(a) Per share results for 1997 are calculated after deducting a premium over stated value on redemption of a subsidiary's preferred stock of $153.3 million.
AFG was formed through the combination of AFC and American Premier in merger transactions completed in April 1995.
IT INITIATIVE In 1999, AFG initiated an enterprise-wide study of its information technology ("IT") resources, needs and opportunities. The initiative, involving improvements in physical infrastructure and business support systems, entails extensive effort and costs over a period of several years. While the costs precede the expected savings, management believes the benefits will exceed the costs incurred, all of which have been and will be funded through available working capital.
RATIOS AFG's debt to total capital ratio (at the parent holding company level) was approximately 27% at December 31, 2001, compared to 25% at December 31, 2000.
In December 2000, AFG issued 8.3 million shares of Common Stock, using the $155 million in net cash proceeds to make capital contributions to its property and casualty operations. In April 1999, AFG issued $350 million principal amount of 7-1/8% senior debentures due 2009, using the proceeds to retire outstanding holding company public debt and borrowings under AFC's credit line. All debentures issued by the parent holding companies and GAFRI are rated investment grade by three nationally recognized rating agencies. Under a currently effective shelf registration statement, AFG can issue up to an aggregate of approximately $340 million in additional Common Stock, debt or trust securities. The shelf registration provides AFG with greater flexibility to access the capital markets from time to time as market and other conditions permit.
The $150.9 million in gross unrealized losses on fixed maturities at December 31, 2001, represents unrealized losses on more than 450 positions. None of the individual losses exceeds $8 million and only 12 have unrealized losses exceeding $2 million. All of the securities with unrealized losses are current in payment of principal and interest.
Based on its analysis of the factors enumerated above, management believes (i) the issuers of these securities will continue to meet their obligations and (ii) that AFG has the ability and intent to hold the securities until they mature or recover in value. Should either of these beliefs change with regard to a particular security, a charge for impairment would likely be required.
Net Realized Gains (Losses) Charges for On Sales Impairment Other(a) Total -------------- ----------- ----- ------ 2001 $89.8 ($125.5)(b) $11.6 ($24.1) 2000 (1.7) (27.5) 2.6 (26.6) 1999 31.1 (13.0) 2.1 20.2 1998 40.2 (32.2) (1.7) 6.3 1997 54.7 (6.7) (2.0) 46.0
UNCERTAINTIES Aside from risks common to most insurance operations, management believes that the areas posing the greatest risk of material loss are Great American's exposure to asbestos, environmental and other mass tort claims and American Premier's exposure to asbestos, environmental and other contingencies arising out of its former operations.
PROPERTY AND CASUALTY INSURANCE RESERVES Future costs of claims are projected based on historical trends adjusted for changes in underwriting standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors which are subject to significant variation. Through the use of analytical reserve development techniques, management monitors items such as the effect of inflation on medical, hospitalization, material, repair and replacement costs, general economic trends and the legal environment.
EXPOSURE TO MARKET RISK Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. AFG'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. To a much lesser extent, AFG's long-term debt is also exposed to interest rate risk.
The following table provides information about AFG's fixed maturity investments at December 31, 2001 and 2000, that are sensitive to interest rate risk. The table shows principal cash flows (in millions) and related weighted average interest rates by expected maturity date for each of the five subsequent years and for all years thereafter. 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.
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.
Included in "Other stocks" at December 31, 2001 were warrants (valued at $15.6 million) to purchase common stock of various companies. Under Statement of Financial Accounting Standards ("SFAS") No. 133, which was adopted as of October 1, 2000, these warrants are generally considered derivatives and marked to market through current earnings as realized gains and losses.
ANNUITY CONTRACTS Substantially all of GAFRI's fixed rate annuity contracts permit GAFRI to change crediting rates (subject to minimum interest rate guarantees of 3% to 4% per annum) enabling management to react to changes in market interest rates and maintain an adequate spread. The spread could be at risk, however, if yields available on newly invested funds fell significantly from current yields and remained lower for a long period. Projected payments (in millions) in each of the subsequent five years and for all years thereafter on GAFRI's fixed annuity liabilities at December 31 were as follows.
Fair First Second Third Fourth Fifth Thereafter Total Value ----- ------ ----- ------ ----- ---------- ------ ------ 2001 $750 $680 $650 $630 $610 $2,512 $5,832 $5,659 2000 720 710 660 630 620 2,204 5,544 5,426
Nearly half of GAFRI's fixed annuity liabilities at December 31, 2001, 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 charge period has expired. Current stated crediting rates on GAFRI's principal fixed annuity products average 5% and range from 3% on equity-indexed annuities (before any equity participation) to 7% on certain new policies (including first year bonus amounts). GAFRI estimates that its effective weighted-average crediting rate over the next five years will approximate 5%. This rate 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.
December 31, 2001 December 31, 2000 ----------------- ----------------- Scheduled Scheduled Principal Principal Payments Rate Payments Rate --------- ---- --------- ---- 2002 $ 4.3 7.02% 2001 $ 2.9 6.74% 2003 * 2002 4.7 6.86 2004 * 2003 * 2005 10.1 9.07 2004 14.2 8.38 2006 18.7 6.73 2005 9.7 9.16 Thereafter 509.3 7.14 Thereafter 509.6 7.14 ------ ------
GENERAL Results of operations as shown in the accompanying financial statements are prepared in accordance with generally accepted accounting principles. Many investors and analysts focus on "core earnings" of companies, setting aside certain items included in net earnings.
The following table reconciles AFG's operating earnings before income taxes as shown in the Statement of Operations to "core earnings" as generally referred to in quarterly news releases and independent financial analysts' reports (in millions, except per share amounts): 2001 2000 1999 ---- ---- ---- Operating earnings before income taxes $ 55.9 $109.9 $302.1 Adjustments for normal items: Eliminate net realized (gains) losses 24.0 (4.7) (20.2) Include minority interest (46.1) (45.1) (50.1) Adjustments for unusual items: Add back special A&E charge 100.0 - - Add back World Trade Center losses 25.0 - - ------ ------ ------ 158.8 60.1 231.8 Provision for income taxes (53.1) (17.8) (81.4) ------ ------ ------
Core earnings from insurance businesses $105.7 $ 42.3 $150.4 ====== ====== ======
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and casualty operations consist of two major business groups: Specialty and Personal.
2001 2000 1999 ---- ---- ---- NET WRITTEN PREMIUMS (GAAP) Specialty $1,542 $1,324 $1,111 Personal 1,040 1,311 1,154 Other Lines - 3 (2) ------ ------ ------ $2,582 $2,638 $2,263 ====== ====== ====== COMBINED RATIOS (GAAP) Specialty 101.7% 107.9% 102.7% Personal 107.9 108.6 100.7 Aggregate (including A&E and other lines) 108.8% 108.0% 102.0%
SPECIAL A&E CHARGE Estimating ultimate liability for asbestos claims presents unique and difficult challenges to the insurance industry due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. The casualty insurance industry is engaged in extensive litigation over these coverage and liability issues as the volume and severity of claims against asbestos defendants continue to increase.
While management believes that the reserves, as strengthened, are a reasonable estimate of ultimate liability for A&E claims, actual results may vary materially from the amounts currently recorded due to outstanding issues and uncertainties such as whether coverage exists, whether claims are to be allocated among triggered policies and implicated years, whether claimants who exhibit no signs of illness will be successful in pursuing their claims, predicting the number of future claims, and the impact of recent bankruptcy filings.
The Personal group's increase in net written premiums for 2000 reflects firming market prices in the nonstandard auto market and expanded writings in certain private passenger automobile markets. These items were partially offset by the expected decline in volume caused by rate increases implemented throughout 2000. The combined ratio for 2000 increased due to (i) increased auto claim frequency and severity (particularly in medical and health related costs), (ii) the impact of a very competitive pricing environment on policies written during 1999 and early 2000 and (iii) increased underwriting expenses associated with the direct and Internet marketing initiatives. In an effort to alleviate increasing losses, AFG implemented rate increases averaging approximately 13% in 2000.
GAIN ON SALE OF OTHER INVESTMENTS In September 2000, GAFRI realized a $27.2 million pretax gain on the sale of its minority ownership in a company engaged in the production of ethanol. GAFRI's investment was repurchased by the ethanol company which, following the purchase, became wholly-owned by AFG's Chairman.
Realized gains (losses) on securities includes gains of $5.2 million in 2001 and $1.5 million in the fourth quarter of 2000 to adjust the carrying value of AFG's investment in warrants to market value under SFAS No. 133.
GAINS ON SALES OF SUBSIDIARIES In 2001, AFG recognized a $7.1 million pretax gain on the sale of a small insurance subsidiary. In connection with the sale of the Japanese division in 2001, AFG recognized a $6.9 million pretax loss and deferred a gain of approximately $21 million on ceded insurance which is being recognized over the estimated settlement period (weighted average of 4 years) of the ceded claims.
2001 2000 1999 ---- ---- ---- Other income $102.6 $95.9 $87.4 Other operating and general expenses 64.9 65.6 62.5 Interest charges on borrowed money 2.3 2.6 2.8 Minority interest expense, net 3.7 1.5 2.0
2000 COMPARED TO 1999 Other operating and general expenses for 2000 include second quarter charges of $18.3 million related to an agreement to settle a lawsuit against a GAFRI subsidiary and $8.8 million for an adverse California Supreme Court ruling against an AFG property and casualty subsidiary. Excluding these litigation charges, other operating and general expenses increased $56.1 million (14%) due primarily to the inclusion of the operations of UTA following its acquisition in October 1999 and increased expenses from certain start-up operations.
START-UP MANUFACTURING BUSINESSES AFG's pretax operating earnings for 2000 include losses of $6.7 million from two start-up manufacturing businesses acquired in 2000 from their former owners. AFG sold the equity interests in these businesses in the fourth quarter of 2000 for a nominal cash consideration plus warrants to repurchase a significant ownership interest. Beginning in the fourth quarter of 2000, AFG's equity in the results of operations of these businesses is included in investee earnings. Loans outstanding to these businesses totaled $86.1 million at December 31, 2001 and $61.5 million at December 31, 2000. Because AFG retains the financial risk in these businesses, it continues accounting for their operations under the equity method as investees. Accordingly, AFG's carrying value of these businesses was approximately $45 million at December 31, 2001 and 2000.
In 1999, GAFRI 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, AFG expensed previously capitalized start-up costs of $3.8 million (net of minority interest and taxes) in the first quarter of 1999.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 141, business combinations initiated after June 30, 2001 are required to be accounted for using the purchase method of accounting. Under SFAS No. 142, goodwill will no longer be required to be amortized beginning January 1, 2002, but will be subject to an impairment test at least annually. A transitional test for impairment is required to be completed in 2002 with any resulting writedown reported during the first quarter as a cumulative effect of a change in accounting principle. Other operating and general expenses include goodwill amortization of $14.4 million in 2001, $17.2 million in 2000 and $14.3 million in 1999. The carrying value of AFG's goodwill at December 31, 2001, was $312.8 million. AFG has not yet determined what effect, if any, the transitional test for impairment will have on its earnings or financial position.
Consolidated Statement of Changes in Shareholders' Equity Years ended December 31, 2001, 2000 and 1999
PLEASE REFER TO "FORWARD-LOOKING STATEMENTS" FOLLOWING THE INDEX IN FRONT OF THIS FORM 10-K.
The information required by the following Items will be included in AFG's definitive Proxy Statement for the 2002 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.
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
A. ACCOUNTING POLICIES I. SHAREHOLDERS' EQUITY B. ACQUISITIONS AND SALES OF SUBSIDIARIES J. INCOME TAXES AND INVESTEES K. EXTRAORDINARY ITEMS C. SEGMENTS OF OPERATIONS L. COMMITMENTS AND CONTINGENCIES D. INVESTMENTS M. QUARTERLY OPERATING RESULTS E. INVESTMENT IN INVESTEE CORPORATIONS N. INSURANCE F. COST IN EXCESS OF NET ASSETS ACQUIRED O. ADDITIONAL INFORMATION G. LONG-TERM DEBT P. SUBSEQUENT EVENT H. MINORITY INTEREST
COST IN EXCESS OF NET ASSETS ACQUIRED Through December 31, 2001, the excess of cost of subsidiaries over AFG's equity in the underlying net assets ("goodwill") was being amortized over periods of 20 to 40 years. Under Statement of Financial Accounting Standards ("SFAS") No. 142 (issued in July 2001), goodwill will no longer be amortized but will be subject to an impairment test at least annually. SFAS No. 142 is effective beginning January 1, 2002, with the initial effect of the standard reported as a first quarter 2002 cumulative effect of a change in accounting principle.
REINSURANCE In the normal course of business, AFG's insurance subsidiaries cede reinsurance to other companies to diversify risk and limit maximum loss arising from large claims. To the extent that any reinsuring companies are unable to meet obligations under agreements covering reinsurance ceded, AFG's insurance subsidiaries would remain liable. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG's insurance subsidiaries report as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. AFG's insurance subsidiaries also assume reinsurance from other companies. Income on reinsurance assumed is recognized based on reports received from ceding companies.
DPAC related to annuities and universal life insurance products is amortized, with interest, in relation to the present value of expected gross profits on the policies. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains. DPAC related to annuities is also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities.
VARIABLE ANNUITY ASSETS AND LIABILITIES Separate accounts related to variable annuities represent deposits invested in underlying investment funds on which Great American Financial Resources, Inc. ("GAFRI"), an 83%-owned subsidiary, earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk. Accordingly, GAFRI's liability for these accounts equals the value of the account assets.
INCOME TAXES AFC files consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries, except for certain life insurance subsidiaries and their subsidiaries. Because holders of AFC Preferred Stock hold in excess of 20% of AFC's voting rights, AFG (parent) and its direct subsidiary, AFC Holding Company ("AFC Holding" or "AFCH"), are not eligible to file consolidated returns with AFC, and therefore, file separately.
stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under AFG's stock option plan, options are granted to officers, directors and key employees at exercise prices equal to the fair value of the shares at the dates of grant. No compensation expense is recognized for stock option grants.
Derivatives included in AFG's Balance Sheet consist primarily of investments in common stock warrants (included in other stocks), the equity-based component of certain annuity products (included in annuity benefits accumulated) and call options (included in other investments) used to mitigate the risk embedded in the equity-indexed annuity products.
START-UP COSTS Prior to 1999, GAFRI deferred certain costs associated with introducing new products and distribution channels and amortized them on a straight-line basis over 5 years. In 1999, GAFRI 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, AFG 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.
EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted earnings per share includes the following dilutive effects of common stock options: 2001 - 440,000 shares; 2000 - 169,000 shares and 1999 - 478,000 shares.
COMMERCIAL LINES DIVISION In 1998, AFG sold its Commercial lines division to Ohio Casualty Corporation for $300 million cash plus warrants to purchase shares of Ohio Casualty common stock. AFG received an additional $25 million (included in gains on sales of subsidiaries) in August 2000 under a provision in the sale agreement related to the retention and growth of the insurance businesses sold.
During the fourth quarter of 2000, AFG sold the equity interests to a group of employees for nominal cash consideration plus warrants to repurchase a significant ownership interest. Due to the absence of significant financial investment by the buyers relative to the amount of loans ($61.5 million at December 31, 2000) owed to AFG subsidiaries, the sale was not recognized as a divestiture for accounting purposes. Assets of the businesses ($57.1 million at December 31, 2001 and $55.3 million at December 31, 2000) are included in other assets; liabilities of the businesses ($11.8 million at December 31, 2001 and $7.5 million at December 31, 2000, after consolidation and elimination of loans from AFG subsidiaries) are included in other liabilities. AFG's equity in the losses of these two companies during 2001 and the fourth quarter of 2000 of $16.6 million and $4.1 million, respectively, is included in investee losses in the Statement of Operations.
C. SEGMENTS OF OPERATIONS AFG's property and casualty group is engaged primarily in specialty and private passenger automobile insurance businesses. The Specialty group includes a highly diversified group of specialty business units. Some of the more significant areas are inland and ocean marine, California workers' compensation, agricultural-related coverages, executive and professional liability, fidelity and surety bonds, collateral protection, and umbrella and excess coverages. The Personal group writes nonstandard and preferred/standard private passenger auto and other personal insurance coverage. AFG's annuity and life business markets primarily retirement products as well as life and supplemental health insurance. AFG's businesses operate throughout the United States. In 2001, 2000, and 1999, AFG derived less than 2% of its revenues from the sale of life and supplemental health products in Puerto Rico and less than 1% of its revenues from the sale of property and casualty insurance in Mexico, Canada, Puerto Rico, Europe and Asia.
(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 lines in "run-off"; AFG has ceased underwriting new business in these operations. (d) Represents primarily investment income. (e) Includes a charge of $100 million in 2001 related to asbestos and other environmental matters ("A&E"). (f) Includes holding company expenses.
MATURITY ------------------------------ One year or less 4% After one year through five years 25 After five years through ten years 30 After ten years 16 --- Mortgage-backed securities 25 --- 100% ===
The only investment which exceeds 10% of Shareholders' Equity is an equity investment in Provident Financial Group, Inc., having a market value of $191 million and $272 million at December 31, 2001 and 2000, respectively.
Gross gains and losses on fixed maturity investment transactions included in the Statement of Cash Flows consisted of the following (in millions):
E. INVESTMENT IN INVESTEE CORPORATIONS Investment in investee corporations at December 31, 2000, reflects AFG's ownership of 24 million shares (36%) of Chiquita common stock. The market value of this investment was $24 million at December 31, 2000. Chiquita is a leading international marketer, producer and distributor of quality fresh fruits and vegetables and processed foods.
Net Sales $2,254 $2,556 Operating Income 27 42 Net Loss (95) (58) Net Loss Attributable to Common Shares (112) (75)
G. LONG-TERM DEBT Long-term debt consisted of the following at December 31, (in thousands):
At December 31, 2001, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in millions):
Holding Companies Subsidiaries Total --------- ------------ ------ 2002 $213.7 $1.2 $214.9 2003 - 1.2 1.2 2004 - 122.4 122.4 2005 - 10.4 10.4 2006 - 19.1 19.1
Debentures purchased in excess of scheduled payments may be applied to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures previously purchased are applied to the earliest scheduled retirements.
Cash interest payments of $51 million, $56 million and $55 million were made on long-term debt in 2001, 2000 and 1999, respectively.
PREFERRED SECURITIES Wholly-owned subsidiary trusts of AFG and GAFRI have issued preferred securities and, in turn, purchased a like amount of subordinated debt which provides interest and principal payments to fund the respective trusts' obligations. The preferred securities must be redeemed upon maturity or redemption of the subordinated debt. AFG and GAFRI effectively provide unconditional guarantees of their respective trusts' obligations.
AFC PREFERRED STOCK AFC's Preferred Stock is voting, cumulative, and consists of the following:
SERIES J, no par value; $25.00 liquidating value per share; annual dividends per share $2.00; redeemable at AFC's option at $25.75 per share beginning December 2005 declining to $25.00 at December 2007 and thereafter; 2,886,161 shares (stated value $72.2 million) outstanding at December 31, 2001 and 2000.
Options Outstanding Options Exercisable ------------------------------- ------------------- Average Average Average Range of Exercise Remaining Exercise Exercise Prices Shares Price Life Shares Price --------------- --------- -------- --------- --------- -------- $18.56 - $20.00 1,836,073 $19.79 8.6 years 360,273 $19.78 $20.01 - $25.00 1,181,362 $23.97 3.3 " 1,181,362 $23.97 $25.01 - $30.00 333,270 $26.98 3.6 " 287,470 $27.02 $30.01 - $35.00 957,250 $30.42 4.1 " 943,350 $30.37 $35.01 - $40.00 1,493,676 $36.81 6.3 " 868,650 $37.12 $40.01 - $45.19 287,500 $42.41 6.2 " 177,200 $42.45
No compensation cost has been recognized for stock option grants. Had compensation cost been determined for stock option awards based on the fair values at grant dates consistent with the method prescribed by SFAS No. 123, AFG's net income would have decreased by $3.7 million ($.05 per share, diluted) in 2001, $4.9 million ($.08 per share) in 2000, and $5.0 million ($.08 per share) in 1999. The weighted-average fair value per option granted was $8.18, $5.38 and $8.32 in 2001, 2000 and 1999, respectively. For SFAS No. 123 purposes, calculations were determined using the Black-Scholes option pricing model and the following weighted-average assumptions: dividend yield of 2% for 2001 and 3% for 2000 and 1999; expected volatility of 27% for 2001, 24% for 2000 and 22% for 1999; weighted average risk-free interest rate of 5.3% for 2001, 6% for 2000 and 5.4% for 1999; and expected life of 7.4 years for 2001 and 2000 and 7.3 years for 1999.
Income taxes at statutory rate ($10,045) ($ 31,913) $ 75,928 Effect of: Adjustment to prior year taxes (6,317) - - Minority interest 5,672 6,187 7,093 Amortization of intangibles 4,526 5,495 4,686 Effect of foreign operations (3,421) 951 (550) Dividends received deduction (2,317) (2,378) (2,783) Nondeductible meals, etc. 1,381 1,300 776 Losses utilized (1,245) (7,000) (5,250) Tax credits (1,243) (5,757) (1,900) Tax exempt interest (1,233) (1,571) (1,721) State income taxes 781 298 332 Other (398) (757) (1,114) ------- -------- -------- Total Provision (Credit) (13,859) (35,145) 75,497
2001 2000 1999 ---- ---- ---- Current taxes: Federal $44,715 $13,880 ($ 5,434) Foreign - 1,106 32 State 1,201 459 511 Deferred taxes: Federal (59,042) (50,070) 81,419 Foreign (733) (520) (1,031) ------- ------- -------
Expiring Amount ----------- ------ { 2002 - 2006 $ 83 Operating Loss { 2007 - 2016 - { 2017 - 2021 112 Other - Tax Credits 12
2001 2000 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 68.3 $ 78.8 Insurance claims and reserves 268.2 244.3 Other, net 106.5 90.0 ------ ------ 443.0 413.1 Valuation allowance for deferred tax assets (40.9) (39.6) ------ ------ 402.1 373.5 Deferred tax liabilities: Deferred acquisition costs (231.5) (205.8) Investment securities (101.1) (121.1) ------ ------ (332.6) (326.9) ------ ------
---- AFG (parent) $2,295 AFC (parent) (2,993) APU (parent) (1,003) ------ ($1,701) ======
At December 31, 2001, American Premier had liabilities for environmental and personal injury claims aggregating $82.2 million. The environmental claims consist of a number of proceedings and claims seeking to impose responsibility for hazardous waste remediation costs related to certain sites formerly owned or operated by the railroad and manufacturing operations. Remediation costs are difficult to estimate for a number of reasons, including the number and financial resources of other potentially responsible parties, the range of costs for remediation alternatives, changing technology and the time period over which these matters develop. The personal injury claims include pending and expected claims, primarily by former employees of PCTC, for injury or disease allegedly caused by exposure to excessive noise, asbestos or other substances in the workplace. In December 2001, American Premier recorded a $12.1 million charge to increase its environmental reserves due to an increase in expected ultimate claim costs. At December 31, 2001, American Premier had $57 million of offsetting recovery assets (included in other assets) for such environmental and personal injury claims based upon estimates of probable recoveries from insurance carriers.
AFG's insurance subsidiaries continue to receive claims related to environmental exposures, asbestos and other mass tort claims. Establishing reserves for these claims is subject to uncertainties that are significantly greater than those presented by other types of claims. The liability for asbestos and environmental reserves at December 31, 2001 and 2000, respectively, was $548 million and $463 million; related recoverables from reinsurers (net of allowances for doubtful accounts) at those dates were $101 million and $105 million, respectively.
N. INSURANCE Securities owned by insurance subsidiaries having a carrying value of about $940 million at December 31, 2001, were on deposit as required by regulatory authorities.
Provision for losses and LAE occurring in the current year 1,950 2,056 1,691 Net increase (decrease) in provision for claims of prior years 163 (60) (74) ------ ------ ------ Total losses and LAE incurred (*) 2,113 1,996 1,617
Payments for losses and LAE of: Current year (831) (905) (780) Prior years (1,036) (936) (986) ------ ------ ------ Total payments (1,867) (1,841) (1,766)
(*) Before amortization of deferred gains on retroactive reinsurance of $33 million in 2001, $34 million in 2000 and $28 million in 1999.
STATUTORY INFORMATION AFG'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):
In January 2001, AFG's insurance companies adopted the Codification of Statutory Accounting Principles. The cumulative effect of these changes at adoption increased the surplus of the property and casualty companies by $44 million; the effect on surplus of the life insurance companies was not material.
Reinsurance recoveries $ 773 $ 567 $ 811 ====== ====== ======
Unadjusted Adjusted Asset Effect of Asset Liability) Sfas 115 (Liability) ---------- --------- ----------- ---- Fixed maturities $10,593.3 $155.3 $10,748.6 Other stocks 187.8 125.9 313.7 Deferred acquisition costs 827.3 (9.0) 818.3 Annuity benefits accumulated (5,827.9) (4.2) (5,832.1) ------ Pretax unrealized 268.0
---- Fixed maturities $10,148.3 $ 16.3 $10,164.6 Other stocks 175.0 210.4 385.4 Deferred acquisition costs 763.1 - 763.1 Annuity benefits accumulated (5,543.7) - (5,543.7) ------ Pretax unrealized 226.7
Deferred taxes 125.2 (78.6) 46.6 Minority interest (500.5) (7.5) (508.0) ------
2001 2000 ------------------ ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- ASSETS: Fixed maturities $10,749 $10,749 $10,165 $10,165 Other stocks 314 314 385 385
flows, discounted at current interest rates. Fair value of annuities in the accumulation phase is assumed to be the policyholders' cash surrender amount. Fair value of shareholders' equity is based on the quoted market price of AFG's Common Stock.
RESTRICTIONS ON TRANSFER OF FUNDS AND ASSETS OF SUBSIDIARIES Payments of dividends, loans and advances by AFG's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. Under applicable restrictions, the maximum amount of dividends available to AFG in 2002 from its insurance subsidiaries without seeking regulatory clearance is approximately $92 million. Total "restrictions" on intercompany transfers from AFG's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
TRANSACTIONS WITH AFFILIATES AFG purchased a $3.7 million minority interest in a residential homebuilding company from an unrelated party in 1995. At that same time, a brother of AFG's chairman purchased a minority interest in the company for $825,000. In 2000, that brother and another brother of AFG's chairman acquired the remaining shares from the third parties. GAFRI has extended a line of credit to this company under which the homebuilder may borrow up to $8 million at 13%. At December 31, 2001 and 2000, $6.4 million and $8 million, respectively, was due under the credit line.
December 31, -------------------------- 2001 2000 ---- ---- ASSETS: Cash and short-term investments $ 529 $ 1,407 Receivables from affiliates 359,582 438,807 Investment in subsidiaries 1,562,550 1,534,280 Other assets 65,214 63,557 ---------- ----------
COSTS AND EXPENSES: Interest charges on borrowed money 42,958 39,912 34,707 Other operating and general expenses 8,588 7,435 9,937 ------- ------- -------- 51,546 47,347 44,644 ------- ------- --------
Extraordinary items - loss on prepayment of debt - - (1,701) Cumulative effect of accounting changes (10,040) (9,072) (3,854) ------- ------- --------
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (IN THOUSANDS)
FINANCING ACTIVITIES: Additional long-term borrowings - - 344,938 Reductions of long-term debt - - (63,179) Issuances of common stock 19,669 159,562 7,389 Repurchases of common stock - - (88,597) Repurchases of trust preferred securities - (1,052) - Cash dividends paid (84,735) (71,553) (78,199) ------- -------- -------- (65,066) 86,957 122,352 ------- -------- --------
S/THEODORE H. EMMERICH Director* March 27, 2002 - ----------------------- Theodore H. Emmerich
S/JAMES E. EVANS Director March 27, 2002 - ----------------------- James E. Evans
S/CARL H. LINDNER III Director March 27, 2002 - ----------------------- Carl H. Lindner III
S/KEITH E. LINDNER Director March 27, 2002 - ----------------------- Keith E. Lindner
S/WILLIAM R. MARTIN Director* March 27, 2002 - ----------------------- William R. Martin
10(c) 2001 Annual Bonus Plan, filed as Exhibit 10 (*) to AFG's June 30, 2001 Form 10-Q.
10(g) Deferred Compensation Plan, filed as Exhibit 10 to AFG's Registration Statement on Form S-8 on December 2, 1999. (*)