UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

 

GREAT AMERICAN FINANCIAL RESOURCES, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
			Common Stock, par value $1.00 per share, of Great American Financial Resources, Inc. (“GAFRI Common Stock”).
	(2)		Aggregate number of securities to which transaction applies:
			9,208,886 shares of GAFRI Common Stock and the extinguishment of up to 3,500,000 options to purchase GAFRI Common Stock.
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			The filing fee was determined based upon the sum of (A) the product of 9,208,886 shares of GAFRI Common Stock multiplied by the per share merger consideration of $24.50, plus (B) up to $10,000,000 payable in connection with the extinguishment of outstanding options to purchase GAFRI Common Stock. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.00003070 by the sum of (A) and (B) in the preceding sentence.
	(4)		Proposed maximum aggregate value of transaction:
			$235,617,707
	(5)		Total fee paid:
			$7,233.46

þ		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

Preliminary Copies

 

June   , 2007

 

To the Stockholders of Great American Financial Resources, Inc.:

 

Dear Stockholder:

 

On May 17, 2007, the Board of Directors of Great American Financial Resources, Inc., a Delaware corporation (“GAFRI” or the “Company”), acting upon the unanimous recommendation of a special committee of independent directors, approved an Agreement and Plan of Merger providing for the merger of the Company with GAFRI Acquisition Corp. (“GAC”), a Delaware corporation and wholly-owned subsidiary of American Financial Group, Inc., an Ohio corporation (“AFG”). If the merger is completed, you will be entitled to receive $24.50 in cash, without interest, for each share of the GAFRI common stock that you own, and the Company will be wholly-owned by AFG.

 

You will be asked, at a special meeting of the Company’s stockholders, to vote to approve the Agreement and Plan of Merger. The Board of Directors, acting on the unanimous recommendation of the special committee, has determined that the Agreement and Plan of Merger and the merger are advisable, fair to, and in the best interests of the Company and its stockholders (other than AFG and its subsidiaries and affiliates, including GAFRI or any of its subsidiaries and affiliates) and approved and adopted the Agreement and Plan of Merger. The Board of Directors (with Messrs. Carl H. Lindner, S. Craig Lindner, Kenneth C. Ambrecht, Charles R. Scheper and William R. Martin abstaining) recommends that the Company’s stockholders vote “FOR” the approval of the Agreement and Plan of Merger. AFG, which beneficially owns approximately 81% of the outstanding shares of GAFRI common stock, has determined to vote its shares and to cause its subsidiaries to vote their shares in favor of the Agreement and Plan of Merger.

 

The date, time and place of the special meeting to consider and vote upon the Agreement and Plan of Merger will be          , 2007 at 11:00 a.m. local time at The Cincinnatian Hotel, Sixth and Vine Streets, Cincinnati, Ohio 45202.

 

The proxy statement attached to this letter provides you with information about the proposed merger and the special meeting of the Company’s stockholders. We encourage you to read the entire proxy statement carefully. You may also obtain more information about the Company from documents we have filed with the Securities and Exchange Commission.

 

Your vote is very important. The merger cannot be completed unless the Agreement and Plan of Merger is approved by the affirmative vote of the holders of a majority of the outstanding shares of GAFRI common stock entitled to vote on it. If you fail to vote on the Agreement and Plan of Merger, the effect will be the same as a vote against the approval of the Agreement and Plan of Merger.

 

Whether or not you plan to attend the special meeting and regardless of the number of shares of GAFRI common stock that you own, please vote your shares by proxy by telephone or mail to ensure that your shares are voted at the special meeting. If you receive more than one proxy card because you own shares that are registered differently, please vote all of your shares shown on all of your proxy cards.

 

Voting by proxy will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting and wish to vote in person.

 

Please do not send any certificates for your shares at this time. If the merger is completed, you will receive a letter of transmittal with instructions as to how you exchange your shares for the merger consideration.

Thank you for your cooperation and continued support.

 

Very truly yours,

 

GREAT AMERICAN FINANCIAL RESOURCES, INC.

 

Mark F. Muething

Executive Vice President, General

Counsel and Secretary

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

The proxy statement, dated          , 2007, is first being mailed to stockholders on or about          , 2007.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD          , 2007

 

Notice is hereby given that a special meeting of stockholders of Great American Financial Resources, Inc., a Delaware corporation (“GAFRI”), will be held on          , 2007 at 11:00 a.m. local time at The Cincinnatian Hotel, Sixth and Vine Streets, Cincinnati, Ohio 45202, for the following purposes:

 

(1) To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of May 17, 2007, by and among GAFRI, American Financial Group, Inc. (“AFG”) and GAFRI Acquisition Corp. (“GAC”), which provides for the merger of GAC, a wholly-owned subsidiary of AFG, with and into GAFRI, with GAFRI continuing as the surviving corporation, and the conversion of each outstanding share of common stock of GAFRI (other than shares held by stockholders who perfect their appraisal rights under Delaware law, shares held by GAFRI as treasury shares or otherwise and shares held by AFG or any subsidiary of AFG) into the right to receive $24.50 in cash.

 

(2) To transact such other business as may properly come before the special meeting or any adjournments of the special meeting.

 

Stockholders of record at the close of business on          , 2007 are entitled to notice of, and to vote at, the special meeting or any adjournments thereof.

 

The Agreement and Plan of Merger and the merger are described in the accompanying proxy statement and a copy of the Agreement and Plan of Merger is attached to the proxy statement as Appendix A. We urge you to read the entire proxy statement and the Agreement and Plan of Merger carefully.

 

If you expect to attend the meeting, please check the appropriate box on the proxy card when you return your proxy.

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY. It is important that all stockholders execute, date and return the proxy using the enclosed envelope to which no postage need be affixed if mailed in the United States.

 

By Order of the Board of Directors,

 

          , 2007

 

 

 

 

 

Proxy Statement

 

Table of Contents

 

 

The next several pages summarize the material terms of the transaction detailed in this proxy statement but might not contain all of the information that is important to you. You are urged to read this proxy statement carefully and in its entirety, including the appendices, and the documents referred to or incorporated by reference in this proxy statement. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where Stockholders Can Find More Information” beginning on page   .

 

In this proxy statement, the terms “we,” “us,” “our,” “GAFRI” and the “Company” refer to Great American Financial Resources, Inc. and, where appropriate, its subsidiaries.

 

• Parties Involved in the Proposed Transaction (Page   )

 

 

• The Proposed Transaction (Page   )

 

You will be asked to consider and vote upon approval of the Agreement and Plan of Merger, dated as of May 17, 2007, among the Company, AFG and GAC, which we refer to in this proxy statement as the merger agreement. The merger agreement provides that GAC will be merged with and into the Company, and each outstanding share of common stock, par value $1.00 per share, of the Company, which we refer to in this proxy statement as the GAFRI common stock, other than shares held by stockholders who perfect their appraisal rights under Delaware law, shares held by GAFRI as treasury shares or otherwise and shares held by AFG or any subsidiary of AFG, will be converted into the right to receive $24.50 in cash, without interest and less any required withholding taxes.

 

 

Date, Time and Place (Page   ).  The special meeting will be held on          , 2007 at 11:00 a.m., local time, at The Cincinnatian Hotel, Sixth and Vine Streets, Cincinnati, Ohio 45202.

 

Record Date and Voting (Page   ).  Only stockholders who hold shares of GAFRI common stock at the close of business on          , 2007, the record date for the special meeting, will be entitled to vote at the special meeting. Each share of GAFRI common stock outstanding on the record date will be entitled to one vote on each matter submitted to stockholders for approval at the special meeting. As of the record date, there were          shares of GAFRI common stock outstanding.

 

Vote Required (Page   ).  For us to complete the merger under Delaware law, stockholders holding at least a majority of our common stock outstanding at the close of business on the record date must vote “FOR” the approval of the merger agreement. A failure to vote your shares of GAFRI common stock or an abstention from voting will have the same effect as a vote against the merger.

 

 

As of the record date, AFG beneficially owned approximately 81% of GAFRI’s outstanding shares. AFG has determined to vote its shares and to cause its subsidiaries to vote their shares in favor of the merger agreement. In addition, executive officers and directors of GAFRI and AFG who, in the aggregate beneficially own approximately     % of GAFRI’s outstanding shares, have expressed their intent to vote in favor of the merger agreement. As a result, approval of the merger agreement is assured.

 

• GAFRI Stockholders Will Have Appraisal Rights (Page   )

 

You have the right under Delaware law to dissent from the adoption and approval of the merger agreement and to exercise appraisal rights and receive payment in cash for the fair value of your shares of GAFRI common stock in the event the merger is completed. The fair value of each share of GAFRI common stock as determined in accordance with Delaware law may be more or less than the per share merger consideration to be paid to non-dissenting stockholders in the merger. To preserve your appraisal rights, you must NOT vote in favor of approval of the merger agreement, you must NOT return a signed but not voted proxy card, and you must follow specific procedures required under Delaware law. You must follow these procedures precisely in order to exercise your appraisal rights, or you may lose them. These procedures are described in this proxy statement, and the provisions of Delaware law that grant appraisal rights and govern those procedures are attached as Appendix C. We encourage you to read these provisions carefully and in their entirety and to consult your legal advisor.

 

• When the Merger Will be Completed

 

We anticipate completing the merger on the date of the stockholders’ special meeting, subject to approval of the merger agreement by the Company’s stockholders and the satisfaction of the other closing conditions.

 

• Certain Effects of the Merger (Page   )

 

If the merger agreement is approved by the Company’s stockholders and certain other conditions to the closing of the merger are either satisfied or waived, GAC will be merged with and into the Company, the separate corporate existence of GAC will cease and the Company will continue its corporate existence under Delaware law as the surviving corporation in the merger, and the separate corporate existence of the Company with all of its rights, privileges, immunities, powers and franchises, shall continue unaffected by the merger.

 

 

Upon the completion of the merger, each issued and outstanding share of GAFRI common stock held by our public stockholders (by which we mean stockholders holding shares other than shares held by GAFRI as treasury shares or otherwise and shares held by AFG or any subsidiary of AFG), except for shares held by stockholders who perfect their appraisal rights under Delaware law, will be converted into the right to receive $24.50 in cash.

 

• How Outstanding Options Will Be Treated (Page   )

 

In the merger, vested employee stock options will be extinguished in exchange for a cash payment by GAFRI to each holder of an option of an amount equal to the positive number difference, less applicable taxes, between $24.50 and the applicable option exercise price multiplied by the number of shares of GAFRI common stock formerly subject to an option. We refer to this amount as the “option payment amount”. In addition, so long as a holder of an option is an employee of GAFRI, AFG or any subsidiary of either of them at the vesting dates (as set forth in a GAFRI employee stock option plan or document evidencing a grant of an employee stock option), GAFRI shall pay the option payment amount as soon as practicable after such vesting dates in 2008, 2009, 2010 and 2011. GAFRI directors have agreed that their vested and unvested stock options also will be extinguished upon the consummation of the merger in exchange for the option payment amount to the extent there is a positive difference, less applicable taxes, between $24.50 and the applicable option exercise price. Options for which the exercise price exceeds $24.50 per share will be cancelled. In addition, GAFRI granted options to employees of GAFRI in

February 2007 at an exercise price exceeding the per share merger consideration. The compensation committee of the AFG Board of Directors has taken action to grant options to purchase shares of common stock of AFG on the date that the merger is completed to replace all of these options to purchase GAFRI common stock. The number of shares of AFG common stock that may be acquired upon exercise is identical to the number of shares of GAFRI common stock subject to the prior options, and the exercise price per share, as determined under AFG’s 2005 Stock Incentive Plan, will equal the average of the high and low sales prices as reported on the New York Stock Exchange on the date that the merger is completed. The options to purchase AFG common stock will be subject to AFG’s customary five year vesting. See “Special Factors — Interests of Certain Persons in the Merger.” Also, as of the effective time of the merger, GAFRI will take all action necessary to provide for the termination of its agent stock option plans or agreements and the extinguishment of all rights under such plans and agreements.

 

• Recommendation of the Board of Directors (Page   )

 

Our Board of Directors, which we sometimes refer to as the Board, began the process on February 22, 2007, to form a special committee of independent GAFRI directors who are neither employed by or otherwise affiliated with GAFRI, or who do not have a financial interest in the merger different than GAFRI’s public shareholders. Initially, Mr. Ronald G. Joseph was the only GAFRI director deemed eligible to meet these qualifications. On March 1st, 2007 the Board acted to appoint Mr. Joseph Tomain as a director and appointed him to serve as the second member of the special committee. On March 16, 2007, the Board acted to appoint L. Thomas Hiltz as a member of the Board and appointed him to serve as the third member of the special committee. As a result, the special committee consists of Messrs. Ronald G. Joseph, L. Thomas Hiltz and Joseph P. Tomain. The special committee was formed for the purpose of reviewing, evaluating and, as appropriate, rejecting or accepting and negotiating with respect to the proposal made by AFG on February 22, 2007 that GAFRI common stock be acquired, and to make the related recommendation to our full Board of Directors regarding the AFG proposal. The special committee unanimously determined that the merger agreement and the merger are advisable, substantively and procedurally fair to, and in the best interests of the Company and its public stockholders (other than AFG, GAFRI and their affiliates). Our Board of Directors, acting upon the unanimous determination of the special committee, has determined that the merger agreement and the merger are advisable, substantively and procedurally fair to, and in the best interests of the Company and its public stockholders (other than AFG, GAFRI and their affiliates), approved and adopted (with Messrs. Carl H. Lindner, S. Craig Lindner, Kenneth C. Ambrecht, Charles R. Scheper and William R. Martin abstaining, because of potential conflicts of interest with respect to the proposed transaction) the merger agreement and recommended that the Company’s stockholders vote “FOR” the approval of the merger agreement.

 

For the factors considered by our Board of Directors in reaching its decision to approve and adopt the merger agreement and the merger, see “Special Factors — The Special Committee”; and “Special Factors — Recommendation of the Special Committee and the Board of Directors.”

 

• Opinion of the Special Committee’s Financial Advisor (Page   )

 

Cochran Caronia Waller LLC, which we sometimes refer to as CCW, delivered its written opinion to the special committee and to our Board of Directors that, as of May 17, 2007 and based upon and subject to the factors and assumptions set forth therein, the $24.50 in cash per share to be received by the public stockholders (other than AFG, GAFRI and their affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of CCW, dated May 17, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix B to this proxy statement. CCW provided its opinion for the information and assistance of the special committee and our Board of Directors in connection with their consideration of the proposal made by AFG. The CCW opinion is not a recommendation as to how any holder of GAFRI common stock should vote with respect to the merger. Pursuant to an engagement letter between GAFRI and CCW, GAFRI has agreed to pay CCW a fee for its advisory services, a portion of which was payable upon the issuance of any written opinion by CCW.

 

AFG and certain of its affiliates beneficially own approximately 81% of the outstanding shares of GAFRI common stock, but may enjoy additional benefits in connection with the merger that will not be shared by the public stockholders generally, to the extent that AFG and holders of AFG common stock are better served by paying as low a price per share of GAFRI common stock as possible.

 

In the merger, vested employee stock options and vested and unvested director stock options will be extinguished in exchange for a cash payment by GAFRI to each holder of an option and certain officers of GAFRI will be granted options to purchase shares of common stock of AFG as set forth above under “How Outstanding Options Will Be Treated.”

 

The merger agreement provides that GAFRI will, or will cause the surviving corporation to, (i) honor all rights to indemnification existing in favor of our current and former officers and directors for acts and omissions occurring before the completion of the merger, (ii) not amend the provisions relating to indemnification or exculpation of the liability of directors in the surviving corporation’s organizational documents (in a manner adverse to the current or former directors and officers) and (iii) for six years after the completion of the merger and, subject to certain conditions, maintain GAFRI’s current officers’ and directors’ liability insurance.

 

• A Number of Conditions Must Be Satisfied or Waived to Complete the Merger (Page   )

 

The obligations of AFG, GAFRI and GAC to complete the merger are subject to various conditions, including:

 

 

See “Terms of the Merger — Conditions to the Merger” beginning on page   .

 

• Limitations on Solicitation of Competing Proposals (Page   )

 

Pursuant to the merger agreement, we have agreed not to initiate, solicit or facilitate from third parties any proposals for an alternative transaction while the merger is pending. AFG stated in its proposal letter to GAFRI dated February 22, 2007, and AFG has reiterated to GAFRI on multiple occasions since such time, that AFG is not interested in pursuing a sale of its interest in GAFRI.

• How the Merger May Be Terminated (Page   )

 

AFG and GAFRI may mutually agree to terminate the merger agreement at any time upon the mutual written consent of the parties. With certain exceptions, any of AFG, GAC or GAFRI may also terminate the merger agreement at any time if:

 

 

AFG may also terminate the merger agreement at any time if, with certain exceptions:

 

 

GAFRI may also terminate the merger agreement at any time if, with certain exceptions, there is a breach by AFG or GAC of any representation, warranty, covenant or agreement contained in the merger agreement that would give rise to a failure of a closing condition and which has not been cured or is not capable of being cured within twenty (20) business days following receipt by GAFRI or GAC of written notice from GAFRI of such breach.

 

• Purposes, Reasons and Plans for GAFRI after the Merger (Page   )

 

The purpose of the merger for GAFRI is to enable its public stockholders to immediately realize the value of their investment in the Company through their receipt of the per share merger consideration of $24.50 in cash, representing a premium of approximately 15% to the $21.31 closing price of the GAFRI common stock on The New York Stock Exchange on February 15, 2007 (being the last trading day one week prior to the announcement of the proposed transaction). For the reasons discussed under “Special Factors — Recommendation of the Special Committee and the Board of Directors” the Board of Directors has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, substantively and procedurally fair to, and in the best interests of, the Company and its public stockholders. After the merger GAFRI’s operations will continue as they had before it.

 

• Financing of the Merger (Page   )

 

The merger and the related transaction will be funded by GAFRI’s excess capital and/or by borrowings from AFG. GAFRI and AFG estimate that the total amount of funds necessary to complete the proposed merger is approximately $235 million, which includes approximately $225 million to be paid to the Company’s public stockholders and, up to $10 million to be paid to holders of options. AFG will also guarantee the debt of GAFRI and its subsidiaries in the merger.

 

 

Generally, the merger will be taxable to our stockholders for U.S. federal income tax purposes. A holder of GAFRI common stock receiving cash in the merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the GAFRI common stock.

 

 

 

 

 

 

 

 

If you are a non-registered holder of shares of common stock of GAFRI (which for purposes of this proxy statement means that your shares are held in “street name”), you should instruct your broker or other nominee to vote your shares by following the instructions provided by your broker or other nominee. You may vote in person at the special meeting if you obtain written authorization in your name from your broker or other nominee and bring evidence of your stock ownership from your broker or other nominee. Please contact your broker or other nominee to determine how to vote by mail and whether you will be able to vote by telephone.

If you are an employee of GAFRI, any shares in your retirement and savings plan account and stock purchase plan account will be voted in accordance with your instructions, if indicated. If your proxy card is signed, but does not indicate your voting preferences, we have been advised by the retirement and savings plan administrator and the plan trustee that your shares will be voted “FOR” the approval of the merger agreement and “FOR” the approval of the meeting adjournment proposal.

 

 

 

In September 1992, STI Group, Inc. (“STI”) reached an agreement with a subsidiary of AFG to purchase 100% of the capital stock of Great American Life Insurance Company. This acquisition was conditioned upon AFG acquiring through a tender offer and private purchase from STI no less than 80% of the outstanding common stock of STI and STI obtaining funds sufficient to finance and consummate the acquisition of Great American Life Insurance Company. This acquisition, which was consummated on December 31, 1992, resulted in a subsidiary of AFG beneficially owning slightly more than 80% of the outstanding common stock of STI (STI changed its name to American Annuity Group, Inc. and later to GAFRI). Prior to the consummation of these transactions, AFG owned approximately 39% of the outstanding shares of STI (now GAFRI).

 

Members of AFG management have, from time to time, discussed the possible merits of GAFRI becoming a wholly-owned subsidiary of AFG. However, prior to February 2007 no proposal was made by AFG to GAFRI’s Board of Directors in connection with these discussions. In late 2006 and early 2007, AFG’s management, noting the availability of excess capital to AFG, considered a proposal to acquire the outstanding shares of GAFRI common stock not already owned by AFG and determined that such a transaction would be an appropriate investment of a portion of AFG’s excess capital in a specialty-based insurance business that supports AFG’s strategic initiatives. AFG’s management’s considerations with respect to GAFRI were discussed with the AFG board of directors in late 2006. In February 2007, AFG’s management asked its board of directors to consider authorizing AFG to submit to GAFRI a proposal that AFG acquire the outstanding shares of GAFRI common stock not beneficially owned by AFG so that GAFRI would become a wholly-owned subsidiary of AFG. The proposal presented by AFG’s management to its board of directors contemplated that GAFRI’s public stockholders would have the right to receive $23.50 in cash per share. The AFG Board consented to making the proposal and it was submitted to GAFRI’s Board on February 22, 2007. On April 23, 2007, AFG’s Board of Directors approved an increase of $1.00 in the per share purchase price of the GAFRI common not beneficially owned by AFG. The AFG Board unanimously approved the Merger Agreement on May 17, 2007.

 

AFG did not consider any transaction other than the proposed merger involving its GAFRI ownership. AFG did, however, consider maintaining its approximate 81% ownership interest in GAFRI with GAFRI continuing as an independent public company. AFG stated in its proposal letter to GAFRI dated February 22, 2007, and AFG has reiterated to GAFRI on multiple occasions since such time, that AFG is not interested in pursuing a sale of its interest in GAFRI. AFG’s reasons for proposing the merger immediately follow.

 

AFG proposed the merger to simplify its corporate structure in a manner that provides the following benefits:

 

Improvement of AFG’s Performance.  AFG’s management expects that if the merger is consummated, it will increase AFG’s ability to receive a greater return than what it may currently be achieving on the investment of its excess capital. The merger would increase AFG’s investment in core specialty insurance businesses where AFG already has significant expertise while at the same time further simplifying AFG’s organizational structure. AFG’s management also believes that the merger would provide immediate expense savings and additional synergies between AFG’s and GAFRI’s businesses over time, be accretive to AFG’s earnings and improve AFG’s return on equity. Additionally, the merger would allow for easier movement of capital throughout all of AFG’s operations, which may facilitate the raising of capital by AFG in the future. AFG also believes that, after evaluating other opportunities, the merger is the best use of certain excess capital and it supports AFG’s strategic objectives.

 

Facilitate Future Capital Raising.  AFG believes that simplifying the corporate structure would facilitate the raising of capital by AFG in the future. As a wholly-owned subsidiary of AFG, GAFRI’s capital needs can be met with capital raised by the AFG at the parent level, similar to the method in which AFG has funded its other wholly-owned subsidiaries. Historically, GAFRI has engaged in separate capital raising transactions, normally with rates and terms less attractive than those available to AFG, because of the inability to freely move capital from AFG to GAFRI due to the structural impediment of the minority ownership.

 

Elimination of GAFRI as a Reporting Company.  The merger would terminate GAFRI’s obligations to file reports and other information as a public company required under the Exchange Act. The elimination of the burdens associated with public reporting and other tasks resulting from GAFRI’s public company status, including, for example, the dedication of time and resources of management and of the board to meet the various requirements of being a public company will increase management’s focus on the operations of the business. In addition, GAFRI’s expenses will decrease as a result of the elimination of costs associated with the filing of quarterly, annual or other periodic reports with the SEC or the publishing and distribution of financial information and proxy statements to its shareholders. The elimination of GAFRI’s status as a public company would also result in GAFRI no longer being required to comply separately with the requirements of the Sarbanes-Oxley Act of 2002.

 

The board of directors of AFG and GAC and Carl H. Lindner, Chairman of the Board of AFG and GAFRI, Carl H. Lindner III, Co-Chief Executive Officer, Co-President and a director of AFG, and S. Craig Lindner, Chief Executive Officer and a director of GAFRI and Co-Chief Executive Officer, Co-President and a director of AFG did not independently analyze the merger but relied upon and adopted the conclusions, analyses, determinations and findings of the special committee as set forth below and determined that the merger is both procedurally and substantively fair to the public stockholders of GAFRI, excluding officers, directors and other affiliates of AFG and GAFRI. Carl H. Lindner and S. Craig Lindner each abstained from voting as members of the Board of Directors of GAFRI on the merger proposal because of their potential conflict of interest arising from their positions with both AFG and GAFRI.

 

On February 22, 2007, our Board of Directors authorized the formation of a special committee of independent directors of GAFRI, which we refer to as the special committee, designated Mr. Ronald Joseph as the initial member of the special committee and gave Mr. Joseph the authority to recommend to the Board the appointment of one or more additional persons to serve on the special committee. The special committee was authorized to (i) review and evaluate the terms of the transaction proposed by AFG, (ii) establish such procedures, review such information and engage such financial advisors and legal counsel as it deemed appropriate to assist it in the performance of its duties, (iii) recommend to the Board and the public stockholders of GAFRI to accept the proposed transaction, (iv) recommend to the Board and the public stockholders of GAFRI to reject the proposed transaction, and/or (v) negotiate the terms of a transaction, if any, with AFG.

 

On March 1, 2007, upon the recommendation of Mr. Joseph, the Board elected Mr. Joseph Tomain, dean emeritus and a professor of law at the University of Cincinnati College of Law, as a member of the Board and appointed Mr. Tomain to serve on the special committee.

 

Between February 27 and March 1, 2007, the special committee interviewed several law firms to serve as independent legal counsel to the special committee. On March 3, 2007, the special committee engaged Squire, Sanders & Dempsey, L.L.P. (“Squire Sanders”) as its legal counsel to advise it regarding its duties in connection with the proposed transaction. Thereafter on the same day the special committee met with Squire Sanders to discuss the special committee’s responsibilities, business issues which potentially would need to be addressed in connection with the proposed transaction, and the probable timeline for the transaction.

 

On March 6, 2007, the special committee met with Squire Sanders and continued discussions regarding issues that potentially would need to be addressed in connection with the proposal by AFG. Counsel also advised the special committee on the special committee’s fiduciary and other legal responsibilities. Counsel further advised the special committee on the legal principles applicable to, and the legal consequences of, actions taken by the special committee with respect to any offers to acquire GAFRI, including but not limited to the AFG proposal. At this meeting, the special committee and Squire Sanders also discussed the process to be undertaken in selecting an independent financial advisor, and identified firms that may be suitable to serve as the special committee’s financial advisor. The discussion resulted in the special committee granting a mandate to Squire Sanders to solicit proposals

from prospective financial advisors identified on the basis of general criteria set forth by the special committee, with instructions that any response be received on or before March 13, 2007.

 

The solicitation by Squire Sanders, on behalf of the special committee, resulted in the submission of written preliminary presentations and proposals by thirteen (13) prospective financial advisors. On March 15, 2007, the special committee and its counsel extensively evaluated these materials, and based on its general criteria of potential conflicts, cost and competence, the special committee selected five financial advisors with whom to conduct additional separate meetings. The special committee and its legal counsel also discussed the advisability of adding another independent director to the GAFRI Board of Directors and to the special committee, and the discussion led to the special committee and counsel considering persons that the special committee may recommend to our Board of Directors.

 

On March 16, 2007, upon the recommendation of Messrs. Joseph and Tomain, the Board elected L. Thomas Hiltz, an independent private attorney, as a member of the Board and further appointed Mr. Hiltz to serve on the special committee.

 

On March 20, 2007, the special committee, together with Squire Sanders, conducted separate meetings with representatives from five prospective financial advisors selected from the initial list of thirteen. At the conclusion of those meetings and subsequent discussions with counsel, the special committee selected Cochran Caronia Waller LLC, which we refer to in this proxy statement as CCW, to serve as its financial advisor for the purpose of advising the special committee, assisting the special committee in any negotiations with AFG, and rendering a fairness opinion to the special committee in connection with the proposed transaction. The special committee concluded that CCW was qualified and independent of AFG, and selected CCW based principally on its knowledge of GAFRI and the insurance industry, institutional strength, expertise and experience in representing special committees. On the evening of March 20, 2007, the special committee advised CCW that it had been selected as independent financial advisor to the special committee, and instructed Squire Sanders to negotiate an engagement letter with CCW and to have CCW commence an investigation and analyses of the value of GAFRI.

 

On March 22, 2007, CCW met with members of GAFRI’s management and Squire Sanders to commence CCW’s due diligence process. There was also a detailed discussion of the expectations of the special committee and its advisors with respect to the due diligence process and GAFRI’s production of documents and information. GAFRI management pledged its cooperation in the due diligence meeting and made a summary presentation to, and answered questions from, CCW and Squire Sanders regarding GAFRI’s operations, strategic plan and financial statements, including recent financial and operating history. On March 28, 2007, CCW and Squire Sanders met again with members of GAFRI’s management to discuss tax and environmental liability aspects of the initial due diligence process, and on March 30, 2007, CCW and Squire Sanders met telephonically with the management of GAFRI and GAFRI’s real estate advisors to discuss GAFRI’s real estate investments.

 

On April 4, 2007, GAFRI’s management made a detailed day-long presentation to, and answered questions from, the special committee and its legal and financial advisors regarding GAFRI’s operations and financial condition. The presentation included a discussion of the history and organizational structure of GAFRI, recent acquisitions and dispositions made by GAFRI, a review of each of GAFRI’s Cincinnati-based and Austin-based insurance operations, a review of GAFRI’s investments and strategic plan, a discussion of GAFRI’s financial condition, tax-related matters and available financial statements and a review of all litigation and contingent reserves. In addition to the formal meetings of the special committee and the April 4, 2007 meeting with GAFRI’s management, the special committee in the course of its review and evaluation of the proposed transaction informally consulted with GAFRI’s management on several other occasions.

 

From March 22 through April 17, 2007, CCW reviewed financial and other information concerning GAFRI, including GAFRI’s audited and interim financial statements, business plans and projections provided by GAFRI’s management, and other information concerning GAFRI, as described below in “Special Factors — Opinion of the Special Committee’s Financial Advisor.” On April 17, 2007, CCW made a preliminary presentation of its ongoing valuation analyses to a meeting of the special committee. At that meeting, members of the special committee and its legal counsel held extensive discussions with CCW regarding due diligence performed by CCW, the approaches taken by CCW to value GAFRI, the manner in which CCW may arrive at an opinion as to the fairness, from a financial point of view, of the consideration to be received by public stockholders under the proposed transaction

and the assumptions upon which CCW’s valuation work was based, including forecasts of the expected future performance of GAFRI provided by GAFRI’s management, which represent GAFRI’s best good faith estimate of its future performance, data from comparable transactions, and the terms of the proposed transaction.

 

After describing the due diligence it had performed in the process and discussing the financial analyses techniques utilized in undertaking the valuation of GAFRI, CCW then presented its preliminary valuation of GAFRI, which was based on six valuation methodologies: historical stock price analysis, historical trading multiple analyses, price to book value versus return on equity analysis, public market trading analysis, dividend discount analysis and premiums paid analysis. During this presentation, CCW answered various questions from the special committee regarding the valuation methodologies and the implications of their results. At the conclusion of CCW’s April 17, 2007 presentation of its preliminary valuation and twice by telephonic conference calls on April 18, 2007, the special committee engaged in robust deliberations on the preliminary valuation analyses. Each member of the special committee asked a number of questions of CCW, all of which were answered to the satisfaction of the special committee.

 

On April 20, 2007, the special committee and its advisors met with the management of GAFRI and a representative of our Board of Directors to inform them of its preliminary conclusions with respect to the transaction proposed by AFG as a prelude to meeting with representatives of AFG. Squire Sanders opened the meeting with a report on the legal standards governing the actions of the special committee. This report covered issues such as the independence of the members of the special committee and the independence of CCW and Squire Sanders as advisors to the special committee. The report also discussed the deliberative nature of the actions taken by the special committee up to that date, including meeting with the management of GAFRI for a presentation of GAFRI’s operations, financial condition and strategic initiatives, additional due diligence meetings with GAFRI’s management on tax, environmental and real estate evaluation matters, and the thirteen (13) meetings of the special committee up to that date that included about 4 meetings solely on valuation.

 

Thereafter, on April 20, 2007, the special committee, together with Squire Sanders and CCW, met with representatives of AFG to discuss the financial terms of the proposed transaction. Squire Sanders reviewed the terms of the initial proposal from AFG, and then discussed the process being undertaken by the special committee and the special committee’s work up to that date, including the selection and engagement of Squire Sanders as legal counsel and CCW as financial advisor, due diligence meetings with management of GAFRI, the management’s responsiveness to due diligence requests and the deliberate and robust nature of the special committee’s meetings and discussions, particularly on the subject matter of valuation. The special committee then informed the AFG representatives of the special committee’s resolution not to recommend acceptance of AFG’s initial proposal to pay cash consideration of $23.50 per share for GAFRI common stock held by the public stockholders, and suggested that the special committee might be able to recommend an offer of $25.50 per share, coupled with other conditions it considered to be in the best interest of the public stockholders.

 

AFG responded unequivocally that it would not consider an offer of $25.50 per share of GAFRI common stock. AFG then presented its valuation of GAFRI, which was based on the operations and business prospects of each of GAFRI’s individual lines of business, as well as its own analyses of various valuation metrics, and informed the special committee that the special committee’s suggestion of $25.50 per share was considerably in excess both of what AFG was willing to offer to the public stockholders and of AFG’s valuation of GAFRI which had resulted in an average price of $21.32 per share of GAFRI common stock based on AFG’s various valuation metrics. AFG further stated that because of the regulatory uncertainty with respect to the future of the medical supplement line of the insurance business, its valuation of GAFRI would not justify paying $25.50 per share for GAFRI common stock held by the public stockholders. In response to a question posed by a member of the special committee, AFG indicated that the $25.50 per share valuation would result in a return on equity on GAFRI common stock of about 6.3% in 2007, in comparison to approximately 10% for comparable companies in the insurance industry. CCW asked the AFG representatives questions regarding AFG’s valuation analyses and received responses thereto from the AFG representatives. CCW further discussed the market price analysis of GAFRI as well as other preliminary analyses used by CCW in evaluating the financial fairness of the proposed transaction.

 

Following deliberations between the special committee and its advisors, and further discussions among the special committee and its advisors and the AFG representatives over valuation methodologies and the market value

of GAFRI common stock, the special committee stated that it could recommend acceptance of an offer of $24.50 per share of GAFRI common stock held by the public stockholders, contingent upon the satisfaction of other conditions in the best interests of the public stockholders. The AFG representatives thereafter acceded to the non-binding recommendation to raise its offer to $24.50 per share of GAFRI common stock held by the public stockholders, it being understood that the accord was preliminary in nature as to what the special committee might recommend to our Board of Directors and would not be binding upon the special committee until a definitive merger agreement was negotiated and its execution approved by the special committee, and that even then the recommendation could be withdrawn under customary circumstances. The AFG representatives stated that AFG would withdraw its proposal before it would agree to a price of more than $24.50 per share of GAFRI common stock. AFG then suggested further discussions between AFG’s counsel and the special committee’s legal counsel regarding other merger terms.

 

On April 24, 2007, Squire Sanders, on behalf of the special committee, met with AFG’s counsel for discussions regarding conditions to the proposed transactions and the negotiation of a definitive merger agreement. Between April 26, 2007 and May 10, 2007, the special committee met several times either in person or telephonically with Squire Sanders to deliberate upon and resolve issues with respect to the proposed transaction as it deemed such resolution to be in the best interests of the public stockholders, and to receive updates on the negotiation of a definitive merger agreement and related matters. On May 15, 2007, the special committee met with CCW for an update on its preliminary valuation analyses, which had not changed in any significant respect.

 

On May 17, 2007, the special committee met with CCW and Squire Sanders to receive the final valuation report and fairness opinion of CCW, and to receive a draft of the negotiated definitive merger agreement. CCW reviewed the financial analyses methodologies that it had utilized in the valuation of GAFRI, and then presented its valuation of GAFRI. In addition, CCW delivered its fairness opinion, both orally and by presenting a confirming opinion letter, that the merger consideration of $24.50 per share of GAFRI common stock would be fair to the public stockholders (other than AFG, GAFRI and their affiliates) from a financial point of view. Squire Sanders reviewed the draft merger agreement with the special committee discussing the course of negotiations with AFG’s counsel. Based in part on the CCW opinion and the valuation analyses presented by CCW to the special committee, the special committee’s belief that the $24.50 per share price is a fair offer from a financial point of view and the other factors described below in “Special Factors — Recommendation of the Special Committee and the Board of Directors — Reasons for the Special Committee’s Determination; Fairness of the Merger,” and after further detailed discussions, the special committee unanimously voted to accept the proposed merger, and to recommend to our Board of Directors that the merger and the merger agreement be approved by the Board and recommended to the public stockholders.

 

Thereafter, also on May 17, 2007, our Board of Directors met to receive and deliberate upon the report of the special committee. The special committee, in concert with Squire Sanders and CCW, reported to the Board on the process undertaken by the special committee and the special committee’s review of the merger agreement, and unanimously recommended to our Board of Directors that the Board accept the offer of $24.50 per share of GAFRI common stock held by the public stockholders and to approve and adopt the definitive merger agreement. After the presentation of the report, and responses to questions posed by various members of the Board to the special committee and its advisors, our Board of Directors (with Messrs. Carl H. Lindner, S. Craig Lindner, Kenneth C. Ambrecht, Charles R. Scheper and William R. Martin abstaining, because of potential conflicts of interest with respect to the proposed transaction) approved and adopted the recommendations of the special committee with respect to the proposed transaction, the definitive merger agreement and the transactions contemplated thereby, and resolved to recommend the approval of the proposed transaction and the merger agreement to the public stockholders. Thereafter, GAFRI issued a press release announcing that, based on the recommendation of the special committee, our Board of Directors had approved the proposed transaction and the offer of $24.50 per share in cash.

 

AFG’s acceptance of the final terms of the merger (including the increase in the consideration to be paid for the GAFRI shares) reflected the separate negotiations with counsel for certain shareholders of GAFRI who filed lawsuits in February challenging the original merger terms proposed by AFG. See “Special Factors — Certain Litigation Regarding the Merger.”

 

At a meeting held on May 17, 2007, the special committee determined that the proposed transaction, including the merger, the merger agreement and the transactions contemplated thereby, were fair to the public stockholders (other than AFG, GAFRI and their affiliates) and in the best interests of the public stockholders and unanimously recommended that our Board of Directors approve the proposed transaction, the merger, the merger agreement and the other transactions contemplated thereby and recommend to the public stockholders the merger, the merger agreement and the transactions contemplated thereby. In reaching its conclusion, the special committee was assisted in its deliberations by CCW and Squire Sanders. See “Special Factors — the Special Committee.” Additionally, the special committee met on 22 occasions between February 23, 2007 and the date of this proxy statement, in person or by telephone conference, to consider developments relating to the proposed transaction. The special committee is unaware of any development since its May 17, 2007 meeting that would affect its determination, and, accordingly, the special committee reconfirms that, as of the date of this proxy statement, its determination that the proposed transaction, including the merger, the merger agreement and the transactions contemplated thereby, are fair to the public stockholders (other than AFG, GAFRI and their affiliates) and in the best interests of the public stockholders.

 

Reasons for the Special Committee’s Determination; Fairness of the Merger

 

In recommending the proposed transaction, the merger and the merger agreement to the Board, the special committee considered the current overall position of GAFRI, including its current financial position, operations, strategic business plan, potential for future viability and growth and current market conditions. Specifically, the most significant factors that the special committee evaluated in connection with these considerations and believed supported its determination include:

 

 

 

 

 

 

 

 

 

 

The special committee believes that the procedure that was followed in determining the per share merger consideration to be paid to the public stockholders was fair to the public stockholders other than AFG, GAFRI and their affiliates because, among other things:

 

 

 

 

 

 

 

 

 

In light of the foregoing factors, the special committee determined that the merger is procedurally fair to the public stockholders other than AFG, GAFRI and their affiliates.

 

The special committee also considered certain risks and other potentially negative factors concerning the merger agreement, the merger and the transactions contemplated thereby, but ultimately determined that these factors were outweighed by the factors that supported the special committee’s determination. These potentially negative factors included:

 

 

 

 

 

 

The special committee concluded, however, that the aforementioned risks and potentially negative factors could be managed or mitigated by GAFRI or were unlikely to have a material impact on the merger, and that, overall, the potentially negative factors associated with the merger were outweighed by the potential benefits of the merger.

 

The special committee views its determination and recommendation that the merger agreement and the merger are fair to, and in the best interests of, the public stockholders as being based upon its judgment, in light of the totality of the information presented and considered, of the overall effect of the merger on the public stockholders compared to any alternative transaction and the likely effect of rejecting the merger. The special committee believes that the procedure that was followed in determining the per share merger consideration to be paid to the public stockholders was fair to the public stockholders. The Board appointed as the only members of the special committee three non-employee directors who are not affiliated with AFG, and granted the special committee exclusive authority on behalf of the Board to evaluate, review, reject or accept and negotiate the proposed transaction.

 

Based on the foregoing, the special committee unanimously determined that the AFG proposal, including the merger, the merger agreement and the transactions contemplated thereby, were fair to, and in the best interests of, the public stockholders other than AFG, GAFRI and their affiliates and recommended to our Board of Directors approval of the merger agreement and that it be recommended to the shareholders of GAFRI.

 

Position of the Board of Directors as to Fairness of the Merger

 

Our Board of Directors consists of 10 members, three of whom served on the special committee. At the May 17, 2007 meeting of the Board, the special committee, with representatives of CCW and Squire Sanders participating, reported to the entire Board of Directors on its review of the proposed transaction and the merger agreement. Messrs. Carl H. Lindner, S. Craig Lindner, Kenneth C. Ambrecht, Charles R. Scheper and William R. Martin

abstained from any vote with respect to the merger or the merger agreement. The members of the special committee, Robert A. Adams, and John T. Lawrence III voted to approve the proposed transaction and the merger agreement. The Board considered the analyses performed by, and the conclusions and recommendations of, the special committee. Our Board of Directors believes that, given the careful deliberations and process employed by the special committee, including the advice received by the special committee from each of CCW and Squire Sanders, and based upon the recommendation of the special committee, the merger and the merger agreement are fair to the public stockholders (other than AFG, GAFRI and their affiliates) and in the best interest of the public stockholders (other than AFG, GAFRI and their affiliates) GAFRI and the public stockholders.

 

Pursuant to an engagement letter dated March 20, 2007, the special committee engaged CCW to act as its financial advisor in connection with the special committee’s evaluation of the transaction proposed by AFG, and to render to the special committee a written opinion as to whether the per share merger consideration to be received by the unaffiliated public stockholders was fair to such unaffiliated public stockholders from a financial point of view. As used in this section, the term “unaffiliated public stockholders” does not include (i) AFG and its affiliates or (ii) GAFRI or any of its affiliates with respect to shares held in treasury or otherwise, and CCW’s opinion does not address the fairness of the merger or the per share merger consideration to be received by any such party or holders of shares who have properly exercised appraisal rights, if any.

 

The special committee chose to retain CCW to serve as its financial advisor because CCW is a leading investment banking firm specializing in the insurance industry and its investment banking professionals have substantial experience in transactions similar to the transaction proposed by AFG. CCW, as part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for corporate and other purposes. In addition, CCW was retained by Ceres Group, Inc. (prior to its acquisition by GAFRI) to act as financial advisor in connection with its acquisition by GAFRI in August 2006. CCW has not had any relationship with the Company, GAC or AFG during the two years preceding the date hereof, other than with regard to the merger. On May 17, 2007, at a meeting of the special committee, CCW delivered its oral opinion, which was confirmed by delivery of a written opinion dated May 17, 2007, to the special committee that, as of such date, on the basis of its analyses summarized below and subject to the limitations described below and in the written opinion the per share merger consideration to be received by the unaffiliated public stockholders was fair to such unaffiliated public stockholders from a financial point of view.

 

The full text of CCW’s written opinion, which is attached as Appendix B to this proxy statement and is incorporated herein by reference, describes, among other things, the assumptions made, general procedures followed, matters considered and limitations on the review undertaken by CCW in rendering its opinion. GAFRI’s unaffiliated public stockholders are urged to and should read CCW’s opinion carefully and in its entirety. CCW’s opinion is addressed to the special committee for its use in evaluating the transaction proposed by AFG and it addresses only the fairness from a financial point of view of the consideration to be received by the unaffiliated public stockholders pursuant to the merger agreement and does not address any other aspect of the transaction proposed by AFG. CCW’s opinion does not constitute a recommendation to the special committee or any of the public stockholders on whether or not to vote in favor of or against any matter related to the merger.

 

As compensation to CCW for its services to the special committee in connection with its evaluation of the transaction proposed by AFG, the special committee paid CCW $250,000 upon execution of the engagement letter dated March 20, 2007 and an additional $250,000 upon the delivery of CCW’s opinion. Additional compensation of $250,000 will be payable after GAFRI mails definitive proxy materials to its shareholders or alternatively decides not to proceed with the merger. In addition, regardless of whether the merger is consummated, the special committee has agreed to reimburse CCW for customary expenses, including reasonable attorneys’ fees and disbursements, and to indemnify CCW and related persons against various liabilities arising out of CCW’s engagement. No portion of the CCW fee or its right to expense reimbursement is contingent upon the successful completion of the merger or on the conclusions reached in the CCW opinion.

 

In connection with rendering its opinion and performing its related financial analyses, CCW reviewed, among other things:

 

 

 

 

 

 

 

 

In addition, CCW held discussions with members of the management of GAFRI concerning past and current business operations, assets, liabilities, financial condition and future prospects of GAFRI. CCW also considered other matters which it has deemed relevant to its inquiry and has taken into account such accepted financial and investment banking procedures and considerations as it has deemed relevant.

 

CCW was not requested to opine to, and did not address, among other things:

 

 

 

In arriving at its opinion, CCW relied upon and assumed, without independent verification, the accuracy and completeness of all financial, accounting, legal, tax and other information examined by it or otherwise reviewed or discussed with GAFRI. In that regard, CCW assumed, with the consent of the special committee and GAFRI, that the Forecasts were reasonably prepared by the management of GAFRI on a basis reflecting the best then currently available estimates and judgments of the management of GAFRI and CCW expressed no opinion with respect to such Forecasts or the assumptions on which they are based.

 

CCW is not an actuary and its services did not include any actuarial determination or evaluation by CCW or any attempt to evaluate actuarial assumptions and CCW has relied on GAFRI’s actuaries with respect to reserve adequacy. In that regard, CCW made no analysis of, and expressed no opinion as to, the adequacy of the insurance and investment contract liabilities or the policy liabilities of GAFRI. In addition, CCW did not make an independent evaluation or appraisal of the assets, liabilities (including any derivative or off-balance-sheet assets and liabilities) or solvency of GAFRI or any of its respective subsidiaries and CCW was not furnished with any such evaluation or appraisal. CCW’s opinion does not address the underlying business decision of GAFRI to engage in the merger, nor did CCW express any opinion as to the prices at which shares of GAFRI common stock will trade at any time.

 

CCW relied as to all legal, tax and regulatory matters on advice of counsel to GAFRI, and assumed that the merger will be consummated on the terms described in the merger agreement, without any waiver of any material terms or conditions by GAFRI. The special committee did not request that CCW, and CCW did not, solicit third party indications of interest in respect of the merger.

 

In the ordinary course of its investment banking activities, CCW and its affiliates may provide such services to GAFRI, AFG and their respective affiliates, may actively trade the debt and equity securities (or related derivative securities) of GAFRI and AFG for its own account and for the accounts of its customers and may at any time hold long and short positions of such securities.

 

The following is a summary of the material financial analyses presented by CCW to the special committee on May 17, 2007, in connection with providing its opinion, which we refer to herein as the CCW presentation. The following summary does not purport to be, and is not, a complete description of the financial analyses performed by CCW. Financial analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed and, therefore, financial analyses are not readily susceptible to summary description. No company, transaction or business utilized by CCW in conducting its financial analyses as a comparison is identical to GAFRI, the merger agreement or the merger, and an evaluation of the results of those analyses is not entirely mathematical. The estimates used in, and the valuation ranges resulting from, such analyses are inherently subject to substantial uncertainty and, thus, such analyses do not purport to be, and should not be construed in any respect as, a guaranty of value at which GAFRI, the common stock of GAFRI or any other interests in GAFRI actually could be acquired or sold. The summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of CCW’s financial analyses.

 

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 17, 2007, and is not necessarily indicative of current market conditions. CCW’s financial analyses were necessarily based on the information available to CCW and general economic, financial and stock market conditions and circumstances as they existed and could be evaluated by CCW as of the date of preparation of the CCW presentation. Although subsequent developments may affect the financial analyses performed by CCW, CCW does not have any obligation to update, revise or reaffirm any of the information included in the CCW presentation.

 

Overview

 

As part of its financial analysis, CCW performed a “Public Market Trading Analysis,” a “Dividend Discount Analysis,” and a “Premiums Paid Analysis.” These analyses and the resulting per share reference ranges for GAFRI indicated by these analyses are described below. As part of CCW’s financial analysis, CCW reviewed the historical stock price performance and average trading volume of GAFRI and selected companies and the historical financial performance and trading multiples of GAFRI. The order of analyses described below does not represent the relative importance or weight given to those analyses by CCW. CCW considered the results of all of its analyses as a whole, did not attribute any particular weight to any analysis or factor considered by it and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, CCW believes that the summary set forth below and its analyses must be considered as a whole and that selecting portions thereof, without considering all of its analyses, could create an incomplete view of the processes underlying its analyses.

 

Public Market Trading Analysis

 

In order to access how the public market values shares of similar publicly traded companies, CCW reviewed and compared specific financial and market data relating to GAFRI with selected companies that CCW, based on its experience with companies in the life insurance and annuities industries, deemed appropriate as comparables to GAFRI, including: American Equity Investment Life Holding Co., Conseco, Inc., FBL Financial Group, Inc., National Western Life Insurance Company, Nationwide Financial Services, Inc., Presidential Life Corporation, Protective Life Corporation and Torchmark Corporation.

 

The financial information compared included current stock price, previous 52 weeks’ high and low stock price, average weekly trading volume over the last year as a percentage of shares outstanding, market capitalization, stock performance over the last year, GAAP book value, including and excluding the impact of unrealized gains and losses, as of March 31, 2007, return on equity, or ROE, for the last twelve months ended March 31, 2007, or LTM, estimated ROE for 2007 and 2008, dividend yield, LTM diluted EPS, LTM operating EPS, estimated operating EPS for 2007 and 2008 and beta. The credit statistic compared included the ratio of long-term debt to book capitalization. In order to arrive at a public market reference range for GAFRI, CCW derived multiples for the comparable companies, including price as a multiple of (i) LTM operating EPS, (ii) 2007 estimated operating EPS, (iii) 2008 estimated operating EPS, and (iv) GAAP book value per share, excluding the impact of unrealized gains and losses, as of March 31, 2007. Additionally, CCW

examined the correlation between 2007 estimated ROEs and price to book value multiples of the comparable companies for which 2007 earnings estimates were publicly available. The resulting regression line provides the implied price to book value multiple for a company at a given 2007 estimated ROE. The market price information used in the analysis was as of May 15, 2007. The earnings per share estimates used were based on First Call consensus estimates as of May 15, 2007. First Call is a product of Thomson Financial, a data service that monitors and publishes a compilation of earnings estimates regarding companies of interest to institutional investors produced by selected research analysts.

 

The following table presents the selected results of the financial analysis described above for the comparable companies:

 

 

CCW then derived from this the ranges of these multiples deemed most meaningful for this analysis (which were 13.0x — 14.0x LTM operating EPS, 12.5x — 13.5x 2007 estimated operating EPS, 11.5x — 12.5x 2008 estimated operating EPS and 0.90x — 1.10x GAAP book value per share, excluding the impact of unrealized gains and losses, as of March 31, 2007) and applied these multiples to corresponding financial data of GAFRI. Estimated financial data of GAFRI were based on internal estimates of GAFRI’s management. CCW also derived a range of 0.90x — 1.00x GAAP book value per share, excluding the impact of unrealized gains and losses, as of March 31, 2007 based on the price to book value multiple implied by inputting GAFRI’s 2007 estimated ROE into the regression line discussed above. These calculations indicated an overall mean range of implied per share equity values for GAFRI of $20.58 to $22.96. CCW noted that the merger consideration of $24.50 was above the range of implied per share equity values for GAFRI based on the Public Market Trading Analysis.

 

CCW selected the comparable companies named above because their businesses and operating profiles are reasonably similar to those of GAFRI. However, because of the inherent differences between business, operations and prospects of GAFRI and the businesses, operations and prospects of the comparable companies, CCW believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the Public Market Trading Analysis. Accordingly, CCW also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of GAFRI and the companies included in this analysis that would affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing sizes, growth prospects, profitability levels and degree of operational risk between GAFRI and the companies included in the Public Market Trading Analysis.

 

Dividend Discount Analysis

 

In order to estimate the present value of GAFRI common stock, CCW modeled a dividend discount cash flow analysis using the dividends available to GAFRI’s common shareholders for fiscal years 2007 through 2011 based on estimates provided by GAFRI management.

 

A dividend discount cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset by calculating the “present value” of estimated future dividends of the asset. Dividends represent the cash available to common shareholders after funding capital requirements, working capital needs and debt financing requirements. “Present value” refers to the current value of future cash flows or amounts and is obtained by

discounting those future cash flows or amounts by a discount rate that takes into account macro-economic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

 

CCW performed a dividend discount cash flow analysis for GAFRI by adding (1) the present value of GAFRI’s projected dividends to (2) the present value of the “terminal value” of GAFRI. The “terminal value” refers to the value of all future cash flows from an asset at a particular point in time.

 

To determine terminal value, CCW used a terminal forward net income multiple range of 12.5x — 13.5x based on the peer group and a terminal book value multiple range of 1.12x — 1.22x based on the price to book value versus 2007 estimated ROE regression analysis utilized in the Public Market Trading Analysis. CCW discounted the dividend streams and the estimated terminal value to a present value using a discount rate range of 11.0% — 12.0% based on GAFRI’s estimated weighted average cost of equity. CCW used a capital asset pricing model to calculate GAFRI’s estimated weighted average cost of equity using standard industry pricing models.

 

These calculations indicated an overall mean range of implied per share equity values for GAFRI of $22.27 to $25.22. The results of this analysis are summarized as follows:

 

 

CCW noted that the merger consideration of $24.50 per share was within the implied per share equity value ranges that resulted from the Dividend Discount Analysis.

 

Premiums Paid Analysis

 

In order to assess the premium proposed to be paid by AFG in the merger, CCW reviewed premiums paid by acquirers in selected minority buy-out transactions since 1996 where the acquirer owned at least 50% of the target before the transaction and the acquired entity equity value was at least $50 million. These 116 transactions included 74 all-cash transactions, 30 transactions in which the acquired company was a financial institution, eleven transactions in which the acquired company was an insurance company, and seven all-cash transactions in which the acquired company was an insurance company. CCW utilized the premiums paid based on SDC Platinum^tm calculations for the 1 week prior to the transaction. SDC Platinum^tm is a product of Thomson Financial, a company that designs and develops information systems to address specific needs of the capital markets industry. The following table summarizes the results of such calculations:

 

 

CCW selected ranges based on the median premiums and applied these ranges to the share price of GAFRI’s common stock for the same period to calculate the implied per share equity value ranges of GAFRI as follows:

 

 

 

 

Based on the analysis above, these calculations indicated an overall mean range of implied per share equity values for GAFRI of $24.46 to $26.59. CCW noted that the merger consideration of $24.50 per share was within this range.

 

The premiums paid analysis utilized by CCW represents a comparative analysis with many factors that may be unique to each transaction and may or may not be applicable to the merger and to GAFRI. CCW believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the premiums paid analysis and, accordingly, also made certain qualitative judgments that would affect the reference ranges of GAFRI.

 

A copy of the CCW presentation has been attached as an exhibit to the Schedule 13E-3 filed with the SEC in connection with the merger. The CCW presentation will be available for any interested shareholder (or any representatives of the shareholder who have been so designated in writing) to inspect and copy at our principal executive offices during regular business hours.

 

Conversion of Outstanding GAFRI Common Stock and Treatment of Stock Options

 

If the merger agreement is approved by GAFRI’s stockholders and the other conditions to the completion of the merger are either satisfied or waived, GAC will be merged with and into GAFRI, with GAFRI continuing as the surviving corporation in the merger. In addition, GAFRI will be a wholly-owned subsidiary of AFG, Carl H. Lindner will continue as Chairman of the Board of AFG and Carl H. Lindner III and S. Craig Lindner will continue as Co-Chief Executive Officers, Co-Presidents and directors of AFG. Upon the completion of the merger, each issued and outstanding share owned by our public stockholders, (other than shares held by stockholders who perfect their appraisal rights under Delaware law) will be converted into the right to receive the per share merger consideration. GAFRI stockholders will be required to surrender their stock certificates upon the completion of the merger to receive a cash payment equal to the per share merger consideration for each share of GAFRI common stock tendered. After completion of the merger, stockholders will not have the opportunity to liquidate their shares at a time and for a price of their own choosing.

 

In the merger, vested employee stock options will be extinguished in exchange for a cash payment by GAFRI to each holder of an option of an amount equal to the positive number difference, less applicable taxes, between $24.50 and the applicable option exercise price multiplied by the number of shares of GAFRI common stock formerly subject to an option. We refer to this amount as the “option payment amount”. In addition, so long as a holder of an option is an employee of GAFRI, AFG or any subsidiary of either of them at the vesting dates (as set forth in a GAFRI employee stock option plan or document evidencing a grant of an employee stock option), GAFRI shall pay the option payment amount as soon as practicable after such vesting dates in 2008, 2009, 2010 and 2011. Also, as of the effective time of the merger, GAFRI will take all action necessary to provide for the termination of its agent stock option plans or agreements and the extinguishment of all rights under such plans and agreements.

 

Effect on Ownership Structure of GAFRI; Beneficial and Detrimental Effects

 

After the merger, GAFRI will be a wholly-owned subsidiary of AFG. The benefit of the merger to public stockholders (other than stockholders who perfect their appraisal rights under Delaware law) is the right to receive the per share merger consideration for each share of GAFRI common stock held by such public stockholders. The public stockholders will additionally be able to dispose of their shares without paying the usual transaction costs associated with open market sales and will no longer have to bear the risk of any future losses or decrease in GAFRI’s enterprise value. The detriments are that public stockholders will cease to have ownership interests in GAFRI or rights as stockholders. Therefore, public stockholders will no longer benefit from any increases in GAFRI’s value, nor will they participate in any earnings or growth of GAFRI following the merger. Further, the receipt of the payment for their shares will be a taxable transaction for federal income tax purposes. See “Special Factors — Material U.S. Federal Income Tax Consequences.”

 

A benefit of the merger to AFG is that GAFRI will be a wholly-owned subsidiary of AFG. Future earnings and growth will be solely for the benefit of AFG and will not benefit the public stockholders. Detriments of the merger to AFG include the risk that GAFRI will decrease in value following the merger and the payment by AFG of an aggregate of approximately $3 million in transaction costs and estimated fees and expenses relating to the merger and financing transactions.

 

Effect on Listing; Registration and Status of GAFRI Common Stock

 

GAFRI common stock is currently registered as a class of equity securities under the Exchange Act and is quoted on the New York Stock Exchange under the symbol “GFR”. As a result of the merger, GAFRI will be a privately-held company, with no public market for its common stock. After the merger, GAFRI common stock will cease to be traded on the New York Stock Exchange, and prices with respect to sales of shares of GAFRI common stock in the public market will no longer be available. In addition, registration of GAFRI common stock under the Exchange Act will be terminated. This termination and the delisting of GAFRI common stock from the New York Stock Exchange will make certain provisions of the Exchange Act, such as the short-swing recovery provisions of Section 16(b) and the requirement to furnish a proxy or an information statement in connection with a stockholders’ meeting, the liability provisions of the Exchange Act and the corporate governance requirements under New York Stock Exchange rules and regulations and under the Sarbanes-Oxley Act of 2002, such as the requirement that certain executive officers of GAFRI certify the accuracy of GAFRI’s financial statements and that annual reports contain management’s report on the effectiveness of the company’s internal controls, no longer applicable to GAFRI. AFG will guarantee $280 million of debt of GAFRI and its subsidiaries in the merger. In addition, following the completion of the merger, we expect to deregister the shares of GAFRI common stock and cease to be a public reporting company. Accordingly, GAFRI will no longer be required to file periodic reports with the SEC after the effective time of the merger. If GAFRI, as the entity surviving the merger, completes a registered exchange or public offering of debt securities, however, it would be required to file periodic reports with the SEC under the Exchange Act for a period of time following that transaction.

 

Source of Funds

 

The total funds needed to complete the merger are estimated to be $235 million. These funds will come from amounts available at GAFRI as well as borrowings from AFG. As a result, it is expected that GAFRI’s indebtedness after completion of the Merger will be greater. The amount borrowed from AFG will be dependent on funds available at GAFRI at the time the merger is completed. However, the rate at which the funds shall be borrowed is expected to be seventy-five basis points over LIBOR and such indebtedness is expected to mature on March 29, 2011.

 

Set forth below are various risks relating to the proposed merger. The following is not intended to be an exhaustive list of the risks relating to the merger and should be read in conjunction with the other information in this proxy statement. In addition, you should refer to the section entitled “Risk Factors” in GAFRI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 which is incorporated in this proxy statement by reference, for risks relating to GAFRI’s business.

 

Failure to complete the merger could negatively impact the market price of GAFRI common stock.

 

If the merger is not completed for any reason, GAFRI will be subject to a number of material risks, including:

 

 

 

If the merger is not approved by GAFRI’s stockholders at the special meeting, GAFRI, AFG and GAC will not be permitted under Delaware law to complete the merger and each of GAFRI, AFG and GAC will have the right to terminate the merger agreement.

 

Until the merger is completed or the merger agreement is terminated, under certain circumstances, GAFRI will not be able to solicit any proposals for a merger or business combination with another party at a favorable price because of restrictions in the merger agreement.

 

Unless or until the merger agreement is terminated, subject to specified exceptions, GAFRI is restricted from soliciting, initiating, knowingly encouraging or knowingly facilitating any inquiries or proposals that may lead to a proposal or offer for an alternative transaction with any person or entity other than AFG. See “Terms of the Merger — No Solicitation of Competing Proposals.” AFG stated in its proposal letter to GAFRI dated February 22, 2007, and AFG has reiterated to GAFRI on multiple occasions since such time, that AFG is not interested in pursuing a sale of its approximately 81% equity holding in GAFRI.

 

Uncertainties associated with the merger may cause GAFRI to lose key personnel.

 

Our current and prospective employees may be uncertain about their future roles and relationships with GAFRI if the merger is not completed. If the merger is not completed, this uncertainty may adversely affect our ability to attract and retain key management, marketing and technical personnel.

 

In considering the recommendations of our Board of Directors, GAFRI stockholders should be aware that some of GAFRI’s executive officers and members of the Board have interests in the transaction that are different from, or in addition to, the interests of the public stockholders generally. The Board appointed the special committee, consisting solely of directors who are not officers or employees of GAFRI, to evaluate, reject or accept and negotiate the proposed transaction, including the merger, and to evaluate whether such transactions are in the best interests of the public stockholders. The special committee was aware of these differing interests and considered them, among other matters, in evaluating the proposed transaction and negotiating the merger and in recommending to the Board that the merger and the merger be approved and adopted.

 

 

 

 

In addition, in the merger, vested employee stock options (including those held by GAFRI’s executive officers) and vested and unvested director stock options will be extinguished in exchange for a cash payment by GAFRI to each holder of an option as set forth under “How Outstanding Options Will Be Treated.”

 

The table below sets forth the amounts that officers and directors of GAFRI would be entitled to receive as a result of the completion of the merger:

 

 

 

 

 

In addition, GAFRI granted options to employees of GAFRI in February 2007 at an exercise price exceeding the per share merger consideration. The compensation committee of the AFG Board of Directors has taken action to grant options to purchase shares of common stock of AFG on the date that the merger is completed to replace all of these options to purchase GAFRI common stock. The number of shares of AFG common stock that may be acquired upon exercise is identical to the number of shares of GAFRI common stock subject to the prior options, and the exercise price per share, as determined under AFG’s 2005 Stock Incentive Plan, will equal the average of the high and low sales prices as reported on the New York Stock Exchange on the date that the merger is completed. The options to purchase AFG common stock will be subject to AFG’s customary five year vesting. As a result, the following officers will be granted the following number of options to purchase shares of AFG common stock upon the closing of the merger: Mr. Berding — 20,000; Mr. Magoteaux — 20,000; Mr. Miliano — 20,000; Mr. Moffett — 20,000; Mr. Muething — 20,000; Mr. Prager — 20,000; and Mr. Scheper — 50,000.

 

Except as set forth in the immediately preceding paragraphs, we are not aware of any other benefits or additional compensation in connection with this transaction that will not be shared by the public stockholders generally. The proposed transaction does not constitute a “change of control” for purposes of any existing employment agreement with the executive officers of GAFRI, and GAFRI has not and does not anticipate entering into any new employment or other compensation agreements with its executive officers as a result of the proposed

transaction. We understand that all of the directors of GAFRI and all of the executive officers intend at this time to vote their shares in favor of the proposal to approve and adopt the merger and the merger agreement.

 

Following the announcement of the AFG proposal on February 22, 2007, two actions were filed in the Court of Common Pleas of Hamilton County, Ohio. The two actions, which we refer to as the actions, are styled Webb, et al. v. Great American Financial Resources, Inc., et al., Case No. A-0701905 and Call 4U, Limited, et al. v. Carl H. Lindner, et al., Case No. A-0701929, and were filed on February 28, 2007 as putative class actions on behalf of all of GAFRI public stockholders other than members of the GAFRI Board of Directors, naming AFG, GAFRI and the members of our Board of Directors as defendants. The actions alleged that the our Board of Directors had a conflict of interest in considering the AFG proposal on behalf of GAFRI’s largest shareholder that prevented them from acting independently and in the best interest of the public stockholders. The actions also alleged that all of the defendants breached their fiduciary duties to the public stockholders by failing to obtain the highest value for the shares held by the public stockholders and by failing to implement a process that would produce an outcome and a price that was entirely fair to such public stockholders. The actions seek primarily injunctive relief to enjoin the proposed transaction and to require the defendants to implement a fair process to produce an entirely fair transaction and the highest possible price for the GAFRI common stock not owned by AFG and its affiliates. Both actions seek to recover attorneys’ fees and costs , and one of the actions also seeks unspecified damages. On April 18, 2007, the actions were consolidated and lead counsel was appointed for the plaintiffs.

 

During this time, counsel for Defendants and Plaintiffs entered into discussions regarding the facts and law at issue in the actions. Defendants produced financial information and other documents to Plaintiffs’ counsel and Plaintiffs’ expert financial consultant regarding the merger, events leading up to the merger, and included documents obtained from and prepared by CCW. Plaintiffs’ counsel negotiated to provide their expert financial consultant with the opportunity to directly discuss the merger and the financial analysis of CCW directly with representatives of CCW. Counsel for Plaintiffs and Defendant AFG also met directly to discuss issues related to potential settlement of the actions, including a price at which AFG’s purchase of the remaining shares of GAFRI could be deemed fair to the minority shareholders of GAFRI. Through April and into May, the expert for Plaintiffs continued to directly discuss the financial analyses of GAFRI and counsel for Plaintiffs and counsel for Defendant AFG continued their independent discussions and negotiations regarding the merger process and the price to be paid by AFG to minority shareholders.

 

On May 17, 2007, as a result of extensive arms-length negotiations between counsel for the plaintiffs and representatives of AFG, and after review of financial information regarding GAFRI aa well as negotiations with counsel for the special committee, the parties reached an agreement in principle for the settlement of the actions. Pursuant to such settlement, AFG agreed to acquire the outstanding shares of GAFRI common stock that it did not already beneficially own from the public stockholders at a purchase price of $24.50 per share, a price in excess of what originally was offered by AFG in its February 22, 2007 proposal. AFG and GAFRI further agreed to provide plaintiffs’ counsel an opportunity to review and comment upon the disclosures contained in the publicly filed disclosure documents relating to the transaction including, but not limited to, any definitive merger agreement and the proxy statement to be sent to GAFRI shareholders. Defendants also have agreed not to oppose the application of plaintiffs’ counsel for an award of attorneys fees and expenses in a total amount not to exceed $850,000.00. All parties agree that the settlement is fair and is in the best interests of GAFRI and the public stockholders. The settlement is subject to confirmatory discovery and court approval.

 

GAFRI and AFG will make the necessary filings with regulatory authorities pursuant to any applicable antitrust laws.

 

We are not aware of any other regulatory approvals to be obtained, or waiting periods to expire, to complete the merger. If the parties discover that other approvals or waiting periods are necessary, they will seek to obtain or comply with them. Should any such approval or other action be required, it is our present intention to seek such approval or action. There can be no assurance however that any such approval or other action, if needed, would be

obtained without substantial effort or that adverse consequences might not result to our business, or that certain parts of our business might not have to be disposed of or held separate or other substantial conditions complied with in order to obtain such approval or other action or in the event that such approval was not obtained or such other action was not taken.

 

The merger will be a tax free reorganization with respect to AFG, GAFRI and GAC.

 

The following is a summary of the material U.S. federal income tax consequences of the merger to public stockholders, including Carl H. Lindner, Carl H. Lindner III and S. Craig Lindner. This summary is based on the Internal Revenue Code of 1986, as amended, referred to as the “Code” in this proxy statement, regulations promulgated under the Code, administrative rulings by the Internal Revenue Service and court decisions now in effect. All of these authorities are subject to change, possibly with retroactive effect so as to result in tax consequences different from those described below. This summary does not address all of the U.S. federal income tax consequences that may be applicable to a particular public stockholder. In addition, this summary does not address the U.S. federal income tax consequences of the merger to public stockholders who are subject to special treatment under U.S. federal income tax law, including, for example, banks and other financial institutions, insurance companies, tax-exempt investors, S corporations, holders that are properly classified as “partnerships” under the Code, dealers in securities, holders who hold their common stock as part of a hedge, straddle or conversion transaction, holders whose functional currency is not the U.S. dollar, holders who acquired common stock through the exercise of employee stock options or other compensatory arrangements, holders who are subject to the alternative minimum tax provisions of the Code and holders who do not hold their shares of GAFRI common stock as “capital assets” within the meaning of Section 1221 of the Code. This summary does not address the U.S. federal income tax consequences to any public stockholder who, for U.S. federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust and this summary does not address the tax consequences of the merger under state, local or foreign tax laws. This summary does not address any tax consequences under state, local or foreign laws.

 

The summary that follows neither binds the Internal Revenue Service nor precludes the Internal Revenue Service from adopting a position contrary to that expressed in this proxy statement, and we cannot assure you that such a contrary position could not be asserted successfully by the Internal Revenue Service or adopted by a court if the positions were litigated. GAFRI does not intend to obtain a ruling from the Internal Revenue Service with respect to the U.S. federal income tax consequences of the merger. In addition, we do not intend to obtain an opinion from tax counsel with respect to the federal income tax consequences of the merger.

 

Each public stockholder should consult the holder’s individual tax advisors as to the particular tax consequences of the merger to such holder, including the application and effect of any state, local, foreign or other tax laws and the possible effect of changes to such laws.

 

Exchange of Common Stock for Cash

 

Generally, the merger will be taxable to stockholders for U.S. federal income tax purposes. A holder of GAFRI common stock receiving cash in the merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the GAFRI common stock surrendered. Any such gain or loss generally will be capital gain or loss if the GAFRI common stock is held as a capital asset at the effective time of the merger. Any capital gain or loss will be taxed as long-term capital gain or loss if the holder has held the GAFRI common stock for more than one year prior to the effective time of the merger. If the holder has held the GAFRI common stock for one year or less prior to the effective time of the merger, any capital gain or loss will be taxed as short-term capital gain or loss. Currently, long-term capital gain for non-corporate taxpayers is taxed at a maximum federal tax rate of 15%. The deductibility of capital losses is subject to certain limitations.

 

Backup Withholding

 

Under the U.S. federal backup withholding tax rules, unless an exemption applies, the paying agent will be required to withhold, and will withhold, 28% of all cash payments to which a holder of GAFRI common stock is entitled pursuant to the merger agreement unless the holder provides a tax identification number (social security number in the case of an individual or employer identification number in the case of other holders), certifies that such number is correct and that no backup withholding is otherwise required and otherwise complies with such backup withholding rules. Each holder of GAFRI common stock should complete, sign and return to the paying agent the Substitute Form W-9 in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is satisfied in a manner satisfactory to the paying agent. The Substitute Form W-9 will be included as part of the letter of transmittal mailed to each record holder of GAFRI common stock. See “Terms of the Merger — Payment for GAFRI Common Stock in the Merger” beginning on page   of this proxy statement.

 

The discussion below is not a complete summary regarding your appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which are attached to this proxy statement as Appendix C. Stockholders intending to exercise appraisal rights should carefully review Appendix C. Failure to follow precisely any of the statutory procedures set forth in Appendix C may result in a termination or waiver of these rights.

 

If the merger is completed, dissenting holders of GAFRI common stock who follow the procedures specified in Section 262 of the Delaware General Corporation Law within the appropriate time periods will be entitled to have their shares of GAFRI common stock appraised and receive the “fair value” of such shares in cash as determined by the Delaware Court of Chancery in lieu of the consideration that such stockholder would otherwise be entitled to receive under the merger agreement.

 

The following is a brief summary of Section 262, which explains the procedures for dissenting from the merger and demanding statutory appraisal rights. Failure to follow the procedures described in Section 262 precisely could result in the loss of appraisal rights. This proxy statement constitutes notice to holders of GAFRI common stock concerning the availability of appraisal rights under Section 262. A stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the effective time of the merger.

 

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262. A stockholder must file a written demand for appraisal of shares with GAFRI before the special meeting on          , 2007. This written demand for appraisal of shares must be in addition to and separate from a vote against the merger. Stockholders electing to exercise their appraisal rights must not vote “FOR” the adoption and approval of the merger agreement. Also, because a submitted proxy not marked “AGAINST” or “ABSTAIN” will be voted “FOR” the proposal to adopt and approve the merger agreement, the submission of a proxy not marked “AGAINST” or “ABSTAIN” will result in the waiver of appraisal rights. Any proxy or vote against the adoption and approval of the merger agreement, by itself, will not, by itself, constitute a demand for appraisal within the meaning of Section 262.

 

A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the share certificate. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record. However, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A person having a beneficial interest in GAFRI common stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below in a timely manner to perfect whatever appraisal rights the beneficial owners may have.

 

A stockholder of ours who elects to exercise appraisal rights should mail or deliver such stockholder’s written demand to Great American Financial Resources, Inc. at our address at 250 East Fifth Street, Cincinnati, Ohio 45202, Attention: Corporate Secretary. The written demand for appraisal should specify the stockholder’s name and mailing address, and that the stockholder is thereby demanding appraisal of such stockholder’s GAFRI common stock. Within ten (10) days after the effective time of the merger, we must provide notice of the effective time of the merger to all of our stockholders who have complied with Section 262 and have not voted for the merger.

 

Within 120 days after the effective time of the merger (but not thereafter), any stockholder who has satisfied the requirements of Section 262 may deliver to us a written demand for a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. GAFRI, as the surviving corporation in the merger, must mail such written statement to the stockholder within ten (10) days after the stockholders’ request is received by GAFRI or within ten (10) days after the latest date for delivery of a demand for appraisal under Section 262, whichever is later.

 

Within 120 days after the effective time of the merger (but not thereafter), either GAFRI or any stockholder who has complied with the required conditions of Section 262 and who is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the GAFRI shares of stockholders entitled to appraisal rights. GAFRI has no present intention to file such a petition if demand for appraisal is made.

 

Upon the filing of any petition by a stockholder in accordance with Section 262, service of a copy must be made upon GAFRI, which must, within twenty (20) days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by GAFRI. If a petition is filed by us, the petition must be accompanied by the verified list. The Register in Chancery, if so ordered by the court, will give notice of the time and place fixed for the hearing of such petition by registered or certified mail to us and to the stockholders shown on the list at the addresses therein stated, and notice will also be given by publishing a notice at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or such publication as the court deems advisable. The forms of the notices by mail and by publication must be approved by the court, and we must bear the costs thereof. The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings and the Delaware Court of Chancery may dismiss the proceedings as to any stockholder that fails to comply with such direction.

 

If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the court will determine which stockholders are entitled to appraisal rights and will appraise the shares owned by these stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value.

 

Stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 could be more, the same or less than the consideration they would receive pursuant to the merger agreement if they did not seek appraisal of their shares. Stockholders should also be aware that investment banking opinions as to the fairness from a financial point of view of the consideration payable in a merger are not opinions as to fair value under Section 262. The costs of the appraisal proceeding may be determined by the court and taxed against the parties as the court deems equitable under the circumstances. Upon application of a dissenting stockholder, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of a determination or assessment, each party bears such party’s own expenses. The exchange of shares for cash pursuant to the exercise of appraisal rights will be a taxable transaction for United States federal income tax purposes and possibly state, local and foreign income tax purposes as well.

 

Any stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote for any purpose the shares subject to demand or to receive payment of

dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within sixty (60) days after the effective time of the merger, any stockholder will have the right to withdraw such stockholder’s demand for appraisal and to accept the terms offered in the merger agreement. After this period, a stockholder may withdraw such stockholder’s demand for appraisal and receive payment for such stockholder’s shares as provided in the merger agreement only with our consent. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal (if available) will cease. Inasmuch as we have no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis. No petition timely filed in the court demanding appraisal may be dismissed as to any stockholder without the approval of the court, which approval may be conditioned upon such terms as the court deems just.

 

Failure by any GAFRI stockholder to comply fully with the procedures described above and set forth in Appendix C to this proxy statement may result in termination of such stockholder’s appraisal rights. In view of the complexity of exercising your appraisal rights under Delaware law, if you are considering exercising these rights you should consult with your legal counsel.

 

Great American Financial Resources, Inc.

250 East Fifth Street

Cincinnati, Ohio 45202

 

GAFRI is a Delaware corporation and a holding company that markets retirement products, primarily fixed, indexed and variable annuities, and various forms of supplemental insurance through its subsidiaries, principally including Great American Life Insurance Company, Annuity Investors Life Insurance Company, Loyal American Life Insurance Company, United Teacher Associates Insurance Company, Continental General Insurance Company and Central Reserve Life Insurance Company.

 

American Financial Group, Inc.

GAFRI Acquisition Corp.

One East Fourth Street

Cincinnati, Ohio 45202

 

AFG is a holding company that, through subsidiaries, is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and, through GAFRI’s subsidiaries, in the sale of traditional fixed, indexed and variable annuities and a variety of supplemental insurance products.

 

GAC is a newly-formed Delaware corporation and a wholly-owned subsidiary of AFG. AFG formed GAC for the sole purposes of entering into the merger agreement and completing the merger contemplated by the merger agreement.

 

The enclosed proxy is solicited on behalf of our Board of Directors for use at a special meeting of stockholders to be held on          , 2007, at 11:00 a.m., local time, or at any adjournments of the special meeting, for the purposes set forth in this proxy statement and in the accompanying notice of special meeting. The special meeting will be held at The Cincinnatian Hotel, Sixth and Vine Streets, Cincinnati, Ohio 45202. GAFRI intends to mail this proxy statement and the accompanying proxy card on or about          , 2007 to all stockholders entitled to vote at the special meeting.

 

At the special meeting, stockholders will be asked to consider and vote upon proposals to:

 

 

GAFRI does not expect a vote to be taken on any other matters at the special meeting. If any other matters are properly presented at the special meeting for consideration, however, the holders of the proxies, if properly authorized, will have discretion to vote on these matters in accordance with their best judgment.

 

Record Date and Voting Information

 

Stockholders of record of GAFRI common stock at the close of business on          , 2007, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournments thereof. At the close of business on the record date, shares of GAFRI common stock were outstanding and entitled to vote. Each holder of record of GAFRI common stock on the record date will be entitled to one vote on each matter submitted to stockholders for approval at the special meeting for each share held. If you sell or transfer your shares of GAFRI common stock after the record date but before the special meeting, you will transfer the right to receive the per share merger consideration, if the merger is completed, to the person to whom you sell or transfer your shares, but you will retain your right to vote at the special meeting.

 

All votes will be tabulated by the inspector of election appointed for the special meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Brokers who hold shares in “street name” for clients typically have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. Absent specific instructions from the beneficial owner of the shares, however, brokers are not allowed to exercise their voting discretion with respect to the approval of non-routine matters, such as approval of the merger agreement. Proxies submitted without a vote by brokers on these matters are referred to as “broker non-votes.”

 

Quorum

 

Shares entitled to vote at the special meeting may take action on a matter at the special meeting only if a quorum of those shares exists with respect to that matter. Accordingly, the presence in person or by proxy of the holders of shares of stock having a majority of the votes that could be cast by the holders of all outstanding shares of GAFRI common stock entitled to vote at the special meeting is necessary and sufficient to constitute a quorum for the transaction of business at the special meeting. If a share is represented for any purpose at the special meeting, other than for the purpose of objecting to the special meeting or the transacting of business at the special meeting, it will be deemed present for purposes of determining whether a quorum exists.

 

Any shares of GAFRI common stock held in treasury by GAFRI are not considered to be outstanding on the record date or otherwise entitled to vote at the special meeting for purposes of determining a quorum. Shares

represented by proxies reflecting abstentions and properly executed broker non-votes are counted for purposes of determining whether a quorum exists at the special meeting.

 

The affirmative vote of a majority of the shares of GAFRI common stock outstanding on the record date is required to approve the merger agreement and the transactions contemplated thereby, including the merger. Approval of the meeting adjournment proposal requires the affirmative vote of a majority of the shares of GAFRI common stock present and entitled to vote at the special meeting.

 

As of the record date, AFG beneficially owned approximately 81% of GAFRI’s outstanding shares. AFG has determined to vote its shares and to cause its subsidiaries to vote their shares in favor of the merger agreement. In addition, executive officers and directors of GAFRI and AFG who, in the aggregate beneficially own approximately     % of GAFRI’s outstanding shares, have expressed their intent to vote in favor of the merger agreement. As a result, approval of the merger agreement is assured.

 

Proxies that reflect abstentions and broker non-votes, as well as proxies that are not returned, will have the same effect as a vote against approval of the merger agreement. In the case of the meeting adjournment proposal, a failure to vote or a vote to abstain will have no effect on the outcome of the voting. A broker non-vote will have the same effect as a vote against approval of the meeting adjournment proposal.

 

If the special meeting is adjourned or postponed for any reason, at any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as they would have been voted at the original convening of the meeting, except for any proxies that have been revoked or withdrawn in the interim.

 

Registered stockholders may vote by using a toll-free telephone number, by completing a proxy form and mailing it to the proxy tabulator, or by attending the meeting and voting in person. The telephone voting facilities will open following the mailing of materials on          , 2007, and close at 9:00 a.m. Eastern Daylight Savings Time on the meeting date. The telephone voting procedures are designed to authenticate stockholders by use of a proxy control number to allow stockholders to confirm that their instructions have been properly recorded.

 

Stockholders whose shares are held in the name of a broker, bank or other nominee should refer to the proxy card or the information forwarded by such broker, bank or other nominee to see what voting options are available.

 

To vote by telephone, stockholders should call 1-800-PROXIES (1-800-776-9437), using any touch-tone telephone, and have their proxy form at hand. To vote by mail, stockholders should complete and sign the bottom portion of the proxy form and return only that portion to the proxy tabulator.

 

Solicitation of proxies through the mail, in person and otherwise, is being made by management at the direction of the Board of Directors, without additional compensation. We will pay all costs of soliciting proxies. In addition, we will request brokers and other custodians, nominees and fiduciaries to forward proxy soliciting material to the beneficial owners of shares held of record by such persons, and we will reimburse them for their expenses.

 

Proxies received at any time before the special meeting and not revoked or superseded before being voted will be voted at the special meeting. If the proxy indicates a specification, it will be voted in accordance with the specification. If no specification is indicated, the proxy will be voted “FOR” approval of the merger agreement and “FOR” the meeting adjournment proposal. A properly executed proxy gives the persons named as proxies on the proxy card authority to vote in their discretion with respect to any other business that may properly come before the meeting or any adjournment of the meeting.

 

Please do not send in stock certificates at this time.  If the merger is completed, you will receive instructions regarding the procedures for exchanging your GAFRI stock certificates for the payment of the per share merger consideration.

The execution of a proxy or vote by phone does not affect the right to vote in person at the meeting, and a proxy or vote by phone may be revoked by the person giving it prior to the exercise of the powers conferred by it. A stockholder may revoke a prior vote by writing to our Secretary at our principal offices or by properly executing and delivering a proxy bearing a later date (or recording a later telephone vote) or by voting in person at the meeting. In addition, persons attending the meeting in person may withdraw their proxies. Attending the meeting will not serve to vote your proxy unless you vote at the meeting. Attendance at the special meeting will not, by itself, revoke a proxy. If you have given voting instructions to a broker or other nominee that holds your shares in “street name,” you may revoke those instructions by following the directions given by the broker or other nominee.

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of this proxy statement or annual report may have been sent to multiple stockholders in your household. GAFRI will promptly deliver a separate copy of this proxy statement, including the attached appendices, to you if you write or call GAFRI at the following address or phone number:          .

 

If the special meeting is adjourned to a different place, date or time, GAFRI need not give notice of the new place, date or time if the new place, date or time is announced at the meeting before adjournment, unless the adjournment is for more than thirty (30) days or a new record date is or must be set for the adjourned meeting.

 

In order to attend the special meeting in person, you must be a stockholder of record on the record date, hold a valid proxy from a record holder or be an invited guest of GAFRI. You will be asked to provide proper identification at the registration desk on the day of the meeting or any adjournment of the meeting.

 

Following the announcement of the AFG proposal on February 22, 2007, litigation was initiated by certain shareholders of GAFRI challenging the proposed transaction. See “Special Factors — Certain Litigation Regarding the Merger.”

 

The following is a summary of the material terms of the merger agreement. This summary does not purport to describe all the terms of the merger agreement and is qualified by reference to the complete merger agreement which is attached as Appendix A to this proxy statement. We urge to you to read the merger agreement carefully and in its entirety because it, and not this proxy statement, is the legal document that governs the merger.

 

The text of the merger agreement has been included to provide you with information regarding its terms. The terms of the merger agreement (such as the representations and warranties) are intended to govern the contractual rights and relationships, and to allocate risks, among the parties in relation to the merger. The merger agreement contains representations and warranties that AFG, GAFRI and GAC made to each other as of specific dates. The representations and warranties were negotiated between the parties with the principal purpose of setting forth their respective rights with respect to their obligation to complete the merger and may be subject to important limitations and qualifications as set forth therein, including a contractual standard of materiality different from that generally applicable under federal securities laws.

 

At the effective time of the merger, upon the terms and subject to the satisfaction or waiver of the conditions of the merger agreement and in accordance with the Delaware General Corporation Law, GAC will merge with and into GAFRI and the separate corporate existence of GAC will end. GAFRI will be the surviving corporation in the

merger and will continue to be a Delaware corporation after the merger, wholly-owned by AFG. The certificate of incorporation and bylaws of GAC at the effective time of the merger will be the certificate of incorporation and bylaws of the surviving corporation.

 

The directors of GAFRI, as the surviving corporation, will initially, from and after the effective time of the merger, be S. Craig Lindner, Charles R. Scheper and Mark F. Muething, until the earlier of their resignation or removal or until their successors are duly elected and qualified. Each of Mr. Lindner, Mr. Scheper and Mr. Muething are currently officers of GAFRI. The officers of GAC immediately prior to the effective time of the merger will, from and after the effective time of the merger, be the initial officers of GAFRI, as the surviving corporation, until the earlier of their resignation or removal or until their successors are duly elected and qualified.

 

GAC and GAFRI will file a certificate of merger with the Secretary of State of the State of Delaware as soon as practicable after the satisfaction or waiver of the conditions to the merger. The merger will become effective at the close of business on the date on which the certificate of merger is filed or at such other later date and time as GAC and GAFRI agree and specify in the certificate of merger.

 

If stockholders approve the merger agreement, the parties intend to complete the merger as soon as practicable thereafter. The parties to the merger agreement expect to complete the merger in GAFRI’s third fiscal quarter of 2007. Because the merger is subject to certain conditions, the exact timing of the merger cannot be presently determined.

 

The merger agreement provides that, at the effective time of the merger:

 

 

In the merger, vested employee stock options will be extinguished in exchange for a cash payment by GAFRI to each holder of an option of an amount equal to the positive number difference, less applicable taxes, between $24.50 and the applicable option exercise price multiplied by the number of shares of GAFRI common stock formerly subject to an option. We refer to this amount as the “option payment amount”. In addition, so long as a holder of an option is an employee of GAFRI, AFG or any subsidiary of either of them at the vesting dates (as set forth in a GAFRI employee stock option plan or document evidencing a grant of an employee stock option), GAFRI shall pay the option payment amount as soon as practicable after such vesting dates in 2008, 2009, 2010 and 2011. GAFRI directors have agreed that their vested and unvested stock options also will be extinguished upon the consummation of the merger in exchange for the option payment amount to the extent there is a positive difference, less applicable taxes, between $24.50 and the applicable option exercise price. Also, as of the effective time of the merger, GAFRI will take all action necessary to provide for the termination of its agent stock option plans or agreements and the extinguishment of all rights under such plans and agreements.

 

AFG will also guarantee $280 million of net debt of GAFRI and its subsidiaries in the merger.

 

As soon as reasonably practicable after the effective time of the merger, the paying agent designated by AFG and GAFRI will mail (and make available for collection by hand) to each record holder of GAFRI common stock a letter of transmittal and instructions for use in effecting the surrender of their GAFRI common stock certificates in exchange for the merger consideration. You should not send in your GAFRI common stock certificates until you receive the letter of transmittal. The letter of transmittal and instructions will tell you what to do if you have lost a

certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by GAFRI (as the surviving corporation), post a bond in a reasonable amount as GAFRI directs as indemnity against any claim that may be made against GAFRI with respect to such certificate.

 

The paying agent will promptly pay you your per share merger consideration for each share of GAFRI common stock represented by your certificates after you have surrendered your certificates to the paying agent and provided to the paying agent any other items specified by the letter of transmittal and instructions. The surrendered certificates will be canceled upon delivery of the related per share merger consideration. Interest will not be paid or accrued in respect of cash payments of the related per share merger consideration. AFG, GAFRI or the paying agent may reduce the amount of the related per share merger consideration paid to you by any applicable withholding taxes.

 

If payment is to be made to a person other than the person in whose name the GAFRI common stock certificate surrendered is registered, it will be a condition of payment that the certificate so surrendered be properly endorsed and otherwise in proper form for transfer and that the person requesting such payment pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the certificate surrendered of the amount due under the merger agreement, or that such person establish to the satisfaction of the paying agent that such tax has been paid or is not applicable.

 

None of AFG, the paying agent, GAFRI, GAC or any other person will be liable to any stockholder for any merger consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws.

 

After the effective time of the merger, there will be no further transfers in the records of GAFRI or its transfer agent of certificates representing GAFRI common stock and, if any certificates are presented to GAFRI for transfer, they will be canceled against payment of the related per share merger consideration. After the effective time of the merger, subject to the right to surrender your certificate in exchange for payment of the merger consideration, you will cease to have any rights as a stockholder of GAFRI.

 

GAFRI has made certain customary representations and warranties in the merger agreement to AFG and GAC, including as to:

 

 

 

Certain aspects of the representations and warranties of GAFRI are qualified by the concept of “material adverse effect.” For the purposes of the merger agreement, a “material adverse effect” on GAFRI means any effect, change or development that, individually or in the aggregate, with other effects, changes or developments, has been or would reasonably be expected to be material and adverse to the financial condition, business operations or results of operations of GAFRI and its subsidiaries, taken as a whole, or that could reasonably be expected to adversely affect the ability of GAFRI to consummate the merger.

 

Notwithstanding the foregoing, to the extent any effect, change or development is caused by or results from any of the following, it shall not be taken into account in determining whether there has been a “material adverse effect” on GAFRI:

 

 

Each of AFG and GAC has made certain representations and warranties in the merger agreement to GAFRI, including as to:

 

 

Certain aspects of the representations and warranties of AFG and GAC are qualified by the concept of “material adverse effect.” For the purposes of the merger agreement, a “material adverse effect” on AFG and GAC means any effect, change or development that, individually or in the aggregate, with other effects, changes or developments, has been or would reasonably be expected to be material and adverse to the financial condition, business operations or results of operations of AFG and GAC, taken as a whole, or could reasonably be expected to adversely affect the ability of AFG or GAC to consummate the merger.

Notwithstanding the foregoing, to the extent any effect, change or development is caused by or results from any of the following, it shall not be taken into account in determining whether there has been a “material adverse effect” on AFG and GAC:

 

 

The representations and warranties contained in the merger agreement do not survive the completion of the merger or the termination of the merger agreement.

 

GAFRI has agreed that, until the completion of the merger, GAFRI and its subsidiaries will carry on their businesses in the usual, regular and ordinary course of business consistent with past practice and will use commercially reasonable efforts to preserve substantially intact their present lines of business, maintain their rights and franchises and preserve substantially intact their current relationships with customers, suppliers and others having business dealings with them and keep available the services of their present officers, employees and consultants, in each case to the end that their ongoing businesses will not be impaired in a manner that would have a material adverse effect on GAFRI at the effective time of the merger.

 

In addition, GAFRI has agreed, with certain exceptions, that neither it nor any of its subsidiaries will, prior to the completion of the merger, do any of the following without the prior written consent of AFG, which consent shall not be unreasonably withheld or delayed:

 

 

 

 

 

The merger agreement provides that, until the effective time of the merger or the termination of the merger agreement, GAFRI will not, whether directly or indirectly through its affiliates, advisors, agents or other intermediaries, and GAFRI will direct and cause its and its subsidiaries’ respective officers, directors, affiliates, advisors, representatives or other agents not to:

 

 

For purposes of the merger agreement, the term “acquisition proposal” means any offer or proposal regarding a merger, consolidation, share exchange, recapitalization, reclassification, liquidation or other business combination involving GAFRI or the acquisition or purchase of 10% or more of any class of equity securities of GAFRI or any of its material subsidiaries then outstanding, or any tender offer (including self-tenders) or exchange offer that if consummated would result in any person beneficially owning 10% or more of any class of equity securities of GAFRI or any of its material subsidiaries, or a substantial portion of the assets of, GAFRI or any of its subsidiaries taken as a whole, other than the transactions contemplated by the merger agreement.

 

For purposes of the merger agreement, the term “material subsidiary” means any subsidiary whose consolidated revenues, net income or assets constitute 10% or more of the revenues, net income or assets of GAFRI and its subsidiaries, taken as a whole.

 

The merger agreement provides that GAFRI will use its commercially reasonable best efforts to duly call, give notice of, convene and hold a special meeting of its stockholders as promptly as practicable for the purpose of considering and taking action upon the merger agreement. The merger agreement further provides that our Board of Directors and the special committee must recommend approval of the merger agreement by GAFRI’s stockholders, except when the Board or the special committee may determine not to so recommend or to withdraw or change such recommendation.

 

The merger agreement provides that:

 

 

 

The merger agreement provides that:

 

 

 

 

Closing Conditions for Each Party

 

The obligations of AFG, GAFRI and GAC to complete the merger are subject to the satisfaction or, to the extent permitted by applicable law, the waiver on or prior to the effective time of the merger, of each of the following conditions:

 

 

 

Additional Closing Conditions for GAFRI

 

GAFRI’s obligation to complete the merger is subject to the satisfaction or, to the extent permitted by applicable law, the waiver on or prior to the effective time of the merger, of each of the following additional conditions:

 

 

Additional Closing Conditions for AFG and GAC

 

AFG’s and GAC’s obligations to complete the merger are subject to the satisfaction or, to the extent permitted by applicable law, the waiver on or prior to the effective time of the merger, of each of the following additional conditions:

 

 

 

There is no financing condition to AFG’s and GAC’s obligations to complete the merger. As stated above, the closing conditions to the merger may be waived to the extent permitted by applicable law. GAFRI may waive any of the conditions listed under the heading “Additional Closing Conditions for GAFRI.” Similarly, AFG or GAC may waive any of the conditions listed under the heading “Additional Closing Conditions for AFG and GAC.” Despite their ability to do so, no party to the merger agreement, as of the date of this proxy statement, intends to waive any closing condition. The conditions relating to stockholder approval and prohibition or disallowance of the merger by a governmental entity may not be waived by any party to the merger agreement.

 

Circumstances Under Which AFG or GAFRI May Terminate the Merger

 

AFG and GAFRI may mutually agree to terminate the merger agreement at any time prior to the effective time of the merger upon the mutual written consent of the parties. Either of AFG or GAFRI may also terminate the merger agreement at any time if:

 

 

Circumstances Under Which AFG May Terminate the Merger

 

AFG may also terminate the merger agreement at any time, if:

 

 

Circumstances Under Which GAFRI May Terminate the Merger

 

GAFRI may also terminate the merger agreement at any time, if there is a breach by AFG or GAC of any representation, warranty, covenant or agreement contained in the merger agreement that would give rise to a failure of a condition described in any of the first three bullet points under “Terms of the Merger Agreement — Conditions to the Merger — Additional Closing Conditions for GAFRI” and which has not been cured, or is not capable of

being cured, within twenty (20) business days following receipt by GAFRI or GAC of written notice from GAFRI of such breach.

 

If the merger agreement is terminated, the merger agreement shall become void and there shall be no liability or obligation on the part of AFG, GAFRI or GAC or their respective officers or directors and except that none of AFG nor GAFRI or GAC shall be relieved or released from any liabilities or damages arising out of any willful or knowing breach of the merger agreement and except that the confidentiality agreement entered into among the parties shall survive such termination.

 

All costs and expenses incurred in connection with the merger agreement and the merger will be paid by the party incurring such expenses.

 

Any provision of the merger agreement may be amended, modified or waived by AFG, GAFRI or GAC, acting through their respective boards of directors, prior to the completion of the merger. However, no such amendment, modification or waiver by GAFRI will be effective unless it is authorized by the Board of Directors and, after the approval of the merger agreement by GAFRI’s stockholders, there shall not be made any amendment that by applicable law or regulation requires the further approval by stockholders without such further approval.

 

GAFRI’s senior management does not as a matter of course make public projections as to future performance or earnings beyond the current fiscal year and is especially wary of making projections for extended earnings periods due to the unpredictability of the underlying assumptions and estimates. However, financial forecasts prepared by senior management were made available to AFG as well as to the special committee and its financial advisor in connection with their respective considerations of the merger. We have included all material information included in these projections to give our stockholders access to certain nonpublic information considered by the CCW, the special committee and our Board of Directors for purposes of considering and evaluating the merger. The inclusion of this information should not be regarded as an indication that AFG, the special committee or our Board of Directors, CCW, or any other recipient of this information considered, or now considers, it to be a reliable prediction of future results.

 

GAFRI advised the recipients of the projections that its internal financial forecasts, upon which the projections were based, are subjective in many respects. The projections reflect numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict and beyond GAFRI’s control. The projections also reflect estimates and assumptions related to the business of GAFRI that are inherently subject to significant economic, political, and competitive uncertainties, all of which are difficult to predict and many of which are beyond GAFRI’s control. As a result, there can be no assurance that the projected results will be realized or that actual results will not be significantly higher or lower than projected. The financial projections were prepared for internal use and to assist AFG and the financial advisors to the special committee with their respective due diligence investigations of GAFRI and not with a view toward public disclosure or toward complying with GAAP, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. GAFRI’s independent registered public accounting firm has not examined or compiled any of the financial projections, expressed any conclusion or provided any form of assurance with respect to the financial projections and, accordingly, assumes no responsibility for them. The financial projections do not take into account any circumstances or events occurring after the date they were prepared.

Projections of this type are based on estimates and assumptions that are inherently subject to factors such as industry performance, general business, economic, regulatory, market and financial conditions, as well as changes to the business, financial condition or results of operations of the Company, including the factors described under “Cautionary Statement Concerning Forward-Looking Information”, which factors may cause the financial projections or the underlying assumptions to be inaccurate. Since the projections cover multiple years, such information by its nature becomes less reliable with each successive year.

 

Since the date of the projections, the Company has made publicly available its actual results of operations for the quarter ended March 31, 2007. You should review the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 to obtain this information. Readers of this proxy statement are cautioned not to place undue reliance on the specific portions of the financial projections set forth below. No one has made or makes any representation to any stockholder regarding the information included in these projections.

 

For the foregoing reasons, as well as the bases and assumptions on which the financial projections were compiled, the inclusion of specific portions of the financial projections in this proxy statement should not be regarded as an indication that such projections will be an accurate prediction of future events, and they should not be relied on as such. Except as required by applicable securities laws, GAFRI does not intend to update, or otherwise revise the financial projections or the specific portions presented to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in the event that any or all of the assumptions are shown to be in error.

 

FINANCIAL OVERVIEW(1)

 

 

 

 

Our common stock trades on the New York Stock Exchange under the symbol “GFR.” As of          , 2007, there were 47,774,881 shares of GAFRI common stock outstanding, held by approximately 3,000 stockholders of record.

The following table sets forth the high and low reported closing prices for our common stock for the periods shown as reported by the New York Stock Exchange:

 

 

On February 22, 2007, the last trading day before public disclosure of AFG’s initial proposal to acquire the Company for $23.50 per share, the closing price of the GAFRI common stock on the New York Stock Exchange was $21.694. On May 16, 2007, the last trading day before GAFRI, AFG and GAC executed the merger agreement, last trading day before GAFRI publicly announced the execution of the merger agreement, the closing price of the GAFRI common stock on the New York Stock Exchange was $24.83. On          , 2007, the last trading day before the date of this proxy statement, , the closing price of the GAFRI common stock on the New York Stock Exchange was $     .

 

STOCKHOLDERS SHOULD OBTAIN A CURRENT MARKET QUOTATION FOR GAFRI COMMON STOCK BEFORE MAKING ANY DECISION WITH RESPECT TO THE MERGER.

 

GAFRI paid annual common dividends of $0.10 per share in 2006 and 2005. Under the merger agreement, GAFRI has agreed not to pay any cash dividends on its common stock before the completion of the merger.

 

The directors and executive officers of GAFRI are set forth below. Except as described below, none of these persons nor GAFRI has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and none of these persons has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. All of the directors and executive officers of GAFRI are citizens of the United States and can be reached c/o Great American Financial Resources, Inc., 250 East Fifth Street, Cincinnati, Ohio 45202.

 

 

 

 

Carl H. Lindner has been Chairman of the Board of GAFRI since 1987. Mr. Lindner also serves as Chairman of the board of directors of AFG. Carl H. Lindner is the father of S. Craig Lindner.

 

S. Craig Lindner has been a director of GAFRI since 1993 and was elected Chief Executive Officer in November 1999. Mr. Lindner is President of American Money Management Corporation (“AMM”), a subsidiary of AFG which provides investment services for AFG and its affiliated companies, including GAFRI. He is also Co-Chief Executive Officer and a director of AFG.

 

Robert A. Adams has been a director of GAFRI since 1992. Mr. Adams served as Chief Operating Officer of GAFRI until November 1999 and as Vice Chairman of the Board from November 1999 until his retirement as an employee of GAFRI in December 2001.

 

Kenneth C. Ambrecht has been a director of GAFRI since 2004. In December 2005, Mr. Ambrecht organized KCA Associates, LLC. KCA Associates Services, a consultant to several companies, advising them with respect to financing and financing transactions. From July 2004 to December 2005, Mr. Ambrecht served as a Managing Director for the investment banking firm of First Albany Capital. For more than five years prior thereto he was a Managing Director with Royal Bank Canada Capital Markets. Mr. Ambrecht also serves as a director of AFG and Fortescue Metals Group Limited, an Australian Mining Company and Dominion Petroleum Ltd., an oil and gas exploration company.

 

Ronald G. Joseph has been a director of GAFRI since 1994. For more than five years, Mr. Joseph has been Chief Executive Officer and attorney of various Cincinnati-based automobile dealerships and real estate holdings.

 

L. Thomas Hiltz was elected a director of GAFRI in March 2007. Mr. Hiltz is a private attorney and serves as a director of Applied Industrial Technologies, Inc. and a member of the board of numerous charitable organizations.

 

John T. Lawrence III has been a director of GAFRI since 1994. For more than five years, Mr. Lawrence has been a Senior Vice President with UBS Financial Services, Inc., a national investment banking firm.

 

William R. Martin has been a director of GAFRI since 1994. Although currently retired, Mr. Martin was previously President of MB Computing, Inc., which is a privately held software development company. Mr. Martin is also a director of AFG.

 

Charles R. Scheper has been a director of GAFRI since 2002. Mr. Scheper was elected Chief Operating Officer in November 1999.

 

Joseph P. Tomain was elected a director of GAFRI in March 2007. Mr. Tomain currently serves as Dean Emeritus and a Professor of Law at the University of Cincinnati College of Law.

 

John B. Berding was elected Executive Vice President in May 1999. During that time, he has also been a Senior Vice President, and effective March 2002, an Executive Vice President of AMM.

 

Richard L. Magoteaux was elected Senior Vice President in May 2001. Prior to that time, he served as Vice President for over five years.

 

Christopher P. Miliano was elected Treasurer in May 2004, Executive Vice President in May 2002 and Chief Financial Officer in May 2001. Prior to that time, he served as Vice President and Controller for over five years.

 

James E. Moffett was elected Senior Vice President in May 2001. In June 2000, Mr. Moffett was employed by the Company as a Vice President and Chief Operating Officer of Loyal American Life Insurance Company. Prior to that time, he was employed by Thomas Group, Inc., a Dallas based strategy and operations consulting firm.

 

Mark F. Muething was elected Executive Vice President, General Counsel and Secretary in May 1999.

 

Michael J. Prager was elected Executive Vice President in November 2004 and Senior Vice President and Chief Actuary in May 2002. Prior to that time he served in various capacities since joining the Company in June 2000. Prior to that time, Mr. Prager was an independent consultant with respect to actuarial and general insurance matters.

 

The table below contains information regarding the beneficial ownership of shares of GAFRI common stock by each person or entity known by GAFRI to beneficially own 5% or more of the total number of outstanding shares of GAFRI common stock as of June 30, 2007. The table below also contains information regarding the beneficial ownership of shares of GAFRI common stock as of June 30, 2007 by all executive officers and directors of GAFRI and by all executive officers and directors of AFG, other than those who are executive officers or directors of GAFRI.

 

 

 

 

 

 

 

 

 

 

 

 

The financial statements as of December 31, 2006 and December 31, 2005 and for each of the three years for the period ended December 31, 2006, incorporated by reference in this proxy statement, have been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report incorporated by reference in this proxy statement.

 

GAFRI will hold an annual meeting in 2007 only if the merger is not completed. In order to be eligible for inclusion in GAFRI’s proxy materials for GAFRI’s 2007 annual meeting, if such a meeting is held, written notice of any stockholder proposal must have been received by GAFRI not later than December 1, 2006.

 

If the merger is completed, there will be no public participation in any future meetings of stockholders of GAFRI. If the merger is not completed, however, stockholders will continue to be entitled to attend and participate in meetings of stockholders. If the merger is not completed, GAFRI will inform its stockholders, by press release or other means determined reasonable by GAFRI, of the date by which stockholder proposals must be received by GAFRI for inclusion in the proxy materials relating to GAFRI’s 2007 annual meeting, which proposals must comply with the rules and regulations of the SEC then in effect.

 

GAFRI files annual, quarterly and current reports, proxy statements and other documents with the SEC under the Exchange Act. These reports, proxy statements and other information contain additional information about GAFRI and will be made available for inspection and copying at GAFRI’s executive offices during regular business hours by any stockholder or a representative of a stockholder as so designated in writing.

 

Stockholders may read and copy any reports, statements or other information filed by GAFRI at the SEC’s public reference room at Station Place, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of this information by mail from the public reference section of the SEC at Station Place, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. GAFRI’s SEC filings made electronically through the SEC’s EDGAR system are available to the public at the SEC’s website at www.sec.gov. You can also inspect reports, proxy statements and other information about GAFRI at the offices of the NASDAQ National Market. For further information on obtaining copies of our public filings at the NASDAQ National Market, you should call 1-800-261-0148.

 

A list of stockholders will be available for inspection by stockholders of record at GAFRI’s executive offices at 250 East Fifth Street, Cincinnati, Ohio 45202 during regular business hours beginning two (2) business days after notice of the special meeting is given and continuing to the date of the special meeting. The list of stockholders will be available at the special meeting or any adjournment thereof.

 

The SEC allows GAFRI to “incorporate by reference” information that it files with the SEC in other documents into this proxy statement. This means that GAFRI may disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this proxy statement. This proxy statement and the information that GAFRI files later with the SEC may update and supersede the information incorporated by reference. Similarly, the information that GAFRI later files with the

SEC may update and supersede the information in this proxy statement. Such updated and superseded information will not, except as so modified or superseded, constitute part of this proxy statement.

 

GAFRI incorporates by reference in this proxy statement the following documents filed by it with the SEC under the Exchange Act:

 

 

GAFRI undertakes to provide without charge to each person to whom a copy of this proxy statement has been delivered, upon request, by first class mail or other equally prompt means, within one business day of receipt of such request, a copy of any or all of the documents incorporated by reference in this proxy statement, other than the exhibits to these documents, unless the exhibits are specifically incorporated by reference into the information that this proxy statement incorporates. These documents incorporated by reference are also available on GAFRI’s website at www.GAFRI.com. You may obtain documents incorporated by reference by requesting them in writing or by telephone at the following address and telephone number:

 

Great American Financial Resources, Inc.

 

Documents should be requested by          , 2007 in order to receive them before the special meeting. You should be sure to include your complete name and address in your request.

 

This proxy statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is not lawful to make any offer or solicitation in that jurisdiction. The delivery of this proxy statement should not create an implication that there has been no change in the affairs of GAFRI since the date of this proxy statement or that the information herein is correct as of any later date.

 

AFG and GAC have supplied, and GAFRI has not independently verified, the information in this proxy statement relating to AFG and GAC.

 

Stockholders should not rely on information other than that contained or incorporated by reference in this proxy statement. GAFRI has not authorized anyone to provide information that is different from that contained in this proxy statement. This proxy statement is dated          , 2007. No assumption should be made that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement will not create any implication to the contrary. Notwithstanding the foregoing, in the event of any material change in any of the information previously disclosed, GAFRI will, where relevant and if required by applicable law, update such information through a supplement to this proxy statement.

Appendix A

AGREEMENT AND PLAN OF MERGER

among

AMERICAN FINANCIAL GROUP, INC.,

GREAT AMERICAN FINANCIAL RESOURCES, INC.

and

GAFRI ACQUISITION CORP.

Dated as of May 17, 2007

Table of Contents

							Page
Article I       DEFINITIONS							1
		Section 1.1		Definitions			1
Article II     THE MERGER							6
		Section 2.1		The Merger			6
		Section 2.2		Closing			6
		Section 2.3		Effective Time			6
Article III     EFFECTS OF THE MERGER							7
		Section 3.1		Effects of the Merger			7
		Section 3.2		Certificate of Incorporation			7
		Section 3.3		Bylaws			7
		Section 3.4		Officers			7
		Section 3.5		Directors			7
		Section 3.6		Conversion of Treasury Stock and Parent Owned Stock			7
		Section 3.7		Conversion of GAFRI Common Stock			7
		Section 3.8		Option Consideration			8
		Section 3.9		Cancellation of the Common Stock of GAC			8
		Section 3.10		Dissenting Shares			10
Article IV     REPRESENTATIONS AND WARRANTIES OF GAFRI							11
		Section 4.1		Organization			11
		Section 4.2		Authorization			11
		Section 4.3		Consents and Approvals; No Violations			12
		Section 4.4		Capitalization			13
		Section 4.5		Subsidiaries			14
		Section 4.6		No Undisclosed Liabilities			14
		Section 4.7		SEC Filings			14
		Section 4.8		Financial Statements; No Undisclosed Liabilities			15
		Section 4.9		Proxy Statement			16
		Section 4.10		Absence of Material Adverse Changes, etc			16
		Section 4.11		Environmental Matters			16
		Section 4.12		Employee Benefit Plans			17
		Section 4.13		Litigation; Compliance with Laws			17
		Section 4.14		Intellectual Property			17
		Section 4.15		Labor and Employment			18
		Section 4.16		Opinion of Financial Advisors			18
		Section 4.17		Finders’ and Other Fees			18
		Section 4.18		State Takeover Statutes			18
		Section 4.19		[Reserves			18
		Section 4.20		[Reserved]			18
		Section 4.21		Investment Company			18
		Section 4.22		No Downgrading of Rating			19
Article V     REPRESENTATIONS AND WARRANTIES OF PARENT AND GAC							19
		Section 5.1		Organization			19
		Section 5.2		Authorization			19
		Section 5.3		Consents and Approvals; No Violations			19