Significant variables in estimating the loss reserves for the medical malpractice business include:
Gross and net written premiums increased in 2011 compared to 2010 due primarily to higher premiums in the Property and transportation segment, particularly the crop and transportation businesses. In addition, higher net written premiums in 2011 reflect the impact of a third quarter 2010 reinsurance transaction in the Specialty financial group. Overall renewal rate momentum in the Specialty insurance operations was positive during the fourth quarter of 2011.
Underwriting results for 2011, 2010 and 2009 include $44 million, $55 million and $56 million, respectively, in adverse reserve development related to Marketform, primarily its run-off Italian public hospital medical malpractice business.
Annuity and Supplemental Insurance Operations Operating earnings before income taxes (excluding realized gains (losses)) of the annuity and supplemental insurance segment increased $22 million (11%) to $224 million in 2011 due primarily to higher earnings in the fixed annuity and Medicare supplement businesses, partially offset by higher mortality in the run-off life operations, the impact of a decrease in the stock market on the variable annuity business and the impact of lower interest rates on the indexed annuity business. The 2010 results were $40 million (25%) higher than 2009 as expense savings and higher earnings in the fixed annuity and supplemental insurance operations were partially offset by lower earnings in the variable annuity operations.
We have audited American Financial Group, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
Gross Unrealized Losses on All Other Corporates AFG recorded in earnings approximately $6 million in other-than-temporary impairment charges on “all other corporate” securities during 2011. Management concluded that no additional charges for other-than-temporary impairments were required based on many factors, including AFG’s ability and intent to hold the investments for a period of time sufficient to allow for anticipated recovery of its amortized cost, the length of time and the extent to which fair value has been below cost, analysis of historical and projected company-specific financial data, the outlook for industry sectors, and credit ratings.
The following table summarizes the gain (loss) included in the Statement of Earnings for changes in the fair value of these derivatives for 2011, 2010 and 2009 (in millions):
The PVFP amounts in the table above are net of $195 million and $174 million of accumulated amortization at December 31, 2011 and 2010, respectively. Amortization of the PVFP was $20 million in 2011, $26 million in 2010 and $29 million in 2009. During each of the next five years, the PVFP is expected to decrease at a rate of approximately one-sixth of the balance at the beginning of each respective year.
As discussed above under “Recent Accounting Standards,” AFG’s current accounting for DPAC will change effective in 2012 and amounts included herein will be adjusted retrospectively. Deferred policy acquisition costs on an adjusted basis at December 31, 2011, will be $901 million, consisting of $189 million for the property and casualty subsidiaries and $712 million for the annuity and supplemental subsidiaries.
Operating Leases Total rental expense for various leases of office space and equipment was $54 million in 2011 and $42 million in each of 2010 and 2009. Future minimum rentals, related principally to office space, required under operating leases having initial or remaining noncancelable lease terms in excess of one year at December 31, 2011, were as follows: 2012 - $52 million; 2013 - $49 million; 2014 - $44 million; 2015 - $37 million; 2016 - $33 million; and $197 million thereafter.