AFC subsidiaries own transferable rights to develop approximately 1.5 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.
Ratios Following the combination of AFC and American Premier in merger transactions completed in April 1995 (the "Mergers"), AFC's debt to total capital ratio at the parent holding company level (excluding amounts due AFG) improved from nearly 60% at the date of the Mergers to approximately 8% at December 31, 1999. Including amounts due AFG, the ratio was 27% at the end of 1999.
AFC has a reciprocal Master Credit Agreement with the various AFG holding companies under which these companies make funds available to each other for general corporate purposes.
In April 1999, AFC used funds borrowed under its credit agreement with AFG to retire outstanding holding company public debt and borrowings under its credit line.
For statutory accounting purposes, equity securities are generally carried at market value. At December 31, 1999, AFC's insurance companies owned publicly traded equity securities with a market value of $1.1 billion, including equity securities of AFC affiliates (including subsidiaries) of $.7 billion. Since significant amounts of these are concentrated in a relatively small number of companies, decreases in the market prices could adversely affect the insurance group's capital, potentially impacting the amount of dividends available or necessitating a capital contribution. Conversely, increases in the market prices could have a favorable impact on the group's dividend-paying capability.
IT Initiative From inception of the Year 2000 Project in the early 1990's, AFC estimates that it incurred approximately $79 million in Year 2000 costs, including capitalized costs of $20 million, to successfully ensure its systems function properly in the year 2000 and beyond. Although a significant portion of the costs charged to expense were related primarily to allowing systems to continue to execute properly, the Project also included the upgrading of a significant number of systems and enhanced the knowledge of virtually all existing systems.
In the third quarter of 1999, AFC's newly hired Chief Information Officer initiated an enterprise-wide study of its information technology ("IT") resources, needs and opportunities. AFC expects that the initiative will entail extensive effort and costs and may lead to substantial changes in the area, which should result in significant cost savings, efficiencies and effectiveness in the future. While the costs (most of which will be expensed) will precede any savings to be realized, management expects benefits to greatly exceed the costs incurred, all of which will be funded through available working capital.
Litigation 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 American Premier have now been dismissed with prejudice, and, although USX has appeals pending, American Premier and its outside legal counsel continue to believe that American Premier will not suffer a material loss from this litigation.
December 31, 1999 December 31, 1998 ----------------- ----------------- Principal Principal Cash Flows Rate Cash Flows Rate ---------- ---- ---------- ---- 2000 $ 618.2 7.83% 1999 $ 848.9 7.97% 2001 622.6 8.69 2000 942.7 7.64 2002 848.4 8.14 2001 954.2 8.32 2003 1,267.6 7.65 2002 1,086.3 7.77 2004 999.2 7.73 2003 1,415.3 7.57 Thereafter 5,871.0 7.50 Thereafter 4,784.1 7.53 --------- ---------
December 31, 1999 December 31, 1998 ----------------- ----------------- Scheduled Scheduled Principal Principal Payments Rate Payments Rate --------- ---- --------- ---- 2000 $ 26.9 9.96% 1999 $ 90.7 9.69% 2001 * 2000 49.1 9.85 2002 * 2001 * 2003 * 2002 * 2004 14.2 8.38 2003 * Thereafter 135.0 7.25 Thereafter 233.3 8.26 ------ ---- ------ ----
Investments Approximately two-thirds of AFC's consolidated assets are invested in marketable securities. A diverse portfolio of primarily publicly traded bonds and notes accounts for 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 90% 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, 1999. 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.
Individual portfolio 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: 1999 - $20 million; 1998 - $16 million; 1997 - $57 million; 1996 - $166 million and 1995 - $84 million. At December 31, 1999, AFC had a net unrealized loss on fixed maturities of $239 million (before income taxes). The net unrealized gain on equity securities was $181 million (before income taxes) at that same date.
General Operating earnings before income taxes were $310 million in 1999, $269 million in 1998 and $385 million in 1997. Results for 1998 include a pretax charge of $214 million for reserve strengthening relating to asbestos and other environmental matters ("A&E") and $159 million of pretax gains on sales of subsidiaries.
The Personal group sells nonstandard and preferred/standard private passenger auto insurance and, to a lesser extent, homeowners' insurance. Nonstandard automobile insurance covers risks not typically accepted for standard automobile coverage because of the applicant's driving record, type of vehicle, age or other criteria.
1999 1998 1997 ---- ---- ---- Net Written Premiums (GAAP) --------------------------- Personal $1,154 $1,279 $1,345 Specialty 1,111 1,312(*) 1,468 Other Lines (2) 18 45 ------ ------ ------ $2,263 $2,609 $2,858 ====== ====== ======
Combined Ratios (GAAP) ---------------------- Personal 100.7% 97.3% 98.5% Specialty 102.7 105.0 100.0 Aggregate (including A&E and other lines) 102.0% 110.7% 101.4%
Special A&E Charge Under the agreement covering the sale of its Commercial lines division in 1998, AFC retained liabilities for certain A&E exposures. Prompted by this retention and as part of the continuing process of monitoring reserves, AFC began a thorough study of its A&E exposures. AFC's study was reviewed by independent actuaries who used state of the art actuarial techniques that have wide acceptance in the industry. The methods used involved sampling and statistical modeling incorporating external databases that supplement the internal information. AFC recorded a fourth quarter charge of $214 million increasing A&E reserves at December 31, 1998, to approximately $866 million (before deducting reinsurance recoverables of $241 million), an amount which, in the opinion of management, makes a reasonable provision for AFC's ultimate liability for A&E claims.
In 1998, the Personal group's net written premiums decreased 5% due primarily to stronger price competition in the personal automobile market. The combined ratio improved in 1998 due to both lower loss experience and a 6% reduction in underwriting expenses.
1999 compared to 1998 Other income increased $7.9 million (6%) in 1999 as increased fee income generated by certain insurance operations more than offset a decrease in income from the sale of operating real estate and lease residuals.
1998 compared to 1997 Other income decreased $15.2 million (10%) in 1998 due primarily to income of $46.3 million in 1997 from the sale of development rights in New York City (including $32.5 million on rights sold to AFG) and the absence of revenues from a noninsurance subsidiary which was sold in the fourth quarter of 1997, partially offset by income in 1998 from the sale of operating real estate assets and lease residuals.
Annuity benefits decreased $17.2 million (6%) in 1998 due primarily to decreases in crediting rates and changes in actuarial assumptions.
Interest on Borrowed Money Changes in interest expense result from fluctuations in market rates as well as changes in borrowings. AFC has generally financed its borrowings on a long-term basis which has resulted in higher current costs. Interest expense decreased in both 1999 and 1998 due to lower average indebtedness.
Other Operating and General Expenses From inception of AFC's Year 2000 Project in the early 1990's through 1997, AFC expensed approximately $9 million in remediation costs. During 1999 and 1998, respectively, $23 million and $27 million in such costs were expensed. Because a significant portion of the Year 2000 Project was completed using internal staff, these costs do not represent solely incremental costs.
AFC recorded pretax equity in net losses of Chiquita of $27.4 million, $13.2 million and $5.6 million in 1999, 1998 and 1997, respectively. Chiquita's loss attributable to common shareholders was $75.5 million, $35.5 million and $16.6 million during these same periods.
Cumulative Effect of Accounting Change In the first quarter of 1999, AAG implemented Statement of Position 98-5, "Reporting on the Costs of Start- Up Activities." The SOP requires that costs of start-up activities be expensed as incurred and that unamortized balances of previously deferred costs be expensed and reported as the cumulative effect of a change in accounting principle. Accordingly, AFC expensed previously capitalized start-up costs of $3.8 million (net of minority interest and taxes) in the first quarter of 1999.
Recent Accounting Standards The following accounting standards have been implemented by AFC in 1998 or 1999 or will be implemented in 2001. 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 Financial Accounting Standards ("SFAS") No. 133 in the first quarter of 2001 is not expected to have a significant effect on AFC.
The information required by the following Items will be included in AFC's definitive Proxy Statement for the 2000 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.
We have audited the accompanying consolidated balance sheet of American Financial Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (In Thousands, Except Per Share Data)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars In Thousands)
Start-up Costs Prior to 1999, AAG, an 83%-owned subsidiary, deferred certain costs associated with introducing new products and distribution channels and amortized them on a straight-line basis over 5 years. In 1999, AAG implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires that (i) costs of start-up activities be expensed as incurred and (ii) unamortized balances of previously deferred costs be expensed and reported as the cumulative effect of a change in accounting principle. Accordingly, AFC expensed previously capitalized start-up costs of $3.8 million (net of minority interest and taxes) or $.06 per diluted share, effective January 1, 1999.
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 6 million (post split) shares of Ohio Casualty common stock. AFC deferred a gain of $103 million on the insurance ceded to Ohio Casualty and recognized a 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 also 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 $230 million in 1998 (11 months) and $315 million in 1997.
Funeral Services division In September 1998, AAG sold its Funeral Services division for approximately $165 million in cash. The division held assets of approximately $1 billion at the sale date. AFC realized a pretax gain of $21.6 million, before $2.7 million of minority interest, on this sale.
Chiquita During 1997 and 1998, Chiquita issued shares of its common stock in acquisitions of operating businesses. AFC recorded pretax gains of $11.4 million in the fourth quarter of 1997, $7.7 million in the first quarter of 1998 and $1.7 million in the second quarter of 1998 representing the excess of AFC's equity in Chiquita following the issuances of its common stock over AFC's previously recorded carrying value.
The table below sets forth the scheduled maturities of fixed maturities based on market value as of December 31, 1999. Data based on amortized cost is generally the same. Mortgage-backed securities had an average life of approximately 6 years at December 31, 1999.
Net Sales $2,556 $2,720 $2,434 Operating Income 42 79 100 Net Loss (58) (18) - Net Loss Attributable to Common Shares (75) (36) (17)
Chiquita's 1999 results include a $9 million charge resulting from a workforce reduction program. Operating results for 1998 include $74 million of fourth quarter write-offs and costs resulting from widespread flooding in Honduras and Guatemala caused by Hurricane Mitch.
F. Cost in Excess of Net Assets Acquired Amortization expense for the excess of cost over net assets of purchased subsidiaries was $14.4 million in 1999, $12.2 million in 1998 and $11.6 million in 1997. At December 31, 1999 and 1998, accumulated amortization amounted to approximately $157 million and $143 million, respectively.
1999 1998 ---- ---- Holding Companies: AFC notes payable under bank line $ 68,000 $ 80,000 AFC 9-3/4% Debentures, less discount of $618 - 78,560 American Premier Underwriters, Inc. ("APU") 9-3/4% Subordinated Notes, including premium of $487 - 89,467 APU 10-5/8% Subordinated Notes due April 2000, including premium of $119 and $883 (imputed rate - 8.7%) 23,786 41,518 APU 10-7/8% Subordinated Notes due May 2011, including premium of $940 and $1,471 (imputed rate - 9.6%) 11,661 17,473 Other 9,110 8,518 -------- --------
1999 1998 ---- ---- Interest of AFG (parent) and noncontrolling shareholders in subsidiaries' common stock $270,594 $299,335 Preferred securities issued by subsidiary trusts 219,600 225,000 -------- -------- $490,194 $524,335 ======== ========
J. Shareholders' Equity At December 31, 1999 and 1998, American Financial Group beneficially owned all of the outstanding shares of AFC's Common Stock.
Preferred Stock Under provisions of both the Nonvoting (4.0 million shares authorized) and Voting (4.0 million shares authorized) Cumulative Preferred Stock, the Board of Directors may divide the authorized stock into series and set specific terms and conditions of each series. At December 31, 1999 and 1998, the outstanding voting shares of AFC's Preferred Stock consisted of the following:
K. Income Taxes The following is a reconciliation of income taxes at the statutory rate of 35% and income taxes as shown in the Statement of Earnings (in thousands):
Amounts applicable to: Minority interest expense 6,501 6,661 5,425 Equity in net losses of investee 9,574 4,620 1,947 Extraordinary items 2,152 495 4,054 Accounting change 2,516 - - -------- -------- --------
Total earnings before income taxes include income (losses) subject to tax in foreign jurisdictions of $8.1 million in 1999, $7.5 million in 1998 and ($9.3) million in 1997.
1999 1998 1997 ---- ---- ---- Current taxes (credits): Federal ($ 7,454) $61,501 $ 27,875 Foreign 32 94 - State 511 652 (2,544) Deferred taxes: Federal 88,219 18,254 96,301 Foreign (1,031) 422 (459) ------- ------- --------
1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 32.6 $ 44.3 Capital loss carryforwards - 23.7 Insurance claims and reserves 236.5 291.2 Other, net 117.6 110.0 ------ ------ 386.7 469.2 Valuation allowance for deferred tax assets (48.9) (88.6) ------ ------ 337.8 380.6 Deferred tax liabilities: Deferred acquisition costs (172.3) (121.3) Investment securities (67.0) (267.9) ------ ------ (239.3) (389.2) ------ ------
L. Extraordinary Items Extraordinary items represent AFC's proportionate share of gains and losses related to debt retirements by the following companies. Amounts shown are net of minority interest and income taxes (in thousands):
1999 1998 1997 ---- ---- ---- Holding Companies: AFC (parent) ($2,993) ($ 77) ($5,395) APU (parent) (856) (37) (502) Subsidiary: AAG - (649) (1,250) ------ ---- ------ ($3,849) ($763) ($7,147) ====== ==== ======
N. Quarterly Operating Results (Unaudited) The operations of certain of AFC's business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, tornadoes, etc.) may be seasonal. Historically, Chiquita's operations are significantly stronger in the first and second quarters than in the third and fourth quarters. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the nature of investees' operations and discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time. The following are quarterly results of consolidated operations for the two years ended December 31, 1999 (in millions).
The 1999 fourth quarter results include a charge of $10 million for expenses related to realignment within the operating units of the life and annuity business.
In the second quarter of 1998, AFC recorded approximately $41 million of losses due to severe storms in the midwestern part of the country. Included in "Loss and loss adjustment expenses" for 1998 is a fourth quarter noncash, pretax charge of $214 million for A&E exposures. Under the agreement covering the sale of the Commercial lines division in 1998, AFC retained liabilities for certain A&E exposures. Prompted by this retention and as part of the continuing process of monitoring reserves, AFC began a comprehensive review of its A&E exposures. AFC increased its A&E reserve to an amount consistent with the conclusions of the review.
O. Insurance Securities owned by insurance subsidiaries having a carrying value of about $900 million at December 31, 1999, were on deposit as required by regulatory authorities.
Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred by AFC's insurance companies.
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 ------------------ -------------- 1999 1998 1997 1999 1998 ---- ---- ---- ---- ----
Property and casualty companies $170 $261 $159 $1,664 $1,840 Life insurance companies 37 41 74 421 365
Reinsurance In the normal course of business, AFC's insurance subsidiaries assume and cede reinsurance with other insurance companies. The following table shows (in millions) (i) amounts deducted from property and casualty written and earned premiums in connection with reinsurance ceded, (ii) written and earned premiums included in income for reinsurance assumed and (iii) reinsurance recoveries deducted from losses and loss adjustment expenses.
1999 1998 1997 ---- ---- ---- Direct premiums written $3,113 $3,221 $3,383 Reinsurance assumed 48 38 89 Reinsurance ceded (898) (788)(*) (614) ------ ------ ------
(*) Includes $138 million for the unearned premium transfer related to the sale of the Commercial lines division.
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, 1999, were as follows: 2000 - $39 million; 2001 - $33 million; 2002 - $25 million; 2003 - $19 million; 2004 - $8 million; and $10 million thereafter. At December 31, 1999, minimum sublease rentals to be received through the expiration of the leases aggregated $6 million.
Fair Value of Financial Instruments The following table presents (in millions) the carrying value and estimated fair value of AFC's financial instruments at December 31.
Liabilities: Annuity benefits accumulated $5,520 $5,371 $ 5,450 $ 5,307 Long-term debt: Holding companies 113 113 315 326 Subsidiaries 240 230 177 176 Trust preferred securities 220 205 225 231
Unrealized Gain (Loss) on Marketable Securities, Net The components of the Consolidated Balance Sheet caption "Unrealized gain (loss) on marketable securities, net" in shareholders' equity are summarized as follows (in millions): Unadjusted Adjusted Asset Effect of Asset (Liability) SFAS 115 (Liability) ----------- -------- ----------- ---- Fixed maturities $10,101.0 ($238.8) $9,862.2 Other stocks 229.2 180.5 409.7 Deferred acquisition costs 656.1 4.6 660.7 Annuity benefits accumulated (5,532.6) 13.1 (5,519.5) ------ Pretax unrealized (40.6)
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, 1999, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totaling up to $54 million.
Restrictions on Transfer of Funds and Assets of Subsidiaries Payments of dividends, loans and advances by AFC's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. Under applicable restrictions, the maximum amount of dividends available to AFC in 2000 from its insurance subsidiaries without seeking regulatory clearance is approximately $186 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
2. Financial Statement Schedules: A.Selected Quarterly Financial Data is included in Note N to the Consolidated Financial Statements.
B.Schedules filed herewith for 1999, 1998 and 1997: Page ---- I - Condensed Financial Information of Registrant S-2
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In Thousands)
December 31, ---------------------------- 1999 1998 ---- ---- Assets: Cash and short-term investments $ 941 $ 4,767 Investment in securities 1,214 3,129 Receivables from affiliates 126,118 72,772 Investment in subsidiaries 2,730,621 2,769,112 Investment in investee corporation - 22,364 Other assets 3,899 8,623 ---------- ----------
Liabilities and Shareholders' Equity: Accounts payable, accrued expenses and other liabilities $ 109,455 $ 122,564 Payables to affiliates 1,352,121 1,060,469 Long-term debt 77,110 167,078 Shareholders' equity 1,324,107 1,530,656 ---------- ----------
Costs and Expenses: Interest charges on intercompany borrowings 39,025 36,479 28,772 Interest charges on other borrowings 7,993 14,542 15,250 Other operating and general expenses 34,875 37,331 36,392 -------- -------- -------- 81,893 88,352 80,414 -------- -------- --------
Earnings before income taxes, extraordinary items and accounting change 237,448 210,821 333,764 Provision for income taxes 84,945 81,418 125,227 -------- -------- --------
Extraordinary items - loss on prepayment of debt (3,849) (763) (7,147) Cumulative effect of accounting change (3,854) - - -------- -------- --------
Signed: March 28, 2000 BY:s/CARL H. LINDNER Carl H. Lindner Chairman of the Board and Chief Executive Officer
s/FRED J. RUNK Senior Vice President and March 28, 2000 Fred J. Runk Treasurer (principal financial and accounting officer)
10(c) Deferred Compensation Plan, filed as Exhibit 10 to Registration Statement No. 333-91945 on Form S-8 on December 2, 1999 (*)