the second quarter 2016 gain on the sale of an apartment property, which was less than the second quarter 2015 gain on the sale of a hotel and the fourth quarter 2015 gain on the sale of an apartment property, and
AFG’s Specialty property and casualty insurance operations recorded net adverse reserve development related to prior accident years of $10 million in the fourth quarter of 2016 compared to net favorable reserve development related to prior accident years of $5 million in the fourth quarter of 2015.
AFG’s annuity operations generated statutory premiums of $1.11 billion in both the fourth quarter of 2016 and 2015. The following table summarizes AFG’s annuity sales (dollars in millions):
Management believes that these results demonstrate that AFG’s reinvestment rate assumptions are reasonable and prudently conservative. In addition to the reinvestment rates above, actual default rates in 2015 and 2016 were lower than the long-term default rates of 0.18% assumed in the unlocking in each of the periods above.
AFG’s holding companies and other operations outside of its insurance operations recorded interest expense of $21 million in the fourth quarter of 2016 compared to $16 million in the fourth quarter of 2015, an increase of $5 million (31%). This increase reflects higher average indebtedness, partially offset by lower average interest rates on outstanding debt. The following table details the principal amount of AFG’s long-term debt balances as of October 1, 2016 compared to October 1, 2015 (dollars in millions):
As discussed in Note B - “Acquisitions and Sale of Businesses” to the financial statements, AFG acquired the noncontrolling interest in National Interstate Corporation in November 2016. This transaction allowed National Interstate and its subsidiaries to become members of the AFG consolidated tax group, which resulted in a tax benefit of $66 million to AFG during the fourth quarter of 2016.
Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $5.98 billion in 2016 compared to $5.83 billion in 2015, an increase of $149 million (3%). GWP increased $355 million (6%) in 2015 compared to 2014. Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):
Property and transportation Gross written premiums increased $49 million (2%) in 2016 compared to 2015. This increase was the result of higher premiums in the agricultural businesses, growth in the transportation businesses and higher gross written premiums from the Singapore branch, which opened for business in June 2015, partially offset by lower gross written premiums in the property and inland marine businesses. Average renewal rates increased approximately 3% for this group in 2016, including a 5% increase in National Interstate’s renewal rates. Reinsurance premiums ceded as a percentage of gross written premiums were comparable in 2016 and 2015.
Underwriting profit for this group was $48 million in 2015 compared to $21 million in 2014, an increase of $27 million (129%). Higher profits in the agricultural operations and improved year-over-year underwriting results at National Interstate, due primarily to lower adverse prior year reserve development, were partially offset by lower profitability in the property and inland marine, ocean marine and other transportation businesses.
Specialty casualty The 2.8 percentage point increase in the loss and LAE ratio for the current year, excluding catastrophe losses in 2016 compared to 2015 reflects an increase in current accident year trade credit losses in Neon’s political risk and trade credit business and an increase in the loss and LAE ratio of the targeted markets, general liability and excess and surplus businesses.
Neon exited lines charge During the second quarter of 2016, AFG’s specialist Lloyd’s market insurer completed a strategic review of its business under a new leadership team and re-launched as Neon Underwriting Ltd. As part of its strategic review, Neon sold and/or exited certain historical lines of business including its UK and international medical malpractice and general liability classes. As a result of Neon’s claims review of its exited lines of business, AFG recorded a charge of approximately $65 million including $57 million to increase loss reserves primarily related to its medical malpractice and general liability lines. Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), this charge is being treated as non-core because it resulted from a special strategic review of lines of business that Neon no longer writes.
The lower amortization of intangibles in 2015 compared to 2014 reflects the impact of intangible assets related to three acquisitions that became fully amortized in 2014.
The following table details AFG’s earnings before income taxes from its annuity operations for 2016, 2015 and 2014 (dollars in millions):
AFG’s holding companies and other operations outside of its insurance operations recorded interest expense of $77 million in 2016 compared to $73 million in 2015, an increase of $4 million (5%). This increase reflects higher average indebtedness during 2016 compared to 2015, partially offset by a lower weighted average interest rate on outstanding debt and the favorable impact of the interest rate swap on the 9-7/8% Senior Notes due June 2019 that was entered into in June 2015.
Debt Issuance Costs Debt issuance costs related to AFG’s outstanding debt are amortized over the life of the related debt using the effective interest method. Effective January 1, 2016, AFG adopted (on a retrospective basis) ASU 2015-03, which requires debt issuance costs to be presented in the balance sheet as a direct reduction in the carrying value of long-term debt (consistent with the treatment of debt discounts) with the periodic amortization of such costs included in interest expense. Debt issuance costs related to AFG’s revolving credit facilities will continue to be included in other assets in AFG’s Balance Sheet. Prior to AFG’s adoption of ASU 2015-03, AFG reported unamortized debt issuance costs as a deferred charge asset (included in other assets) in AFG’s Balance Sheet and the periodic amortization was included in other expenses in AFG’s Statement of Earnings. The updated guidance did not affect the overall recognition and measurement guidance for debt issuance costs. Accordingly, the guidance did not have an overall impact on AFG’s Shareholders’ Equity or results of operations.
AFG recorded $89 million in other-than-temporary impairment charges on common stocks in 2016. At December 31, 2016, the gross unrealized losses on common stocks of $23 million relate to 23 securities, none of which has been in an unrealized loss position for more than 12 months.
Management believes AFG will recover its cost basis in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at December 31, 2016.
Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR. The notional amounts of the interest rate swaps amortize down over each swap’s respective life (the swaps expire between August 2019 and June 2030) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of AFG’s interest rate swaps increased to $1.08 billion at December 31, 2016 compared to $604 million at December 31, 2015, reflecting four new swaps with an aggregate notional amount at issuance of $610 million entered into in 2016, partially offset by the scheduled amortization discussed above. The fair value of the effective portion of the interest rate swaps in an asset position and included in other assets was $1 million at December 31, 2016 and $2 million at December 31, 2015. The fair value of the effective portion of interest rate swaps in a liability position and included in other liabilities was $22 million at December 31, 2016 and less than $1 million at December 31, 2015. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of DPAC and deferred taxes. Amounts reclassified from AOCI (before DPAC and taxes) to net investment income were $7 million and $6 million in 2016 and 2015, respectively. There was no ineffectiveness recorded in net earnings during these periods. A collateral receivable supporting these swaps of $60 million at December 31, 2016 and $14 million at December 31, 2015 is included in other assets in AFG’s Balance Sheet.
associated with these losses, AFG maintains a full valuation allowance of $120 million against these deferred tax assets at December 31, 2016. In addition to the valuation allowance related to the Neon Lloyd’s insurance business, the gross deferred tax asset has also been reduced by a $50 million valuation allowance related to a portion of AFG’s net operating loss carryforwards (“NOL”) subject to the separate return limitation year (“SRLY”) tax rules. A SRLY NOL can be used only by the entity that created it and only in years that both it and the consolidated group have taxable income.
AFG has reinsured approximately $10.22 billion of its $13.49 billion in face amount of life insurance at December 31, 2016 compared to $11.19 billion of its $14.67 billion in face amount of life insurance at December 31, 2015. Life written premiums ceded were $31 million, $40 million and $41 million for 2016, 2015 and 2014, respectively. Reinsurance recoveries on ceded life policies were $41 million, $50 million and $59 million for 2016, 2015 and 2014, respectively.