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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 2003 No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer.
Yes X No
As of May 1, 2003, there were 69,582,123 shares of the Registrant's
Common Stock outstanding, excluding 18,666,614 shares owned by subsidiaries.
Page 1 of 33
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AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
2003 2002
----------- -----------
ASSETS:
Cash and short-term investments $ 736,099 $ 871,103
Investments:
Fixed maturities - at market
(amortized cost - $10,990,657 and $11,549,710) 11,445,257 12,006,910
Other stocks - at market
(cost - $161,757 and $174,645) 252,557 300,445
Investment in investee corporations 211,163 -
Policy loans 213,462 214,852
Real estate and other investments 248,957 257,731
----------- -----------
Total investments 12,371,396 12,779,938
Recoverables from reinsurers and prepaid
reinsurance premiums 2,915,464 2,866,780
Agents' balances and premiums receivable 484,185 708,327
Deferred acquisition costs 815,469 842,070
Other receivables 264,765 307,008
Variable annuity assets (separate accounts) 431,134 455,142
Prepaid expenses, deferred charges and other assets 350,143 425,775
Goodwill 173,408 248,683
----------- -----------
$18,542,063 $19,504,826
=========== ===========
LIABILITIES AND CAPITAL:
Unpaid losses and loss adjustment expenses $ 4,601,287 $ 5,203,831
Unearned premiums 1,543,347 1,847,924
Annuity benefits accumulated 6,610,445 6,453,881
Life, accident and health reserves 934,274 902,393
Payable to reinsurers 438,406 508,718
Long-term debt:
Holding companies 495,672 648,410
Subsidiaries 296,369 296,771
Variable annuity liabilities (separate accounts) 431,134 455,142
Accounts payable, accrued expenses and other
liabilities 1,002,018 990,884
----------- -----------
Total liabilities 16,352,952 17,307,954
Minority interest 472,208 471,024
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 69,527,781 and 69,129,352 shares outstanding 69,528 69,129
Capital surplus 928,220 923,042
Retained earnings 426,255 409,777
Unrealized gain on marketable securities, net 292,900 323,900
----------- -----------
Total shareholders' equity 1,716,903 1,725,848
----------- -----------
$18,542,063 $19,504,826
=========== ===========
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
Three months ended
March 31,
---------------------
2003 2002
---- ----
INCOME:
Property and casualty insurance premiums $542,785 $603,908
Life, accident and health premiums 74,110 70,935
Investment income 201,904 219,771
Realized gains (losses) on:
Securities 2,239 (17,800)
Subsidiary (39,386) -
Other income 57,437 48,322
-------- --------
839,089 925,136
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses 371,970 442,913
Commissions and other underwriting expenses 156,437 170,266
Annuity benefits 74,847 75,525
Life, accident and health benefits 59,596 55,920
Annuity and life acquisition expenses 27,298 24,779
Interest charges on borrowed money 13,048 14,193
Other operating and general expenses 97,955 90,686
-------- --------
801,151 874,282
-------- --------
Operating earnings before income taxes 37,938 50,854
Provision for income taxes 5,793 673
-------- --------
Net operating earnings 32,145 50,181
Minority interest expense, net of tax (7,582) (5,677)
Equity in net earnings (losses) of investees, net of tax 557 (2,734)
-------- --------
Earnings before cumulative effect of accounting change 25,120 41,770
Cumulative effect of accounting change - (40,360)
-------- --------
NET EARNINGS $ 25,120 $ 1,410
======== ========
BASIC EARNINGS PER COMMON SHARE:
Before accounting change $.36 $.61
Cumulative effect of accounting change - (.59)
---- ----
Net earnings available to Common Shares $.36 $.02
==== ====
DILUTED EARNINGS PER COMMON SHARE:
Before accounting change $.36 $.61
Cumulative effect of accounting change - (.59)
---- ----
Net earnings available to Common Shares $.36 $.02
==== ====
Average number of Common Shares:
Basic 69,289 68,556
Diluted 69,403 69,019
Cash dividends per Common Share $.125 $.125
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Common Stock Unrealized
Common and Capital Retained Gain on
Shares Surplus Earnings Securities Total
---------- ------------ -------- ---------- ----------
BALANCE AT JANUARY 1, 2003 69,129,352 $992,171 $409,777 $323,900 $1,725,848
Net earnings - - 25,120 - 25,120
Change in unrealized - - - (31,000) (31,000)
----------
Comprehensive income (loss) (5,880)
Dividends on Common Stock - - (8,642) - (8,642)
Shares issued:
Dividend reinvestment plan 103,492 2,110 - - 2,110
Employee stock purchase plan 12,157 256 - - 256
Retirement plan contributions 278,434 5,437 - - 5,437
Deferred compensation distributions 3,300 71 - - 71
Directors fees paid in stock 1,050 24 - - 24
Shares acquired and retired (4) - - -
Other - (2,321) - - (2,321)
---------- -------- -------- -------- ----------
BALANCE AT MARCH 31, 2003 69,527,781 $997,748 $426,255 $292,900 $1,716,903
========== ======== ======== ======== ==========
BALANCE AT JANUARY 1, 2002 68,491,610 $979,566 $359,513 $159,300 $1,498,379
Net earnings - - 1,410 - 1,410
Change in unrealized - - - (63,000) (63,000)
----------
Comprehensive income (loss) (61,590)
Dividends on Common Stock - - (8,562) - (8,562)
Shares issued:
Exercise of stock options 13,155 310 - - 310
Dividend reinvestment plan 49,333 1,121 - - 1,121
Employee stock purchase plan 11,465 283 - - 283
Retirement plan contributions 87,690 2,405 - - 2,405
Directors fees paid in stock 1,002 24 - - 24
Deferred compensation distributions 1,501 35 - - 35
Shares acquired and retired (5) - - - -
Tax effect of intercompany dividends - (800) - - (800)
Other - 226 - - 226
---------- -------- -------- -------- ----------
BALANCE AT MARCH 31, 2002 68,655,751 $983,170 $352,361 $ 96,300 $1,431,831
========== ======== ======== ======== ==========
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net earnings $ 25,120 $ 1,410
Adjustments:
Cumulative effect of accounting change - 40,360
Equity in net (earnings) losses of investees (557) 2,734
Depreciation and amortization 41,300 38,005
Annuity benefits 74,847 75,525
Realized losses on investing activities 37,130 17,605
Deferred annuity and life policy acquisition costs (44,748) (38,600)
Increase in reinsurance and other receivables (195,939) (119,964)
Decrease (increase) in other assets 28,610 (3,759)
Increase in insurance claims and reserves 235,949 152,361
Increase in payable to reinsurers 8,490 30,348
Increase (decrease) in other liabilities 57,933 (22,444)
Increase in minority interest 184 952
Other, net 1,058 755
---------- ----------
269,377 175,288
---------- ----------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments (1,817,002) (1,499,179)
Equity securities (8,168) -
Real estate, property and equipment (5,124) (4,518)
Maturities and redemptions of fixed maturity
investments 522,366 408,962
Sales of:
Fixed maturity investments 873,948 597,159
Equity securities 1,820 5,164
Subsidiary 186,269 -
Real estate, property and equipment 386 1,669
Cash and short-term investments of former subsidiary (86,781) -
Decrease in other investments 4,656 3,368
---------- ----------
(327,630) (487,375)
---------- ----------
FINANCING ACTIVITIES:
Fixed annuity receipts 214,519 169,872
Annuity surrenders, benefits and withdrawals (140,294) (135,912)
Net transfers from (to) variable annuity assets 8,629 (5,570)
Additional long-term borrowings 18,311 41,000
Reductions of long-term debt (171,601) (20,240)
Issuances of Common Stock 217 551
Cash dividends paid (6,532) (7,441)
---------- ----------
(76,751) 42,260
---------- ----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (135,004) (269,827)
Cash and short-term investments at beginning
of period 871,103 544,173
---------- ----------
Cash and short-term investments at end of period $ 736,099 $ 274,346
========== ==========
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for American Financial Group, Inc. ("AFG") and subsidiaries are unaudited;
however, management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein) necessary for
fair presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
Certain reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany balances and
transactions have been eliminated. All acquisitions have been treated as
purchases. The results of operations of companies since their formation or
acquisition are included in the consolidated financial statements.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in circumstances
could cause actual results to differ materially from those estimates.
INVESTMENTS All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses reported
as a separate component of shareholders' equity. Short-term investments
are carried at cost; loans receivable are carried primarily at the
aggregate unpaid balance. Premiums and discounts on mortgage-backed
securities are amortized over a period based on estimated future principal
payments, including prepayments. Prepayment assumptions are reviewed
periodically and adjusted to reflect actual prepayments and changes in
expectations. The most significant determinants of prepayments are the
difference between interest rates on the underlying mortgages and current
mortgage loan rates and the structure of the security. Other factors
affecting prepayments include the size, type and age of underlying
mortgages, the geographic location of the mortgaged properties and the
credit worthiness of the borrowers. Variations from anticipated
prepayments will affect the life and yield of these securities.
Gains or losses on securities are determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the cost basis of that investment is reduced.
Interest income on non-investment grade asset-backed investments is
recorded at a yield based on projected cash flows. The yield is adjusted
prospectively to reflect actual cash flows and changes in projected
amounts. Impairment losses on these investments must be recognized when
(i) the fair value of the security is less than its cost basis and (ii)
there has been an adverse change in the expected cash flows. These
impairment losses are included in realized gains and losses.
INVESTMENT IN INVESTEE CORPORATIONS Investments in securities of 20%-to
50%-owned companies are generally carried at cost, adjusted for AFG's
proportionate share of their undistributed earnings or losses.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
GOODWILL Goodwill represents the excess of cost of subsidiaries over AFG's
equity in their underlying net assets. Effective January 1, 2002, AFG
implemented Statement of Financial Accounting Standards ("SFAS") No. 142,
under which goodwill is no longer amortized but is subject to an
impairment test at least annually. As required under SFAS No. 142, AFG
completed the transitional test for goodwill impairment (as of January 1,
2002) in the fourth quarter of 2002. The resulting write-down was reported
by restating first quarter 2002 results for the cumulative effect of a
change in accounting principle.
INSURANCE As discussed under "Reinsurance" below, unpaid losses and loss
adjustment expenses and unearned premiums have not been reduced for
reinsurance recoverable.
REINSURANCE Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured
policies. AFG's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. Payable to reinsurers
includes ceded premiums retained by AFG's insurance subsidiaries under
contracts to fund ceded losses as they become due. AFG's insurance
subsidiaries also assume reinsurance from other companies. Income on
reinsurance assumed is recognized based on reports received from ceding
companies.
DEFERRED POLICY ACQUISITION COSTS ("DPAC") Policy acquisition costs
(principally commissions, premium taxes and other marketing and
underwriting expenses) related to the production of new business are
deferred. For the property and casualty companies, DPAC is limited based
upon recoverability without any consideration for anticipated investment
income and is charged against income ratably over the terms of the related
policies.
DPAC related to annuities and universal life insurance products is
deferred to the extent deemed recoverable and 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 gain on
marketable securities, net" in the shareholders' equity section of the
Balance Sheet.
DPAC related to traditional life and health insurance is amortized over
the expected premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium
revenues.
ANNUITY AND LIFE ACQUISITION EXPENSES Annuity and life acquisition
expenses on the Statement of Earnings consists primarily of amortization
of DPAC related to the annuity and life, accident and health businesses.
This line item also includes certain marketing and commission costs that
are expensed as paid.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities
stated for unpaid claims and for expenses of investigation and adjustment
of unpaid claims are based upon (a) the accumulation of case estimates for
losses reported prior to the close of the accounting period on direct
business written; (b) estimates received from ceding reinsurers and
insurance pools and associations;
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(c) estimates of unreported losses based on past experience; (d) estimates
based on experience of expenses for investigating and adjusting claims and
(e) the current state of the law and coverage litigation. Establishing
reserves for asbestos and environmental claims involves considerably more
judgment than other types of claims due to, among other things,
inconsistent court decisions, an increase in bankruptcy filings as a
result of asbestos-related liabilities, novel theories of coverage, and
judicial interpretations that often expand theories of recovery and
broaden the scope of coverage.
Loss reserve liabilities are subject to the impact of changes in claim
amounts and frequency and other factors. Changes in estimates of the
liabilities for losses and loss adjustment expenses are reflected in the
Statement of Earnings in the period in which determined. In spite of the
variability inherent in such estimates, management believes that the
liabilities for unpaid losses and loss adjustment expenses are adequate.
ANNUITY BENEFITS ACCUMULATED Annuity receipts and benefit payments
are recorded as increases or decreases in "annuity benefits accumulated"
rather than as revenue and expense. Increases in this liability for
interest credited are charged to expense and decreases for surrender
charges are credited to other income.
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 the original
projections of investment yields, mortality, morbidity and surrenders and
include provisions for unfavorable deviations. Reserves established for
accident and health claims are modified as necessary to reflect actual
experience and developing trends.
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 at March 31, 2003, earns a fee. Investment funds are
selected and may be changed only by the policyholder, who retains all
investment risk.
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.
POLICYHOLDER DIVIDENDS Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other liabilities" and
represent estimates of amounts payable on participating policies which
share in favorable underwriting results. Estimates are accrued during the
period in which premiums are earned. Changes in estimates are included in
income in the period determined. Policyholder dividends do not become
legal liabilities unless and until declared by the boards of directors of
the insurance companies.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MINORITY INTEREST For balance sheet purposes, minority interest represents
the interests of noncontrolling shareholders in AFG subsidiaries,
including American Financial Corporation ("AFC") preferred stock and
preferred securities issued by trust subsidiaries of AFG. For income
statement purposes, minority interest expense represents those
shareholders' interest in the earnings of AFG subsidiaries as well as AFC
preferred dividends and accrued distributions on the trust preferred
securities.
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.
Deferred income taxes are calculated using the liability method. Under
this method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases and are
measured using enacted tax rates. Deferred tax assets are recognized if it
is more likely than not that a benefit will be realized.
STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation," AFG accounts for stock options and other
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.
The following table illustrates the effect on net earnings and earnings
per share had compensation cost been recognized and determined based on
the fair values at grant dates consistent with the method prescribed by
SFAS No. 123. For SFAS No. 123 purposes, the fair value per option granted
of $5.60 for the first quarter of 2003 and $8.52 for the first quarter of
2002 was calculated using the Black-Scholes option pricing model and the
following assumptions: dividend yield of 2%; expected volatility of 30%;
risk-free interest rate of 3.6% for 2003 and 4.9% for 2002; and expected
option life of 7.4 years.
Three months ended
March 31,
----------------------
2003 2002
---- ----
Net earnings, as reported $25,120 $ 1,410
Pro forma stock option expense, net of tax (1,521) (1,061)
------- -------
Adjusted net earnings $23,599 $ 349
======= =======
Earnings per share (as reported):
Basic $0.36 $0.02
Diluted $0.36 $0.02
Earnings per share (adjusted):
Basic $0.34 $0.01
Diluted $0.34 $0.01
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
BENEFIT PLANS AFG provides retirement benefits to qualified employees of
participating companies through the AFG Retirement and Savings Plan, a
defined contribution plan. AFG makes all contributions to the retirement
fund portion of the plan and matches a percentage of employee
contributions to the savings fund. Employees have been permitted to direct
the investment of their contributions to independently managed investment
funds, while Company contributions have been invested primarily in
securities of AFG and affiliates. Employees may direct the investment of a
portion of their vested retirement fund account balances (increasing from
12.5% in July 2002 to 100% in April 2004) from securities of AFG and its
affiliates to independently managed investment funds. As of March 31,
2003, the Plan owned 12% of AFG's outstanding Common Stock. Company
contributions are expensed in the year for which they are declared.
AFG and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. AFG also provides postemployment benefits
to former or inactive employees (primarily those on disability) who were
not deemed retired under other company plans. The projected future cost of
providing these benefits is expensed over the period employees earn such
benefits.
DERIVATIVES Derivatives included in AFG's Balance Sheet consist primarily
of investments in common stock warrants (valued at $8.4 million at March
31, 2003; included in other stocks), the equity-based component of certain
annuity products (included in annuity benefits accumulated) and related
call options (included in other investments) designed to be consistent
with the characteristics of the liabilities and used to mitigate the risk
embedded in those annuity products. Changes in the fair value of
derivatives are included in current earnings.
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 114,000
shares in 2003 and 463,000 shares in 2002 representing the dilutive effect
of common stock options.
STATEMENT OF CASH FLOWS For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include obtaining resources from owners and providing them with a return
on their investments, borrowing money and repaying amounts borrowed.
Annuity receipts, benefits and withdrawals are also reflected as financing
activities. All other activities are considered "operating". Short-term
investments having original maturities of three months or less when
purchased are considered to be cash equivalents for purposes of the
financial statements.
B. ACQUISITIONS AND SALES OF SUBSIDIARIES
INFINITY PROPERTY AND CASUALTY CORPORATION On December 31, 2002, AFG
transferred to Infinity Property and Casualty Corporation ("Infinity", a
newly formed subsidiary) the following subsidiaries involved primarily in
the issuance of nonstandard auto policies: Atlanta Casualty Company,
Infinity Insurance Company, Leader Insurance Company and Windsor Insurance
Company. Effective January 1, 2003, Great American Insurance Company, an
AFG subsidiary, transferred to Infinity its personal insurance business
written through independent agents. In February 2003, AFG sold 61% of
Infinity in a public offering. AFG realized a pretax loss of $39.4 million
on the sale. In addition, AFG realized a $5.5 million tax benefit related
to its basis in Infinity stock. The businesses transferred generated
aggregate net written premiums of approximately $690 million in 2002.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DIRECT AUTOMOBILE INSURANCE BUSINESS In January 2003, AFG reached an
agreement to sell two of its subsidiaries that market automobile insurance
directly to customers. The transaction was completed on April 25, 2003,
and included the transfer of Great American Insurance's right to renew
certain of its personal automobile insurance business written on a direct
basis in selected markets. Premiums generated by the businesses sold were
approximately $79 million in 2002. AFG does not expect to report a
significant gain or loss on the sale.
NEW JERSEY PRIVATE PASSENGER AUTOMOBILE INSURANCE BUSINESS In September
2002, an AFG subsidiary entered into an agreement under which Palisades
Safety and Insurance Association and Palisades Insurance Company will
assume the subsidiary's obligations to renew its private passenger
automobile insurance business written in New Jersey. As of September 9,
2002, AFG no longer accepts any new private passenger automobile insurance
in that state.
MANHATTAN NATIONAL LIFE INSURANCE On June 28, 2002, GAFRI acquired
Manhattan National Life Insurance Company ("MNL") from Conseco, Inc. for
$48.5 million in cash. At December 31, 2002, MNL reinsured 90% of its
in-force business.
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. SEGMENTS OF OPERATIONS AFG's property and casualty group writes primarily
specialized commercial products for businesses through 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. In February 2003, AFG sold a substantial portion of
its Personal segment; see Note B - "Acquisitions and Sales of
Subsidiaries." The Personal group wrote nonstandard and preferred/standard
private passenger auto and other personal insurance coverage. AFG's
annuity, life and health business markets primarily retirement products as
well as life and supplemental health insurance.
The following table (in thousands) shows AFG's revenues and operating
profit (loss) by significant business segment. Operating profit (loss)
represents total revenues less operating expenses.
Three months ended
March 31,
---------------------
2003 2002
---- ----
REVENUES (a)
Property and casualty insurance:
Premiums earned:
Specialty $427,848 $356,415
Personal 114,938 247,203
Other lines (1) 290
-------- --------
542,785 603,908
Investment and other income 120,050 100,259
-------- --------
662,835 704,167
Annuities, life and health (b) 218,446 217,422
Other (42,192) 3,547
-------- --------
$839,089 $925,136
======== ========
OPERATING PROFIT (LOSS)
Property and casualty insurance:
Underwriting:
Specialty $ 9,521 $ 5,294
Personal 5,212 (5,239)
Other lines (c) (355) (9,326)
-------- --------
14,378 (9,271)
Investment and other income 71,290 63,251
-------- --------
85,668 53,980
Annuities, life and health 15,563 21,981
Other (d) (63,293) (25,107)
-------- --------
$ 37,938 $ 50,854
======== ========
(a) Revenues include sales of products and services as well as other
income earned by the respective segments.
(b) Represents primarily investment income.
(c) Represents development of lines in "run-off"; AFG has ceased
underwriting new business in these operations.
(d) Includes holding company expenses.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. INVESTMENT IN INVESTEES Investment in investee corporations reflects AFG's
ownership of 7.9 million shares (38%) of Infinity common stock and a $55
million 8.5% note receivable from Infinity. The market value of the
investment in Infinity stock was $143 million at March 31, 2003 and $165
million at May 1, 2003. Prior to AFG's sale of 12.5 million shares of
Infinity in February 2003, AFG beneficially owned 100% of Infinity (see
Note B). Infinity is a national provider of personal automobile insurance
with an emphasis on the nonstandard market.
Summarized financial information for Infinity is shown below for the three
months ended March 31, 2003 (in millions).
Earned premiums $165.5
Total revenues 181.0
Net earnings 11.5
Equity in net earnings (losses) of investees for the first quarter of 2002
represents AFG's share of the losses from two start-up manufacturing
businesses that were formerly subsidiaries. One of these businesses was
sold in the fourth quarter of 2002; equity in the net loss of the
remaining business for the first quarter of 2003 was $865,000.
E. GOODWILL Effective January 1, 2002, goodwill is no longer amortized but
is subject to annual impairment testing under a two step process. Under
the first step, an entity's net assets are classified by reporting units
and compared to their fair value. Fair value is estimated based primarily
on the present value of expected future cash flows. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment
loss, if any. The second step of the initial impairment test, measuring
the amount of impairment loss, was completed in the fourth quarter with a
resulting $40.4 million ($.59 per share, basic and diluted) impairment
charge, net of tax, reported by restating first quarter 2002 results for
the cumulative effect of a change in accounting principle. The impairment
charge included $21.2 million (pretax) for the annuities and life
insurance segment related to a decrease in estimated future earnings
based upon lower forecasted new business sales over the next few years
and $39.6 million (pretax) for the personal lines segment related
primarily to planned future reductions in new business volume written
through the direct channel.
The change in goodwill during the first quarter of 2003 reflects $75.3
million in goodwill related to Infinity, which was sold in February 2003.
Included in deferred acquisition costs in AFG's Balance Sheet are $68.4
million and $66.8 million at March 31, 2003, and December 31, 2002,
respectively, representing the present value of future profits ("PVFP")
related to acquisitions by AFG's annuity and life business. The PVFP
amounts are net of $59.5 million and $57.3 million of accumulated
amortization. Amortization of the PVFP was $2.2 million and $1.7 million
during the first three months of 2003 and 2002. During each of the next
five years, the PVFP is expected to decrease at a rate of approximately
13% of the balance at the beginning of each respective year.
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. LONG-TERM DEBT The carrying value of long-term debt consisted of the
following (in thousands):
March 31, December 31,
2003 2002
-------- -----------
HOLDING COMPANIES:
AFG 7-1/8% Senior Debentures due April 2009 $301,349 $301,298
AFG 7-1/8% Senior Debentures due December 2007 79,600 79,600
AFC notes payable under bank line 95,000 248,000
APU 10-7/8% Subordinated Notes due May 2011 11,482 11,498
Other 8,241 8,014
-------- --------
$495,672 $648,410
======== ========
SUBSIDIARIES:
GAFRI 6-7/8% Senior Notes due June 2008 $100,000 $100,000
GAFRI notes payable under bank line 148,600 148,600
Notes payable secured by real estate 35,457 35,610
Other 12,312 12,561
-------- --------
$296,369 $296,771
======== ========
At March 31, 2003, scheduled principal payments on debt for the balance of
2003 and the subsequent five years were as follows (in millions):
Holding
Companies Subsidiaries Total
--------- ------------ ------
2003 $ - $ 9.5 $ 9.5
2004 - 150.6 150.6
2005 95.0 11.2 106.2
2006 - 19.4 19.4
2007 84.9 .1 85.0
2008 - 100.1 100.1
AFC may borrow up to $280 million under its credit agreement; the line may
be expanded to $300 million through the end of 2003. The new line consists
of two facilities: a 364-day revolving facility, extendable annually, for
one-third of the total line and a three-year revolving facility for the
remaining two-thirds. Amounts borrowed bear interest at rates ranging from
1.25% to 2.25% over LIBOR based on AFG's credit rating. In addition, GAFRI
has an unsecured credit agreement under which it can borrow up to $155
million at floating rates based on prime or Eurodollar rates through
December 2004.
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. MINORITY INTEREST Minority interest in AFG's balance sheet is comprised of
the following (in thousands):
March 31, December 31,
2003 2002
-------- -----------
Interest of noncontrolling shareholders
in subsidiaries' common stock $158,391 $157,207
Preferred securities issued by
subsidiary trusts 241,663 241,663
AFC preferred stock 72,154 72,154
-------- --------
$472,208 $471,024
======== ========
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.
The preferred securities consisted of the following (in thousands):
Amount Outstanding
Date of ------------------ Optional
Issuance Issue (Maturity Date) 3/31/03 12/31/02 Redemption Dates
------------- ------------------------ ------- -------- ----------------
October 1996 AFCH 9-1/8% TOPrS (2026) $98,750 $98,750 Currently redeemable
November 1996 GAFRI 9-1/4% TOPrS (2026) 72,913 72,913 Currently redeemable
March 1997 GAFRI 8-7/8% Pfd (2027) 70,000 70,000 On or after 3/1/2007
AFC PREFERRED STOCK See Note J - "Subsequent Event." 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.
MINORITY INTEREST EXPENSE Minority interest expense is comprised of (in
thousands):
Three months ended
March 31,
------------------
2003 2002
---- ----
Interest of noncontrolling shareholders
in earnings of subsidiaries $2,569 $ 664
Accrued distributions by subsidiaries
on preferred securities:
Trust issued securities, net of tax 3,570 3,570
AFC preferred stock 1,443 1,443
------ ------
$7,582 $5,677
====== ======
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. SHAREHOLDERS' EQUITY At March 31, 2003, there were 69,527,781 shares of
AFG Common Stock outstanding, including 1,361,711 shares held by American
Premier for possible distribution to certain creditors and other claimants
upon proper claim presentation and settlement pursuant to the 1978 plan of
reorganization of American Premier's predecessor, The Penn Central
Corporation. Shares being held for distribution are not eligible to vote
but otherwise are accounted for as issued and outstanding. AFG is
authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5
million shares of Nonvoting Preferred Stock, each without par value.
STOCK OPTIONS At March 31, 2003, there were 9.7 million shares of AFG
Common Stock reserved for issuance upon exercise of stock options. As of
that date, options for 7.8 million shares were outstanding. Options
generally become exercisable at the rate of 20% per year commencing one
year after grant; those granted to non-employee directors of AFG are fully
exercisable upon grant. Options generally expire ten years after the date
of grant.
I. COMMITMENTS AND CONTINGENCIES There have been no significant changes to
the matters discussed and referred to in Note K "Commitments and
Contingencies" of AFG's Annual Report on Form 10-K for 2002.
J. SUBSEQUENT EVENT On April 17, 2003, AFG announced a proposal to merge
with its subsidiary, AFC. Under the proposal, AFC Series J preferred
shareholders would receive $22.00 in AFG Common Stock in exchange for
each share of Series J preferred stock. This transaction is subject to
(i) the negotiation of specific terms and final documentation, (ii) the
approval of the Board of Directors of each of AFG, AFC, and a special
committee of independent directors of AFC, and (iii) the receipt of all
required shareholder, stock exchange listing and regulatory approvals.
In addition, the merger would eliminate the deferred tax liabilities
associated with AFC's holding of AFG stock. Assuming that the proposed
transaction is completed, these changes are expected to result in a 12%
to 15% increase in shareholders' equity. AFG hopes to complete the merger
in the third quarter of 2003.
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
AFG and its subsidiaries, AFC and American Premier, are organized as
holding companies with almost all of their operations being conducted by
subsidiaries. These parent corporations, however, have continuing cash
needs for administrative expenses, the payment of principal and interest
on borrowings, shareholder dividends, and taxes. Therefore, certain
analyses are best done on a parent only basis while others are best done
on a total enterprise basis. In addition, since most of its businesses are
financial in nature, AFG does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. Some of the
forward-looking statements can be identified by the use of forward-looking
words such as "anticipates", "believes", "expects", "estimates",
"intends", "plans", "seeks", "could", "may", "should", "will" or the
negative version of those words or other comparable terminology. Examples
of such forward-looking statements include statements relating to:
expectations concerning market and other conditions and their effect on
future premiums, revenues, earnings and investment activities;
recoverability of asset values; expected losses and the adequacy of
reserves for asbestos, environmental pollution and mass tort claims; rate
increases, improved loss experience and expected expense savings resulting
from recent initiatives.
Actual results could differ materially from those contained in or implied
by such forward-looking statements for a variety of factors including:
o changes in economic conditions, including interest rates,
performance of securities markets, and the availability of capital;
o regulatory actions;
o changes in legal environment;
o tax law changes;
o levels of natural catastrophes, terrorist events, incidents of war
and other major losses;
o the ultimate amount of liabilities associated with certain asbestos
and environmental-related claims;
o the unpredictability of possible future litigation if certain
settlements do not become effective;
o adequacy of insurance reserves;
o trends in mortality and morbidity;
o availability of reinsurance and ability of reinsurers to pay their
obligations;
o competitive pressures, including the ability to obtain rate
increases; and
o changes in debt and claims paying ratings.
The forward-looking statements herein are made only as of the date of this
report. AFG assumes no obligation to publicly update any forward-looking
statements.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A to the financial
statements. The preparation of financial statements requires management to
make estimates and assumptions that can have a significant effect on
amounts reported in the financial statements. As more information becomes
known, these estimates and assumptions could change and thus impact
amounts reported in the future. Management believes that the establishment
of insurance reserves, especially asbestos and environmental-related
reserves, and the determination of "other than temporary" impairment on
investments are the two areas where the degree of judgment required to
determine amounts recorded in the financial statements make the accounting
policies critical. For further discussion of these policies, see
"Liquidity and Capital Resources - Investments" and "Liquidity and Capital
Resources - Uncertainties."
LIQUIDITY AND CAPITAL RESOURCES
RATIOS AFG's debt to total capital ratio (at the parent holding company
level) was approximately 21% at March 31, 2003, and 25% at December 31,
2002.
SOURCES OF FUNDS Management believes the parent holding companies have
sufficient resources to meet their liquidity requirements, primarily
through funds generated by their subsidiaries' operations. If funds
provided by subsidiaries through dividends and tax payments are
insufficient to meet fixed charges in any period, the holding companies
would be required to generate cash through borrowings, sales of securities
or other assets, or similar transactions.
AFC may borrow up to $280 million under the bank credit line; the line may
be expanded to $300 million through the end of 2003. The line consists of
two facilities: a 364-day revolving facility, extendable annually, for
one-third of the total line and a three-year revolving facility for the
remaining two-thirds. Amounts borrowed bear interest at rates ranging from
1.25% to 2.25% over LIBOR based on AFG's credit rating. This credit
agreement provides ample liquidity and can be used to obtain funds for
operating subsidiaries or, if necessary, for the parent companies. At
March 31, 2003, there was $95 million borrowed under the line.
INVESTMENTS AFG's investment portfolio at March 31, 2003, contained
$11.4 billion in "Fixed maturities" and $252.6 million in "Other stocks",
all carried at market value with unrealized gains and losses reported as a
separate component of shareholders' equity on an after-tax basis. At March
31, 2003, AFG had pretax net unrealized gains of $454.6 million on fixed
maturities and $90.8 million on other stocks.
Approximately 93% of the fixed maturities held by AFG at March 31, 2003,
were rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies. Investment grade securities generally bear
lower yields and lower degrees of risk than those that are unrated and
noninvestment grade. Management believes that a high quality investment
portfolio is more likely to generate a stable and predictable investment
return.
Individual portfolio securities are sold creating gains or losses as
market opportunities exist. Since all of these securities are carried at
market value in the balance sheet, there is virtually no effect on
liquidity or financial condition upon the sale and ultimate realization of
unrealized gains and losses.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Summarized information for the unrealized gains and losses recorded in
AFG's balance sheet at March 31, 2003, is shown in the following table
(dollars in millions). Approximately $133 million of "Fixed maturities"
and $16 million of "Other stocks" had no unrealized gains or losses at
March 31, 2003.
Securities Securities
With With
Unrealized Unrealized
Gains Losses
---------- ----------
Fixed Maturities
----------------
Market value of securities $10,232 $1,080
Amortized cost of securities $ 9,692 $1,165
Gross unrealized gain (loss) $ 540 ($ 85)
Market value as % of amortized cost 106% 93%
Number of security positions 1,742 316
Number individually exceeding
$2 million gain or loss 15 8
Concentration of gains (losses) by
type or industry (exceeding 5% of
unrealized):
Mortgage-backed securities $ 120.7 ($ 7.7)
Banks and savings institutions 43.9 (.5)
U.S. government and government agencies 41.2 -
Electric services 38.8 (3.0)
State and municipal 33.6 (5.5)
Asset-backed securities 15.0 (9.7)
Air transportation (generally collateralized) 4.3 (34.0)
Percentage rated investment grade 96% 67%
Other Stocks
------------
Market value of securities $ 209 $ 28
Cost of securities $ 115 $ 31
Gross unrealized gain (loss) $ 94 ($ 3)
Market value as % of cost 182% 90%
Number individually exceeding
$2 million gain or loss 2 -
AFG's investment in equity securities of Provident Financial Group, a
Cincinnati-based commercial banking and financial services company,
represents $83 million of the $94 million in unrealized gains on other
stocks at March 31, 2003.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The table below sets forth the scheduled maturities of fixed maturity
securities at March 31, 2003, based on their market values. Asset backed
securities and other securities with sinking funds are reported at average
maturity. Actual maturities may differ from contractual maturities because
certain securities may be called or prepaid by the issuers.
Securities Securities
With With
Unrealized Unrealized
Maturity Gains Losses
-------- ---------- ----------
One year or less 4% 2%
After one year through five years 21 24
After five years through ten years 33 38
After ten years 9 23
--- ---
67 87
Mortgage-backed securities 33 13
--- ---
100% 100%
=== ===
AFG realized aggregate losses of $1.9 million during the first quarter of
2003 on $12.7 million in sales of fixed maturity securities (3
issues/issuers) that had individual unrealized losses greater than
$500,000 at December 31, 2002. Market values of two of the issues
increased an aggregate of $3 million from December 31 to date of sale. The
market value of the remaining security decreased $263,000 from December 31
to the sale date.
Although AFG had the ability to continue holding these investments, its
intent to hold them changed due primarily to deterioration in the issuers'
creditworthiness, decisions to lessen exposure to a particular credit or
industry, or to modify asset allocation within the portfolio.
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The table below (dollars in millions) summarizes the length of time
securities have been in an unrealized gain or loss position at March 31,
2003.
Market
Aggregate Aggregate Value as
Market Unrealized % of Cost
Value Gain (Loss) Basis
--------- ----------- ---------
Fixed Maturities
----------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $500,000 at 3/31/03 and for:
Less than one year (333 issues) $ 4,770 $305 106.8%
More than one year (48 issues) 563 57 111.3
Less than $500,000 at 3/31/03 (1,361 issues) 4,899 178 103.8
------- ----
$10,232 $540 105.6%
======= ====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $500,000 at 3/31/03 and for:
Less than one year (30 issues) $ 190 ($ 36) 84.1%
More than one year (17 issues) 102 (31) 76.7
Less than $500,000 at 3/31/03 (269 issues) 788 (18) 97.8
------- ----
$ 1,080 ($ 85) 92.7%
======= ====
Other Stocks
-----------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $500,000 at 3/31/03 and for:
Less than one year (4 issues) $ 18 $ 6 150.0%
More than one year (3 issues) 159 85 214.9
Less than $500,000 at 3/31/03 (71 issues) 32 3 110.3
------- ----
$ 209 $ 94 181.7%
======= ====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $500,000 at 3/31/03 and for:
Less than one year (none) $ - $ - - %
More than one year (none) - - -
Less than $500,000 at 3/31/03 (75 issues) 28 (3) 90.3
------- ----
$ 28 ($ 3) 90.3%
======= ====
When a decline in the value of a specific investment is considered to be
"other than temporary," a provision for impairment is charged to earnings
(accounted for as a realized loss) and the cost basis of that investment
is reduced. The determination of whether unrealized losses are "other than
temporary" requires judgment based on subjective as well as objective
factors. A listing of factors considered and resources used is contained
in the discussion of "Investments" under Management's Discussion and
Analysis in AFG's 2002 Form 10-K.
Based on its analysis, management believes (i) AFG will recover its cost
basis in the securities with unrealized losses 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. While it is
not possible to accurately predict if or when a specific security will
become impaired, charges for other than temporary impairment could be
material to results of operations in a future period. Management believes
it is not likely that future impairment charges will have a significant
effect on AFG's liquidity.
UNCERTAINTIES As more fully explained in the following paragraphs,
management believes that the areas posing the greatest risk of material
loss are the adequacy of its insurance reserves and American Premier's
contingencies arising out of its former operations.
21
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
PROPERTY AND CASUALTY INSURANCE RESERVES The liabilities for unpaid claims
and for expenses of investigation and adjustment of unpaid claims are
based upon: (a) the accumulation of case estimates for losses reported
prior to the close of the accounting periods on direct business written;
(b) estimates received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past experience;
(d) estimates based on experience of expense for investigating and
adjusting claims; and (e) the current state of law and coverage
litigation. Using these items as well as historical trends adjusted for
changes in underwriting standards, policy provisions, product mix and
other factors, company actuaries determine a single or "point" estimate
which management utilizes in recording its best estimate of the
liabilities. Ranges of loss reserves are not developed by company
actuaries.
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 utilizes items such as the effect of inflation on medical,
hospitalization, material, repair and replacement costs, general economic
trends and the legal environment.
Quarterly reviews of unpaid loss and LAE reserves are prepared using
standard actuarial techniques. These may include: Case Incurred
Development Method; Paid Development Method; Bornhuetter-Ferguson Method;
and Incremental Paid LAE to Paid Loss Methods. Generally, data is
segmented by major product or coverage within product using countrywide
data; however, in some situations data may be reviewed by state for large
volume states.
ASBESTOS AND ENVIRONMENTAL-RELATED ("A&E") RESERVES Establishing
reserves for A&E claims relating to policies and participations in
reinsurance treaties and former operations is subject to uncertainties
that are significantly greater than those presented by other types of
claims. For this group of claims, traditional actuarial techniques that
rely on historical loss development trends cannot be used. Case reserves
and expense reserves are established by the claims department as specific
policies are identified. In addition to the case reserves established for
known claims, management establishes additional reserves for claims not
yet known or reported and for possible development on known claims. These
additional reserves are management's best estimate based on its review of
industry trends and other industry information about such claims, with due
consideration to individual claim situations like the A.P. Green case
discussed below. Estimating ultimate liability for asbestos claims
presents a unique and difficult challenge 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 AFG's reserves for A&E claims are a
reasonable estimate of ultimate liability for such claims, actual results
may vary materially from the amounts currently recorded due to the
difficulty in predicting the number of future claims and the impact of
recent bankruptcy filings, and unresolved issues such as whether coverage
exists, whether policies are subject to aggregate limits on coverage,
whether claims are to be allocated among triggered policies and implicated
years, and whether claimants who exhibit no signs of illness will be
successful in pursuing their claims.
22
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In February 2003, Great American Insurance Company entered into an
agreement for the settlement of asbestos related coverage litigation under
insurance polices issued during the 1970's and 1980's to Bigelow-Liptak
Corporation and related companies, subsequently known as A.P. Green
Industries, Inc. ("A.P. Green"). Management believes that this settlement
will enhance financial certainty and provides resolution to litigation
that represents AFG's largest known asbestos-related claim and the only
such claim that management believes to be material.
The settlement is for $123.5 million (Great American has the option to pay
in cash or over time with 5.25% interest), all of which is covered by
reserves established prior to 2003, and anticipated reinsurance
recoverables for this matter. The agreement allows up to 10% of the
settlement to be paid in AFG Common Stock.
The settlement is subject to a number of contingencies, including the
approval of the bankruptcy court supervising the reorganization of A.P.
Green and subsequent confirmation of a plan of reorganization that
includes an injunction prohibiting the assertion against Great American of
any present or future asbestos personal injury claims under policies
issued to A.P. Green and related companies. This process could take a year
or more and no assurance can be made that all of these consents and
approvals will be obtained; no payments are required until completion of
the process. If not obtained, the outcome of this litigation will again be
subject to the complexities and uncertainties associated with a Chapter 11
proceeding and asbestos coverage litigation.
RESULTS OF OPERATIONS
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 such as
realized gains and losses, the cumulative effect of accounting changes and
certain other unusual items. Realized gains and losses are excluded from
"core earnings" because they are unpredictable and not necessarily
indicative of current operating fundamentals. Other items, such as the tax
resolution benefits, are excluded to assist investors in analyzing their
impact on the trend in operating results. Nonetheless, these items are
significant components of AFG's overall financial results.
23
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The following table shows AFG's net earnings and diluted earnings per
share as stated in the Statement of Earnings as well as the after-tax
effect of certain items included in these GAAP measures that are typically
excluded in deriving "core earnings" (in millions, except per share
amounts):
Three months ended
March 31,
--------------------
2003 2002
---- ----
NET EARNINGS $25.1 $ 1.4
After tax income (expense) items included in
net earnings:
Special tax benefits 5.5 16.0
Net losses from non-insurance investees (.9) (2.7)
Realized investment losses (23.3) (8.4)
Cumulative effect of accounting changes - (40.4)
DILUTED PER SHARE AMOUNTS:
NET EARNINGS $ .36 $ .02
Special tax benefits .08 .24
Net losses from non-insurance investees (.01) (.04)
Realized investment losses (.34) (.12)
Cumulative effect of accounting changes - (.59)
In addition to the effects of items shown in the table above, net earnings
increased in 2003 primarily due to significantly improved underwriting
results in the property and casualty operations, partially offset by lower
investment income.
PROPERTY AND CASUALTY INSURANCE - UNDERWRITING AFG's property and casualty
group has consisted of two major business groups: Specialty and Personal.
See Note B, "Acquisitions and Sales of Subsidiaries," to the Financial
Statements for a discussion of the sale of nearly all of the Personal
group.
The Specialty group includes a highly diversified group of business lines.
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 wrote nonstandard and preferred/standard private
passenger auto insurance and, to a lesser extent, homeowners' insurance.
Nonstandard automobile insurance covers risk not typically accepted for
standard automobile coverage because of an applicant's driving record,
type of vehicle, age or other criteria.
Underwriting profitability is measured by the combined ratio which is a
sum of the ratios of underwriting losses, loss adjustment expenses,
underwriting expenses and policyholder dividends to premiums. When the
combined ratio is under 100%, underwriting results are generally
considered profitable; when the ratio is over 100%, underwriting results
are generally considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
24
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Premiums and combined ratios for AFG's property and casualty insurance
subsidiaries were as follows (dollars in millions):
Three months ended
March 31,
-----------------------
2003 2002
---- ----
Gross Written Premiums (GAAP)
-----------------------------
Specialty $676.8 $562.8
Personal (a) 181.1 347.5
Other lines - .3
------ ------
$857.9 $910.6
====== ======
Net Written Premiums (GAAP)
---------------------------
Specialty $438.8 $386.7
Personal (a) 117.9 256.4
Other lines - .3
------ ------
$556.7 $643.4
====== ======
Combined Ratios (GAAP)
----------------------
Specialty 97.9% 98.5%
Personal 95.5 102.1
Aggregate (including
discontinued lines) 97.4 101.4
(a) Includes the operations of Infinity through the sale date
in mid-February 2003.
SPECIALTY The Specialty group's gross written premiums increased 20% for
the first quarter of 2003 over the comparable 2002 period, reflecting the
impact of continuing rate increases and volume growth in most of its
businesses. Specialty rate increases averaged 27% during the first three
months of 2003. Net written premiums increased 14% for the first quarter
over the comparable 2002 period. Strong growth in gross written premiums
was offset by the timing impact of premiums ceded under certain
reinsurance agreements.
The Specialty group reported an underwriting profit of $9.5 million for
the 2003 first quarter with a combined ratio of 97.9%, an improvement of
.6 points over the 2002 first quarter. The group's underwriting results
for the 2003 quarter included approximately $5.1 million, or 1.2 points,
of losses from severe weather compared to about $2.6 million, or .7
points, in the 2002 period.
PERSONAL The Personal group results represent primarily Infinity's
underwriting results through the public offering in mid-February 2003 and
the direct-to-consumer auto business, which was sold in April 2003. AFG's
ongoing personal lines business is limited to two subsidiaries that
generated less than $35 million in net written premiums in 2002 and
certain direct-to-consumer business in run-off that had approximately $28
million in net written premiums in 2002. AFG's 38% continuing ownership
interest in Infinity is accounted for as an investee corporation.
Accordingly, AFG's share of Infinity's earnings following the mid-February
public offering is included in equity in net earnings (losses) of
investees in the Statement of Earnings.
The Personal group generated an underwriting profit of $5.2 million in the
2003 first quarter. The group's combined ratio of 95.5% improved 6.6
points compared with the 2002 quarter, reflecting Infinity's reduced
underwriting in unprofitable states, the continuing positive effects of
recent rate increases and recent expense reductions from consolidating
business functions.
25
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
INVESTMENT INCOME The decrease in investment income for the first quarter
of 2003 compared to the 2002 quarter reflects lower average investment
balances (due to the mid-February sale of Infinity) as well as lower
average yields on fixed maturity investments.
REALIZED GAINS Realized capital gains have been an important part of the
return on investments. Individual assets are sold creating gains and
losses as market opportunities exist.
GAINS (LOSSES) ON SECURITIES Realized gains (losses) on securities include
provisions for other than temporary impairment of securities still held of
$34.9 million in the first quarter of 2003 and $18.3 million in the first
quarter of 2002. Increased impairment charges in recent years reflect a
rise in corporate defaults in the marketplace. The increase in impairment
charges in 2003 reflects primarily the downturn in the airline industry
and writedowns of certain asset-backed securities.
Realized losses on securities include losses of $4.5 million in the first
quarter of 2003 and $3 million in the first quarter of 2002 to adjust the
carrying value of AFG's investment in warrants to market value.
LOSS ON SUBSIDIARY In February 2003, AFG recognized a $39.4 million pretax
loss on the public offering of 12.5 million shares of Infinity.
REAL ESTATE OPERATIONS AFG's subsidiaries are engaged in a variety of real
estate operations including hotels, apartments, office buildings and
recreational facilities; they also own several parcels of land. Revenues
and expenses of these operations, including gains and losses on disposal,
are included in AFG's Statement of Earnings as shown below (in millions).
Three months ended
March 31,
------------------
2003 2002
---- ----
Other income $16.0 $15.3
Other operating and general expenses 16.1 14.5
Interest charges on borrowed money .6 .6
OTHER INCOME Other income increased $9.1 million (19%) for the first
quarter of 2003 compared to 2002 due primarily to increased revenues
earned by the Specialty group's growing warranty business and higher fee
income in certain other specialty insurance operations.
ANNUITY BENEFITS Annuity benefits reflect amounts accrued on annuity
policyholders' funds accumulated. Annuity benefits in the first quarter of
2003 were slightly lower than the 2002 quarter as an increase in average
annuity benefits accumulated was offset by a decrease in rates credited to
policyholders.
The majority of GAFRI's fixed annuity products permit GAFRI to change the
crediting rate at any time subject to minimum interest rate guarantees (as
determined by applicable law). Approximately 45% of the annuity
benefits accumulated relate to policies that have a minimum guarantee of
3%; the balance have a guarantee of 4%. Virtually all new
sales of GAFRI's fixed annuities offer a minimum interest rate of 3%.
Historically, management has been able to react to changes in market
interest rates and maintain a desired interest rate spread. The recent
interest rate environment has resulted in spread compression which could
continue at least through the remainder of 2003.
26
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
On its deferred annuities (annuities in the accumulation phase), GAFRI
generally credits interest to policyholders' accounts at their current
stated "surrender" interest rates. Furthermore, for "two-tier" deferred
annuities (annuities under which a higher interest amount can be earned if
a policy is annuitized rather than surrendered), GAFRI accrues an
additional liability to provide for expected deaths and annuitizations.
Changes in crediting rates, actual surrender, death and annuitization
experience or modifications in actuarial assumptions can affect this
accrual. Significant changes in projected investment yields could result
in charges to earnings in the period such projections are modified.
ANNUITY AND LIFE ACQUISITION EXPENSES Annuity and life acquisition
expenses include amortization of annuity and life, accident and health
deferred policy acquisition costs ("DPAC") as well as a portion of
commissions on sales of insurance products. Annuity and life acquisition
expenses also include amortization of the present value of future profits
of businesses acquired. The increase in annuity and life acquisition
expenses in the first quarter of 2003 compared to 2002 is due primarily to
the amortization associated with GAFRI's purchase of MNL in June 2002.
The vast majority of GAFRI's DPAC asset relates to its fixed annuity,
variable annuity and life insurance lines of business. Continued spread
compression, decreases in the stock market and adverse mortality could
lead to writeoffs of DPAC in the future.
INTEREST ON BORROWED MONEY Changes in interest expense result from
fluctuations in market rates as well as changes in borrowings. AFG has
generally financed its borrowings on a long-term basis which has resulted
in higher current costs. Interest expense decreased in the first quarter
of 2003 compared to the first quarter of 2002 as lower average
indebtedness and lower interest charges on amounts due reinsurers were
partially offset by higher average rates on the AFC bank line.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
increased $7.3 million (8%) for the first quarter of 2003 compared to the
first quarter of 2002 due primarily to higher expenses in the Specialty
group's growing warranty business and higher expenses related to growth
in certain other Specialty operations.
INCOME TAXES The 2003 provision for income taxes reflects $5.5 million in
tax benefits related to AFG's basis in Infinity stock. The 2002 provision
for income taxes includes a $16 million first quarter tax benefit for the
reduction of previously accrued amounts due to the resolution of certain
tax matters.
INVESTEE CORPORATIONS
INFINITY PROPERTY AND CASUALTY CORPORATION Following AFG's sale of 61% of
Infinity in the mid-February offering, AFG's proportionate share of
Infinity's earnings is included in equity in net earnings (losses) of
investees. Infinity reported net earnings for the first quarter of 2003 of
$11.5 million, including $5.4 million subsequent to the offering.
START-UP MANUFACTURING BUSINESSES Equity in earnings (losses) of investees
also includes losses of two start-up manufacturing businesses (see Note
D). Equity in net earnings (losses) of investees includes $865,000 in 2003
and $859,000 in 2002 in losses of one of these businesses. Investee losses
in 2002 include $1.9 million in losses of the other manufacturing
business, which sold substantially all of its assets in December 2002.
27
AMERICAN FINANCIAL GROUP, INC. 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
CUMULATIVE EFFECT OF ACCOUNTING CHANGE Effective January 1, 2002, AFG
implemented Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", under which goodwill is no longer
amortized, but is subject to an impairment test at least annually. The
initial impairment testing resulted in a charge of $40.4 million (net of
minority interest and taxes) for the cumulative effect of a change in
accounting principle.
RECENT ACCOUNTING STANDARDS In January 2003, the Financial Accounting
Standards Board issued Interpretation No.46, Consolidation of Variable
Interest Entities ("FIN 46"). This interpretation will require companies
to consolidate entities without sufficient equity based on ownership of
expected gains and losses. FIN 46 is effective immediately to variable
interest entities acquired after January 31, 2003. For entities acquired
before that date, the guidance becomes effective for periods beginning
after June 15, 2003.
AFG is currently assessing the application of FIN 46 as it relates to its
investments in two collateralized debt obligations ("CDOs"), for which AFG
also acts as investment manager. Under the CDOs, securities were issued in
various senior and subordinate classes and the proceeds were invested
primarily in bank loans, and to a lesser extent, high yield bonds, all of
which serve as collateral for the securities issued by the CDOs. None of
the collateral was purchased from AFG. The market value of the collateral
at March 31, 2003, was approximately $770 million.
AFG's investments in the two CDOs are subordinate to the senior classes
(approximately 92% of the total securities) issued by the CDOs. To the
extent there are defaults and unrecoverable losses on the underlying
collateral resulting in reduced cash flows, AFG's class would bear losses
first. Holders of the CDO debt securities have no recourse against AFG for
the liabilities of the CDOs; accordingly, AFG's exposure to loss on these
investments is limited to its investment. AFG's investments in the CDOs
are carried at estimated market value of $10.8 million at March 31, 2003,
and are included in fixed maturities in AFG's balance sheet.
PROPOSED ACCOUNTING STANDARD GAFRI's variable annuity contracts contain a
guaranteed minimum death benefit ("GMDB") (which may exceed the value of
the policyholder's account) to be paid if the annuityholder dies before
the annuity payout period commences. Payment of any difference between the
GMDB and the related account balance is borne by GAFRI and expensed when
paid. In periods of declining equity markets, the GMDB difference
increases as the variable annuity account value decreases. At March 31,
2003, the aggregate GMDB values (assuming every policyholder died on that
date) exceeded the market value of the underlying variable annuities by
$243 million. Industry practice varies, but GAFRI does not establish GAAP
reserves for this mortality risk. If a proposed accounting standard
becomes effective, GAFRI would be required to record a liability for the
present value of expected GMDB payments. Initial recognition of a GAAP
liability (estimated to be less than 4% of the difference between the
underlying market value of the variable annuities and GMDB value) would be
accounted for as the cumulative effect of a change in accounting
principles. Death benefits paid in excess of the variable annuity account
balances were about $600,000 in the first quarter of 2003 and $1.1 million
in all of 2002.
28
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As of March 31, 2003, there were no material changes to the information
provided in AFG's Form 10-K for 2002 under the caption "Exposure to Market
Risk" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
------------------------------------
ITEM 4
CONTROLS AND PROCEDURES
AFG's chief executive officer and chief financial officer, with assistance
from management, have evaluated AFG's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days
prior to filing this report. Based on that evaluation, they concluded that
the controls and procedures are effective. There have been no significant
changes in AFG's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
29
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10 - 2003 Annual Bonus Plan.
Exhibit 99 - Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Date of Report Item Reported
-------------- -------------
February 19, 2003 Press Release - Fourth quarter and full year
2002 results; asbestos litigation settlement.
May 1, 2003 A. Press Releases:
1. Proposal to have a majority of independent
directors.
2. First Quarter 2003 Earnings Release.
B. Written transcript, including slides, of
May 1, 2003 webcast.
---------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Group, Inc. has duly caused this Report to be signed on its behalf by
the undersigned duly authorized.
American Financial Group, Inc.
May 14, 2003 BY: s/Fred J. Runk
-----------------------------------
Fred J. Runk
Senior Vice President and Treasurer
30
AMERICAN FINANCIAL GROUP, INC. 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS
I, Carl H. Lindner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 14, 2003 BY: s/Carl H. Lindner
-----------------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
31
AMERICAN FINANCIAL GROUP, INC. 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS - CONTINUED
I, Fred J. Runk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 14, 2003 BY: s/Fred J. Runk
-----------------------------------
Fred J. Runk
Senior Vice President and Treasurer
(principal financial officer)
32
AMERICAN FINANCIAL GROUP, INC. 10-Q
EXHIBIT 99
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT WILL BE RETAINED
BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION
OR ITS STAFF UPON REQUEST.
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of American Financial Group, Inc. (the "Company") on Form 10-Q
for the period ended March 31, 2003 (the "Report"), the undersigned officers of
the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that to the best of their knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
May 14, 2003 BY: s/Carl H. Lindner
- --------------------------- -----------------------------------
Date Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
May 14, 2003 BY: s/Fred J. Runk
- --------------------------- -----------------------------------
Date Fred J. Runk
Senior Vice President and Treasurer
33
