenger automobile and specialty insurance businesses. The Personal group consists of the nonstandard auto group along with the preferred/standard private passenger auto and other personal insurance business, formerly included in the Commercial and Personal lines. The Specialty group now includes a highly diversified group of specialty business units (formerly, Specialty lines) plus the commercial business previously included in the Commercial and Personal lines. AFC's annuity and life business markets primarily retirement products as well as life and supplemental health insurance. AFC's businesses operate throughout the United States. In addition, AFC has owned significant portions of the voting equity securities of certain companies (investee corporation - see Note E).
$15,847,867 $15,737,982 $14,999,163 Revenues (b) Property and casualty insurance: Premiums earned: Personal $ 1,289,689 $ 1,356,642 $ 1,447,751 Specialty 1,371,509 1,429,143 1,355,906 Other lines 37,540 38,596 40,855 2,698,738 2,824,381 2,844,512 Investment and other income 643,106 448,849 500,897 3,341,844 3,273,230 3,345,409 Annuities and life (c) 729,854 638,348 585,079 Other 331 146,888 200,315 4,072,029 4,058,466 4,130,803 Equity in net losses of investees (13,198) (5,564) (16,955)
Maturity One year or less 6% After one year through five years 25 After five years through ten years 30 After ten years 15 Mortgage-backed securities 24 100%
(*) Includes $6.8 million in realized gains on fixed maturities transferred to Ohio Casualty in connection with the sale of the Commercial lines division (see Note B).
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)
E. Investment in Investee Corporation Investment in investee corporation reflects AFC's ownership of 24 million shares (37%) of Chiquita common stock. The market value of this investment was $229 million and $391 million at December 31, 1998 and 1997, respectively. Chiquita is a leading international marketer, producer and distributor of quality fresh fruits and vegetables and processed foods. Equity in net losses excludes AFC's share of amounts included in extraordinary items; the amount for 1996 includes $1.5 million in earnings from Citicasters which was sold in 1996.
F. Cost in Excess of Net Assets Acquired At December 31, 1998 and 1997, accumulated amortization of the excess of cost over net assets of purchased subsidiaries amounted to approximately $143 million and $133 million, respectively. Amortization expense was $12.2 million in 1998, $11.6 million in 1997 and $10.8 million in 1996.
G. Payable to American Financial Group Following the Mergers, American Premier agreed to lend up to $675 million to AFC under a line of credit. Borrowings under the credit line bore interest at 11-5/8%. On December 27, 1996, American Premier paid a dividend to AFG which consisted of the $675 million note receivable plus accrued interest. Subsequently, AFG contributed $450 million of the note to AFC.
In December 1997, AFG's credit agreements with AFC and APU were replaced with a ten-year reciprocal Master Credit Agreement among AFG and several 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.
H. Other Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands):
1998 1997 Holding Companies: AFC notes payable under bank line $ 80,000 $ 45,000 AFC 9-3/4% Debentures due April 2004, less discount of $618 and $737 (imputed rate - 9.8%) 78,560 79,792 American Premier Underwriters, Inc. ("APU") 9-3/4% Subordinated Notes due August 1999, including premium of $487 and $1,224 (imputed rate - 8.8%) 89,467 92,127 APU 10-5/8% Subordinated Notes due April 2000, including premium of $883 and $1,559 (imputed rate - 8.8%) 41,518 43,889 APU 10-7/8% Subordinated Notes due May 2011, including premium of $1,471 and $1,584 (imputed rate - 9.6%) 17,473 17,586 Other 8,518 8,267
Holding Companies Subsidiaries Total 1999 $88,980 $ 1,986 $90,966 2000 40,635 8,685 49,320 2001 - 1,382 1,382 2002 85,608 1,268 86,876 2003 - 28,294 28,294
In January 1998, AAG replaced its existing bank lines with a $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 Eurodollar rates. At December 31, 1998 and 1997, the weighted average interest rate on amounts borrowed under AAG's bank credit line was 6.09% and 6.80%, respectively.
Cash interest payments of $73 million, $98 million and $83 million were made on long-term debt in 1998, 1997 and 1996, respectively.
1998 1997 Interest of AFG (parent) and noncontrolling shareholders in subsidiaries' common stock $299,335 $284,619 Preferred securities issued by subsidiary trusts 225,000 225,000
November 1996 AAG 9-1/4% TOPrS (2026) 75,000,000 On or after 11/7/2001 March 1997 AAG 8-7/8% Pfd (2027) 75,000,000 On or after 3/1/2007 May 1997 AAG 7-1/4% ROPES (2041) 75,000,000 Prior to 9/28/2000 and after 9/28/2001
1998 1997 1996 Interest of AFG (parent) and noncontrolling shareholders in earnings of subsidiaries $26,248 $29,978 $53,717 Accrued distributions on trust issued preferred securities 19,031 15,499 1,031
Tax Minority Pretax Effects Interest Net 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 Less 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 net unrealized gain on marketable securities $16.1 ($4.3) ($4.7) $7.1
Unrealized holding gains (losses) on securities arising during the period $320.2 ($112.2) ($20.7) $187.3 Less reclassification adjustment for realized gains included in net income (51.5) 18.0 4.0 (29.5) Change in net unrealized gain on marketable securities $268.7 ($ 94.2) ($16.7) $157.8
Income taxes at statutory rate $ 73,347 112,897 $106,628 Effect of: Minority interest 9,055 10,168 18,507 Losses utilized (6,572) (3,164) (43,789) Amortization of intangibles 4,566 3,362 3,065 Dividends received deduction (2,189) (2,002) (7,450) Other 2,716 (88) 5,694 Total provision 80,923 121,173 82,655
Amounts applicable to extraordinary items 495 4,054 7,003 Provision for income taxes as shown on the Statement of Earnings $ 81,418 $125,227 $ 89,658
1998 1997 1996 Subject to tax in: United States $202,094 $331,855 $318,919 Foreign jurisdictions 7,469 (9,292) (14,268)
Expiring Amount { 1999 - 2003 $70 Operating Loss{ 2004 - 2008 56 Capital Loss 1999 68 Other - Tax Credits 15
Cash payments for income taxes, net of refunds, were $41.4 million, $43.7 million and $40.2 million for 1998, 1997 and 1996, respectively.
1998 1997 1996 Holding Companies: AFC (parent) ($ 77) ($5,395) ($ 9,672) APU (parent) (37) (502) (2,636) Subsidiaries: AAG (649) (1,250) (7,159) Other - - 57 Investee: Chiquita - - (8,479)
AFC has accrued approximately $10.6 million at December 31, 1998, for environmental costs and certain other matters associated with the sales of former operations.
In management's opinion, the outcome of the items discussed under "Uncertainties" in Management's Discussion and Analysis and the above claims and contingencies will not, individually or in the aggregate, have a material adverse effect on AFC's financial condition or results of operations.
1st 2nd 3rd 4th Total Quarter Quarter Quarter Quarter Year Revenues $1,016.7 $1,038.1 $1,032.4 $971.6 $4,058.8 Earnings (loss) before extraordinary items 66.4 39.6 58.0 (34.6) 129.4 Extraordinary items (.7) (.1) - - (.8) Net earnings (loss) 65.7 39.5 58.0 (34.6) 128.6
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 LAE occurring in the current year 2,059 2,045 2,179 Net increase (decrease) in provision for claims of prior years 156 31 (48) 2,215 2,076 2,131 Payments for losses and LAE of: Current year (885) (840) (999) Prior years (1,110) (1,151) (1,121) (1,995) (1,991) (2,120)
Reserves transferred to Ohio Casualty (481) - - Reclassification of allowance for uncollectable reinsurance 77 - -
Add back reinsurance recoverables, net of allowable in 1998 1,468 736 720
Reinsurance Recoverable Balance sheet amounts for reinsurance recoverable and prepaid reinsurance premiums at December 31, 1998, include amounts recoverable related to (i) the transfer of the Commercial lines business to Ohio Casualty under a reinsurance contract ($644 million), (ii) additional A&E reserves recorded ($121 million) and (iii) the ceding of 30% of California workers' compensation business ($38 million).
1998 1997 1996 Insurance group investment income: Fixed maturities $849.6 $830.6 $817.8 Equity securities 9.1 6.4 8.2 Other 12.1 10.6 13.5 870.8 847.6 839.5 Insurance group investment expenses (*) (42.6) (37.3) (38.5) $828.2 $810.3 $801.0
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 1998 1997 1996 1998 1997
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.
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, 1998, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totaling up to $80 million.
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.
2. Financial Statement Schedules: A. Selected Quarterly Financial Data is included in Note N to the Consolidated Financial Statements.
B. Schedules filed herewith for 1998, 1997 and 1996: Page I - Condensed Financial Information of Registrant S-2
Costs and Expenses: Interest charges on intercompany borrowings 36,479 28,772 81,623 Interest charges on other borrowings 14,542 15,250 21,796 Other operating and general expenses 37,331 36,392 29,407 88,352 80,414 132,826
Extraordinary items - loss on prepayment of debt (763) (7,147) (27,889)
Investing Activities: Purchases of subsidiaries and other investments - (122,969) (43,491) Sales of subsidiaries and other investments - 143,728 104,967 Other, net (172) 250 265 (172) 21,009 61,741
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F (a) RESERVES FOR DEFERRED UNPAID CLAIMS (b) AFFILIATION POLICY AND CLAIMS DISCOUNT (c) WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K CLAIMS AND CLAIM AMORTIZATION EXPENSES INCURRED AMORTIZATION PAID RELATED TO OF DEFERRED CLAIMS NET POLICY AND CLAIM INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS INCOME YEARS YEARS COSTS EXPENSES WRITTEN
4 Instruments defining the rights of The rights of holders of of security holders. Registrant's Preferred Stock are defined in the Articles of Incorporation. Registrant has no outstanding debt issues exceeding 10% of the assets of Registrant and consolidated subsidiaries.