AMERICAN FINANCIAL GROUP INC - Quarter Report: 2021 September (Form 10-Q)
____________________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2021
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under the Laws of Ohio IRS Employer I.D. No. 31-1544320
301 East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities Registered Pursuant to Section 12(b) of the Act: | |||||||||||||||||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | |||||||||||||||
Common Stock | AFG | New York Stock Exchange | |||||||||||||||
5.875% Subordinated Debentures due March 30, 2059 | AFGB | New York Stock Exchange | |||||||||||||||
5.625% Subordinated Debentures due June 1, 2060 | AFGD | New York Stock Exchange | |||||||||||||||
5.125% Subordinated Debentures due December 15, 2059 | AFGC | New York Stock Exchange | |||||||||||||||
4.50% Subordinated Debentures due September 15, 2060 | AFGE | New York Stock Exchange |
As of November 1, 2021, there were 84,807,882 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.
____________________________________________________________________________________________
AMERICAN FINANCIAL GROUP, INC. 10-Q
TABLE OF CONTENTS
Page | |||||
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM 1. — FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in Millions)
September 30, 2021 | December 31, 2020 | ||||||||||
Assets: | |||||||||||
Cash and cash equivalents | $ | 2,833 | $ | 1,665 | |||||||
Investments: | |||||||||||
Fixed maturities, available for sale at fair value (amortized cost — $10,211 and $8,812; allowance for expected credit losses of $9 and $12) | 10,427 | 9,084 | |||||||||
Fixed maturities, trading at fair value | 29 | 24 | |||||||||
Equity securities, at fair value | 993 | 889 | |||||||||
Investments accounted for using the equity method | 1,407 | 1,235 | |||||||||
Mortgage loans | 537 | 377 | |||||||||
Real estate and other investments | 161 | 220 | |||||||||
Total cash and investments | 16,387 | 13,494 | |||||||||
Recoverables from reinsurers | 3,523 | 3,288 | |||||||||
Prepaid reinsurance premiums | 1,028 | 768 | |||||||||
Agents’ balances and premiums receivable | 1,492 | 1,229 | |||||||||
Deferred policy acquisition costs | 262 | 244 | |||||||||
Assets of managed investment entities | 5,130 | 4,971 | |||||||||
Other receivables | 1,097 | 678 | |||||||||
Other assets | 847 | 977 | |||||||||
Goodwill | 176 | 176 | |||||||||
Assets of discontinued annuity operations | — | 47,885 | |||||||||
Total assets | $ | 29,942 | $ | 73,710 | |||||||
Liabilities and Equity: | |||||||||||
Unpaid losses and loss adjustment expenses | $ | 10,991 | $ | 10,392 | |||||||
Unearned premiums | 3,415 | 2,803 | |||||||||
Payable to reinsurers | 1,146 | 807 | |||||||||
Liabilities of managed investment entities | 5,034 | 4,914 | |||||||||
Long-term debt | 1,964 | 1,963 | |||||||||
Other liabilities | 2,152 | 1,584 | |||||||||
Liabilities of discontinued annuity operations | — | 44,458 | |||||||||
Total liabilities | 24,702 | 66,921 | |||||||||
Shareholders’ equity: | |||||||||||
Common Stock, no par value — 200,000,000 shares authorized — 84,795,008 and 86,345,246 shares outstanding | 85 | 86 | |||||||||
Capital surplus | 1,315 | 1,281 | |||||||||
Retained earnings | 3,680 | 4,149 | |||||||||
Accumulated other comprehensive income, net of tax | 160 | 1,273 | |||||||||
Total shareholders’ equity | 5,240 | 6,789 | |||||||||
Noncontrolling interests | — | — | |||||||||
Total equity | 5,240 | 6,789 | |||||||||
Total liabilities and equity | $ | 29,942 | $ | 73,710 |
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(In Millions, Except Per Share Data)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Property and casualty insurance net earned premiums | $ | 1,529 | $ | 1,381 | $ | 3,952 | $ | 3,774 | |||||||||||||||
Net investment income | 169 | 122 | 521 | 314 | |||||||||||||||||||
Realized gains (losses) on: | |||||||||||||||||||||||
Securities | (17) | 23 | 103 | (197) | |||||||||||||||||||
Subsidiaries | — | (30) | 4 | (30) | |||||||||||||||||||
Income of managed investment entities: | |||||||||||||||||||||||
Investment income | 45 | 46 | 135 | 154 | |||||||||||||||||||
Gain (loss) on change in fair value of assets/liabilities | 1 | (5) | 9 | (21) | |||||||||||||||||||
Other income | 27 | 19 | 70 | 62 | |||||||||||||||||||
Total revenues | 1,754 | 1,556 | 4,794 | 4,056 | |||||||||||||||||||
Costs and Expenses: | |||||||||||||||||||||||
Property and casualty insurance: | |||||||||||||||||||||||
Losses and loss adjustment expenses | 954 | 963 | 2,335 | 2,441 | |||||||||||||||||||
Commissions and other underwriting expenses | 417 | 406 | 1,187 | 1,235 | |||||||||||||||||||
Interest charges on borrowed money | 24 | 24 | 71 | 64 | |||||||||||||||||||
Expenses of managed investment entities | 37 | 34 | 115 | 129 | |||||||||||||||||||
Other expenses | 55 | 89 | 196 | 192 | |||||||||||||||||||
Total costs and expenses | 1,487 | 1,516 | 3,904 | 4,061 | |||||||||||||||||||
Earnings (loss) from continuing operations before income taxes | 267 | 40 | 890 | (5) | |||||||||||||||||||
Provision (credit) for income taxes | 48 | (48) | 164 | (52) | |||||||||||||||||||
Net earnings from continuing operations, including noncontrolling interests | 219 | 88 | 726 | 47 | |||||||||||||||||||
Net earnings (loss) from discontinued operations | — | 76 | 914 | (20) | |||||||||||||||||||
Net earnings, including noncontrolling interests | 219 | 164 | 1,640 | 27 | |||||||||||||||||||
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests | — | — | — | (13) | |||||||||||||||||||
Net Earnings Attributable to Shareholders | $ | 219 | $ | 164 | $ | 1,640 | $ | 40 | |||||||||||||||
Earnings (Loss) Attributable to Shareholders per Basic Common Share from: | |||||||||||||||||||||||
Continuing operations | $ | 2.57 | $ | 1.00 | $ | 8.52 | $ | 0.67 | |||||||||||||||
Discontinued operations | — | 0.86 | 10.72 | (0.22) | |||||||||||||||||||
Total basic earnings attributable to shareholders | $ | 2.57 | $ | 1.86 | $ | 19.24 | $ | 0.45 | |||||||||||||||
Earnings (Loss) Attributable to Shareholders per Diluted Common Share: | |||||||||||||||||||||||
Continuing operations | $ | 2.56 | $ | 1.00 | $ | 8.45 | $ | 0.66 | |||||||||||||||
Discontinued operations | — | 0.86 | 10.66 | (0.21) | |||||||||||||||||||
Total diluted earnings attributable to shareholders | $ | 2.56 | $ | 1.86 | $ | 19.11 | $ | 0.45 | |||||||||||||||
Average number of Common Shares: | |||||||||||||||||||||||
Basic | 84.8 | 88.2 | 85.2 | 89.4 | |||||||||||||||||||
Diluted | 85.2 | 88.5 | 85.8 | 89.9 |
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(In Millions)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net earnings, including noncontrolling interests | $ | 219 | $ | 164 | $ | 1,640 | $ | 27 | |||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net unrealized gains (losses) on securities: | |||||||||||||||||||||||
Unrealized holding gains (losses) on securities arising during the period | (29) | 194 | (177) | 350 | |||||||||||||||||||
Reclassification adjustment for realized (gains) losses included in net earnings | 2 | (12) | (16) | — | |||||||||||||||||||
Reclassification adjustment for unrealized gains of subsidiaries sold | — | — | (884) | — | |||||||||||||||||||
Total net unrealized gains (losses) on securities | (27) | 182 | (1,077) | 350 | |||||||||||||||||||
Net unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||||
Unrealized holding gains (losses) on cash flow hedges arising during the period | — | 1 | (1) | 49 | |||||||||||||||||||
Reclassification adjustment for investment income included in net earnings | — | (7) | (11) | (25) | |||||||||||||||||||
Reclassification adjustment for unrealized gains on cash flow hedges of subsidiaries sold | — | — | (29) | — | |||||||||||||||||||
Total net unrealized gains (losses) on cash flow hedges | — | (6) | (41) | 24 | |||||||||||||||||||
Foreign currency translation adjustments | (3) | — | (3) | (6) | |||||||||||||||||||
Pension and other postretirement plans adjustments (“OPRP”): | |||||||||||||||||||||||
Unrealized holding losses on pension and OPRP arising during the period | — | — | (1) | — | |||||||||||||||||||
Reclassification adjustment for pension settlement loss included in net earnings | — | — | 9 | — | |||||||||||||||||||
Total pension and OPRP adjustments | — | — | 8 | — | |||||||||||||||||||
Other comprehensive income (loss), net of tax | (30) | 176 | (1,113) | 368 | |||||||||||||||||||
Total comprehensive income, net of tax | 189 | 340 | 527 | 395 | |||||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | — | — | — | (11) | |||||||||||||||||||
Comprehensive income attributable to shareholders | $ | 189 | $ | 340 | $ | 527 | $ | 406 |
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(Dollars in Millions)
Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
Common | Common Stock and Capital | Retained | Other Comprehensive | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||||
Shares | Surplus | Earnings | Income | Total | Interests | Equity | ||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 84,713,927 | $ | 1,388 | $ | 4,023 | $ | 190 | $ | 5,601 | $ | — | $ | 5,601 | |||||||||||||||||||||||||||||||
Net earnings | — | — | 219 | — | 219 | — | 219 | |||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (30) | (30) | — | (30) | |||||||||||||||||||||||||||||||||||||
Dividends ($6.50 per share) | — | — | (551) | — | (551) | — | (551) | |||||||||||||||||||||||||||||||||||||
Shares issued: | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 153,842 | 6 | — | — | 6 | — | 6 | |||||||||||||||||||||||||||||||||||||
Restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Other benefit plans | 17,029 | 2 | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | 6,272 | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 4 | — | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||
Shares acquired and retired | (94,960) | (1) | (11) | — | (12) | — | (12) | |||||||||||||||||||||||||||||||||||||
Shares exchanged — benefit plans | (562) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | (540) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 84,795,008 | $ | 1,400 | $ | 3,680 | $ | 160 | $ | 5,240 | $ | — | $ | 5,240 | |||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 88,659,407 | $ | 1,388 | $ | 3,685 | $ | 1,053 | $ | 6,126 | $ | — | $ | 6,126 | |||||||||||||||||||||||||||||||
Net earnings | — | — | 164 | — | 164 | — | 164 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | 176 | 176 | — | 176 | |||||||||||||||||||||||||||||||||||||
Dividends ($0.45 per share) | — | — | (39) | — | (39) | — | (39) | |||||||||||||||||||||||||||||||||||||
Shares issued: | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 19,865 | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||
Restricted stock awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Other benefit plans | 38,822 | 2 | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | 2,901 | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 5 | — | — | 5 | — | 5 | |||||||||||||||||||||||||||||||||||||
Shares acquired and retired | (1,447,588) | (23) | (73) | — | (96) | — | (96) | |||||||||||||||||||||||||||||||||||||
Shares exchanged — benefit plans | (1,337) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | (5,488) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Other | — | (4) | — | 4 | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 87,266,582 | $ | 1,370 | $ | 3,737 | $ | 1,233 | $ | 6,340 | $ | — | $ | 6,340 |
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) — CONTINUED
(Dollars in Millions)
Shareholders’ Equity | Redeemable | |||||||||||||||||||||||||||||||||||||||||||||||||
Common | Common Stock and Capital | Retained | Accumulated Other Comp. | Noncon- trolling | Total | Noncon- trolling | ||||||||||||||||||||||||||||||||||||||||||||
Shares | Surplus | Earnings | Income | Total | Interests | Equity | Interests | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 86,345,246 | $ | 1,367 | $ | 4,149 | $ | 1,273 | $ | 6,789 | $ | — | $ | 6,789 | |||||||||||||||||||||||||||||||||||||
Net earnings | — | — | 1,640 | — | 1,640 | — | 1,640 | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,113) | (1,113) | — | (1,113) | |||||||||||||||||||||||||||||||||||||||||||
Dividends ($21.50 per share) | — | — | (1,826) | — | (1,826) | — | (1,826) | |||||||||||||||||||||||||||||||||||||||||||
Shares issued: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 1,118,586 | 55 | — | — | 55 | — | 55 | |||||||||||||||||||||||||||||||||||||||||||
Restricted stock awards | 207,020 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Other benefit plans | 60,494 | 7 | — | — | 7 | — | 7 | |||||||||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | 42,926 | 5 | — | — | 5 | — | 5 | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 11 | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||
Shares acquired and retired | (2,769,182) | (44) | (274) | — | (318) | — | (318) | |||||||||||||||||||||||||||||||||||||||||||
Shares exchanged — benefit plans | (91,926) | (1) | (9) | — | (10) | — | (10) | |||||||||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | (118,156) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 84,795,008 | $ | 1,400 | $ | 3,680 | $ | 160 | $ | 5,240 | $ | — | $ | 5,240 | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 90,303,686 | $ | 1,397 | $ | 4,009 | $ | 863 | $ | 6,269 | $ | — | $ | 6,269 | $ | — | |||||||||||||||||||||||||||||||||||
Cumulative effect of accounting change | — | — | 7 | — | 7 | — | 7 | — | ||||||||||||||||||||||||||||||||||||||||||
Net earnings (loss) | — | — | 40 | — | 40 | — | 40 | (13) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | 366 | 366 | — | 366 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Dividends ($1.35 per share) | — | — | (120) | — | (120) | — | (120) | — | ||||||||||||||||||||||||||||||||||||||||||
Shares issued: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 229,208 | 10 | — | — | 10 | — | 10 | — | ||||||||||||||||||||||||||||||||||||||||||
Restricted stock awards | 227,867 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other benefit plans | 105,318 | 7 | — | — | 7 | — | 7 | — | ||||||||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | 7,251 | 1 | — | — | 1 | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | 15 | — | — | 15 | — | 15 | — | ||||||||||||||||||||||||||||||||||||||||||
Shares acquired and retired | (3,468,107) | (54) | (179) | — | (233) | — | (233) | — | ||||||||||||||||||||||||||||||||||||||||||
Shares exchanged — benefit plans | (97,731) | (2) | (9) | — | (11) | — | (11) | — | ||||||||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | (40,910) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other | — | (4) | (11) | 4 | (11) | — | (11) | 11 | ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 87,266,582 | $ | 1,370 | $ | 3,737 | $ | 1,233 | $ | 6,340 | $ | — | $ | 6,340 | $ | — |
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Millions)
Nine months ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Operating Activities: | |||||||||||
Net earnings, including noncontrolling interests | $ | 1,640 | $ | 27 | |||||||
Adjustments: | |||||||||||
Depreciation and amortization | 160 | 248 | |||||||||
Annuity benefits | 377 | 905 | |||||||||
Realized (gains) losses on investing activities | (1,111) | 332 | |||||||||
Net (purchases) sales of trading securities | (6) | 18 | |||||||||
Deferred annuity and life policy acquisition costs | (98) | (112) | |||||||||
Change in: | |||||||||||
Reinsurance and other receivables | (987) | (597) | |||||||||
Other assets | 238 | 120 | |||||||||
Insurance claims and reserves | 1,204 | 702 | |||||||||
Payable to reinsurers | 339 | 163 | |||||||||
Other liabilities | 88 | (220) | |||||||||
Managed investment entities’ assets/liabilities | (78) | 99 | |||||||||
Other operating activities, net | (341) | 11 | |||||||||
Net cash provided by operating activities | 1,425 | 1,696 | |||||||||
Investing Activities: | |||||||||||
Purchases of: | |||||||||||
Fixed maturities | (6,907) | (7,817) | |||||||||
Equity securities | (110) | (354) | |||||||||
Mortgage loans | (179) | (197) | |||||||||
Equity index options and other investments | (313) | (699) | |||||||||
Real estate, property and equipment | (53) | (41) | |||||||||
Proceeds from: | |||||||||||
Maturities and redemptions of fixed maturities | 4,075 | 4,114 | |||||||||
Repayments of mortgage loans | 27 | 48 | |||||||||
Sales of fixed maturities | 690 | 3,123 | |||||||||
Sales of equity securities | 462 | 421 | |||||||||
Sales and settlements of equity index options and other investments | 562 | 673 | |||||||||
Sales of real estate, property and equipment | 25 | 7 | |||||||||
Sales of businesses | 3,547 | — | |||||||||
Cash and cash equivalents of businesses sold | (2,060) | — | |||||||||
Managed investment entities: | |||||||||||
Purchases of investments | (1,480) | (878) | |||||||||
Proceeds from sales and redemptions of investments | 1,579 | 818 | |||||||||
Other investing activities, net | 32 | 10 | |||||||||
Net cash used in investing activities | (103) | (772) | |||||||||
Financing Activities: | |||||||||||
Annuity receipts | 2,403 | 2,968 | |||||||||
Ceded annuity receipts | (311) | (246) | |||||||||
Annuity surrenders, benefits and withdrawals | (1,931) | (2,506) | |||||||||
Ceded annuity surrenders, benefits and withdrawals | 282 | — | |||||||||
Net transfers from variable annuity assets | 34 | 44 | |||||||||
Additional long-term borrowings | — | 635 | |||||||||
Issuances of managed investment entities’ liabilities | 1,665 | 30 | |||||||||
Retirements of managed investment entities’ liabilities | (1,701) | (79) | |||||||||
Issuances of Common Stock | 60 | 15 | |||||||||
Repurchases of Common Stock | (318) | (233) | |||||||||
Cash dividends paid on Common Stock | (1,482) | (119) | |||||||||
Net cash provided by (used in) financing activities | (1,299) | 509 | |||||||||
Net Change in Cash and Cash Equivalents | 23 | 1,433 | |||||||||
Cash and cash equivalents at beginning of period | 2,810 | 2,314 | |||||||||
Cash and cash equivalents at end of period | $ | 2,833 | $ | 3,747 |
7
INDEX TO NOTES | |||||||||||||||||
A. | Accounting Policies | H. | Goodwill and Other Intangibles | ||||||||||||||
B. | Discontinued Operations | I. | Long-Term Debt | ||||||||||||||
C. | Sales of Businesses | J. | Shareholders’ Equity | ||||||||||||||
D. | Segments of Operations | K. | Income Taxes | ||||||||||||||
E. | Fair Value Measurements | L. | Contingencies | ||||||||||||||
F. | Investments | M. | Insurance | ||||||||||||||
G. | Managed Investment Entities | ||||||||||||||||
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial statements for American Financial Group, Inc. and its subsidiaries (“AFG”) are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with U.S. generally accepted accounting principles (“GAAP”).
Certain reclassifications have been made to prior periods to conform to the current year’s presentation including reclassifying the assets and liabilities of the Annuity subsidiaries sold in May 2021 to assets and liabilities of discontinued annuity operations and their earnings to net earnings (loss) from discontinued operations. See Note B — “Discontinued Operations.” 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 September 30, 2021, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.
Unless otherwise stated, the information in the Notes to the Consolidated Financial Statements relates to AFG’s continuing operations.
The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.
Discontinued Operations Disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations.
Fair Value Measurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2021.
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. 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
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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 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 are recorded immediately in net earnings through realized gains (losses).
Investments Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on securities classified as “trading” under previous guidance, its small portfolio of limited partnerships and similar investments carried at fair value and certain other securities classified at purchase as “fair value through net investment income” in net investment income.
Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (“AOCI”) in AFG’s Balance Sheet. Fixed maturity securities classified as “trading” are reported at fair value with changes in unrealized holding gains or losses during the period included in net investment income. Mortgage loans (net of any allowance) are carried primarily at the aggregate unpaid balance.
Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
Limited partnerships and similar investments are generally accounted for using the equity method of accounting. Under the equity method, AFG records its share of the earnings or losses of the investee based on when it is reported by the investee in its financial statements rather than in the period in which the investee declares a dividend. AFG’s share of the earnings or losses from equity method investments is generally recorded on a quarter lag due to the timing of the receipt of the investee’s financial statements. AFG’s equity in the earnings (losses) of limited partnerships and similar investments is included in net investment income.
Realized gains or losses on the disposal of fixed maturity securities are determined on the specific identification basis. When a decline in the value of an available for sale fixed maturity is considered to be other-than-temporary at the balance sheet date, an allowance for credit losses (impairment), including any write-off of accrued interest, is charged to earnings (included in realized gains (losses) on securities). If management can assert that it does not intend to sell the security and it is not more likely than not that it will have to sell it before recovery of its amortized cost basis (net of allowance), then the impairment is separated into two components: (i) the allowance related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the charge. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment is recorded in earnings to reduce the amortized cost (net of allowance) of that security to fair value.
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.
Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG reports as assets (i) the estimated reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported, and (ii) amounts paid or due to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums due to reinsurers, as well as ceded premiums retained by AFG under contracts to fund ceded losses as they become due. AFG also assumes reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Deferred Policy Acquisition Costs (“DPAC”) Policy acquisition costs (principally commissions, premium taxes and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred. DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies. A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses and unamortized acquisition costs exceed the related unearned premiums. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses.
Managed Investment Entities A company is considered the primary beneficiary of, and therefore must consolidate, a variable interest entity (“VIE”) based primarily on its ability to direct the activities of the VIE that most significantly impact that entity’s economic performance and the obligation to absorb losses of, or receive benefits from, the entity that could potentially be significant to the VIE.
AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note G — “Managed Investment Entities”). AFG has determined that it is the primary beneficiary of these CLOs because (i) its role as asset manager gives it the power to direct the activities that most significantly impact the economic performance of the CLOs and (ii) through its investment in the CLO debt tranches, it has exposure to CLO losses (limited to the amount AFG invested) and the right to receive CLO benefits that could potentially be significant to the CLOs.
Because AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities, the assets and liabilities of the CLOs are shown separately in AFG’s Balance Sheet. AFG has elected the fair value option for reporting on the CLO assets and liabilities to improve the transparency of financial reporting related to the CLOs. The net gain or loss from accounting for the CLO assets and liabilities at fair value is presented separately in AFG’s Statement of Earnings.
The fair values of a CLO’s assets may differ from the separately measured fair values of its liabilities even though the CLO liabilities only have recourse to the CLO assets. AFG has set the carrying value of the 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 a separately measured fair value. CLO earnings attributable to AFG’s shareholders are measured by the change in the fair value of AFG’s investments in the CLOs and management fees earned.
At September 30, 2021, assets and liabilities of managed investment entities included $171 million in assets and $131 million in liabilities of a temporary warehousing entity that was established in connection with the formation of a new CLO that is expected to close in the fourth quarter of 2021. At closing, all warehoused assets will be transferred to the new CLO and the liabilities will be repaid.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims represent management’s best estimate and are based upon (i) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of unreported losses (including possible development on known claims) based on past experience; (iv) estimates based on experience of expenses for investigating and adjusting claims; and (v) the current state of the law and coverage litigation. Establishing reserves for asbestos, environmental and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.
Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the statement of earnings in the period in which determined. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.
Debt Issuance Costs Debt issuance costs related to AFG’s outstanding debt are presented in its Balance Sheet as a direct reduction in the carrying value of long-term debt and are amortized over the life of the related debt using the effective interest method as a component of interest expense. Debt issuance costs related to AFG’s revolving credit facilities are included in other assets in AFG’s Balance Sheet.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Leases Leases for terms of longer than one year are recognized as assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of contractual cash flows.
At September 30, 2021 AFG has a $136 million lease liability included in and a lease right-of-use asset of $118 million included in other assets compared to $159 million and $139 million, respectively, at December 31, 2020.
Noncontrolling Interests For balance sheet purposes, noncontrolling interests represent the interests of shareholders other than AFG in consolidated entities. In the statement of earnings, net earnings and losses attributable to noncontrolling interests represents such shareholders’ interest in the earnings and losses of those entities.
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.
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.
AFG recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on AFG’s reserve for uncertain tax positions are recognized as a component of tax expense.
Stock-Based Compensation All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant.
AFG records excess tax benefits or deficiencies for share-based payments through income tax expense in the statement of earnings. In addition, AFG accounts for forfeitures of awards when they occur.
Benefit Plans AFG provides retirement benefits to qualified employees of participating companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG makes all contributions to the retirement fund portion of the plan and matches a percentage of employee contributions to the savings fund. Company contributions are expensed in the year for which they are declared. AFG and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFG also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period employees earn such benefits.
Earnings Per Share Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: third quarter of 2021 and 2020 — 0.4 million and 0.3 million; first nine months of 2021 and 2020 — 0.6 million and 0.5 million.
There were no anti-dilutive potential common shares for the third quarter or the first nine months of 2021 or 2020.
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. All other activities are considered “operating.” Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
B. Discontinued Operations
Annuity Business On May 28, 2021, AFG completed the sale of its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”) with an effective date of May 31, 2021. MassMutual acquired Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries included AFG’s run-off life and long-term care operations. Proceeds from the sale were $3.57 billion (including $34 million in preliminary post-closing adjustments). AFG realized a $656 million net gain on the sale. The sale continues to be subject to tax-related post-closing adjustments, which are not expected to be material and are expected to be settled in 2022. Beginning with the first quarter of 2021, the results of the Annuity business sold were reported as discontinued operations in accordance with generally accepted accounting principles, which included adjusting prior period results to reflect these operations as discontinued.
Prior to the sale, AFG acquired approximately $480 million in investments accounted for using the equity method and approximately $100 million of directly owned real estate from GALIC.
Details of the assets and liabilities of the Annuity subsidiaries sold were as follows (in millions):
May 31, 2021 | December 31, 2020 | ||||||||||
Assets of businesses sold: | |||||||||||
Cash and cash equivalents | $ | 2,060 | $ | 1,145 | |||||||
Investments | 38,323 | 38,011 | |||||||||
Recoverables from reinsurers | 6,748 | 6,804 | |||||||||
Other assets | 2,152 | 1,925 | |||||||||
Total assets of discontinued annuity operations | 49,283 | 47,885 | |||||||||
Liabilities of businesses sold: | |||||||||||
Annuity benefits accumulated | 43,690 | 42,573 | |||||||||
Other liabilities | 1,813 | 1,885 | |||||||||
Total liabilities of discontinued annuity operations | 45,503 | 44,458 | |||||||||
Receivable from AFG for real estate-related investments | — | 537 | |||||||||
Reclassify AOCI | (913) | (1,071) | |||||||||
Net investment in annuity businesses sold, excluding AOCI | $ | 2,867 | $ | 2,893 |
Details of the results of operations for the discontinued annuity operations were (in millions):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 (*) | 2020 | ||||||||||||||||||||
Net investment income | $ | — | $ | 459 | $ | 746 | $ | 1,256 | |||||||||||||||
Realized gains (losses) on securities | — | 22 | 112 | (105) | |||||||||||||||||||
Other income | — | 26 | 52 | 91 | |||||||||||||||||||
Total revenues | — | 507 | 910 | 1,242 | |||||||||||||||||||
Annuity benefits | — | 203 | 377 | 905 | |||||||||||||||||||
Annuity and supplemental insurance acquisition expenses | — | 172 | 136 | 250 | |||||||||||||||||||
Other expenses | — | 38 | 73 | 118 | |||||||||||||||||||
Total costs and expenses | — | 413 | 586 | 1,273 | |||||||||||||||||||
Earnings (loss) before income taxes from discontinued operations | — | 94 | 324 | (31) | |||||||||||||||||||
Provision (credit) for income taxes on operations | — | 18 | 66 | (11) | |||||||||||||||||||
Net earnings (loss) from operations, net of tax | — | 76 | 258 | (20) | |||||||||||||||||||
Gain on sale, net of tax | — | — | 656 | — | |||||||||||||||||||
Net earnings (loss) from discontinued operations | $ | — | $ | 76 | $ | 914 | $ | (20) |
(*)Results through the May 31, 2021 effective date of the sale.
Net investment income in the table above excludes $10 million in the third quarter of 2020, and $51 million and $29 million in first nine months of 2021 and 2020, respectively, related to the real estate-related entities that AFG acquired from the discontinued annuity operations prior to the completion of the sale.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
The impact of the sale of the annuity business is shown below (in millions):
May 31, 2021 | |||||
Cash proceeds | $ | 3,537 | |||
Receivable from MassMutual | 34 | ||||
Sale related expenses | (8) | ||||
Total net proceeds | 3,563 | ||||
Net investment in annuity businesses sold, excluding AOCI | 2,867 | ||||
Reclassify net deferred tax asset | (199) | ||||
Pretax gain on sale | 895 | ||||
Income tax expense: | |||||
Reclassify net deferred tax asset | 199 | ||||
Tax liabilities triggered by pending sale in the first quarter of 2021 | 41 | ||||
Other | (1) | ||||
Total income tax expense | 239 | ||||
Net gain on sale | $ | 656 |
Summarized cash flows for the discontinued annuity operations were (in millions):
Nine months ended September 30, | |||||||||||
2021 | 2020 | ||||||||||
Net cash provided by operating activities | $ | 87 | $ | 904 | |||||||
Net cash used in investing activities | (1,709) | (440) | |||||||||
Net cash provided by financing activities | 477 | 260 |
Derivatives The vast majority of AFG’s derivatives were held by the sold annuity subsidiaries. The following table summarizes the gains (losses) included in net earnings (loss) from discontinued operations for changes in the fair value of derivatives that do not qualify for hedge accounting for the first nine months of 2021 and 2020 (in millions):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
Derivative | 2021 | 2020 | 2021 (*) | 2020 | ||||||||||||||||||||||
MBS with embedded derivatives | $ | — | $ | (3) | $ | (1) | $ | 2 | ||||||||||||||||||
Fixed-indexed and variable-indexed annuities (embedded derivative) | — | (5) | (222) | 41 | ||||||||||||||||||||||
Equity index call options | — | 203 | 237 | (42) | ||||||||||||||||||||||
Equity index put options | — | 2 | 5 | 1 | ||||||||||||||||||||||
Reinsurance contract (embedded derivative) | — | 1 | 1 | — | ||||||||||||||||||||||
$ | — | $ | 198 | $ | 20 | $ | 2 |
(*)Through the May 31, 2021 effective date of the sale.
C. Sales of Businesses
Annuity Operations See Note B — “Discontinued Operations,” for information on the sale of AFG’s annuity operations.
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. In December 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. In the second quarter of 2021, AFG recognized a pretax gain on sale of a subsidiary of $4 million related to contingent consideration received on the sale of Neon.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Under GAAP accounting guidance, only disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations. Because AFG’s primary business continues to be commercial property and casualty insurance, as well as the immaterial expected impact on AFG’s ongoing results of operations, the sale of Neon was not reported as a discontinued operation.
An estimated loss of $30 million on the sale of Neon was recorded in AFG’s financial statements as of September 30, 2020 as shown below (in millions):
Estimated sale proceeds, net of expenses | $ | 4 | |||
Assets of businesses to be sold: | |||||
Cash and investments | $ | 461 | |||
Recoverables from reinsurers | 198 | ||||
Prepaid reinsurance premiums | 30 | ||||
Agents’ balances and premiums receivable | 48 | ||||
Other assets | 73 | ||||
Total assets | 810 | ||||
Liabilities of businesses to be sold: | |||||
Unpaid losses and loss adjustment expenses | 598 | ||||
Unearned premiums | 83 | ||||
Payable to reinsurers | 39 | ||||
Other liabilities | 47 | ||||
Total liabilities | 767 | ||||
Reclassify accumulated other comprehensive income | (9) | ||||
Net assets of businesses to be sold | $ | 34 | |||
Pretax loss on subsidiaries recorded in the third quarter of 2020 | $ | (30) |
Revenues, costs and expenses, and earnings before income taxes for the subsidiaries sold were (in millions):
Three months ended | Nine months ended | ||||||||||
September 30, 2020 | September 30, 2020 | ||||||||||
Net earned premiums | $ | 42 | $ | 174 | |||||||
Loss and loss adjustment expenses | 60 | 166 | |||||||||
Commissions and other underwriting expenses | 20 | 90 | |||||||||
Underwriting loss | (38) | (82) | |||||||||
Net investment income | 1 | (5) | |||||||||
Other income and expenses, net | (3) | (5) | |||||||||
Loss before income taxes and noncontrolling interests | $ | (40) | $ | (92) |
D. Segments of Operations
Subsequent to the sale of its annuity operations, see Note B — “Discontinued Operations,” AFG manages its business as two segments: Property and casualty insurance and Other, which includes holding company costs and operations attributable to the noncontrolling interests of the managed investment entities.
AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses and trucks, inland and ocean marine, agricultural-related products and other commercial property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, executive and professional liability, general liability, umbrella and excess liability, specialty coverages in targeted markets, customized programs for small to mid-sized businesses and workers’ compensation insurance, and (iii) Specialty financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.
The following tables (in millions) show AFG’s revenues and earnings (loss) from continuing operations before income taxes by segment and sub-segment.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Property and casualty insurance: | |||||||||||||||||||||||
Premiums earned: | |||||||||||||||||||||||
Specialty | |||||||||||||||||||||||
Property and transportation | $ | 700 | $ | 574 | $ | 1,547 | $ | 1,350 | |||||||||||||||
Specialty casualty | 613 | 560 | 1,772 | 1,663 | |||||||||||||||||||
Specialty financial | 163 | 155 | 477 | 455 | |||||||||||||||||||
Other specialty | 53 | 50 | 156 | 132 | |||||||||||||||||||
Other lines (a) | — | 42 | — | 174 | |||||||||||||||||||
Total premiums earned | 1,529 | 1,381 | 3,952 | 3,774 | |||||||||||||||||||
Net investment income (b) | 165 | 112 | 467 | 277 | |||||||||||||||||||
Other income | 4 | — | 9 | 8 | |||||||||||||||||||
Total property and casualty insurance | 1,698 | 1,493 | 4,428 | 4,059 | |||||||||||||||||||
Other | 73 | 60 | 208 | 195 | |||||||||||||||||||
Income on real estate-related entities (c) | — | 10 | 51 | 29 | |||||||||||||||||||
Total revenues before realized gains (losses) | 1,771 | 1,563 | 4,687 | 4,283 | |||||||||||||||||||
Realized gains (losses) on securities | (17) | 23 | 103 | (197) | |||||||||||||||||||
Realized gains (losses) on subsidiaries | — | (30) | 4 | (30) | |||||||||||||||||||
Total revenues | $ | 1,754 | $ | 1,556 | $ | 4,794 | $ | 4,056 |
(a)Represents premiums earned in the Neon exited lines (which were sold in December 2020) during the third quarter and first nine months of 2020.
(b)Includes income of $1 million for the third quarter of 2020 and a loss of $5 million in the Neon exited lines in the first nine months of 2020 (primarily from the change in fair value of equity securities).
(c)Represents investment income from real estate-related entities acquired from the discontinued annuity operations while they were held by those operations. Subsequent to the sale of the annuity group, this income is included in the segment of the acquirer.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Earnings (Loss) From Continuing Operations Before Income Taxes | |||||||||||||||||||||||
Property and casualty insurance: | |||||||||||||||||||||||
Underwriting: | |||||||||||||||||||||||
Specialty | |||||||||||||||||||||||
Property and transportation | $ | 45 | $ | 47 | $ | 163 | $ | 107 | |||||||||||||||
Specialty casualty | 110 | 53 | 237 | 132 | |||||||||||||||||||
Specialty financial | 26 | 13 | 72 | 30 | |||||||||||||||||||
Other specialty | (12) | (9) | (16) | (22) | |||||||||||||||||||
Other lines (a) | (1) | (86) | (2) | (133) | |||||||||||||||||||
Total underwriting | 168 | 18 | 454 | 114 | |||||||||||||||||||
Investment and other income, net (b) | 161 | 100 | 451 | 249 | |||||||||||||||||||
Total property and casualty insurance | 329 | 118 | 905 | 363 | |||||||||||||||||||
Other (c) | (45) | (74) | (173) | (152) | |||||||||||||||||||
Income on real estate-related entities (d) | — | 3 | 51 | 11 | |||||||||||||||||||
Total earnings from continuing operations before realized gains (losses) and income taxes | 284 | 47 | 783 | 222 | |||||||||||||||||||
Realized gains (losses) on securities | (17) | 23 | 103 | (197) | |||||||||||||||||||
Realized gains (losses) on subsidiaries | — | (30) | 4 | (30) | |||||||||||||||||||
Total earnings (loss) from continuing operations before income taxes | $ | 267 | $ | 40 | $ | 890 | $ | (5) |
(a)Includes an underwriting loss of $38 million in the third quarter of 2020 and $82 million in the first nine months of 2020 in the Neon exited lines. Also includes a special charge of $47 million in the third quarter of 2020 to increase asbestos and environmental (“A&E”) reserves.
(b)Includes $2 million and $10 million in the third quarter and first nine months of 2020, respectively, in net expenses from the Neon exited lines, before noncontrolling interest.
(c)Includes holding company interest and expenses, including a special charge of $21 million in the third quarter of 2020 to increase A&E reserves related to AFG’s former railroad and manufacturing operations.
(d)Represents investment income (net of DAC) from real estate-related entities acquired from the discontinued annuity operations while they were held by those operations. Subsequent to the sale of the annuity group, this income is included in the segment of the acquirer.
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
E. Fair Value Measurements
Accounting standards for measuring fair value are based on inputs used in estimating fair value. The three levels of the hierarchy are as follows:
Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG’s Level 1 financial instruments consist primarily of publicly traded equity securities, highly liquid government bonds for which quoted market prices in active markets are available and short-term investments of managed investment entities.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.
Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available at the valuation date. Financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information are classified as Level 3.
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.
AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 investment professionals whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, the Company communicates directly with the pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Assets and liabilities of continuing operations measured and carried at fair value in the financial statements are summarized below (in millions):
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Available for sale (“AFS”) fixed maturities: | |||||||||||||||||||||||
U.S. Government and government agencies | $ | 217 | $ | 1 | $ | — | $ | 218 | |||||||||||||||
States, municipalities and political subdivisions | — | 1,884 | 42 | 1,926 | |||||||||||||||||||
Foreign government | — | 217 | — | 217 | |||||||||||||||||||
Residential MBS | — | 736 | 18 | 754 | |||||||||||||||||||
Commercial MBS | — | 113 | — | 113 | |||||||||||||||||||
Collateralized loan obligations | — | 1,828 | 1 | 1,829 | |||||||||||||||||||
Other asset-backed securities | — | 2,335 | 309 | 2,644 | |||||||||||||||||||
Corporate and other | 15 | 2,463 | 248 | 2,726 | |||||||||||||||||||
Total AFS fixed maturities | 232 | 9,577 | 618 | 10,427 | |||||||||||||||||||
Trading fixed maturities | — | 29 | — | 29 | |||||||||||||||||||
Equity securities | 681 | 44 | 268 | 993 | |||||||||||||||||||
Assets of managed investment entities (“MIE”) | 316 | 4,802 | 12 | 5,130 | |||||||||||||||||||
Total assets accounted for at fair value | $ | 1,229 | $ | 14,452 | $ | 898 | $ | 16,579 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Liabilities of managed investment entities | $ | 310 | $ | 4,712 | $ | 12 | $ | 5,034 | |||||||||||||||
Total liabilities accounted for at fair value | $ | 310 | $ | 4,712 | $ | 12 | $ | 5,034 | |||||||||||||||
December 31, 2020 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Available for sale fixed maturities: | |||||||||||||||||||||||
U.S. Government and government agencies | $ | 195 | $ | 3 | $ | — | $ | 198 | |||||||||||||||
States, municipalities and political subdivisions | — | 2,273 | 39 | 2,312 | |||||||||||||||||||
Foreign government | — | 176 | — | 176 | |||||||||||||||||||
Residential MBS | — | 877 | 38 | 915 | |||||||||||||||||||
Commercial MBS | — | 90 | 2 | 92 | |||||||||||||||||||
Collateralized loan obligations | — | 1,046 | 16 | 1,062 | |||||||||||||||||||
Other asset-backed securities | — | 1,742 | 305 | 2,047 | |||||||||||||||||||
Corporate and other | 4 | 2,140 | 138 | 2,282 | |||||||||||||||||||
Total AFS fixed maturities | 199 | 8,347 | 538 | 9,084 | |||||||||||||||||||
Trading fixed maturities | — | 24 | — | 24 | |||||||||||||||||||
Equity securities | 665 | 48 | 176 | 889 | |||||||||||||||||||
Assets of managed investment entities | 217 | 4,733 | 21 | 4,971 | |||||||||||||||||||
Total assets accounted for at fair value | $ | 1,081 | $ | 13,152 | $ | 735 | $ | 14,968 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Liabilities of managed investment entities | $ | 215 | $ | 4,678 | $ | 21 | $ | 4,914 | |||||||||||||||
Total liabilities accounted for at fair value | $ | 215 | $ | 4,678 | $ | 21 | $ | 4,914 |
Approximately 5% of the total assets of continuing operations carried at fair value at September 30, 2021, were Level 3 assets. Approximately 17% ($150 million) of those Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Approximately $61 million (7%) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets. Approximately 17% ($149 million) of the Level 3 assets were equity investments (that do not qualify for equity method accounting) in limited partnerships whose prices were determined based on financial information provided by the limited partnerships.
Internally developed Level 3 asset fair values of continuing operations represent approximately $519 million (58%) of the total fair value of Level 3 assets at September 30, 2021. Internally priced fixed maturities are priced using a variety of
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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. Since internally developed Level 3 asset fair values represent less than 10% of AFG’s Shareholders’ Equity, any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position.
Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2021 and 2020 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.
Total realized/unrealized gains (losses) included in | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | Net earnings (loss) | OCI | Purchases and issuances | Sales and settlements | Transfer into Level 3 | Transfer out of Level 3 | Balance at September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
AFS fixed maturities: | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
State and municipal | 36 | — | — | — | — | 8 | (2) | 42 | |||||||||||||||||||||||||||||||||||||||
Residential MBS | 28 | (1) | — | — | (1) | — | (8) | 18 | |||||||||||||||||||||||||||||||||||||||
Commercial MBS | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 6 | — | 1 | — | — | — | (6) | 1 | |||||||||||||||||||||||||||||||||||||||
Other asset-backed securities | 315 | 1 | (1) | 41 | (38) | — | (9) | 309 | |||||||||||||||||||||||||||||||||||||||
Corporate and other | 220 | — | (1) | 36 | (9) | 2 | — | 248 | |||||||||||||||||||||||||||||||||||||||
Total AFS fixed maturities | 605 | — | (1) | 77 | (48) | 10 | (25) | 618 | |||||||||||||||||||||||||||||||||||||||
Equity securities | 245 | 7 | — | 20 | (4) | — | — | 268 | |||||||||||||||||||||||||||||||||||||||
Assets of MIE | 15 | (2) | — | 1 | — | — | (2) | 12 | |||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 865 | $ | 5 | $ | (1) | $ | 98 | $ | (52) | $ | 10 | $ | (27) | $ | 898 |
Total realized/unrealized gains (losses) included in | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | Net earnings (loss) | OCI | Purchases and issuances | Sales and settlements | Transfer into Level 3 | Transfer out of Level 3 | Balance at September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
AFS fixed maturities: | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
State and municipal | 41 | — | — | — | — | — | — | 41 | |||||||||||||||||||||||||||||||||||||||
Residential MBS | 42 | (1) | — | — | (3) | 8 | (1) | 45 | |||||||||||||||||||||||||||||||||||||||
Commercial MBS | 6 | — | — | — | — | — | (4) | 2 | |||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 55 | — | 1 | — | — | — | — | 56 | |||||||||||||||||||||||||||||||||||||||
Other asset-backed securities | 293 | (1) | 2 | 8 | (15) | 14 | (8) | 293 | |||||||||||||||||||||||||||||||||||||||
Corporate and other | 178 | 3 | 1 | 8 | (28) | 1 | (26) | 137 | |||||||||||||||||||||||||||||||||||||||
Total AFS fixed maturities | 615 | 1 | 4 | 16 | (46) | 23 | (39) | 574 | |||||||||||||||||||||||||||||||||||||||
Equity securities | 164 | (5) | — | 5 | — | — | (5) | 159 | |||||||||||||||||||||||||||||||||||||||
Assets of MIE | 17 | (2) | — | — | — | — | — | 15 | |||||||||||||||||||||||||||||||||||||||
Assets of discontinued annuity operations | 3,044 | (7) | 19 | 83 | (113) | 224 | (193) | 3,057 | |||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 3,840 | $ | (13) | $ | 23 | $ | 104 | $ | (159) | $ | 247 | $ | (237) | $ | 3,805 | |||||||||||||||||||||||||||||||
Liabilities of discontinued annuity operations | $ | (3,675) | $ | (5) | $ | — | $ | (56) | $ | 79 | $ | — | $ | — | $ | (3,657) | |||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | (3,675) | $ | (5) | $ | — | $ | (56) | $ | 79 | $ | — | $ | — | $ | (3,657) |
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Total realized/unrealized gains (losses) included in | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | Net earnings (loss) | OCI | Purchases and issuances | Sales and settlements | Transfer into Level 3 | Transfer out of Level 3 | Sale of annuity business | Balance at September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
AFS fixed maturities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
State and municipal | 39 | — | — | — | (3) | 8 | (2) | — | 42 | ||||||||||||||||||||||||||||||||||||||||||||
Residential MBS | 38 | (4) | — | 6 | (2) | 6 | (26) | — | 18 | ||||||||||||||||||||||||||||||||||||||||||||
Commercial MBS | 2 | — | — | — | — | — | (2) | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 16 | 1 | — | — | (1) | — | (15) | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed securities | 305 | 1 | — | 131 | (110) | 14 | (32) | — | 309 | ||||||||||||||||||||||||||||||||||||||||||||
Corporate and other | 138 | (1) | (2) | 142 | (29) | 5 | (5) | — | 248 | ||||||||||||||||||||||||||||||||||||||||||||
Total AFS fixed maturities | 538 | (3) | (2) | 279 | (145) | 33 | (82) | — | 618 | ||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 176 | 78 | — | 44 | (23) | — | (7) | — | 268 | ||||||||||||||||||||||||||||||||||||||||||||
Assets of MIE | 21 | 1 | — | 3 | — | 1 | (14) | — | 12 | ||||||||||||||||||||||||||||||||||||||||||||
Assets of discontinued annuity operations | 2,971 | 85 | (21) | 209 | (328) | 32 | (229) | (2,719) | — | ||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 3,706 | $ | 161 | $ | (23) | $ | 535 | $ | (496) | $ | 66 | $ | (332) | $ | (2,719) | $ | 898 | |||||||||||||||||||||||||||||||||||
Liabilities of discontinued annuity operations | $ | (3,933) | $ | (222) | $ | — | $ | (146) | $ | 158 | $ | — | $ | — | $ | 4,143 | $ | — | |||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | (3,933) | $ | (222) | $ | — | $ | (146) | $ | 158 | $ | — | $ | — | $ | 4,143 | $ | — |
Total realized/unrealized gains (losses) included in | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | Net earnings (loss) | Other comprehensive income (loss) | Purchases and issuances | Sales and settlements | Transfer into Level 3 | Transfer out of Level 3 | Balance at September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
AFS fixed maturities: | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. government agency | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
State and municipal | 40 | — | 2 | — | (1) | — | — | 41 | |||||||||||||||||||||||||||||||||||||||
Residential MBS | 45 | — | (1) | — | (5) | 9 | (3) | 45 | |||||||||||||||||||||||||||||||||||||||
Commercial MBS | 6 | — | — | — | — | — | (4) | 2 | |||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 1 | (1) | 4 | — | — | 52 | — | 56 | |||||||||||||||||||||||||||||||||||||||
Other asset-backed securities | 256 | (6) | 3 | 69 | (62) | 41 | (8) | 293 | |||||||||||||||||||||||||||||||||||||||
Corporate and other | 223 | 2 | — | 40 | (39) | 3 | (92) | 137 | |||||||||||||||||||||||||||||||||||||||
Total AFS fixed maturities | 571 | (5) | 8 | 109 | (107) | 105 | (107) | 574 | |||||||||||||||||||||||||||||||||||||||
Equity securities | 161 | (22) | — | 16 | — | 9 | (5) | 159 | |||||||||||||||||||||||||||||||||||||||
Assets of MIE | 17 | (4) | — | — | — | 2 | — | 15 | |||||||||||||||||||||||||||||||||||||||
Assets of discontinued annuity operations | 3,092 | (27) | 39 | 444 | (325) | 482 | (648) | 3,057 | |||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 3,841 | $ | (58) | $ | 47 | $ | 569 | $ | (432) | $ | 598 | $ | (760) | $ | 3,805 | |||||||||||||||||||||||||||||||
Liabilities of discontinued annuity operations | $ | (3,730) | $ | 41 | $ | — | $ | (180) | $ | 212 | $ | — | $ | — | $ | (3,657) | |||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | (3,730) | $ | 41 | $ | — | $ | (180) | $ | 212 | $ | — | $ | — | $ | (3,657) |
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Fair Value of Financial Instruments The carrying value and fair value of financial instruments of continuing operations that are not carried at fair value in the financial statements are summarized below (in millions):
Carrying | Fair Value | ||||||||||||||||||||||||||||
Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,833 | $ | 2,833 | $ | 2,833 | $ | — | $ | — | |||||||||||||||||||
Mortgage loans | 537 | 555 | — | — | 555 | ||||||||||||||||||||||||
Total financial assets not accounted for at fair value | $ | 3,370 | $ | 3,388 | $ | 2,833 | $ | — | $ | 555 | |||||||||||||||||||
Long-term debt | $ | 1,964 | $ | 2,295 | $ | — | $ | 2,292 | $ | 3 | |||||||||||||||||||
Total financial liabilities not accounted for at fair value | $ | 1,964 | $ | 2,295 | $ | — | $ | 2,292 | $ | 3 | |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,665 | $ | 1,665 | $ | 1,665 | $ | — | $ | — | |||||||||||||||||||
Mortgage loans | 377 | 382 | — | — | 382 | ||||||||||||||||||||||||
Total financial assets not accounted for at fair value | $ | 2,042 | $ | 2,047 | $ | 1,665 | $ | — | $ | 382 | |||||||||||||||||||
Long-term debt | $ | 1,963 | $ | 2,325 | $ | — | $ | 2,322 | $ | 3 | |||||||||||||||||||
Total financial liabilities not accounted for at fair value | $ | 1,963 | $ | 2,325 | $ | — | $ | 2,322 | $ | 3 |
F. Investments
Available for sale fixed maturities held by AFG’s continuing operations at September 30, 2021 and December 31, 2020, consisted of the following (in millions):
Amortized Cost | Allowance for Expected Credit Losses | Gross Unrealized | Net Unrealized | Fair Value | |||||||||||||||||||||||||||||||
Gains | Losses | ||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||||||||||
U.S. Government and government agencies | $ | 216 | $ | — | $ | 3 | $ | (1) | $ | 2 | $ | 218 | |||||||||||||||||||||||
States, municipalities and political subdivisions | 1,849 | — | 77 | — | 77 | 1,926 | |||||||||||||||||||||||||||||
Foreign government | 216 | — | 2 | (1) | 1 | 217 | |||||||||||||||||||||||||||||
Residential MBS | 704 | — | 51 | (1) | 50 | 754 | |||||||||||||||||||||||||||||
Commercial MBS | 110 | — | 3 | — | 3 | 113 | |||||||||||||||||||||||||||||
Collateralized loan obligations | 1,827 | 1 | 5 | (2) | 3 | 1,829 | |||||||||||||||||||||||||||||
Other asset-backed securities | 2,631 | 7 | 25 | (5) | 20 | 2,644 | |||||||||||||||||||||||||||||
Corporate and other | 2,658 | 1 | 73 | (4) | 69 | 2,726 | |||||||||||||||||||||||||||||
Total fixed maturities | $ | 10,211 | $ | 9 | $ | 239 | $ | (14) | $ | 225 | $ | 10,427 | |||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||||||||||
U.S. Government and government agencies | $ | 192 | $ | — | $ | 6 | $ | — | $ | 6 | $ | 198 | |||||||||||||||||||||||
States, municipalities and political subdivisions | 2,196 | — | 116 | — | 116 | 2,312 | |||||||||||||||||||||||||||||
Foreign government | 172 | — | 4 | — | 4 | 176 | |||||||||||||||||||||||||||||
Residential MBS | 859 | — | 57 | (1) | 56 | 915 | |||||||||||||||||||||||||||||
Commercial MBS | 89 | — | 3 | — | 3 | 92 | |||||||||||||||||||||||||||||
Collateralized loan obligations | 1,065 | 3 | 4 | (4) | — | 1,062 | |||||||||||||||||||||||||||||
Other asset-backed securities | 2,040 | 7 | 27 | (13) | 14 | 2,047 | |||||||||||||||||||||||||||||
Corporate and other | 2,199 | 2 | 88 | (3) | 85 | 2,282 | |||||||||||||||||||||||||||||
Total fixed maturities | $ | 8,812 | $ | 12 | $ | 305 | $ | (21) | $ | 284 | $ | 9,084 |
21
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Available for sale fixed maturities that are included in assets of discontinued annuity operations at December 31, 2020, consisted of the following (in millions):
Amortized Cost | Allowance for Expected Credit Losses | Gross Unrealized | Net Unrealized | Fair Value | |||||||||||||||||||||||||||||||
Gains | Losses | ||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||||||||||
U.S. Government and government agencies | $ | 39 | $ | — | $ | 5 | $ | — | $ | 5 | $ | 44 | |||||||||||||||||||||||
States, municipalities and political subdivisions | 3,053 | — | 370 | (2) | 368 | 3,421 | |||||||||||||||||||||||||||||
Foreign government | 31 | — | 4 | — | 4 | 35 | |||||||||||||||||||||||||||||
Residential MBS | 1,953 | 3 | 194 | (4) | 190 | 2,140 | |||||||||||||||||||||||||||||
Commercial MBS | 659 | — | 40 | (1) | 39 | 698 | |||||||||||||||||||||||||||||
Collateralized loan obligations | 3,491 | 10 | 23 | (13) | 10 | 3,491 | |||||||||||||||||||||||||||||
Other asset-backed securities | 5,098 | 11 | 142 | (53) | 89 | 5,176 | |||||||||||||||||||||||||||||
Corporate and other | 17,272 | 4 | 1,874 | (24) | 1,850 | 19,118 | |||||||||||||||||||||||||||||
Total fixed maturities | $ | 31,596 | $ | 28 | $ | 2,652 | $ | (97) | $ | 2,555 | $ | 34,123 |
Equity securities held by AFG’s continuing operations, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2021 and December 31, 2020 (in millions):
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||
Actual Cost | over (under) | Actual Cost | over (under) | ||||||||||||||||||||||||||||||||
Fair Value | Cost | Fair Value | Cost | ||||||||||||||||||||||||||||||||
Common stocks | $ | 464 | $ | 563 | $ | 99 | $ | 516 | $ | 510 | $ | (6) | |||||||||||||||||||||||
Perpetual preferred stocks | 386 | 430 | 44 | 369 | 379 | 10 | |||||||||||||||||||||||||||||
Total equity securities carried at fair value | $ | 850 | $ | 993 | $ | 143 | $ | 885 | $ | 889 | $ | 4 |
Investments accounted for using the equity method held by AFG’s continuing operations, by category, carrying value and net investment income are as follows (in millions):
Carrying Value | Net Investment Income | ||||||||||||||||||||||||||||||||||
September 30, 2021 | December 31, 2020 | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
Real estate-related investments (*) | $ | 1,024 | $ | 915 | $ | 52 | $ | 17 | $ | 151 | $ | 55 | |||||||||||||||||||||||
Private equity | 336 | 266 | 21 | 21 | 66 | 4 | |||||||||||||||||||||||||||||
Private debt | 47 | 54 | — | (2) | 5 | (6) | |||||||||||||||||||||||||||||
Total investments accounted for using the equity method | $ | 1,407 | $ | 1,235 | $ | 73 | $ | 36 | $ | 222 | $ | 53 |
(*)Includes 88% invested in multi-family properties, 2% in single family properties and 10% in other property types as of September 30, 2021 and 87% invested in multi-family properties, 2% in single family properties and 11% in other property types as of December 31, 2020.
The earnings (losses) from these investments are generally reported on a three-month lag due to the timing required to obtain the necessary information from the funds. AFG regularly reviews and discusses fund performance with the fund managers to corroborate the reasonableness of the underlying reported asset values and to assess whether any events have occurred within the lag period that may materially affect the valuation of these investments.
With respect to partnerships and similar investments, AFG’s continuing operations had unfunded commitments of $302 million and $290 million as of September 30, 2021 and December 31, 2020, respectively.
Assets of discontinued annuity operations included investments accounted for under the equity method of $646 million as of December 31, 2020.
22
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
The following table shows gross unrealized losses (dollars in millions) on available for sale fixed maturities held by AFG’s continuing operations by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates.
Less Than Twelve Months | Twelve Months or More | ||||||||||||||||||||||||||||||||||
Unrealized Loss | Fair Value | Fair Value as % of Cost | Unrealized Loss | Fair Value | Fair Value as % of Cost | ||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||||||||||
U.S. Government and government agencies | $ | (1) | $ | 97 | 99 | % | $ | — | $ | 19 | 100 | % | |||||||||||||||||||||||
States, municipalities and political subdivisions | — | 13 | 100 | % | — | 15 | 100 | % | |||||||||||||||||||||||||||
Foreign government | (1) | 48 | 98 | % | — | — | — | % | |||||||||||||||||||||||||||
Residential MBS | — | 54 | 100 | % | (1) | 8 | 89 | % | |||||||||||||||||||||||||||
Commercial MBS | — | — | — | % | — | — | — | % | |||||||||||||||||||||||||||
Collateralized loan obligations | (1) | 687 | 100 | % | (1) | 168 | 99 | % | |||||||||||||||||||||||||||
Other asset-backed securities | (2) | 662 | 100 | % | (3) | 76 | 96 | % | |||||||||||||||||||||||||||
Corporate and other | (3) | 278 | 99 | % | (1) | 31 | 97 | % | |||||||||||||||||||||||||||
Total fixed maturities | $ | (8) | $ | 1,839 | 100 | % | $ | (6) | $ | 317 | 98 | % | |||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||||||||||
U.S. Government and government agencies | $ | — | $ | 23 | 100 | % | $ | — | $ | — | — | % | |||||||||||||||||||||||
States, municipalities and political subdivisions | — | 39 | 100 | % | — | 10 | 100 | % | |||||||||||||||||||||||||||
Foreign government | — | 7 | 100 | % | — | — | — | % | |||||||||||||||||||||||||||
Residential MBS | (1) | 86 | 99 | % | — | 7 | 100 | % | |||||||||||||||||||||||||||
Commercial MBS | — | 7 | 100 | % | — | 5 | 100 | % | |||||||||||||||||||||||||||
Collateralized loan obligations | (1) | 192 | 99 | % | (3) | 366 | 99 | % | |||||||||||||||||||||||||||
Other asset-backed securities | (10) | 465 | 98 | % | (3) | 92 | 97 | % | |||||||||||||||||||||||||||
Corporate and other | (2) | 133 | 99 | % | (1) | 17 | 94 | % | |||||||||||||||||||||||||||
Total fixed maturities | $ | (14) | $ | 952 | 99 | % | $ | (7) | $ | 497 | 99 | % |
At September 30, 2021, the gross unrealized losses on fixed maturities of $14 million relate to 394 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 74% of the gross unrealized loss and 94% of the fair value.
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.
AFG analyzes its MBS securities for expected credit losses (impairment) each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.
Management believes AFG will recover its cost basis (net of any allowance) in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at September 30, 2021.
23
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Credit losses on available for sale fixed maturities are measured based on the present value of expected future cash flows compared to amortized cost. Beginning January 1, 2020, impairment losses are recognized through an allowance instead of directly writing down the amortized cost. Recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance. In addition, the allowance on available for sale fixed maturities cannot cause the amortized cost net of the allowance to be below fair value. Accordingly, future changes in the fair value of an impaired security (when the allowance was limited by the fair value) due to reasons other than issuer credit (e.g. changes in market interest rates) result in increases or decreases in the allowance, which are recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities held by AFG’s continuing operations is shown below (in millions):
Structured Securities (*) | Corporate and Other | Total | |||||||||||||||
Balance at June 30, 2021 | $ | 8 | $ | 1 | $ | 9 | |||||||||||
Initial allowance for purchased securities with credit deterioration | — | — | — | ||||||||||||||
Provision for expected credit losses on securities with no previous allowance | — | — | — | ||||||||||||||
Additions (reductions) to previously recognized expected credit losses | — | — | — | ||||||||||||||
Reductions due to sales or redemptions | — | — | — | ||||||||||||||
Balance at September 30, 2021 | $ | 8 | $ | 1 | $ | 9 | |||||||||||
Balance at June 30, 2020 | $ | 11 | $ | 3 | $ | 14 | |||||||||||
Initial allowance for purchased securities with credit deterioration | — | — | — | ||||||||||||||
Provision for expected credit losses on securities with no previous allowance | — | — | — | ||||||||||||||
Additions (reductions) to previously recognized expected credit losses | — | — | — | ||||||||||||||
Reductions due to sales or redemptions | — | — | — | ||||||||||||||
Balance at September 30, 2020 | $ | 11 | $ | 3 | $ | 14 | |||||||||||
Balance at January 1, 2021 | $ | 10 | $ | 2 | $ | 12 | |||||||||||
Initial allowance for purchased securities with credit deterioration | — | — | — | ||||||||||||||
Provision for expected credit losses on securities with no previous allowance | — | — | — | ||||||||||||||
Additions (reductions) to previously recognized expected credit losses | (2) | 1 | (1) | ||||||||||||||
Reductions due to sales or redemptions | — | (2) | (2) | ||||||||||||||
Balance at September 30, 2021 | $ | 8 | $ | 1 | $ | 9 | |||||||||||
Balance at January 1, 2020 | $ | — | $ | — | $ | — | |||||||||||
Impact of adoption of new accounting policy | — | — | — | ||||||||||||||
Initial allowance for purchased securities with credit deterioration | — | — | — | ||||||||||||||
Provision for expected credit losses on securities with no previous allowance | 12 | 4 | 16 | ||||||||||||||
Additions (reductions) to previously recognized expected credit losses | (1) | (1) | (2) | ||||||||||||||
Reductions due to sales or redemptions | — | — | — | ||||||||||||||
Balance at September 30, 2020 | $ | 11 | $ | 3 | $ | 14 |
(*)Includes mortgage-backed securities, collateralized loan obligations and other asset-backed securities.
In the third quarter and first nine months of 2021 and 2020, AFG’s continuing operations did not purchase any securities with expected credit losses.
24
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturities as of September 30, 2021 (dollars in millions). Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Amortized | Fair Value | ||||||||||||||||
Cost, net (*) | Amount | % | |||||||||||||||
Maturity | |||||||||||||||||
One year or less | $ | 1,182 | $ | 1,194 | 11 | % | |||||||||||
After one year through five years | 2,571 | 2,662 | 26 | % | |||||||||||||
After five years through ten years | 901 | 939 | 9 | % | |||||||||||||
After ten years | 284 | 292 | 3 | % | |||||||||||||
4,938 | 5,087 | 49 | % | ||||||||||||||
Collateralized loan obligations and other ABS (average life of approximately 3 years) | 4,450 | 4,473 | 43 | % | |||||||||||||
MBS (average life of approximately 3 years) | 814 | 867 | 8 | % | |||||||||||||
Total | $ | 10,202 | $ | 10,427 | 100 | % |
(*)Amortized cost, net of allowance for expected credit losses.
Certain risks are inherent in fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.
There were no investments in individual issuers that exceeded 10% of shareholders’ equity at September 30, 2021 or December 31, 2020.
25
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Net Unrealized Gain on Fixed Maturity Securities The following table shows (in millions) the components of the net unrealized gain on securities that is included in AOCI in AFG’s Balance Sheet.
Pretax | Deferred Tax | Net | |||||||||||||||
September 30, 2021 | |||||||||||||||||
Net unrealized gain on fixed maturities | $ | 225 | $ | (47) | $ | 178 | |||||||||||
December 31, 2020 | |||||||||||||||||
Net unrealized gain on fixed maturities held by continuing operations | $ | 284 | $ | (60) | $ | 224 | |||||||||||
Discontinued operations (*): | |||||||||||||||||
Net unrealized gain on fixed maturities | $ | 2,555 | $ | (536) | $ | 2,019 | |||||||||||
Deferred policy acquisition costs — annuity segment | (934) | 196 | (738) | ||||||||||||||
Annuity benefits accumulated | (324) | 68 | (256) | ||||||||||||||
Life, accident and health reserves | (3) | — | (3) | ||||||||||||||
Unearned revenue | 11 | (2) | 9 | ||||||||||||||
Total net unrealized gain from discontinued operations | 1,305 | (274) | 1,031 | ||||||||||||||
Total net unrealized gain on fixed maturity securities | $ | 1,589 | $ | (334) | $ | 1,255 |
(*)In addition to adjusting fixed maturity securities classified as “available for sale” to fair value, GAAP requires that deferred policy acquisition costs and certain other balance sheet amounts related to AFG’s discontinued annuity, long-term care and life businesses be adjusted to the extent that unrealized gains and losses from securities would result in adjustments to those balances had the unrealized gains or losses actually been realized.
Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred in AFG’s continuing operations.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Investment income: | |||||||||||||||||||||||
Fixed maturities | $ | 73 | $ | 73 | $ | 217 | $ | 232 | |||||||||||||||
Equity securities: | |||||||||||||||||||||||
Dividends | 6 | 9 | 21 | 27 | |||||||||||||||||||
Change in fair value (a) (b) | 7 | (2) | 41 | (10) | |||||||||||||||||||
Equity in earnings of partnerships and similar investments | 73 | 36 | 222 | 53 | |||||||||||||||||||
Other | 14 | 8 | 28 | 17 | |||||||||||||||||||
Gross investment income | 173 | 124 | 529 | 319 | |||||||||||||||||||
Investment expenses | (4) | (2) | (8) | (5) | |||||||||||||||||||
Net investment income (b) |