On January 27, 2021, AFG announced that it entered into a definitive agreement to sell its annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”) for $3.5 billion in cash, subject to final closing adjustments. Under the terms of the agreement, which is expected to close in the second quarter of 2021, MassMutual will acquire AFG’s wholly-owned annuity subsidiary, Great American Life Insurance Company (“GALIC”) and GALIC’s two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. At December 31, 2020, GALIC and its subsidiaries had approximately $40 billion of traditional fixed and indexed annuity reserves. AFG expects to recognize an after-tax gain on the sale of $620 million to $690 million ($7.10 to $7.90 per AFG share) upon closing. Prior to the completion of the transaction, AFG will acquire approximately $500 million in real estate-related partnerships and directly owned real estate from GALIC. Beginning with the first quarter of 2021, AFG will report the results of the Annuity business as discontinued operations, in accordance with GAAP, which includes adjusting prior period results to reflect these operations as discontinued.
GALIC entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company (“Commonwealth”), a subsidiary of Global Atlantic Financial Group Limited in October 2020. Under the terms of the
AFG reported fourth quarter 2020 net earnings attributable to shareholders of $692 million ($7.93 per share, diluted) compared to $211 million ($2.31 per share, diluted) in the fourth quarter of 2019, reflecting:
•higher net realized gains on securities in the fourth quarter of 2020 compared to the fourth quarter of 2019 reflecting the disposal of investments in the annuity block reinsurance transaction,
Full year 2020 net earnings attributable to AFG’s shareholders were $732 million ($8.20 per share, diluted) compared to $897 million ($9.85 per share, diluted) in 2019. The COVID-19 pandemic has had widespread financial and economic impacts and adversely impacted returns on AFG’s $3.81 billion of investments that are accounted for using the equity method or carried at fair value through net earnings. AFG’s results reflect:
As a result of the contracted economy, exposures in many of AFG’s property and casualty businesses have changed due to workforce reduction, fewer miles driven and reduced revenue. This has and may continue to lead to lower frequency in certain lines while there has and may continue to be COVID-19 related increases in claim frequency in other lines of business.
There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape, such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG’s business interruption coverages require direct physical damage to covered property for business interruption coverage to apply and the vast majority of AFG’s property policies also contain virus exclusions. See Item 1A - “Risk Factors.”
(*) The adjusted information above is shown “as if” the transaction to sell AFG’s annuity business to MassMutual closed on December 31, 2020, and assumes an after-tax gain on the sale of the annuity business of $655 million (midpoint of the estimated range).
Although the ratio of earnings to fixed charges excluding annuity benefits is not required or encouraged to be disclosed under Securities and Exchange Commission rules, some investors and lenders may not consider interest credited to annuity policyholders’ accounts a borrowing cost for an insurance company, and accordingly, believe this ratio is meaningful.
The NAIC’s model law for risk-based capital (“RBC”) applies to both life and property and casualty companies. RBC formulas determine the amount of capital that an insurance company needs so that it has an acceptable expectation of not becoming financially impaired. At December 31, 2020, the capital ratios of all AFG insurance companies exceeded the RBC requirements.
AFG’s principal sources of cash include insurance premiums, income from its investment portfolio and proceeds from the maturities, redemptions and sales of investments. Insurance premiums in excess of acquisition expenses and operating costs are invested until they are needed to meet policyholder obligations or made available to the parent company through dividends to cover debt obligations and corporate expenses, and to provide returns to shareholders through share repurchases and dividends. Cash flows from operating, investing and financing activities as detailed in AFG’s Consolidated Statement of Cash Flows are shown below (in millions):
As discussed above, in January 2021, AFG reached a definitive agreement to sell its annuity business to MassMutual for $3.5 billion in cash, subject to final closing adjustments. AFG’s capital and liquidity will be significantly enhanced as a result of the transaction. With a strong balance sheet and substantial excess capital, management will continue to evaluate opportunities for deploying AFG’s excess capital, including the potential for healthy, profitable organic growth, expansion of the Specialty property & casualty niche businesses through acquisitions and start-ups that meet target return thresholds, as well as share repurchases and special dividends.
In 2020, AFG repurchased 4,531,394 shares of its Common Stock for $313 million and paid a special cash dividend of $2.00 per share of AFG Common Stock in December totaling approximately $173 million.
In December 2019, AFG issued $200 million of 5.125% Subordinated Debentures due in December 2059. A portion of the net proceeds of the offering were used to redeem AFG’s $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in September 2054, at par value, with the remainder used for general corporate purposes.
In February 2020, GALIC entered into a flow reinsurance agreement with Commonwealth under which GALIC cedes certain newly issued traditional fixed and indexed annuities on a quota share coinsurance basis with such quota share percentages being up to 50%. That agreement was effective for policies issued after May 6, 2020. Under accounting guidance, the reinsurance transaction will be accounted for using the deposit method.
In the fourth quarter of 2018, GALIC entered into a reinsurance treaty with Hannover Life Reassurance Company of America that transfers the risk of certain surrender activity in GALIC’s fixed-indexed annuity business. This treaty meets the statutory risk transfer rules and resulted in increases in statutory surplus (through an after-tax reserve credit) of $139 million at December 31, 2020 and $124 million at December 31, 2019. The treaty reduces statutory capital and surplus volatility related to GALIC’s fixed-indexed annuity policies from stock market fluctuations, which could impact GALIC’s risk-based capital and the amount of dividends available in future periods. Under GAAP, this transaction does not meet the GAAP insurance risk transfer criteria and did not have a material impact on AFG’s financial statements.
AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG’s insurance subsidiaries are adequate to maintain its business and rating agency ratings. Should the current adverse financial conditions continue into 2021, AFG’s insurance subsidiaries will reduce dividend payments to AFG parent as needed to maintain sufficient capital at the insurance companies. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries’ investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.
Parent Net Cash Provided by Operating Activities Parent holding company cash flows from operating activities consist primarily of dividends and tax payments received from AFG’s insurance subsidiaries, reduced by tax payments to the IRS and holding company interest and other expenses. Parent holding company net cash provided by operating activities was $483 million in 2020 compared to $306 million in 2019 and $215 million in 2018. The $177 million increase in net cash provided by operating activities in 2020 as compared to 2019 was due primarily to higher dividends received from subsidiaries in 2020 as compared to 2019. The $91 million increase in net cash provided by operating activities in 2019 as compared to 2018 was due primarily to higher dividends received from subsidiaries.
$56 million in 2019 and net cash provided by investing activities of $10 million in 2018. The $56 million in net cash used in investing activities in 2019 and the $10 million in net cash provided by investing activities in 2018 are significantly lower than the $294 million in net cash used in investing activities in 2020 due primarily to higher capital contributions to AFG’s property and casualty subsidiaries in 2020.
Parent Net Cash Used in Financing Activities Parent company financing activities consist primarily of the issuance and retirement of long-term debt, dividends to shareholders, and, to a lesser extent, proceeds from employee stock option exercises and repurchases of AFG Common Stock. Significant long-term debt and common stock transactions are discussed above under “Parent Holding Company Liquidity.” Parent holding company net cash used in financing activities was $140 million in 2020 compared to $242 million in 2019 and $366 million in 2018. The $102 million decrease in net cash used in financing activities in 2020 as compared to 2019 reflects the net issuances of long-term debt in 2020 and lower dividends (due primarily to special dividends of $2.00 per share in 2020 compared to special dividends of $3.30 per share in 2019), partially offset by $313 million in repurchases of outstanding common shares in 2020 compared to no repurchases in 2019. The $124 million decrease in net cash used in financing activities in 2019 as compared to 2018 reflects the net issuances of long-term debt in 2019, partially offset by higher dividends (due primarily to special dividends of $3.30 per share in 2019 compared to $3.00 per share in 2018).
(a)Amounts presented in the table represent estimated cash payments under such contracts, based on significant assumptions related to mortality, morbidity, lapse, renewal, retirement and annuitization. These assumptions also include interest and index crediting consistent with assumptions used to amortize DPAC and assess loss recognition. All estimated cash payments are undiscounted for the time value of money. As a result, total outflows for all years exceed the corresponding liabilities of $42.57 billion for annuity benefits accumulated and $607 million for life, accident and health reserves included in AFG’s Balance Sheet as of December 31, 2020. Based on the same assumptions, AFG projects reinsurance recoveries related to annuity benefits accumulated totaling $7.25 billion as follows: Within 1 year - $876 million; 2-3 years - $1.73 billion; 4-5 years - $2.05 billion; and thereafter - $2.59 billion and reinsurance recoveries related to life, accident and health reserves totaling $577 million as follows: Within 1 year - $58 million; 2-3 years - $91 million; 4-5 years - $74 million; and thereafter - $354 million. Actual payments and their timing could differ significantly from these estimates. Both the annuities and life, accident and health liabilities are part of the pending sale of annuity business, which is expected to close in the second quarter of 2021.
As detailed in Note E - “Investments - Net Unrealized Gain on Marketable Securities” to the financial statements, unrealized gains and losses on AFG’s fixed maturity securities are included in shareholders’ equity after adjustments for related changes in DPAC and certain liabilities related to annuity, long-term care and life businesses and deferred income taxes. DPAC and certain other balance sheet amounts applicable to annuity, long-term care and life businesses are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding increases or decreases (net of tax) included in accumulated other comprehensive income in AFG’s Balance Sheet.
Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2020, the average life of AFG’s fixed maturities was about 5-1/2 years.
The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage-backed securities (“MBS”) are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers’ prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.
Summarized information for AFG’s MBS (including those classified as trading) at December 31, 2020, is shown in the table below (dollars in millions). Agency-backed securities are those issued by a U.S. government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime. The average life of the residential and commercial MBS is approximately 3-1/2 years and 3 years, respectively. Approximately 75% of AFG’s MBS are owned in the annuity businesses expected to be sold.
When a decline in the value of a specific investment is considered to be other-than-temporary, an allowance for credit losses (impairment) is charged to earnings (accounted for as a realized loss). The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:
a)whether the unrealized loss is credit-driven or a result of changes in market interest rates,
d)historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases,
Based on its analysis of the factors listed above, management believes AFG will recover its cost basis (net of any allowance) in the fixed maturity 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, 2020. Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers’ creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG’s ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, increases in the allowance for credit losses could be material to results of operations in future periods. Significant declines in the fair value of AFG’s investment portfolio could have a significant adverse effect on AFG’s liquidity. For information on AFG’s realized gains (losses) on securities, see “Results of Operations - Consolidated Realized Gains (Losses) on Securities.”
The estimates of liabilities for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon: (i) the accumulation of case estimates for losses reported prior to the close of the accounting periods on direct business written (“case reserves”); (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of claims incurred but not reported or “IBNR” (including possible development on known claims);
Approximately 28% and 23% of AFG’s workers’ compensation reserves at December 31, 2020 relate to policies written in Florida and California, respectively. The Castellanos v. Next Door Company decision in Florida and the implementation of Senate Bill 863 in California are two examples of changes that impacted the workers’ compensation operating environment and added difficulty and uncertainty to the estimation of related liabilities.
AFG recorded favorable prior year reserve development of $178 million in 2020 due to lower than anticipated medical claim severity and improving claim closure rates, particularly in the southeastern United States and California. AFG recorded favorable prior year reserve development of $180 million in 2019 related to its workers’ compensation coverage due to lower than anticipated frequency of lost-time claims and medical severity. AFG recorded favorable prior year reserve development of $127 million in 2018 due to lower than anticipated claim severity in the southeastern United States and improving claim closure rates in California.
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, economic conditions led to higher frequency of claims, particularly in the D&O policies for small account and not-for-profit organizations. Since then, claim frequency has decreased from its peak in 2010 and has stabilized to near pre-2008 levels.
AFG recorded favorable prior year reserve development of $8 million in 2020, $4 million in 2019 and $9 million in 2018 on its D&O business as claim frequency and severity was less than expected across several prior accident years.
AFG recorded favorable prior year reserve development of $16 million in 2020, $15 million in 2019 and $26 million in 2018. Although severity trends for this line of business continue to be elevated, the severity has been lower than initially projected in each period.
See Item 1 - Business - “Property and Casualty Insurance Segment - Reinsurance” for more information on AFG’s reinsurance programs. For additional information on the effect of reinsurance on AFG’s historical results of operations see Note P - “Insurance - Reinsurance” to the financial statements.
Outside of its property and casualty operations, AFG also has reinsurance recoverables of $6.54 billion related to the annuity business and $265 million related to the run-off long-term care and life business. The annuity related recoverable is due from Commonwealth Annuity and Life Insurance Company. Under the terms of the agreements, Commonwealth is required to maintain collateral in trusts in excess of amounts owed to GALIC. Of the $265 million related to the run-off long-term care and life business, $183 million ($179 million net of credit allowances) is due (directly or indirectly) from Hannover Life Reassurance Company of America (rated AA- by S&P).
reviews adjusted for payments and identifiable changes, supplemented by management’s review of industry information about such claims, with due consideration to individual claim situations.
•There is interest at the state level to attempt to legislatively address asbestos liabilities and the manner in which asbestos claims are resolved. These developments are fluid and could result in piecemeal state-by-state solutions.
While management believes that AFG’s reserves for A&E claims are a reasonable estimate of ultimate liability for such claims, actual results may vary materially from the amounts currently recorded due to the difficulty in predicting the number of future claims, the impact of bankruptcy filings and unresolved issues such as whether coverage exists, whether policies are subject to aggregate limits on coverage, how claims are to be allocated among triggered policies and implicated years and whether claimants who exhibit no signs of illness will be successful in pursuing their claims. A 1% variation in loss cost trends, caused by any of the factors previously described, would change net earnings by approximately $38 million.
During the third quarter of 2020, AFG completed a comprehensive external study of its asbestos and environmental exposures relating to the run-off operations of its property and casualty insurance segment and its exposures related to former railroad and manufacturing operations and sites. In addition to its ongoing internal monitoring of asbestos and environmental exposures, AFG has periodically conducted comprehensive external studies of its asbestos and environmental reserves with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years.
As a result of the 2020 external study, AFG’s property and casualty insurance segment recorded a $47 million pretax special charge to increase its asbestos reserves by $26 million (net of reinsurance) and its environmental reserves by $21 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.
An in-depth internal review of AFG’s A&E reserves was completed in the third quarter of 2019. As a result of the 2019 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance). The increase in property and casualty environmental reserves relates to updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites.
An in-depth internal review of AFG’s A&E reserves was also completed in the third quarter of 2018. As a result of the 2018 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance). The increase in property and casualty asbestos reserves relates to increased estimates for indemnity and defense costs. The increase in property and casualty environmental reserves was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites.
(a)Elimination of the fair value of AFG’s investment in CLOs and related accrued interest.
(a)Includes income of $7 million representing the change in fair value of AFG’s CLO investments plus $16 million in CLO management fees earned.
Beginning with the second quarter of 2019, AFG’s core net operating earnings for its annuity segment excludes unlocking, the impact of changes in the fair value of derivatives related to fixed-indexed annuities (“FIAs”), and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs (“annuity non-core earnings (losses)”). Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of FIA liabilities that management believes can be inconsistent with the long-term economics of this growing portion of AFG’s annuity business. Management believes that separating these impacts as “non-core” provides investors with a better view of the fundamental performance of the business, and a more comparable measure of the annuity segment’s business compared to the results identified as “core” by its peers. Core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, so results for periods following the change are not directly comparable to prior periods. The impact of the items now considered annuity non-core earnings on prior periods is highlighted in the discussion following the reconciliation of net earnings attributable to shareholders to core net operating earnings.
In January 2021, AFG entered into a definitive agreement to sell its Annuity business to MassMutual. Beginning with the first quarter of 2021, AFG will report the results of its annuity segment and the run-off life and long-term care operations (reported in the Holding Company, Other and Unallocated segment) as discontinued operations, in accordance with GAAP, which includes adjusting prior period results to reflect these operations as discontinued.
In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon and its predecessor, Marketform, have failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), beginning with the first quarter of 2020, AFG’s core net operating earnings for its property and casualty insurance segment excludes the run-off operations of Neon (“Neon exited lines”). In the third quarter of 2020, AFG reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. The transaction closed in the fourth quarter of 2020.
(losses). In addition, the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts are considered non-core earnings (losses).
AFG reported net earnings attributable to shareholders of $692 million in the fourth quarter of 2020 compared to $211 million in the fourth quarter of 2019 reflecting higher after-tax net realized gains on securities resulting from the disposal of investments associated with AFG’s annuity block reinsurance transaction, higher core net operating earnings and lower non-core losses from the Neon exited lines, partially offset by annuity non-core losses in the fourth quarter of 2020 compared to annuity non-core earnings in the fourth quarter of 2019. Core net operating earnings for the fourth quarter of 2020 increased $66 million compared to the fourth quarter of 2019 reflecting higher core net operating earnings in the annuity segment and higher core underwriting profit in the property and casualty insurance segment, partially offset by higher interest charges on borrowed money.
Net earnings attributable to shareholders decreased $165 million for the full-year of 2020 compared to the same period in 2019 reflecting lower core net operating earnings and higher special A&E charges. In addition, net earnings attributable to shareholders includes after-tax losses of $149 million for the full year of 2020 and $38 million for the full year of 2019 (after tax losses of $9 million in the first quarter, $27 million in the second quarter, $21 million in the third quarter and an after tax gain of $19 million in the fourth quarter) from the annuity reinsurance transaction entered into in the fourth quarter of 2020, annuity unlocking, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, unlocking and this impact on the accounting for FIAs is considered non-core earnings (losses) beginning with the second quarter of 2019. Excluding the $9 million after-tax negative impact of these items on results for the first quarter of 2019, core net operating earnings decreased $41 million in 2020 compared to 2019 reflecting higher interest charges on borrowed money and lower investment income due to lower market interest rates, lower dividend income and the negative impact of the COVID-19 pandemic on partnerships and similar investments and AFG-managed CLOs in both the property and casualty insurance and annuity segments, partially offset by higher underwriting profit in the property and casualty insurance segment and lower holding company expenses.
RESULTS OF OPERATIONS - QUARTERS ENDED DECEMBER 31, 2020 AND 2019
AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months ended December 31, 2020 and 2019 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):
(b)As discussed under “Results of Operations - General,” beginning with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses). In addition, the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts are considered non-core earnings (losses).
(c)As discussed under “Results of Operations - General,” beginning with the first quarter of 2020, the Neon run-off operations are considered property and casualty insurance non-core earnings (losses).
Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 29% of gross written premiums for the fourth quarter of 2020 compared to 25% of gross written premiums for the fourth quarter of 2019, an increase of 4 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):
Property and transportation Gross written premiums increased $19 million (3%) in the fourth quarter of 2020 compared to the fourth quarter of 2019. This increase was largely the result of growth and new business opportunities in the property and inland marine and ocean marine businesses and higher gross written premiums in the crop operations, partially offset by lower premiums in the transportation businesses, primarily from reduced exposures as a result of the COVID-19 pandemic and premium reductions in two large national accounts. Average renewal rates increased nearly 5% for this group in the fourth quarter of 2020. Reinsurance premiums ceded as a percentage of gross written premiums increased 3 percentage points for the fourth quarter of 2020 compared to the fourth quarter of 2019, reflecting higher cessions in the crop insurance, transportation and ocean marine businesses.
Specialty financial Gross written premiums increased $3 million (2%) in the fourth quarter of 2020 compared to the fourth quarter of 2019, due primarily to growth in the lender services business, partially offset by COVID-related economic impacts on the surety business and heightened risk selection that has reduced new business in the trade credit business. Average renewal rates for this group increased approximately 9% in the fourth quarter of 2020. Reinsurance premiums ceded as a percentage of gross written premiums decreased 3 percentage points in the fourth quarter of 2020 compared to the fourth quarter of 2019 reflecting lower cessions in the financial institutions business and a change in the mix of business in the fidelity business.
Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased $9 million (23%) in the fourth quarter of 2020 compared to the fourth quarter of 2019, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.
The Specialty property and casualty insurance operations generated an underwriting profit of $179 million for the fourth quarter of 2020 compared to $89 million in the fourth quarter of 2019, an increase of $90 million (101%). Higher underwriting profitability in the Property and transportation and Specialty casualty sub-segments was partially offset by lower underwriting profit in the Specialty financial sub-segment. The Specialty property and casualty insurance operations did not record any additional reserve charges for COVID-19 in the fourth quarter of 2020. Overall catastrophe losses were
Specialty casualty Underwriting profit for this group was $91 million for the fourth quarter of 2020 compared to $69 million in the fourth quarter of 2019, an increase of $22 million (32%). This increase reflects higher year-over-year underwriting profit in the excess and surplus and excess liability businesses and improved year-over-year results in the general liability business, partially offset by lower favorable prior year reserve development in the workers’ compensation businesses. Catastrophe losses were $5 million (0.8 points on the combined ratio) and related net reinstatement premium recoveries were $3 million in the fourth quarter of 2020 compared to catastrophe losses of $5 million (0.8 points) and related reinstatement premiums of $1 million in the fourth quarter of 2019.
Other specialty This group reported an underwriting loss of $6 million for the fourth quarter of 2020 compared to $10 million in the fourth quarter of 2019, a decrease of $4 million (40%), reflecting lower losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the fourth quarter of 2020 compared to the fourth quarter of 2019.
In September 2020, AFG reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon. The transaction closed in the fourth quarter of 2020. AFG recorded $53 million in non-core underwriting losses (including $8 million of net adverse prior year reserve development) related to this business in the fourth quarter of 2020. These losses were offset by a $53 million gain on the sale of Neon recorded in the fourth quarter of 2020.
Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), the $53 million underwriting loss at Neon and offsetting gain on sale in the fourth quarter of 2020 and the $76 million charge related to the Neon exited lines recorded in the fourth quarter of 2019 in connection with AFG’s plans to exit the Lloyd’s of London insurance market are treated as non-core.
Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment include an underwriting loss of $53 million at Neon in the fourth quarter of 2020, due primarily to catastrophe losses and several large claims and the $76 million Neon exited lines charge mentioned above in the fourth quarter of 2019. Aggregate underwriting results for AFG’s property and casualty insurance segment also include adverse prior year reserve development of $16 million in the fourth quarter of 2020 and $1 million in the fourth quarter of 2019 related to business outside of the Specialty group that AFG no longer writes.
The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 59.5% for the fourth quarter of 2020 compared to 66.0% for the fourth quarter of 2019, a decrease of 6.5 percentage points.
Specialty casualty The 3.4 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects a decrease in the loss and LAE ratios of the workers’ compensation, targeted markets, general liability, executive liability and excess and surplus businesses, partially offset by the impact of the Neon exited lines in the fourth quarter of 2019, which has a lower loss and LAE ratio than many of the other businesses in the Specialty casualty group. Excluding the impact of the Neon exited lines, the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses decreased 6.9 percentage points in the fourth quarter of 2020 compared to the fourth quarter of 2019.
Specialty casualty Net favorable reserve development of $6 million in the fourth quarter of 2020 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in general liability contractor claims and the public sector and excess liability businesses. Net favorable reserve development of $25 million in the fourth quarter of 2019 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses, higher than expected claim frequency in product liability contractor claims, and higher than anticipated claim severity in the public sector business.
Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment for the fourth quarter of 2020 and 2019 includes net adverse reserve development of $8 million in the fourth quarter of 2020 and $7 million in the fourth quarter of 2019 related to Neon exited lines discussed above under “Neon exited lines.” Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment also includes net adverse reserve development of $16 million in the fourth quarter of 2020 and $1 million in the fourth quarter of 2019 related to business outside the Specialty group that AFG no longer writes.
Catastrophe losses of $41 million in the fourth quarter of 2020 resulted primarily from Hurricanes Delta, Laura, Sally and Zeta and the Nashville explosion. Catastrophe losses of $14 million in the fourth quarter of 2019 resulted primarily from Typhoons Faxai and Hagibis, storms and tornadoes in the south-central United States and the Kincade fire in California.
AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $385 million in the fourth quarter of 2020 compared to $446 million for the fourth quarter of 2019, a decrease of $61 million (14%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 29.0% for the fourth quarter of 2020 compared to 32.5% for the fourth quarter of 2019, a decrease of 3.5 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):
Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased 2.3 percentage points in the fourth quarter of 2020 compared to the fourth quarter of 2019 reflecting the impact of higher premiums on the ratio in the fidelity business and lower expenses in the equipment leasing business.
represent contractual employee severance benefits and other incurred exit costs. See “Neon exited lines” above for information about AFG’s exit from the Lloyd’s of London insurance market in 2020.
The property and casualty insurance segment’s increase in net investment income for the fourth quarter of 2020 compared to the fourth quarter of 2019 reflects the impact of growth in the property and casualty insurance segment and higher earnings from alternative investments, partially offset by the effect of lower short-term investment rates and lower dividend income. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.02% for the fourth quarter of 2020 compared to 4.09% for the fourth quarter of 2019, a decrease of 0.07 percentage points. The annualized yield earned on alternative investments (partnerships and similar investments and AFG-managed CLOs) was 17.0% in the fourth quarter of 2020 compared to 9.2% in the prior year period.
In addition to the property and casualty segment’s net investment income from ongoing operations discussed above, the Neon exited lines reported less than $1 million in net investment income in the fourth quarter of 2020.
AFG’s annuity operations contributed $81 million in GAAP pretax earnings in the fourth quarter of 2020 compared to $128 million in the fourth quarter of 2019, a decrease of $47 million (37%). This decrease in AFG’s GAAP annuity segment results for the fourth quarter of 2020 as compared to the fourth quarter of 2019 is due primarily to the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts and a higher negative impact from lower than expected interest rates on the accounting for FIAs in 2020 compared to 2019, partially offset by higher core earnings before income taxes.
The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the three months ended December 31, 2020 and 2019 (dollars in millions):
•Other expenses - unfavorable impact of $6 million in the fourth quarter of in 2020.
Because fluctuations in interest rates and the stock market, among other factors, can cause volatility in annuity benefits expense related to FIAs that can be inconsistent with the long-term economics of the FIA business, management believes that including the actual cost of the equity options purchased in the FIA business and excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs provides investors with a better view of the true cost of funds in the business and a more comparable measure to the cost of funds reported by its peers. The cost of the equity options included in AFG’s cost of funds is the net purchase price of the option contracts amortized on a straight-line basis over the life of the contracts, which is generally one year. The following table reconciles AFG’s non-GAAP cost of funds measure to total GAAP annuity benefits expense (in millions):
(*)Excluding the impact of reinsurance and changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on annuity benefits and the related impact on the amortization of deferred policy acquisition costs.
Cost of funds for the fourth quarter of 2020 was $208 million compared to $252 million for the fourth quarter of 2019, a decrease of $44 million (17%), reflecting lower average annuity benefits accumulated from the impact of ceding reserves for the annuity block reinsurance and offering lower renewal crediting rates (index participation) on option costs. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.19 percentage points to 2.35% in the fourth quarter of 2020 from 2.54% in the fourth quarter of 2019 reflecting lower crediting rates (index participation) on both new sales (initial rates) and in force business (renewal rates).
As discussed under “Annuity Benefits Accumulated” in Note A - “Accounting Policies” to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits decreases when the benefit of stock market participation increases. As shown in the table above, the impact of reinsurance and changes in the stock market and interest rates on FIAs increased AFG’s guaranteed withdrawal benefit reserve by $6 million in the fourth quarter of 2020 compared to $2 million in the fourth quarter of 2019. This $4 million (200%) increase was the primary cause of the $5 million overall increase in other annuity benefits, net of guaranteed withdrawal benefit fees in the fourth quarter of 2020 compared to the fourth quarter of 2019.
AFG’s net interest spread increased 0.34 percentage points to 2.28% from 1.94% in the fourth quarter of 2020 compared to the same period in 2019 due primarily to (i) higher earnings from partnerships and similar investments and AFG-managed CLOs and (ii) lower renewal crediting rates, partially offset by lower investment yields. Features included in current annuity product offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.
Annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and equity index call option proceeds received at maturity that are not passed to policyholders through index credits due to surrenders, were $19 million in the fourth quarter of 2020 compared to $13 million the fourth quarter of 2019, an increase of $6 million (46%) reflecting higher gains on equity index call options in excess of policyholder index credits. Annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated increased 0.07 percentage points to 0.18% in the fourth quarter of 2020 from 0.11% in the fourth quarter of 2019.
The following table illustrates the acceleration/deceleration of the amortization of deferred policy acquisition costs (“DPAC”) resulting from the impact of reinsurance and changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):
Annuity acquisition expenses excluding the acceleration/deceleration of the amortization resulting from the impact of reinsurance and changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs were $68 million for the fourth quarter of 2020 compared to $65 million for the fourth quarter of 2019, an increase of $3 million (5%).
The table below illustrates the impact of reinsurance and the estimated impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:
AFG’s fixed-indexed (including variable-indexed) annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s
strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered derivatives that must be adjusted for changes in fair value 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 embedded derivative component of AFG’s annuity benefits accumulated, see Note D - “Fair Value Measurements” to the financial statements. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.
As discussed above under “Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees” and “Annuity Acquisition Expenses,” the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates. These impacts may be temporary in nature and not necessarily indicative of the long-term performance of the FIA business. The table below highlights the impact of reinsurance and changes in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):
The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the three months ended December 31, 2020 and 2019 (in millions):
(*)Net investment income (as a % of investments) of 4.81% and 4.63% for the three months ended December 31, 2020 and 2019, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.
AFG’s net GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $62 million for the fourth quarter of 2020 compared to $55 million for the fourth quarter of 2019, an increase of $7 million (13%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $57 million for the fourth quarter of 2020 compared to $50 million for the fourth quarter of 2019, an increase of $7 million (14%).
The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance and annuity segments for the three months ended December 31, 2020 and 2019 (dollars in millions):
Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In both the fourth quarter of 2020 and the fourth quarter of 2019, AFG collected $17 million in fees for these services. Management views this fee income, net of the $12 million in the fourth quarter of 2020 and $13 million in the fourth quarter of 2019, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.
The increase in interest expense for the fourth quarter of 2020 as compared to the fourth quarter of 2019 reflects the following financing transactions completed by AFG between October 1, 2019 and December 31, 2020:
In November 2020, AFG redeemed its $150 million outstanding principal amount of 6% Subordinated Debentures due in 2055 and wrote off unamortized debt issuance costs of $5 million. In December 2019, AFG redeemed its $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due 2054 and wrote off unamortized debt issuance costs of $5 million.
The $427 million net realized gains from disposals in the fourth quarter of 2020 includes gains of $415 million on investments disposed of in AFG’s 2020 annuity block reinsurance transaction. See Note P - “Insurance” to the financial statements. The $207 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2020 includes gains of $46 million on investments in banks and financing companies, $43 million on investments in media companies, $24 million on investments in technology companies, $17 million on investments in energy companies, $15 million on investments in natural gas companies, $8 million on real estate investment trusts and $7 million on investments in healthcare companies. The $67 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2019 includes gains of $17 million on investments in banks and financing companies, $16 million on investments in technology companies and $14 million on investments in media companies.
The $11 million decrease in previously recognized expected credit losses in the fourth quarter of 2020 includes income of $7 million related to third-party collateralized loan obligations and $6 million related to corporate bonds and other fixed maturities, partially offset by $2 million in charges related to other structured securities. The $9 million impairment charge in the fourth quarter of 2019 includes $7 million on corporate bonds and $2 million on third-party collateralized loan obligations.
On September 28, 2020, AFG announced that it had reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded a $30 million loss in the third quarter of 2020 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. In the fourth quarter of 2020, the estimated loss was adjusted at the closing date to a gain of $23 million based on the final proceeds and the final net assets disposed, which reflects $53 million of non-core losses in the fourth quarter of 2020 at Neon. See Note B - “Acquisitions and Sale of Businesses” to the financial statements.
See Note M - “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax rate.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
AFG’s property and casualty insurance operations contributed $649 million in GAAP pretax earnings in 2019 compared to $709 million in 2018, a decrease of $60 million (8%). Property and casualty core pretax earnings were $743 million in 2019 compared to $727 million in 2018, an increase of $16 million (2%). The decrease in GAAP pretax earnings reflects a pretax non-core charge of $76 million in 2019 related to costs associated with plans to exit the Lloyd’s of London
insurance market in 2020, partially offset by higher core pretax earnings. The increase in core pretax earnings reflects higher net investment income in 2019 compared to 2018 due primarily to growth in the business, partially offset by lower underwriting profit.
Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $7.09 billion in 2020 compared to $7.30 billion in 2019, a decrease of $212 million (3%). GWP increased $459 million (7%) in 2019 compared to 2018. Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):
Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 29% of gross written premiums for the year ended December 31, 2020 and 27% for both the year ended December 31, 2019 and 2018, an increase of 2 percentage points for 2020 compared to 2019. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):
Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $5.01 billion in 2020 compared to $5.34 billion in 2019, a decrease of $329 million (6%). NWP increased $319 million (6%) in 2019 compared to 2018. Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):
Gross written premiums increased $114 million (4%) in 2019 compared to 2018, due primarily to new business opportunities in the transportation businesses and higher year-over-year premiums in the property and inland marine and ocean marine businesses. Average renewal rates increased approximately 4% for this group in 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points in 2019 compared to 2018, reflecting lower cessions in the crop insurance business.
Specialty casualty Gross written premiums decreased $324 million (9%) in 2020 compared to 2019 due primarily to the run-off of Neon. Excluding the $567 million in gross written premiums from the Neon exited lines in 2019, gross written premiums increased approximately 8% in 2020 compared to 2019. This increase reflects growth in the excess and surplus, excess liability, targeted markets and directors and officers businesses, primarily the result of renewal rate
Gross written premiums increased $323 million (9%) in 2019 compared to 2018 due primarily to the addition of premiums from ABA Insurance Services and growth in the excess and surplus lines, executive liability and targeted markets businesses and higher premiums reported by Neon. This growth was partially offset by lower premiums in the workers’ compensation businesses. Average renewal rates increased approximately 3% for this group in 2019. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 8% in 2019. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point in 2019 compared to 2018, reflecting growth in the surplus lines, excess liability and mergers and acquisitions businesses, which have a higher ceding percentage than many of the businesses in the Specialty casualty sub-segment.
Specialty financial Gross written premiums decreased $34 million (4%) in 2020 compared to 2019 due primarily to lower premiums from the impact of various state regulations regarding policy cancellations and the placement of forced coverage in the financial institutions business and COVID-related economic impacts on the surety business and heightened risk selection that has reduced new business in the trade credit business, partially offset by higher premiums in the fidelity business. Average renewal rates for this group increased nearly 8% in 2020. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points in 2020 compared to 2019, reflecting lower cessions in the financial institutions business.
Gross written premiums increased $22 million (3%) in 2019 compared to 2018 due primarily to higher premiums in the fidelity, surety and equipment leasing businesses, partially offset by lower premiums in the financial institutions business. Average renewal rates for this group increased approximately 1% in 2019. Reinsurance premiums ceded as a percentage of gross written premiums were comparable in 2019 and 2018.
Specialty financial Underwriting profit for this group was $50 million in 2020 compared to $92 million in 2019, a decrease of $42 million (46%) due primarily to lower underwriting profitability in the trade credit, surety and innovative markets businesses and higher year-over year catastrophe losses in the financial institutions business. COVID-19 related losses were $26 million (4.3 points on the combined ratio) in 2020 primarily related to trade credit insurance. Catastrophe losses were $26 million (4.3 points on the combined ratio) in 2020 compared to $10 million (1.6 points) in 2019.
Underwriting profit for this group was $92 million in 2019 compared to $66 million in 2018, an increase of $26 million (39%) due primarily to higher underwriting profitability in the financial institutions and surety businesses. Catastrophe losses were $10 million (1.6 points on the combined ratio) in 2019 compared to $28 million (4.7 points) and related net reinstatement premiums of $1 million in 2018.
This group reported an underwriting loss of $21 million in 2019 compared to $5 million in 2018, an increase of $16 million (320%). This increase reflects higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in 2019 compared to 2018.
Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment include asbestos and environmental reserve charges of $47 million in 2020, $18 million in 2019 and $18 million in 2018, an underwriting loss of $135 million at Neon in 2020, due primarily to catastrophe losses, COVID-19 related charges and several large claims, and the $76 million Neon exited lines charge in 2019. See “Asbestos and Environmental-related (“A&E”) Insurance Reserves,” under “Uncertainties” and “Neon exited lines” under “Property and Casualty Insurance Segment - Results of Operations” for the quarters ended December 31, 2020 and 2019. Aggregate underwriting results for AFG’s property and casualty insurance segment also include adverse prior year reserve development of $20 million in 2020, $19 million in 2019 and $2 million in 2018, related to business outside of the Specialty group that AFG no longer writes.
Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses
The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 61.5% in 2020, 64.0% in 2019 and 63.6% in 2018.
Property and transportation The 5.4 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2020 compared to 2019 reflects a decrease in the loss and LAE ratio in the crop operations due to a high level of prevented planting claims resulting from excess rain in 2019 and, to a lesser extent, lower loss and LAE ratios in the aviation and transportation businesses due primarily to rate increases and
lower claim frequency in 2020, and lower loss and LAE ratios in non-crop agricultural businesses and the Singapore branch in 2020 compared to 2019.
The 2.5 percentage points increase in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects an increase in the loss and LAE ratio of the crop operations due to a high level of prevented planting claims resulting from excess rain in 2019.
The 1.6 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects a decrease in the loss and LAE ratio at Neon (excluding the impact of the Neon exited lines charge in 2019).
The 1.1 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects a decrease in the loss and LAE ratio of the financial institutions business.
AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $213 million in 2020 compared to $187 million in 2019 and $212 million in 2018, an increase of $26 million (14%) and a decrease of $25 million (12%), respectively.
Property and transportation Net favorable reserve development of $107 million in 2020 reflects lower than expected claim frequency and severity in the aviation, transportation and agricultural businesses.
Net favorable reserve development of $67 million in 2019 reflects lower than expected claim frequency and severity at National Interstate and lower than expected losses in the crop business.
Net favorable reserve development of $88 million in 2019 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses and higher than expected claim frequency in product liability contractor claims.
Specialty financial Net favorable reserve development of $28 million in 2020 reflects lower than anticipated claim frequency in the trade credit business and lower than anticipated claim frequency and severity in the financial institutions, fidelity and surety businesses.
Net favorable reserve development of $38 million in 2019 reflects lower than expected claim frequency and severity in the surety and financial institutions businesses and lower than anticipated claim severity in the foreign credit business.
Other specialty In addition to the reserve development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $19 million, $6 million and $3 million in 2020, 2019, and 2018, respectively. The net adverse reserve development reflects $24 million, $12 million and $10 million in 2020, 2019 and 2018, respectively, of adverse development associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001.
Neon exited lines AFG recorded net adverse prior year reserve development of $19 million in 2020 and $7 million in 2019 related to Neon’s exited lines of business (included in loss and loss adjustment expenses). See “Neon exited lines” under “Property and Casualty Insurance Segment - Results of Operations” for the quarters ended December 31, 2020 and 2019 for information about AFG’s exit of the Lloyd’s of London insurance market in 2020.
Underwriting results for AFG’s Specialty property and casualty insurance operations in 2020 included $95 million in COVID-19 related losses. Given the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic, these charges, approximately 72% of which establish reserves for claims that have been incurred but not reported, represent AFG’s current best estimate of losses from the pandemic and related economic disruption incurred through December 31, 2020. Approximately 70% of AFG’s COVID-19 related losses were reported in the workers’ compensation, directors and officers and trade credit businesses, with the remainder spread across numerous other businesses.
AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. AFG recorded net catastrophe losses of $128 million in 2020 primarily from storms and tornadoes in multiple regions of the United States in the first quarter; storms and tornadoes in multiple regions of the United States and civil unrest in the second quarter; Hurricanes Hanna, Laura and Sally, Tropical Storm Isaias, storms and tornadoes in multiple regions of the United States and multiple wildfires in west coast states in the third quarter, and Hurricanes Laura, Sally, Delta and Zeta and the Nashville explosion in the fourth quarter.
Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums increased 1.1 percentage points in 2020 compared to 2019, reflecting lower profitability-based ceding commissions received from reinsurers in the crop business.
Commissions and other underwriting expenses as a percentage of net earned premiums decreased 0.5 percentage points in 2019 compared to 2018 reflecting the impact of higher premiums on the ratio.
Commissions and other underwriting expenses as a percentage of net earned premiums increased 2.2 percentage points in 2019 compared to 2018 reflecting higher profitability-based commissions paid to agents in the financial institutions business, partially offset by lower underwriting expenses in the equipment leasing business.
The property and casualty insurance segment’s decrease in net investment income in 2020 compared to 2019 reflects lower earnings from alternative investments (partnerships and similar investments and AFG-managed CLOs) in 2020 as a result of the negative impact of the COVID-19 pandemic on financial markets, lower short-term interest rates and lower dividend income, partially offset by growth in the property and casualty insurance segment. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 3.44% in 2020 compared to 4.16% in 2019, a decrease of 0.72 percentage points. The yield earned on alternative investments was 6.6% in 2020 compared to 10.3% in 2019.
In addition to the property and casualty segment’s net investment income from ongoing operations discussed above, the Neon exited lines reported a $5 million loss in 2020 in net investment income, primarily from changes in the fair value of equity securities.
Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $34 million in 2020, $35 million in 2019, and $31 million in 2018. The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):
In addition to the property and casualty segment’s other income and expenses, net from ongoing operations discussed above, the Neon exited lines incurred a net expense of $5 million in other income and expenses, net during 2020.
AFG’s annuity operations contributed $171 million in GAAP pretax earnings in 2020 compared to $362 million in 2019, a decrease of $191 million (53%) due primarily to lower core earnings, the impact of a stronger stock market performance in 2019 as compared to 2020, the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts and higher unlocking charges in 2020 compared to 2019, partially offset by a less negative impact from lower than expected interest rates on the accounting for FIAs in 2020 compared to 2019. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions annually. Beginning with the third quarter of 2019, AFG moved its annual unlocking from the fourth quarter to the third quarter and expects to continue to conduct the annual review in the third quarter of each year (consistent with many of its peers). If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. AFG’s unlocking of the actuarial assumptions underlying its annuity operations resulted in a net charge of $46 million in 2020 compared to $1 million in 2019.
(a)As discussed under “Results of Operations - General,” beginning with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). In addition, the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts are considered non-core earnings (losses). The impact of these items are shown aggregated as non-core annuity earnings (losses) and excluded from the income statement line items in the table above for 2020 and 2019, respectively:
•Annuity benefits - unfavorable impact of $140 million in 2020 and $11 million in 2019.
•Acquisition expenses - unfavorable impact on the amortization of deferred policy acquisition costs of $37 million in 2020 and $26 million in 2019.
Annuity earnings before income taxes were $359 million in 2020 compared to $398 million in 2019, a decrease of $39 million (10%). As discussed under “Results of Operations - General,” beginning with the second quarter of 2019, unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). In addition, the amortization of the deferred loss related to the annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts are considered non-core earnings (losses). For 2020, the annuity segment’s core earnings before income taxes excludes $188 million in pretax losses related to these items. Since annuity core earnings for the first quarter of 2019 and prior periods were not adjusted, the annuity segment’s core earnings before income taxes for 2019 includes the $11 million unfavorable impact from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs in the first quarter of 2019 and the full-year results for 2018 include the $48 million unfavorable impact from these items. Excluding the $11 million unfavorable impact of these items in the first quarter of 2019, annuity core net operating earnings decreased $50 million in 2020 compared to 2019 reflecting lower income from partnerships and similar investments and AFG-managed CLOs and the impact of lower short-term interest rates on investment income in 2020, partially offset by higher gains on equity index call options in excess of policyholder index credits, lower other expenses, higher than expected persistency and a reduction in the cost of funds due to renewal rate actions taken by AFG. Excluding the unfavorable impact of these items in the first quarter of 2019 and full-year 2018, annuity core earnings before income taxes were $409 million for both 2019 and 2018 reflecting growth in the business, offset by the impact of lower investment yields and higher renewal option costs. The
Net investment income in 2020 was $1.70 billion compared to $1.79 billion in 2019, a decrease of $93 million (5%). The overall yield earned on investments in AFG’s annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by 0.36 percentage points to 4.31% from 4.67% in 2020 compared to 2019. The decrease in net investment income and the net investment yield between periods reflects the negative impact of lower earnings from partnerships and similar investments and AFG-managed CLOs, and the impact of the run-off of higher yielding investments and lower short-term interest rates. AFG’s annuity segment recorded $64 million in earnings from partnerships and similar investments and AFG-managed CLOs in 2020 compared to $110 million in 2019, a decrease of $46 million (42%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was 4.8% in 2020 compared to 9.7% in 2019.
Net investment income in 2019 was $1.79 billion compared to $1.64 billion in 2018, an increase of $154 million (9%). This increase reflects the growth in AFG’s annuity business, partially offset by the impact of lower investment yields. The overall yield earned on investments in AFG’s annuity operations decreased by 0.06 percentage points to 4.67% from 4.73% in 2019 compared to 2018. This decrease in net investment yield reflects lower yields on partnerships and similar investments and AFG-managed CLOs.
Cost of funds for 2020 was $961 million compared to $982 million for 2019, a decrease of $21 million (2%). This decrease reflects a reduction in the cost of funds as a percentage of average annuity benefits accumulated due to offering lower renewal crediting rates (index participation) on option costs. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.11 percentage points to 2.44% from 2.55% in 2020 compared to 2019 reflecting a reduction in the cost of funds as a percentage of average annuity benefits accumulated due to the impact of lower crediting rates (index participation) on both new sales (initial rates) and in force business (renewal rates).
In addition to the impact of unlocking, the following table illustrates the acceleration/deceleration of the amortization of deferred policy acquisition costs (“DPAC”) resulting from reinsurance and changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):
Annuity acquisition expenses excluding reinsurance, unlocking and the acceleration/deceleration of the amortization resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs were $265 million for 2020 compared to $256 million for 2019, an increase of $9 million (4%), reflecting growth in the year-over-year average of fixed annuity benefits accumulated.
The table below illustrates the impact of reinsurance, unlocking and the estimated impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:
Annuity other expenses were $126 million in 2020 compared to $139 million in 2019, a decrease of $13 million (9%) reflecting expense reimbursement related to reinsurance and lower expenses due to the COVID-19 pandemic. Annuity other expenses were $139 million in 2019 compared to $131 million in 2018, an increase of $8 million (6%) reflecting growth in the annuity business. Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses decreased 0.04 percentage points to 0.31% in 2020 from 0.35% in 2019 and decreased 0.02 percentage points in 2019 from 0.37% in 2018.
AFG’s net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates over or under option costs decreased 0.12 percentage points to 1.08% in 2019 from 1.20% in 2018 due primarily to the 0.11 percentage point decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.11 percentage points to 0.96% in 2019 from 1.07% in 2018 due to the decrease in AFG’s net interest spread, the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed above, partially offset by the impact of the unlocking of actuarial assumptions discussed below under “Annuity Unlocking.”
For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for 2020, 2019 and 2018 (in millions):
Management attributes the 8% decrease in annuity premiums in 2019 compared to 2018 to the lower market interest rate environment.
The net charge from unlocking annuity assumptions in 2020 is due primarily to the unfavorable impact related to lower expected future investment income resulting from a decrease to the long-term interest rate assumptions and the unfavorable impact related to changes in assumed persistency outside the surrender period on policies without guaranteed withdrawal benefits, partially offset by the favorable impact of lowering projected FIA option costs, including anticipated renewal rate actions. For the 2020 unlocking, reinvestment rate assumptions are based primarily on the expectation that the 7-year U.S. Treasury rate will increase to 2.45% and the 10-year U.S. Treasury rate will increase to 2.75% over time. For the unlocking in the third quarter of 2020, AFG assumed a net reinvestment rate (net of default and expense assumptions) of 3.08% in 2021, grading up ratably to an ultimate net reinvestment rate of 4.58% in 2031 and beyond.
The net charge from unlocking annuity assumptions in 2019 is due primarily to the unfavorable impacts of a decrease in projected net interest spreads on in force business (due primarily to lower than previously anticipated reinvestment rates and the impact of lower than previously anticipated interest rates on floating rate investments) and higher assumed persistency in certain blocks of business, offset by lowering projected FIA option costs, including anticipated renewal rate actions.
AFG’s net GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $190 million in 2019 compared to $165 million in 2018, an increase of $25 million (15%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $174 million in 2019 compared to $156 million in 2018, an increase of $18 million (12%).
AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $19 million and related benefits and acquisition expenses of $44 million in 2020 (excluding the loss recognition charge described below) compared to net earned premiums of $22 million and related benefits and acquisition expenses of $41 million in 2019. The $4 million (11%) increase in life, accident and health benefits reflects lower policyholder lapses in the run-off life insurance business in 2020 compared to 2019.
AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $22 million and related benefits and acquisition expenses of $41 million in 2019 compared to net earned premiums of $24 million and related benefits and acquisition expenses of $46 million in 2018. The $4 million (10%) decrease in life, accident and health benefits reflects lower claims in both the run-off life and run-off long-term care insurance businesses in 2019 compared to 2018.
income. These securities increased in value by $5 million and $13 million in 2020 and 2019, respectively, and decreased in value by $4 million in 2018.
Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In 2020, AFG collected $67 million in fees for these services compared to $69 million in both 2019 and 2018. Management views this fee income, net of the $46 million in 2020, 2019 and 2018, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.
As discussed under “Annuity Segment - Results of Operations,” AFG purchases and sells equity index options to mitigate the risk in the index-based component of its FIAs. In evaluating the performance of the annuity business, management views the cost of the equity options as a better measurement of the true expenses of the annuity segment as compared to the GAAP accounting for these options as derivatives because any proceeds at expiration from the options generally are passed to policyholders through index credits. On occasion, policyholders surrender their annuity prior to receiving the index credit, which results in any option exercise proceeds being retained by AFG. For internal management reporting, AFG views these “option gains” as miscellaneous (other) income rather than as a component of annuity benefits expense. Consistent with internal management reporting, these option gains are reclassified from annuity benefits to other income in AFG’s segmented results. In 2020, 2019 and 2018, AFG had $33 million, $12 million and $18 million, respectively, in such option gains.
Other income in the table above includes $15 million in both 2020 and 2019 and $16 million in 2018, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation - see the other income line in the Consolidated MIEs column under “Results of Operations - Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance and annuity segments of $12 million in 2020 and $13 million in both 2019 and 2018.
compared to 2018 reflect higher average indebtedness. The following table details the principal amount of AFG’s long-term debt balances as of December 31, 2020, December 31, 2019 and December 31, 2018 (dollars in millions):
In November 2020, AFG redeemed its $150 million outstanding principal amount of 6% Subordinated Debentures due in 2055 and wrote off unamortized debt issuance costs of $5 million. In December 2019, AFG redeemed its $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in 2054 at par value and wrote off unamortized debt issuance costs of $5 million.
AFG’s consolidated realized gains (losses) on securities were net gains of $289 million in 2020 compared to $287 million in 2019, an increase of $2 million (1%). AFG’s consolidated realized gains (losses) on securities were net gains of $287 million in 2019 compared to net losses of $266 million in 2018, a change of $553 million (208%). Realized gains (losses) on securities consisted of the following (in millions):
The $278 million net realized gain from the change in the fair value of equity securities in 2019 includes gains of $97 million on investments in banks and financing companies, $36 million from investments in media companies, $32 million from investments in technology companies, $21 million on investments in asset management companies and $21 million on insurance companies. AFG’s impairment charges in 2019 include $17 million in charges on third-party collateralized loan obligations and $11 million on corporate bonds.
See Note A - “Accounting Policies - Investments” to the financial statements for a discussion of accounting guidance adopted on January 1, 2018, which, among other things, requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net earnings.
In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, which changes the assumptions used to measure the liability for future policy benefits for traditional and limited pay contracts (e.g. life, accident and health benefits) from being locked in at inception to being updated at least annually and standardizes the liability discount rate to be used and updated each reporting period, requires the measurement of market risk benefits associated with deposit contracts (e.g. annuities) to be recorded at fair value, simplifies the amortization of deferred policy acquisition costs to a constant level basis over the expected life of the related contracts and requires enhanced disclosures. AFG will be required to adopt this guidance effective January 1, 2023. See Note R - “Subsequent Event” to the financial statements regarding AFG’s definitive agreement to sell its annuity business (which includes AFG’s annuities and limited pay contracts) to Massachusetts Mutual Life Insurance Company, which is expected to close in the second quarter of 2021.
Consolidated Statement of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
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 2020 that materially affected, or are reasonably likely to materially affect, AFG’s internal control over financial reporting.
We have audited American Financial Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, 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”). In our opinion, American Financial Group, Inc. and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We have audited the accompanying consolidated balance sheets of American Financial Group, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Description of the Matter As of December 31, 2020, the fair value of the Company’s fixed-income and equity securities totaled $44.94 billion, a portion of which are valued based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information. The fair value of these securities are determined by management applying the methodologies outlined in Note D to the consolidated financial statements. The lack of visibility into assumptions used in non-binding broker quotes and the credit spread applied by management for internally developed fixed-income investments are significant unobservable inputs, which create greater subjectivity when determining the fair values. Credit spread inputs are developed based on management’s review of trade activity for comparable securities and credit spreads over the treasury yield of securities with a similar duration.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process for estimating reserves. This included, among others, the review and approval processes that management has in place for the methods and assumptions used in estimating the reserves.
With the assistance of actuarial specialists, our audit procedures included, among others, an evaluation of the Company’s selection and weighting of actuarial methods used with those methods used in prior periods and those used in the industry for the specific types of insurance. To evaluate the significant assumptions used by management, we compared the significant assumptions, including loss development factors, expected loss ratios, and inflation, to factors historically used and current industry benchmarks. We also performed a review of the development of prior years’ reserve estimates. With the assistance of actuarial specialists, we established an independent range of reasonable reserve estimates, which we compared to management’s best estimate.
Auditing management’s estimate of the amortization of annuity deferred policy acquisition costs was complex because it required the involvement of our actuarial specialists due to the highly judgmental nature of the assumptions used in management’s projection of estimated gross profits, which are used in the amortization of annuity deferred policy acquisition costs. The significant judgment was primarily due to the sensitivity of the estimated gross profits to the expected investment yield and lapse rate assumptions.
To test the amortization of deferred policy acquisition costs related to annuity contracts, our audit procedures included, among others, testing the completeness and accuracy of the data used to calculate the estimated gross profits through testing the reconciliation of the underlying data recorded in the source systems to the actuarial valuation models. With the assistance of our actuarial specialists, we evaluated the assumptions used by management in determining estimated gross profits. Also, with the assistance of our actuarial specialists, we compared significant assumptions, including expected investment yields and lapse rates, to prior actual experience and observable market data, and we evaluated management’s estimates of prospective changes in these assumptions. In addition, we performed an independent calculation of estimated and actual gross profits for a sample of product cohorts for comparison with the actuarial model used by management.
Auditing management’s estimate of the fair value of the embedded derivatives related to fixed-indexed annuity products was complex because it required the involvement of our actuarial specialists due to the highly judgmental nature of the assumptions used in the valuation process. The significant judgment was primarily due to the sensitivity of the budgeted option costs and lapse assumptions.
Basis of Presentation The consolidated financial statements include the accounts of American Financial Group, Inc. and its subsidiaries (“AFG”). Certain reclassifications have been made to prior years to conform to the current year’s presentation. All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to December 31, 2020, and prior to the filing of this Form 10-K, have been evaluated for potential recognition or disclosure herein.
Credit Losses on Financial Instruments On January 1, 2020, AFG adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new loss model for determining credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. AFG’s portfolio of mortgage loans crosses a wide variety of commercial properties with very strong loan to value ratios and no credit losses in recent years. In addition, the reinsurance used in AFG’s insurance operations is purchased from financially strong (highly rated) reinsurers and the Company has a long history of collecting premiums receivable through various economic cycles. At the date of adoption, the impact of adjusting AFG’s existing allowances for uncollectable mortgage loans, premiums receivable and reinsurance recoverables to the allowances calculated under the new guidance resulted in a reduction in the net allowance, which was recorded as the cumulative effect of an accounting change ($7 million increase in retained earnings at January 1, 2020).
The updated guidance also amended the current other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses will be recorded immediately in net earnings through realized gains (losses).
Goodwill Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets at the date of acquisition. Goodwill is not amortized, but is subject to an impairment test at least annually. An entity is not required to complete the quantitative annual goodwill impairment test on a reporting unit if the entity elects to perform a qualitative analysis and determines that it is more likely than not that the reporting unit’s fair value exceeds its carrying amount.
An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment performance of the retained assets. This reinsurance contract is considered to contain an embedded derivative (that must be adjusted to fair value) because the yield on the payable is based on a specific block of the ceding company’s assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolio of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to this contract are classified as “trading.” The adjustment to fair value on the embedded derivative offsets the investment income recorded on the adjustment to fair value of the related trading portfolio.
DPAC related to annuities is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. Expected gross profits consist principally of estimated future investment margin (estimated future net investment income less interest credited on policyholder funds) and surrender, mortality, and other life and annuity policy charges, less death, annuitization and guaranteed withdrawal benefits in excess of account balances and estimated future policy administration expenses. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains (losses) on securities.
Annuity Benefits Accumulated Annuity receipts and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability for interest credited are charged to annuity benefits expense and decreases for annuity policy charges are recorded in other income. For traditional fixed annuities, the liability for annuity benefits accumulated represents the account value that had accrued to the benefit of the policyholder as of the balance sheet date. For fixed-indexed annuities (“FIAs”), the liability for annuity benefits accumulated includes an embedded derivative that represents the estimated fair value of the index participation with the remaining component representing the discounted value of the guaranteed minimum contract benefits.
•not separate lease and non-lease components except for buildings (office space and storage facilities),
•use hindsight to determine the lease term for leases existing at the date of adoption.
Premium Recognition Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.
Income Taxes Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. A valuation allowance is established to reduce total deferred tax assets to an amount that will more likely than not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recorded in net earnings in the period that includes the enactment date.
Statement of Cash Flows For cash flow purposes, “investing activities” are defined as making and collecting loans and acquiring and disposing of debt or equity instruments, property and equipment and businesses. “Financing activities” include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, surrenders, benefits and withdrawals are also reflected as financing
Neon In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing Neon Underwriting Ltd. and its other Lloyd’s subsidiaries in run-off. Neon and its predecessor, Marketform, failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008.
On December 31, 2020, AFG completed the sale of GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited for proceeds of $6 million. The sale completed AFG’s exit from the Lloyd’s of London insurance market.
On the sale date, the carrying value of the assets and liabilities disposed represented approximately 1% of both AFG’s assets and liabilities and are detailed in the table below.
The gain on the sale of Neon, which was recorded in AFG’s financial statements as of December 31, 2020, is shown below (in millions):
Revenues, costs and expenses, and earnings before income taxes for the subsidiaries sold were (in millions):
As discussed in Note M - “Income Taxes,” the sale of Neon allowed AFG to recognize a $72 million tax benefit.
ABA Insurance Services Inc. In November 2018, AFG acquired ABA Insurance Services Inc. (“ABAIS”) from American Bankers Mutual Insurance, Ltd. for approximately $30 million using cash on hand at the parent company. Additional contingent consideration of up to $3 million could be due four years after the acquisition date based on achieving certain operating milestones. ABAIS is based in Ohio and is a market-leading provider of directors and officers liability and other complementary insurance solutions for banks, small businesses and nonprofit organizations.
(c)Includes a loss of $5 million in the Neon exited lines in 2020 (primarily from the change in fair value of equity securities).
(c)Includes holding company interest and expenses, including losses on retirement of debt of $5 million in both 2020 and 2019, respectively, and special charges to increase A&E reserves related to AFG’s former railroad and manufacturing operations ($21 million in 2020, $11 million in 2019 and $9 million in 2018). Also includes the results of AFG’s run-off life and long-term care businesses, including a $4 million loss recognition charge recorded in the run-off long-term care business in 2020.
As discussed in Note A - “Accounting Policies - Managed Investment Entities,” AFG has set the carrying value of its CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at separately measured fair values. As a result, the CLO liabilities are categorized within the fair value hierarchy on the same basis (proportionally) as the related CLO assets. Since the portion of the CLO liabilities allocated to Level 3 is derived from the fair value of the CLO assets, these amounts are excluded from the progression of Level 3 financial instruments.
Internally developed Level 3 asset fair values represent approximately $1.68 billion (46%) of the total fair value of Level 3 assets at December 31, 2020. The fixed maturities are priced using a variety of inputs, including appropriate credit spreads over the treasury yield (of a similar duration), trade information and prices of comparable securities and other security specific features (such as optional early redemption). Internally developed prices for equity securities are based primarily on financial information of the entities invested in and sales of comparable companies. Management believes that any justifiable changes in unobservable inputs used to determine internally developed fair values would not have resulted in a material change in AFG’s financial position.
The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed and variable-indexed annuity products with an expected range of 8% to 11% in the majority of future calendar years (4% to 23% over all periods). Increasing the budgeted option cost or risk margin for uncertainty in cash flow assumptions in the table above would increase the fair value of the fixed-indexed and variable-indexed annuity embedded derivatives, while increasing any of the other unobservable inputs in the table above would decrease the fair value of the embedded derivatives.
(b)As previously discussed, these tables exclude the portion of MIE liabilities allocated to Level 3, which are derived from the fair value of MIE assets.
(a)Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives reflects a favorable adjustment related to the unlocking of actuarial assumptions of $181 million in 2019.
(a)Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives includes losses related to the unlocking of actuarial assumptions of $44 million in 2018.
(*)Excludes $1.11 billion and $247 million of life contingent annuities in the payout phase at December 31, 2020 and 2019, respectively.
To evaluate fixed maturities for expected credit losses (impairment), management considers whether the unrealized loss is credit-driven or a result of changes in market interest rates, the extent to which fair value is less than cost basis, historical operating, balance sheet and cash flow data from the issuer, third party research and communications with industry specialists and discussions with issuer management.
In 2020, AFG purchased two residential mortgage-backed securities with expected credit losses. In aggregate at the time of purchase, the par value was $8 million, the purchase price was $6 million and the allowance for credit losses and the discount were each $1 million.
(*)Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.
(a)Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on equity securities classified as “trading” under previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.
Derivatives That Do Not Qualify for Hedge Accounting The following derivatives that do not qualify for hedge accounting under GAAP are included in AFG’s Balance Sheet at fair value (in millions):
As discussed under “Reinsurance” in Note A, AFG has a life business reinsurance contract that is considered to contain an embedded derivative.
The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting for 2020, 2019 and 2018 (in millions):
(*)The change in fair value of the embedded derivative includes a favorable adjustment related to the unlocking of actuarial assumptions of $240 million in 2020 and $181 million in 2019 and losses of $44 million in 2018.
Derivatives Designated and Qualifying as Cash Flow Hedges As of December 31, 2020, Great American Life Insurance (“GALIC”), AFG’s principal annuity subsidiary, has nine active interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in GALIC’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of GALIC’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in short-term LIBOR.
AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 100.0% of the most subordinate debt tranche of twelve active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG’s subsidiaries also own portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2020, these entities issued securities in various senior and subordinate classes and invested the proceeds primarily in secured bank loans, which serve as collateral for the debt securities issued by each CLO. None of the collateral was purchased from AFG. AFG’s investments in the subordinate debt tranches of these entities receive residual income from the CLOs only after the CLOs pay expenses (including management fees to AFG) and interest on and returns of capital to senior levels of debt securities. There are no contractual requirements for AFG to provide additional funding for these entities. AFG has not provided and does not intend to provide any financial support to these entities.
AFG’s maximum exposure to economic loss on the CLOs that it manages is limited to its investment in those CLOs, which had an aggregate fair value of $200 million (including $111 million invested in the most subordinate tranches) at December 31, 2020, and $165 million at December 31, 2019.
The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by $150 million and $146 million at December 31, 2020 and 2019, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $141 million and $129 million at those dates. The CLO assets include loans with an aggregate fair value of $11 million at December 31, 2020 and $10 million at December 31, 2019, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $28 million at December 31, 2020 and $25 million at December 31, 2019).
In addition to the CLOs that it manages, AFG had investments in CLOs that are managed by third parties (therefore not consolidated), which are included in available for sale fixed maturity securities and had a fair value of $4.55 billion at December 31, 2020 and $4.28 billion at December 31, 2019.
In March 2019, AFG issued $125 million in 5.875% Subordinated Debentures due in March 2059.
In December 2020, AFG replaced its existing credit facility with a new five-year, $500 million revolving credit facility which expires in December 2025. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. No amounts were borrowed under this facility at December 31, 2020 or under AFG’s previous credit facility at December 31, 2019.
Cash interest payments on long-term debt were $83 million in 2020, $65 million in 2019 and $59 million in 2018.
AFG and its subsidiaries lease real estate that is primarily used for office space and, to a lesser extent, equipment under operating lease arrangements. Most of AFG’s real estate leases include an option to extend or renew the lease term at AFG’s option. The operating lease liability includes lease payments related to options to extend or renew the lease term if AFG is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, AFG uses an estimate of its incremental
The following table details AFG’s lease activity for the years ended December 31, 2020 and December 31, 2019 (in millions):
The following table presents the undiscounted contractual maturities of AFG’s operating lease liability at December 31, 2020 (in millions):
The total fair value of restricted stock that vested during 2020, 2019 and 2018 was $19 million, $11 million and $10 million, respectively.
AFG has not granted any stock options since 2015. Options granted in prior years have an exercise price equal to the market price of AFG Common Stock at the date of grant. Options generally became exercisable at the rate of 20% per year commencing one year after grant and expire ten years after the date of grant.
The total intrinsic value of options exercised during 2020, 2019 and 2018 was $17 million, $46 million and $57 million, respectively. During 2020, 2019 and 2018, AFG received $14 million, $31 million and $29 million, respectively, in cash from the exercise of stock options. The total tax benefit related to the exercises was $3 million, $8 million and $9 million during those years, respectively.
(a)The reclassification adjustment out of net unrealized gains (losses) on securities affected the following lines in AFG’s Statement of Earnings:
Due to uncertainty concerning the realization of the deferred tax benefits associated with losses incurred at Neon and its predecessor, Marketform, AFG maintained a full valuation allowance against the deferred tax assets related to the Lloyd’s insurance business. The effect of foreign operations and change in valuation allowance in 2020 in the table above reflect the transfer of the deferred tax assets related to Neon, to the buyer at closing, and the corresponding reduction in the valuation allowance. The changes in valuation allowance in 2019 and 2018 are primarily increases in the valuation allowance on tax benefits related to losses in the Neon Lloyd’s insurance business.
Excluding the impact of the $72 million tax benefit on the sale and other impacts of Neon in 2020, AFG’s effective tax rate for the year ended December 31, 2020, was 21%.
AFG’s 2013 - 2020 tax years remain subject to examination by the IRS.
Total earnings before income taxes include losses subject to tax in foreign jurisdictions of $131 million in 2020, $109 million in 2019 and $69 million in 2018, primarily related to the Neon Lloyd’s operations.
For income tax purposes, AFG and its subsidiaries had the following carryforwards available at December 31, 2020 (in millions):
At December 31, 2020 and December 31, 2019, there are no unrecognized tax benefits and related interest and penalties that, if recognized, would impact the effective tax rate. There is no interest expense related to unrecognized tax benefits included in AFG’s provision for income taxes in 2020 or 2019; AFG’s provision for income taxes in 2018 included interest expense related to unrecognized tax benefits of less than $1 million (net of federal benefit or expense). There is no liability for interest related to unrecognized tax benefits at December 31, 2020 or December 31, 2019. There were no penalties related to unrecognized tax benefits included in AFG’s provision for income taxes in 2020. AFG’s provision for income taxes in 2019 and 2018 included penalties of less than $1 million in each year. There is no liability for penalties related to unrecognized tax benefits at December 31, 2020 or December 31, 2019.
At December 31, 2020, American Premier and its subsidiaries had liabilities for environmental and personal injury claims and other contingencies aggregating $94 million. The environmental claims consist of a number of proceedings and claims seeking to impose responsibility for hazardous waste remediation costs related to certain sites formerly owned or operated by the railroad and manufacturing operations. Remediation costs are difficult to estimate for a number of reasons, including the number and financial resources of other potentially responsible parties, the range of costs for remediation alternatives, changing technology and the time period over which these matters develop. The personal injury claims and other contingencies include pending and expected claims, primarily by former employees of PCTC, for injury or disease allegedly caused by exposure to excessive noise, asbestos or other substances in the workplace and other labor disputes.
At December 31, 2020, GAFRI had a liability of $7 million for environmental costs and certain other matters associated with the sales of its former manufacturing operations.
The decline in net investment income before alternative investments in the fourth quarter of 2020 reflects primarily the disposition of fixed maturity investments in October 2020 related to the block reinsurance transaction.
Results for the third quarter of 2020 and 2019 include pretax special charges of $21 million and $11 million, respectively, to strengthen reserves for A&E exposures related to AFG’s former railroad and manufacturing operations.
In determining management’s best estimate of the ultimate liability, management (with the assistance of Company actuaries) considers items such as the effect of inflation on medical, hospitalization, material, repair and replacement costs, the nature and maturity of lines of insurance, general economic trends and the legal environment. In addition, historical trends adjusted for changes in underwriting standards, policy provisions, product mix and other factors are analyzed using actuarial reserve development techniques. Weighing all of the factors, the management team determines a single or “point” estimate that it records as its best estimate of the ultimate liability. Ranges of loss reserves are not developed by Company actuaries. This reserve analysis and review is completed each quarter and for almost every business within AFG’s property and casualty insurance sub-segments.
Each quarterly review includes in-depth analysis of several hundred subdivisions of the business, employing multiple actuarial techniques. For each subdivision, actuaries use informed, professional judgment to adjust these techniques as necessary to respond to specific conditions in the data or within the business.
The period of time from the event triggering a claim through the settlement of the liability is referred to as the “tail”. Generally, the same actuarial methods are considered for both short-tail and long-tail lines of business because most of them work properly for both. The methods are designed to incorporate the effects of the differing length of time to settle particular claims. For nearly all lines of business, the actuaries rely heavily on the Bornhuetter-Ferguson method for more recent accident periods. As accident years mature and the underlying claim data becomes more credible, more weight is given to the Case Incurred and Paid Development methods. This transition occurs relatively quickly for short-tailed lines, and over a number of years for long-tail lines. Liability claims for long-tail lines are more susceptible to litigation and can be significantly affected by changing contract interpretation and the legal environment. Therefore, the estimation of loss reserves for these classes is more complex and subject to a higher degree of variability.
•Closure rates and statistics related to closed and open claim percentages
(*)Reflects the December 31, 2020 sale of Neon (see Note B - “Acquisitions and Sale of Businesses”) and the reinsurance to close transactions at Neon, which settled in early 2018 (discussed below).
The 2020 provision for losses and LAE occurring in the current year includes $115 million of COVID-19 related losses at AFG, including $20 million recorded by the Neon exited lines.
In December 2017, the Neon Lloyd’s syndicate entered into a reinsurance to close transaction for the 2015 and prior years of account, which settled in early 2018.
Closed Block of Long-Term Care Insurance Reserves for AFG’s closed block of long-term care insurance were $52 million at December 31, 2020 and $46 million at December 31, 2019, net of reinsurance recoverables and excluding the impact of unrealized gains on securities. AFG’s remaining outstanding long-term care policies have level premiums and are guaranteed renewable. Premium rates can potentially be increased in reaction to adverse experience; however, any rate increases would require regulatory approval.
investment in FHLB capital stock at December 31, 2020 is included in other investments at cost. Membership in the FHLB provides the annuity operations with an additional source of liquidity. These advances further the FHLB’s mission of improving access to housing by increasing liquidity in the residential mortgage-backed securities market.
The National Association of Insurance Commissioners’ (“NAIC”) model law for risk-based capital (“RBC”) applies to both life and property and casualty insurance companies. RBC formulas determine the amount of capital that an insurance company needs so that it has an acceptable expectation of not becoming financially impaired. Companies below specific trigger points or ratios are subject to regulatory action. At December 31, 2020 and 2019, the capital ratios of all AFG insurance companies substantially exceeded the RBC requirements. AFG’s insurance companies did not use any prescribed or permitted statutory accounting practices that differed from the NAIC statutory accounting practices at December 31, 2020 or 2019.
Holding Company Dividends AFG declared and paid common stock dividends to shareholders totaling $336 million, $446 million and $397 million in 2020, 2019 and 2018, respectively. Currently, there are no regulatory restrictions on AFG’s retained earnings or net earnings that materially impact its ability to pay dividends. Based on shareholders’ equity at December 31, 2020, AFG could pay dividends of approximately $2.0 billion without violating its most restrictive debt covenant. However, the payment of future dividends will be at the discretion of AFG’s Board of Directors and will be dependent on many factors including AFG’s financial condition and results of operations, the capital requirements of its insurance subsidiaries, and rating agency commitments.
In February 2020, GALIC entered into a flow reinsurance agreement with Commonwealth Annuity and Life Insurance Company (“Commonwealth”), a subsidiary of Global Atlantic Financial Group Limited. Under the terms of the agreement, GALIC cedes certain newly issued traditional fixed and indexed annuities on a quota share coinsurance basis with such quota share percentages being up to 50%. That agreement was effective for policies issued after May 6, 2020. Under reinsurance accounting guidance, this transaction will be accounted for using the deposit method.
In the fourth quarter of 2020, GALIC entered into a block reinsurance agreement with Commonwealth. Under the terms of the agreement, GALIC ceded $5.96 billion of in force traditional fixed and indexed annuities, representing approximately 15% of its in force business, and transferred related investments to Commonwealth. The transaction will be accounted for using the deposit method and the $180 million loss on the transaction was deferred and will be recognized over the expected life of the underlying annuity contracts (7-10 years). In the fourth quarter of 2020, $11 million of GALIC’s deferred loss was amortized (and included in annuity benefits expense).
Benefit Plans AFG expensed approximately $41 million in 2020, $39 million in 2019 and $37 million in 2018 for its retirement and employee savings plans.
The information required by the following Items will be included in AFG’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year and is incorporated herein by reference.
Stock Purchase Agreement, dated as of January 27, 2021, by and among Massachusetts Mutual Life Insurance Company, Great American Financial Resources, Inc. and American Financial Group, Inc., filed as Exhibit 2.1 to the Form 8-K filed on January 28, 2021. (*)
Amended and Restated Articles of Incorporation, filed as Exhibit 3.A to AFG’s Form 10-K for 2019. (*)
Amended and Restated Non-Employee Directors Compensation Plan, filed as Exhibit 10 to the Form S-8 Registration Statement (File No. 333-184913) filed by AFG on November 13, 2012. (*)
Amended and restated Nonqualified Auxiliary RASP, filed as Exhibit 10(f) to AFG’s Form 10-K for 2008. (*)
2005 Stock Incentive Plan Exhibit 10 to the Form S-8 Registration Statement (File No. 333-184914) filed by AFG on November 13, 2012. (*)
2015 Stock Incentive Plan filed as Exhibit 10(g) to AFG’s Form 10-K for 2015. (*)
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
/s/ Carl H. Lindner III Co-Chief Executive Officer and Director February 25, 2021
/s/ S. Craig Lindner Co-Chief Executive Officer and Director February 25, 2021
/s/ Brian S. Hertzman Senior Vice President, Chief Financial Officer February 25, 2021