During 2015, AFG repurchased 2.0 million shares of its Common Stock for $126 million. In December 2015, AFG paid a special cash dividend of $1.00 per share of AFG Common Stock totaling approximately $88 million. In January 2016, AFG repurchased 951,394 additional shares of its Common Stock for $64 million.
Off-Balance Sheet Arrangements See Note P - “Additional Information - Financial Instruments - Unfunded Commitments” to the financial statements.
using non-binding broker quotes. When prices obtained for the same security vary, AFG’s internal investment professionals select the price they believe is most indicative of an exit price.
In general, the fair value of AFG’s fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG’s fixed maturity portfolio and accumulated other comprehensive income that an immediate increase of 100 basis points in the interest rate yield curve would have at December 31, 2015 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.
The general state of the economy and the variability of the stock price of the insured can affect the frequency and severity of shareholder class action suits and other situations that trigger coverage under D&O policies. For example, from 2008 to 2010,
The availability and cost of reinsurance are subject to prevailing market conditions, which are beyond AFG’s control and which may affect AFG’s level of business and profitability. Although the cost of certain reinsurance programs may increase, management believes that AFG will be able to maintain adequate reinsurance coverage at acceptable rates without a material adverse effect on AFG’s results of operations. AFG’s gross and net combined ratios are shown in the table below.
Specialty casualty The loss and LAE ratio for the current year, excluding catastrophe losses was comparable in the fourth quarters of 2015 and 2014.
Annuity other expenses for the fourth quarter of 2015 were $22 million compared to $17 million for the fourth quarter of 2014, an increase of $5 million (29%). The fourth quarter of 2014 includes the favorable impact of settling certain accrued expenses
Run-off Long-Term Care and Life Segment - Results of Operations AFG’s run-off long-term care and life segment incurred GAAP pretax losses of $4 million for the three months ended December 31, 2015, which includes a $4 million pretax non-core realized loss adjustment to the previously recognized $162 million estimated pretax loss on the sale of substantially all of AFG’s run-off long-term care insurance business that was recorded in the first quarter of 2015. See Note B - “Acquisitions and Sale of Businesses” to the financial statements. The following table details AFG’s GAAP and core earnings (loss) before income taxes from its run-off long-term care and life operations for the three months ended December 31, 2015 and 2014 (dollars in millions):
The Specialty property and casualty insurance operations generated an underwriting profit of $237 million in 2014 compared to $206 million in 2013, an increase of $31 million (15%). The higher underwriting profit in 2014 reflects significantly higher underwriting profit in the Specialty casualty and Property and transportation groups. Overall catastrophe losses were $28 million (0.7 points on the combined ratio) in 2014 compared to $31 million (1.0 points), in 2013.
Net favorable reserve development of $1 million in 2013 reflects lower than expected claims handling expense in the crop business and lower claim severity in the property and inland marine and ocean marine businesses, substantially offset by adverse development from higher than expected claim severity in commercial auto liability business written in the transportation businesses.
The $153 million increase in commissions and other underwriting expenses in 2014 compared to 2013 reflects the acquisition of Summit in April 2014. The overall decrease of 1.6% in commissions and other underwriting expenses in 2014 compared to 2013 reflects the acquisition of Summit, which has a lower expense ratio than AFG’s overall property and casualty operations.
The increase in average invested assets and net investment income in the property and casualty segment in 2015 compared to 2014 is due primarily to the investment of cash acquired in the Summit acquisition, which occurred over the two quarters following the April 2014 acquisition, as well as growth in the property and casualty segment. The property and casualty segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 3.56% in 2015 compared to 3.75% in 2014, a decline of 0.19 percentage points reflecting the impact of lower yields available in the financial markets and lower earnings from other investments.
subsidiaries are required under the solvency or guaranty laws of most states in which they do business to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies such as ELNY and started receiving guaranty fund assessments related to ELNY from various states in the second quarter of 2013. AFG believes that all ELNY related guaranty fund assessments have been settled.
Annuity policy charges and other miscellaneous income were $63 million in 2014 compared to $52 million in 2013, an increase of $11 million (21%). Excluding the impact of unlocking income of $10 million in 2014 related to unearned revenue, annuity policy charges and other miscellaneous income were $53 million in 2014 and $52 million in 2013, an increase of $1 million (2%). This increase reflects growth in the business, partially offset by the impact of $4 million in income from the sale of real estate recorded in 2013.
AFG’s fixed-indexed annuities, which represented approximately 60% of annuity benefits accumulated at December 31, 2015, provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase of call options on the appropriate index. AFG’s strategy is designed so that the change in the fair value of the call option assets will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call options are considered derivatives that must be marked-to-market through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. For a list of other factors impacting the fair value of the index-based component of AFG’s annuity benefits accumulated, see Note D - “Fair Value Measurements” to the financial statements. Excluding the impact of unlocking charges, the net change in fair value of derivatives related to fixed-indexed annuities increased annuity benefits by $45 million in 2015 and $59 million in 2014, reflecting the negative impact of the decline in the stock market in 2015 and lower than anticipated interest rates in 2015 and 2014 on these derivatives. Conversely, the net change in fair value of the derivatives related to fixed-indexed annuities reduced annuity benefits by $26 million in 2013 due to the positive impact of higher market interest rates and the net impact of strong market performance on these derivatives.
The following table reconciles the GAAP and core net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for 2015, 2014 and 2013 (in millions):
AFG recorded net investment income on investments held outside of its insurance operations of $4 million, $5 million and $8 million in 2015, 2014 and 2013, respectively.
Consolidated Statement of Earnings for the years ended December 31, 2015, 2014 and 2013
AFG’s management, with participation of its Co-Chief Executive Officers and its Chief Financial Officer, has evaluated AFG’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG’s Co-CEOs and CFO concluded that the controls and procedures are effective. There have been no changes in AFG’s internal control over financial reporting during the fourth fiscal quarter of 2015 that materially affected, or are reasonably likely to materially affect, AFG’s internal control over financial reporting.
Based on AFG’s evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2015. The attestation report of AFG’s independent registered public accounting firm on AFG’s internal control over financial reporting as of December 31, 2015, is set forth on the next page.
We have audited American Financial Group, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
liabilities to improve the transparency of financial reporting related to the CLOs. The net gain or loss from accounting for the CLO assets and liabilities at fair value is presented separately in AFG’s Statement of Earnings.
Included in other assets in AFG’s Balance Sheet is $41 million at December 31, 2015 and $49 million at December 31, 2014 of amortizable intangible assets related to property and casualty insurance acquisitions, primarily the acquisition of Summit in 2014. These amounts are net of accumulated amortization of $18 million and $91 million, respectively. The decrease in accumulated amortization reflects the impact of intangibles that became fully amortized in 2015. Amortization of intangibles was $8 million in 2015, $19 million in 2014 and $14 million in 2013. Future amortization of intangibles (weighted average amortization period of 5 years) is estimated to be $8 million per year in each of 2016 through 2020 and $1 million thereafter.
The reclassification adjustment out of net unrealized gains on securities affected the following lines in AFG’s Statement of Earnings:
AFG’s provision for income taxes included an expense of less than $1 million in 2015, a benefit of $1 million in 2014 and an expense of $1 million in 2013 of interest (net of federal benefit or expense). AFG’s liability for interest related to unrecognized tax benefits was less than $1 million at December 31, 2015 and $1 million at December 31, 2013 (net of federal benefit); no penalties were accrued at those dates.
Results for the third quarter of 2015 and 2014 include pretax special charges of $12 million and $6 million, respectively, to strengthen reserves for A&E exposures related to AFG’s former railroad and manufacturing operations.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters