AMERICAN FINANCIAL GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
INDEX TO MD&A
Page Page
Objective 29 Results of Operations - Fourth Quarter 51
Overview 29 Segmented Statement of Earnings 51
Critical Accounting Policies 30 Property and Casualty Insurance 53
Liquidity and Capital Resources 31 Holding Company, Other and Unallocated 63
Real Estate
Entities Acquired from the
Ratios 31 Annuity Operations 65
Condensed Consolidated Cash Flows 31 Discontinued Annuity Operations 65
Parent and Subsidiary Liquidity 33
Condensed Parent Only Cash Flows 34 Results of Operations - Full Year 66
Off-Balance Sheet Arrangements 35 Segmented Statement of Earnings 66
Investments 35 Property and Casualty Insurance 68
Uncertainties 38 Holding Company, Other and Unallocated 80
Managed Investment Entities Real Estate Entities Acquired from the
44 Annuity Operations 84
Results of Operations 49 Discontinued Annuity Operations 84
General 49 Recent Accounting Standards 85
OBJECTIVE
The objective of Management's Discussion and Analysis is to provide a discussion
and analysis of the financial statements and other statistical data that
management believes will enhance the understanding of AFG's financial condition,
changes in financial condition and results of operations. The tables and
narrative that follow are presented in a manner that is consistent with the
information that AFG's management uses to make operational decisions and
allocate capital resources. They are provided to demonstrate the nature of the
transactions and events that could impact AFG's financial results. This
discussion should be read in conjunction with the financial statements beginning
on page F-1.
OVERVIEW
Financial Condition
AFG is organized as a holding company with almost all of its operations being
conducted by subsidiaries. AFG, however, has continuing cash needs for
administrative expenses, the payment of principal and interest on borrowings,
shareholder dividends, and taxes. Therefore, certain analyses are most
meaningfully presented on a parent only basis while others are best done on a
total enterprise basis. In addition, because its businesses are financial in
nature, AFG does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional ratios and
financial analysis tests are not meaningful.
At December 31, 2021 , AFG (parent) held approximately $1.87 billion in cash and
securities and had $500 million available under a bank line of credit, which
expires in December 2025 .
Sale of the Annuity Business
On May 28, 2021 , AFG sold its annuity business consisting of Great American Life
Insurance Company ("GALIC") and its two insurance subsidiaries, Annuity
Investors Life Insurance Company and Manhattan National Life Insurance Company ,
as well as a broker-dealer affiliate, Great American Advisors, Inc. , and
insurance distributor, AAG Insurance Agency, Inc. to Massachusetts Mutual Life
Insurance Company ("MassMutual"). Total proceeds from the sale were
$3.57 billion and AFG realized an after-tax gain on the sale of $656 million .
Beginning with the first quarter of 2021, results of the annuity businesses sold
are reported as discontinued operations, in accordance with generally accepted
accounting principles ("GAAP"), which included adjusting prior period results to
reflect these operations as discontinued.
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Results of Operations
Through the operations of its subsidiaries, AFG is engaged primarily in property
and casualty insurance, focusing on specialized commercial products for
businesses. As discussed above, AFG's former annuity operations are reported as
discontinued operations.
AFG reported net earnings from continuing operations attributable to
shareholders of $355 million ($4.18 per share, diluted) for the fourth quarter
of 2021 compared to $265 million ($3.03 per share, diluted) in the fourth
quarter of 2020 reflecting higher underwriting profit and higher net investment
income in the fourth quarter of 2021 compared to the fourth quarter of 2020,
income from the sale of real estate in the fourth quarter of 2021 and the impact
of the loss on retirement of debt recorded in the fourth quarter of 2020,
partially offset by lower net realized gains in the fourth quarter of 2021
compared to the fourth quarter of 2020.
Full year 2021 net earnings from continuing operations attributable to
shareholders were $1.08 billion ($12.62 per share, diluted) compared to
$325 million ($3.63 per share, diluted) in 2020 reflecting higher underwriting
profit and higher net investment income in 2021 compared to 2020, net realized
gains in 2021 compared to net realized losses in 2020, the impact of special A&E
charges recorded in 2020 and income from the sale of real estate in the fourth
quarter of 2021, partially offset by higher interest charges on borrowed money
and higher holding company expenses.
Outlook
The COVID-19 pandemic began to have a significant impact on global, social and economic activity during the first quarter of 2020. AFG has taken actions under its business continuity plan to minimize risk to the Company's employees and to prevent any significant disruption to AFG's business, agents or policyholders. Management believes that AFG's strong financial position and current liquidity and capital at its subsidiaries will give AFG the flexibility to continue to effectively address and respond to the ongoing uncertainties presented by the pandemic. AFG's insurance subsidiaries continue to have capital at or in excess of the levels required by ratings agencies in order to maintain their current ratings, and the parent company does not have any near-term debt maturities. As a result of the contracted economy, exposures in many of AFG's property and casualty businesses changed due to workforce reduction, fewer miles driven and reduced revenue. This has and may continue to lead to lower frequency in certain lines while there has and may continue to be COVID-19 related increases in claim frequency in other lines of business. There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape, such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG's business interruption coverages require direct physical damage to covered property for business interruption coverage to apply and the vast majority of AFG's property policies also contain virus exclusions. See Item 1A - "Risk Factors."
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A - "Accounting Policies"
to the financial statements. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
can have a significant effect on amounts reported in the financial statements.
As more information becomes known, these estimates and assumptions change and,
thus, impact amounts reported in the future. The areas related to AFG's
continuing operations where management believes the degree of judgment required
to determine amounts recorded in the financial statements is most significant
are as follows:
•the establishment of insurance reserves, especially asbestos and
environmental-related reserves,
•the recoverability of reinsurance,
•the establishment of asbestos and environmental liabilities of former railroad
and manufacturing operations, and
•the valuation of investments, including the determination of impairment
allowances.
See "Liquidity and Capital Resources - Uncertainties" for a discussion of
insurance reserves, recoverables from reinsurers and contingencies related to
American Premier's former operations and "Liquidity and Capital Resources -
Investments" for a discussion of the allowance for credit losses (impairments)
on investments.
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LIQUIDITY AND CAPITAL RESOURCES
Ratios
AFG's debt to total capital ratio on a consolidated basis is shown below
(dollars in millions). Management intends to maintain the ratio of debt to
capital at or below 30% and intends to maintain the capital of its significant
insurance subsidiaries at or above levels currently indicated by rating agencies
as appropriate for the current ratings.
December 31,
2021 2020
Principal amount of long-term debt $ 1,993 $ 1,993
Total capital 6,869 7,486
Ratio of debt to total capital:
Including subordinated debt 29.0 % 26.6 %
Excluding subordinated debt 19.2 % 17.6 %
The ratio of debt to total capital is a non-GAAP measure that management
believes is useful for investors, analysts and ratings agencies to evaluate
AFG's financial strength and liquidity and to provide insight into how AFG
finances its operations. In addition, maintaining a ratio of debt, excluding
subordinated debt and debt secured by real estate (if any), to total capital of
35% or lower is a financial covenant in AFG's bank credit facility. The ratio is
calculated by dividing the principal amount of AFG's long-term debt by its total
capital, which includes long-term debt and shareholders' equity (excluding
unrealized gains (losses) related to fixed maturity investments).
The NAIC's model law for risk-based capital ("RBC") applies to property and
casualty companies. RBC formulas determine the amount of capital that an
insurance company needs so that it has an acceptable expectation of not becoming
financially impaired. At
insurance companies exceeded the RBC requirements.
Condensed Consolidated Cash Flows
AFG's principal sources of cash include insurance premiums, income from its
investment portfolio and proceeds from the maturities, redemptions and sales of
investments. Insurance premiums in excess of acquisition expenses and operating
costs are invested until they are needed to meet policyholder obligations or
made available to the parent company through dividends to cover debt obligations
and corporate expenses, and to provide returns to shareholders through share
repurchases and dividends. Cash flows from operating, investing and financing
activities as detailed in AFG's Consolidated Statement of Cash Flows are shown
below (in millions):
Year ended December 31,
2021 2020 2019
Net cash provided by operating activities $ 1,714 $
2,183
Net cash used in investing activities (436)
(1,564) (3,065)
Net cash provided by (used in) financing activities (1,957) (123) 1,408
Net change in cash and cash equivalents$ (679) $
496
Net Cash Provided by Operating Activities AFG's property and casualty insurance operations typically produce positive net operating cash flows as premiums collected and investment income exceed policy acquisition costs, claims payments and operating expenses. AFG's net cash provided by operating activities is impacted by the level and timing of property and casualty premiums, claim and expense payments and recoveries from reinsurers. Prior to theMay 2021 sale, AFG's discontinued annuity operations typically produced positive net operating cash flows as investment income exceeded acquisition costs and operating expenses. Interest credited on annuity policyholder funds is a non-cash increase in AFG's annuity benefits accumulated liability and annuity premiums, benefits and withdrawals are considered financing activities due to the deposit-type nature of annuities. Cash flows provided by operating activities also include the activity of AFG's managed investment entities (collateralized loan obligations ("CLO")) other than those activities included in investing or financing activities. The changes in the assets and liabilities of the managed investment entities included in operating activities reduced cash flows from operating activities by$144 million in 2021 and increased cash flows from operating activities by$25 million in 2020 and$23 million in 2019, resulting in a$169 million decrease in cash flows from operating activities in 2021 compared to 2020 and a$2 million increase in cash flows from operating activities in 2020 compared to 2019. As discussed in Note A - "Accounting Policies - Managed Investment Entities" to the financial statements, AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities and such assets and liabilities are shown separately in AFG's Balance Sheet. Excluding the impact of the managed investment entities, net 31
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cash provided by operating activities was
Net Cash Used in Investing Activities AFG's investing activities consist primarily of the investment of funds provided by its property and casualty businesses and, prior to theMay 2021 sale, its discontinued annuity operations. InMay 2021 , AFG sold its annuity business to MassMutual for cash proceeds of$3.57 billion (including post-closing adjustments). This increase in cash provided by investing activities was partially offset by a decrease in cash and cash equivalents of$2.06 billion representing balances held in the annuity subsidiaries at the sale date. Excluding the impact of theMay 2021 sale of the annuity business, net cash used in investing activities was$1.95 billion in 2021 compared to$1.56 billion in 2020, an increase of$383 million . As discussed below (under net cash provided by (used in) financing activities), AFG's discontinued annuity operations had net cash flows from annuity policyholders of$477 million in 2021 through theMay 31, 2021 effective date of the sale compared to$351 million in 2020. In addition to the investment of funds provided by the insurance operations, AFG Parent increased its net purchases of fixed maturities by$1.19 billion in 2021 compared to 2020 due primarily to proceeds received from the sale of the annuity business as well as dividends received from subsidiaries. Investing activities also include theDecember 2021 acquisition of Verikai for$120 million in cash and the purchase and disposal of managed investment entity investments, which are presented separately in AFG's Balance Sheet. Net investment activity in the managed investment entities was a$43 million use of cash in 2021 compared to a$281 million use of cash in 2020, accounting for a$238 million decrease in net cash used in investing activities in 2021 compared to 2020. See Note A - "Accounting Policies - Managed Investment Entities" and Note G - "Managed Investment Entities" to the financial statements. Net cash used in investing activities was$1.56 billion in 2020 compared to$3.07 billion in 2019, a decrease of$1.51 billion . As discussed below (under net cash provided by (used in) financing activities), AFG's discontinued annuity operations had net cash flows from annuity policyholders of$351 million in 2020 and$1.66 billion in 2019. Settlements of equity index call options exceeded purchases by$322 million in 2020 compared to$64 million in 2019, accounting for a$258 million decrease in cash used in investing activities. OnDecember 31, 2020 , AFG completed the sale ofGAI Holding Bermuda and its subsidiaries, comprising the legal entities that owned Neon. The assets sold included$425 million in cash and cash equivalents, resulting in an increase in cash used in investing activities in 2020. Net investment activity in the managed investment entities was an$281 million use of cash in 2020 compared to an$11 million source of cash in 2019, accounting for a$292 million increase in net cash used in investing activities in 2020 compared to 2019. Net Cash Provided by (Used In) Financing Activities AFG's financing activities consist primarily of issuances and retirements of long-term debt, issuances and repurchases of common stock, dividend payments and, prior to the sale of the annuity business, transactions with annuity policyholders. Net cash used in financing activities was$1.96 billion in 2021 compared to$123 million in 2020, an increase in net cash used in financing activities of$1.83 billion . Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by$477 million in 2021 through theMay 31, 2021 effective date of the sale compared to$351 million in 2020, resulting in a$126 million increase in net cash provided by financing activities in 2021 compared to 2020. In 2020, GALIC transferred$554 million of cash as part of its reinsurance agreement with Commonwealth to cede in force traditional fixed and indexed annuities. In 2020, AFG issued$300 million of 5.25% Senior Notes due in 2030,$150 million of 5.625% Subordinated Debentures due in 2060 and$200 million of 4.50% Subordinated Debentures due in 2060. The net proceeds of these offerings contributed$634 million to net cash provided by financing activities in 2020. TheNovember 2020 redemption of AFG's 6% Subordinated Debentures due in 2055 was a$150 million use of cash in 2020. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of$26.00 per share in 2021 and$2.00 per share in 2020, which resulted in total cash dividends of$2.37 billion in 2021 compared to$334 million in 2020. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG's Balance Sheet. Issuances of managed investment entity liabilities exceeded retirements by$193 million in 2021 compared to$221 million in 2020, accounting for a$28 million decrease in net cash provided by financing activities in 2021 compared to 2020. See Note A - "Accounting Policies - Managed Investment Entities" and Note G - "Managed Investment Entities" to the financial statements. Net cash used in financing activities was$123 million in 2020 compared to net cash provided by financing activities of$1.41 billion in 2019, a decrease in net cash provided by financing activities of$1.53 billion . Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by$351 million in 2020 compared to$1.66 billion in 2019, resulting in a$1.31 billion decrease in net cash provided by financing activities in 2020 compared to 2019. In 2020, GALIC transferred$554 million of cash as part of its reinsurance agreement with Commonwealth to cede in force traditional fixed and indexed annuities. In 2020, AFG issued$300 million of 5.25% Senior Notes due in 2030,$150 million of 5.625% Subordinated Debentures due in 2060 and$200 million of 4.50% Subordinated Debentures due in 2060. The net proceeds of these offerings contributed$634 million to net cash provided by financing activities in 2020. TheNovember 2020 redemption of AFG's 6% Subordinated Debentures due in 2055 was a$150 million use of cash in 2020. In 2019, AFG issued$125 million of 5.875% Subordinated Debentures due in 2059 and$200 million of 5.125% 32 -------------------------------------------------------------------------------- Table of Contents Subordinated Debentures due in 2059, the net proceeds of which contributed$315 million to net cash provided by financing activities in 2019. TheDecember 2019 redemption of AFG's 6-1/4% Subordinated Debentures was a$150 million use of cash in 2019. During 2020, AFG repurchased$313 million of its Common Stock compared to no share repurchases in 2019. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of$2.00 per share and$3.30 per share in 2020 and 2019, respectively, which resulted in total cash dividends of$334 million in 2020 compared to$444 million in 2019. Issuances of managed investment entity liabilities exceeded retirements by$221 million in 2020 compared to retirements of managed investment entity liabilities exceeding issuances by$11 million in 2019, accounting for a$232 million increase in net cash provided by financing activities in 2020 compared to 2019.
Parent and Subsidiary Liquidity
Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and investments or to generate cash through borrowings, sales of other assets, or similar transactions. As discussed above, AFG sold its annuity business to MassMutual for proceeds of$3.57 billion (including post-closing adjustments). AFG's capital and liquidity was significantly enhanced as a result of the transaction. During 2021, AFG repurchased 2,777,684 shares of its Common Stock for$319 million and paid special cash dividends of$26.00 per share of AFG Common Stock ($14.00 per share in June,$2.00 per share in August,$4.00 per share in October,$4.00 per share in November and$2.00 per share in December) totaling$2.21 billion . Management will continue to evaluate opportunities for deploying AFG's significant remaining excess capital, including returning capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases. In addition, excess capital will be deployed into AFG's core businesses as management identifies the potential for healthy, profitable organic growth, and opportunities to expand the Specialty property and casualty niche businesses through acquisitions and start-ups that meet target return thresholds.
In
intelligence company that utilizes a predictive risk tool for assessing
insurance risk, for
In 2020, AFG repurchased 4,531,394 shares of its Common Stock for
and paid a special cash dividend of
December totaling
In 2020, AFG issued$300 million of 5.25% Senior Notes due inApril 2030 ,$150 million of 5.625% Subordinated Debentures due inJune 2060 and$200 million of 4.50% Subordinated Debentures due inSeptember 2060 to increase liquidity and provide flexibility at the parent holding company in its response to the uncertainties of the economic environment. The net proceeds from the offerings were used for general corporate purposes, which included repurchases of outstanding common shares and theNovember 2020 redemption of AFG's$150 million outstanding principal amount of 6% Subordinated Debentures due inNovember 2055 at par value.
In 2019, AFG paid special cash dividends of
(
InDecember 2019 , AFG issued$200 million of 5.125% Subordinated Debentures due inDecember 2059 . A portion of the net proceeds of the offering were used to redeem AFG's$150 million outstanding principal amount of 6-1/4% Subordinated Debentures due inSeptember 2054 , at par value, with the remainder used for general corporate purposes. InMarch 2019 , AFG issued$125 million of 5.875% Subordinated Debentures due inMarch 2059 . The net proceeds of the offering were used for general corporate purposes. All debentures and notes issued by AFG are rated investment grade by two nationally recognized rating agencies. Under a currently effective shelf registration statement, AFG can offer additional equity or debt securities. The shelf registration provides AFG with flexibility to access the capital markets from time to time as market and other conditions permit. AFG can borrow up to$500 million under its revolving credit facility, which expires inDecember 2025 . Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG's credit rating. The credit facility also includes provisions relating to the replacement of LIBOR with different floating rates in the event of the discontinuance of LIBOR. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during 2021 or 2020. 33 -------------------------------------------------------------------------------- Table of Contents Under a tax allocation agreement with AFG, all 80% (or more) ownedU.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary's contribution to amounts due under AFG's consolidated tax return. Subsidiary Liquidity The liquidity requirements of AFG's insurance subsidiaries relate primarily to the policyholder claims and underwriting expenses and payments of dividends and taxes to AFG. Historically, cash flows from premiums and investment income have generally provided more than sufficient funds to meet these requirements. Funds received in excess of cash requirements are generally invested in marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short duration investments. For statutory accounting purposes, equity securities of non-affiliates are generally carried at fair value. AtDecember 31, 2021 , AFG's insurance companies owned publicly traded equity securities with a fair value of$956 million . Decreases in market prices could adversely affect the insurance group's capital, potentially impacting the amount of dividends available or necessitating a capital contribution. Conversely, increases in market prices could have a favorable impact on the group's dividend-paying capability. Property and casualty reserves for unpaid losses and loss adjustment expenses were$11.07 billion atDecember 31, 2021 and include case reserves and claims incurred but not reported ("IBNR"). The ultimate amount to be paid to settle reserves is an estimate, subject to significant uncertainty. Actual payments to settle claims cannot be determined until a settlement is reached with the claimant. Final claim settlements may vary significantly from estimated amounts. See "Uncertainties - Property and Casualty Insurance Reserves" below. The timing of future payments for the next twelve months and beyond could vary materially from historical payment patterns due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and underwriting expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG's insurance subsidiaries are adequate to maintain its business and rating agency ratings. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries' investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital. Condensed Parent Only Cash Flows AFG's parent holding company only condensed cash flows from operating, investing and financing activities are shown below (in millions): Year ended
2021
2020 2019
Net cash provided by operating activities$ 833
Net cash provided by (used in) investing activities 2,167
(294) (56)
Net cash used in financing activities (2,626)
(140) (242)
Net change in cash and cash equivalents$ 374
Parent Net Cash Provided by Operating Activities Parent holding company cash flows from operating activities consist primarily of dividends and tax payments received from AFG's insurance subsidiaries, reduced by tax payments to theIRS and holding company interest and other expenses. Parent holding company net cash provided by operating activities was$833 million in 2021 compared to$483 million in 2020 and$306 million in 2019. The$350 million increase in net cash provided by operating activities in 2021 as compared to 2020 and the$177 million increase in net cash provided by operating activities in 2020 as compared to 2019 were due primarily to higher dividends received from subsidiaries. Parent Net Cash Provided by (Used in) Investing Activities Parent holding company investing activities consist of capital contributions to and returns of capital from subsidiaries and parent company investment activity. Parent holding company net cash provided by investing activities was$2.17 billion in 2021 compared to net cash used of$294 million in 2020 and$56 million in 2019. The$2.17 billion in net cash provided by investing activities in 2021 is substantially higher than the$294 million in net cash used in investing activities in 2020 due to proceeds of$3.57 billion related to theMay 2021 sale of the annuity business, partially offset by the net purchase of fixed maturity investments of$1.19 billion in 2021 and the$120 million purchase of Verikai inDecember 2021 . The$294 million in net cash used in investing activities in 2020 is higher than the$56 million in net cash used in investing activities in 2019 due primarily to higher capital contributions to AFG's property and casualty subsidiaries in 2020. 34 -------------------------------------------------------------------------------- Table of Contents ParentNet Cash Used in Financing Activities Parent company financing activities consist primarily of the issuance and retirement of long-term debt, repurchases of AFG Common Stock, dividends to shareholders, and, to a lesser extent, proceeds from employee stock option exercises. Significant long-term debt and common stock transactions are discussed above under "Parent Holding Company Liquidity." Parent holding company net cash used in financing activities was$2.63 billion in 2021 compared to$140 million in 2020 and$242 million in 2019. The$2.49 billion increase in net cash used in financing activities in 2021 as compared to 2020 reflects higher dividends paid to shareholders (due primarily to special dividends of$26.00 per share in 2021 compared to special dividends of$2.00 per share in 2020) and the impact of net issuances of long-term debt in 2020. The$102 million decrease in net cash used in financing activities in 2020 as compared to 2019 reflects the higher net issuances of long-term debt in 2020 and lower dividends in 2020 (due primarily to special dividends of$2.00 per share in 2020 compared to special dividends of$3.30 per share in 2019), partially offset by$313 million in repurchases of outstanding common shares in 2020 compared to no repurchases in 2019.
Off-Balance Sheet Arrangements
See Note O - "Additional Information - Financial Instruments - Unfunded
Commitments" to the financial statements.
Investments
AFG attempts to optimize investment income while building the value of its
portfolio, placing emphasis upon total long-term performance.
AFG's investment portfolio atDecember 31, 2021 , contained$10.36 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income and$28 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG's investment portfolio includes$715 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and$327 million in equity securities carried at fair value with holding gains and losses included in net investment income. As detailed in Note F - "Investments - Net Unrealized Gain onFixed Maturity Securities " to the financial statements, unrealized gains and losses on AFG's fixed maturity securities are included in shareholders' equity after adjustments for deferred income taxes. Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. AtDecember 31, 2021 , the average life of AFG's fixed maturities was about 3.5 years. Fair values for AFG's portfolio are determined by AFG's internal investment professionals using data from nationally recognized pricing services, non-binding broker quotes and other market information. Fair values of equity securities are generally based on published closing prices. For AFG's fixed maturity portfolio, approximately 84% was priced using pricing services atDecember 31, 2021 and 10% was priced primarily by using non-binding broker quotes. When prices obtained for the same security vary, AFG's internal investment professionals select the price they believe is most indicative of an exit price. The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage-backed securities ("MBS") are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers' prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs. 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, AFG communicates directly with pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the services to value specific securities. In general, the fair value of AFG's fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating 35 -------------------------------------------------------------------------------- Table of Contents the estimated effect on AFG's fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve would have atDecember 31, 2021 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional. Fair value of fixed maturity portfolio $
10,385
Percentage impact on fair value of 100 bps increase in interest rates (2.0 %)
Pretax impact on fair value of fixed maturity portfolio
$
(208)
Approximately 88% of the fixed maturities held by AFG atDecember 31, 2021 , were rated "investment grade" (credit rating ofAAA to BBB) by nationally recognized rating agencies, 3% were rated "non-investment grade" and 9% were not rated. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high-quality investment portfolio should generate a stable and predictable investment return. Municipal bonds represented approximately 18% of AFG's fixed maturity portfolio atDecember 31, 2021 . AFG's municipal bond portfolio is high quality, with over 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. AtDecember 31, 2021 , approximately 90% of the municipal bond portfolio was held in revenue bonds, with the remaining 10% held in general obligation bonds. Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet atDecember 31, 2021 , is shown in the following table (dollars in millions). Approximately$775 million of available for sale fixed maturity securities had no unrealized gains or losses atDecember 31, 2021 . Securities Securities With With Unrealized Unrealized Gains Losses Available for Sale Fixed Maturities Fair value of securities$ 6,086 $ 3,496 Amortized cost of securities$ 5,885 $ 3,524 Gross unrealized gain (loss)$ 201 $ (28) Fair value as % of amortized cost 103 % 99 % Number of security positions 1,545 514 Number individually exceeding$2 million gain or loss 3 - Concentration of gains (losses) by type or industry (exceeding 5% of unrealized): States and municipalities$ 74 $ - Mortgage-backed securities 50 (3) Other asset-backed securities 17 (11) Asset managers 7 (2) Technology 4 (2) Collateralized loan obligations 3 (2) U.S. Government and government agencies 2 (2) Foreign government - (2) Percentage rated investment grade 90 % 95 % 36
-------------------------------------------------------------------------------- Table of Contents The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities atDecember 31, 2021 , based on their fair values. 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. Securities Securities With With Unrealized Unrealized Gains Losses Maturity One year or less 13 % 2 % After one year through five years 31 % 17 % After five years through ten years 12 % 3 % After ten years 5 % 1 % 61 % 23 %
Collateralized loan obligations and other asset-backed securities
(average life of approximately 3 years)
31 % 64 %
Mortgage-backed securities (average life of approximately 3.5 years)
8 % 13 %
100 % 100 %
The table below (dollars in millions) summarizes the unrealized gains and losses
on fixed maturity securities by dollar amount:
Aggregate Aggregate Fair
Fair Unrealized Value as
Value Gain (Loss) % of Cost
Fixed Maturities at December 31, 2021
Securities with unrealized gains:
Exceeding $500,000 (84 securities) $ 946 $ 75 109 %
$500,000 or less (1,461 securities) 5,140 126
103 %
$ 6,086 $ 201 103 % Securities with unrealized losses: Exceeding$500,000 (8 securities)$ 188 $ (5) 97 %$500,000 or less (506 securities) 3,308 (23) 99 %$ 3,496 $ (28) 99 % The following table (dollars in millions) summarizes the unrealized losses for all securities with unrealized losses by issuer quality and the length of time those securities have been in an unrealized loss position: Aggregate Aggregate Fair Fair Unrealized Value as Value Loss % of Cost
Securities with Unrealized Losses at
Investment grade fixed maturities with losses for:
Less than one year (336 securities)
$ 3,133 $ (21) 99 % One year or longer (53 securities) 196 (3) 98 %$ 3,329 $ (24) 99 %
Non-investment grade fixed maturities with losses for:
Less than one year (80 securities)
$ 137 $ (2) 99 % One year or longer (45 securities) 30 (2) 94 %$ 167 $ (4) 98 %
To evaluate fixed maturities for expected credit losses (impairment), management
considers the following:
a)whether the unrealized loss is credit-driven or a result of changes in market interest rates, b)the extent to which fair value is less than cost basis, c)cash flow projections received from independent sources, d)historical operating, balance sheet and cash flow data contained in issuerSEC filings and news releases, e)near-term prospects for improvement in the issuer and/or its industry, f)third-party research and communications with industry specialists, g)financial models and forecasts, 37 -------------------------------------------------------------------------------- Table of Contents h)the continuity of interest payments, maintenance of investment grade ratings and hybrid nature of certain investments, i)discussions with issuer management, and j)ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value. Based on its analysis of the factors listed above, management believes AFG will recover its cost basis (net of any allowance) in the fixed maturity securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them atDecember 31, 2021 . Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers' creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG's ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, increases in the allowance for credit losses could be material to results of operations in future periods. Significant declines in the fair value of AFG's investment portfolio could have a significant adverse effect on AFG's liquidity. For information on AFG's realized gains (losses) on securities, see "Results of Operations - Realized Gains (Losses) on Securities."
Uncertainties
As more fully explained in the following paragraphs, management believes that
the areas posing the greatest risk of material loss are the adequacy of its
insurance reserves and contingencies arising out of its former railroad and
manufacturing operations.
Property and Casualty Insurance Reserves Estimating the liability for unpaid
losses and loss adjustment expenses ("LAE") is inherently judgmental and is
influenced by factors that are subject to significant variation. Determining the
liability is a complex process incorporating input from many areas of the
Company including actuarial, underwriting, pricing, claims and operations
management.
The estimates of liabilities for unpaid claims and for expenses of investigation
and adjustment of unpaid claims are based upon: (i) the accumulation of case
estimates for losses reported prior to the close of the accounting periods on
direct business written ("case reserves"); (ii) estimates received from ceding
reinsurers and insurance pools and associations; (iii) estimates of claims
incurred but not reported (including possible development on known claims);
(iv) estimates (based on experience) of expense for investigating and adjusting
claims; and (v) the current state of law and coverage litigation.
The process used to determine the total reserve for liabilities involves
estimating the ultimate incurred losses and LAE, adjusted for amounts already
paid on the claims. The IBNR reserve is derived by estimating the ultimate
unpaid reserve liability and subtracting case reserves for loss and LAE. See
Note N - "Insurance - Property and Casualty Insurance Reserves" to the financial
statements for a discussion of the factors considered and actuarial methods used
in determining management's best estimate of the ultimate liability for unpaid
losses and LAE.
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The following table shows (in millions) the breakdown of AFG's property and
casualty insurance reserves between case reserves, IBNR reserves and LAE
reserves (estimated amounts required to adjust, record and settle claims, other
than the claim payments themselves) at December 31, 2021 and gross written
premiums for the year ended December 31, 2021 .
Gross Loss Reserves
Total Gross Written
Case IBNR LAE Reserves Premiums
Statutory Line of Business
Other liability - occurrence $ 770 $ 2,645 $ 635 $ 4,050 $ 1,143
Workers' compensation 948 1,277 351 2,576 1,528
Other liability - claims made 226 515 326 1,067 554
Commercial auto/truck liability/medical 375 396 139 910
842
Special property (fire, allied lines, inland marine, earthquake) 255 239 28 522
1,756
Products liability - occurrence 89 238 149 476 198 Commercial multi-peril 151 126 84 361 356 Other lines 215 443 103 761 1,294 Total Statutory 3,029 5,879 1,815 10,723 7,671 Adjustments for GAAP: Foreign operations 141 175 34 350 268 Deferred gains on retroactive reinsurance - 18 - 18 - Loss reserve discounting (5) - - (5) - Other (12) - - (12) 7 Total Adjustments for GAAP 124 193 34 351 275 Total GAAP Reserves and Premiums$ 3,153 $ 6,072 $ 1,849 $ 11,074 $ 7,946
While current factors and reasonably likely changes in variable factors are
considered in estimating the liability for unpaid losses and LAE, there is no
method or system that can eliminate the risk of actual ultimate results
differing from such estimates.
Following is a discussion of certain critical variables affecting the estimation of loss reserves of the more significant long-tail lines of business (asbestos and environmental liabilities are separately discussed below). Many other variables may also impact ultimate claim costs. An important assumption underlying reserve estimates is that the cost trends implicitly built into development patterns will continue into the future. However, future results could vary due to an unexpected change in the underlying cost trends. This unexpected change could arise from a variety of sources including a general increase in economic inflation, inflation from social programs, new medical technologies, or other factors such as those listed below in connection with AFG's largest lines of business. It is not possible to isolate and measure the potential impact of just one of these variables, and future cost trends could be partially impacted by several such variables. However, it is reasonable to address the sensitivity of the reserves to potential impact from changes in these variables by measuring the effect of a possible overall 1% change in future cost trends that may be caused by one or more variables. Utilizing the effect of a 1% change in overall cost trends enables changes greater than 1% to be estimated by extrapolation. Each additional 1% change in the cost trend would increase the effect on net earnings by an amount slightly (about 5%) greater than the effect of the previous 1%. For example, if a 1% change in cost trends in a line of business would change net earnings by$20 million , a 2% change would change net earnings by approximately$41 million . The estimated cumulative adverse impact that a 1% change in cost trends in AFG's more significant lines of property and casualty business (exceeding 5% of total reserves) would have on net earnings is shown below (in millions). Effect of 1% Change in Line of business Cost Trends Other liability - occurrence $ 55 Workers' compensation 66 Other liability - claims made 20 Commercial auto/truck liability/medical 13 39
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The judgments and uncertainties surrounding management's reserve estimation process and the potential for reasonably possible variability in management's most recent reserve estimates may also be viewed by looking at how recent historical estimates of reserves have developed. The following table shows (dollars in millions) what the impact on AFG's net earnings would be on the more significant lines of business if theDecember 31, 2021 , reserves (net of reinsurance) developed at the same rate as the average development of the most recent five years. 5-yr. Average Net Reserves (b) Effect on Net Development (a)(b)
Other liability - occurrence
4.5 % $ 1,808 $ 82 Workers' compensation (5.1 %) 2,171 (110) Other liability - claims made (1.6 %) 795 (12) Commercial auto/truck liability/medical (1.6 %) 619 (10) (a)Adverse (favorable), net of tax effect. (b)Excludes asbestos and environmental liabilities. The following discussion describes key assumptions and important variables that affect the estimate of the reserve for loss and LAE of the more significant lines of business and explains what caused them to change from assumptions used in the preceding period. Other Liability - Occurrence This long-tail line of business consists of coverages protecting the insured against legal liability resulting from negligence, carelessness, or a failure to act causing property damage or personal injury to others. Some of the important variables affecting estimation of loss reserves for other liability - occurrence include: •Litigious climate •Unpredictability of judicial decisions regarding coverage issues •Magnitude of jury awards •Outside counsel costs •Timing of claims reporting
AFG recorded adverse prior year reserve development of
occurrence coverage due primarily to continued claim severity increases in
excess and umbrella liability coverages.
While management applies the actuarial methods discussed in Note N - "Insurance - Property and Casualty Insurance Reserves" to the financial statements, more judgment is involved in arriving at the final reserve to be held. For recent accident years, more weight is given to the Bornhuetter-Ferguson method.
Workers' Compensation
This long-tail line of business provides coverage to employees who may be injured in the course of employment. Some of the important variables affecting estimation of loss reserves for workers' compensation include: •Legislative actions and regulatory and legal interpretations •Future medical cost inflation •Economic conditions •Frequency of reopening claims previously closed •Advances in medical equipment and processes •Pace and intensity of employee rehabilitation •Changes in the use of pharmaceutical drugs •Changes in mortality trends for permanently injured workers
Approximately 27% and 23% of AFG's workers' compensation reserves at
respectively.
AFG recorded favorable prior year reserve development of$169 million in 2021 related to its workers' compensation coverage due to lower than anticipated medical severity. AFG recorded favorable prior year reserve development of$178 million in 2020 due to lower than anticipated medical claim severity and improving claim closure rates, particularly in the southeasternUnited States andCalifornia . AFG recorded favorable prior year reserve development of$180 million in 2019 due to lower than anticipated frequency of lost-time claims and medical severity. 40
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Other Liability - Claims Made
This long-tail line of business consists mostly of directors' and officers'
liability ("D&O"). Some of the important variables affecting estimation of loss
reserves for other liability - claims made include:
•Litigious climate
•Economic conditions
•Variability of stock prices
•Magnitude of jury awards
The general state of the economy and the variability of the stock price of the
insured can affect the frequency and severity of shareholder class action suits
and other situations that trigger coverage under D&O policies. For example, from
2008 to 2010, economic conditions led to higher frequency of claims,
particularly in the D&O policies for small account and not-for-profit
organizations. Since then, claim frequency has decreased from its peak in 2010
and has stabilized to near pre-2008 levels.
AFG recorded favorable prior year reserve development of $2 million in 2021,
$8 million in 2020 and $4 million in 2019 on its D&O business as claim frequency
and severity was less than expected across several prior accident years.
Commercial Auto/Truck Liability/Medical
This line of business is a mix of coverage protecting the insured against legal liability for property damage or personal injury to others arising from the operation of commercial motor vehicles. The property damage liability exposure is usually short-tail with relatively quick reporting and settlement of claims. The bodily injury and medical payments exposures are longer-tailed; although the claim reporting is relatively quick, the final settlement can take longer to achieve. Some of the important variables affecting estimation of loss reserves for commercial auto/truck liability/medical are similar to other liability - occurrence and include: •Magnitude of jury awards •Unpredictability of judicial decisions regarding coverage issues •Litigious climate and trends •Change in frequency of severe accidents •Health care costs and utilization of medical services by injured parties AFG recorded adverse prior year reserve development of$7 million in 2021 for this line of business and favorable prior year reserve development of$16 million in 2020 and$15 million in 2019. While AFG recorded adverse development in 2021 and severity trends for this line of business continue to be elevated, the severity has generally been lower than initially projected in recent years. Recoverables from Reinsurers and Availability of Reinsurance AFG is subject to credit risk with respect to its reinsurers, as reinsurance contracts do not relieve AFG of its liability to policyholders. To mitigate this risk, substantially all reinsurance is ceded to companies rated "A" or better by S&P or is secured by "funds withheld" or other collateral. The availability and cost of reinsurance are subject to prevailing market conditions, which are beyond AFG's control and which may affect AFG's level of business and profitability. Although the cost of certain reinsurance programs may increase, management believes that AFG will be able to maintain adequate reinsurance coverage at acceptable rates without a material adverse effect on AFG's results of operations. AFG's gross and net combined ratios are shown in the table below. See Item 1 - Business - "Property and Casualty Insurance Segment - Reinsurance" for more information on AFG's reinsurance programs. For additional information on the effect of reinsurance on AFG's historical results of operations see Note N - "Insurance - Reinsurance" to the financial statements.
The following table illustrates the effect that purchasing property and casualty
reinsurance has had on AFG's combined ratio over the last three years.
2021 2020 2019
Before reinsurance (gross) 87.4 % 97.1 % 95.6 %
Effect of reinsurance (0.9 %) (1.6 %) 0.2 %
Actual (net of reinsurance) 86.5 % 95.5 % 95.8 %
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Asbestos and Environmental-related ("A&E") Insurance Reserves Asbestos and
environmental reserves of the property and casualty group consisted of the
following (in millions):
December 31,
2021 2020
Asbestos $ 232 $ 239
Environmental 176 183
A&E reserves, net of reinsurance recoverable 408 422
Reinsurance recoverable, net of allowance 147 150
Gross A&E reserves
$ 555 $ 572 Asbestos reserves include claims asserting alleged injuries and damages from exposure to asbestos. Environmental reserves include claims relating to polluted sites. Asbestos claims against manufacturers, distributors or installers of asbestos products were presented under the products liability section of their policies, which typically had aggregate limits that capped an insurer's liability. In addition, asbestos claims are being presented as "non-products" claims, such as those by installers of asbestos products and by property owners or operators who allegedly had asbestos on their property, under the premises or operations section of their policies. Unlike products exposures, these non-products exposures typically had no aggregate limits, creating greater exposure for insurers. Further, in an effort to seek additional insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits. Approximately 42% of AFG's net asbestos reserves relate to policies written directly by AFG subsidiaries. Claims from these policies generally are product-oriented claims with only a limited amount of non-products exposures and are dominated by small to mid-sized commercial entities that are mostly regional policyholders with few national target defendants. The remainder is assumed reinsurance business that includes exposures from 1954 to 1983. The asbestos and environmental assumed claims are ceded by various insurance companies under reinsurance treaties. A majority of the individual assumed claims have exposures of less than$100,000 to AFG. Asbestos losses assumed include some of the industry known manufacturers, distributors and installers. Pollution losses include industry known insured names and sites. Establishing reserves for A&E claims relating to policies and participations in reinsurance treaties and former operations is subject to uncertainties that are significantly greater than those presented by other types of claims. For this group of claims, traditional actuarial techniques that rely on historical loss development trends cannot be used and a range of reasonably possible losses cannot be estimated. Case reserves and expense reserves are established by the claims department as specific policies are identified. In addition to the case reserves established for known claims, management establishes additional reserves for claims not yet known or reported and for possible development on known claims. These additional reserves are management's best estimate based on periodic comprehensive studies and internal reviews adjusted for payments and identifiable changes, supplemented by management's review of industry information about such claims, with due consideration to individual claim situations. Management believes that estimating the ultimate liability for asbestos claims presents a unique and difficult challenge to the insurance industry 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. Environmental claims likewise present challenges in prediction, due to uncertainty regarding the interpretation of insurance policies, complexities regarding multi-party involvements at sites, evolving cleanup standards and protracted time periods required to assess the level of cleanup required at contaminated sites. The following factors could impact AFG's A&E reserves and payments: •There is interest at the state level to attempt to legislatively address asbestos liabilities and the manner in which asbestos claims are resolved. These developments are fluid and could result in piecemeal state-by-state solutions. •The manner by which bankruptcy courts are addressing asbestos liabilities is in flux. •AFG's insureds may make claims alleging significant non-products exposures. While management believes that AFG's reserves for A&E claims are a reasonable estimate of ultimate liability for such claims, actual results may vary materially from the amounts currently recorded due to the difficulty in predicting the number of future claims, the impact of bankruptcy filings and unresolved issues such as whether coverage exists, whether 42 -------------------------------------------------------------------------------- Table of Contents policies are subject to aggregate limits on coverage, how claims are to be allocated among triggered policies and implicated years and whether claimants who exhibit no signs of illness will be successful in pursuing their claims. A 1% variation in loss cost trends, caused by any of the factors previously described, would change net earnings by approximately$35 million . AFG tracks its A&E claims by policyholder. The following table shows, by type of claim, the number of policyholders that did not receive any payments in the calendar year separate from policyholders that did receive a payment. Policyholder counts represent policies written by AFG subsidiaries and do not include assumed reinsurance. 2021 2020
2019
Number of policyholders with no indemnity payments:
Asbestos 100 97 98
Environmental 131 116 113
231 213 211
Number of policyholders with indemnity payments:
Asbestos 45 48 46
Environmental 20 22 17
65 70 63
Total 296 283 274
Amounts paid (net of reinsurance recoveries) for asbestos and environmental
claims, including LAE, were as follows (in millions):
2021 2020 2019 Asbestos$ 8 $ 8 $ 17 Environmental 6 - 13 Total$ 14 $ 8 $ 30 The survival ratio is a measure often used by industry analysts to compare A&E reserves' strength among companies. This ratio is typically calculated by dividing reserves for A&E exposures by the three-year average of paid losses, and therefore measures the number of years that it would take to pay off current reserves based on recent average payments. Because this ratio can be significantly impacted by a number of factors such as loss payout variability, caution should be exercised in attempting to determine reserve adequacy based simply on the survival ratio. AtDecember 31, 2021 , the property and casualty insurance segment's three-year survival ratios compare favorably with industry survival ratios published byA.M. Best (as ofDecember 31, 2020 , and adjusted for several large portfolio transfers) as detailed in the following table: Property and Casualty Insurance Reserves Three-Year Survival Ratio (Times Paid Losses) Asbestos Environmental Total A&E AFG (12/31/2021) 21.9 26.2 23.6 Industry (12/31/2020) 8.6 6.9 8.2 During the third quarter of 2021, AFG completed an in-depth internal review of its asbestos and environmental exposures relating to the run-off operations of its property and casualty insurance segment and its exposures related to former railroad and manufacturing operations and sites. In addition to its ongoing internal monitoring of asbestos and environmental exposures, AFG has periodically conducted comprehensive external studies of its asbestos and environmental reserves with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years. During the 2021 internal review, no new trends were identified and recent claims activity was generally consistent with AFG's expectations resulting from the 2020 external study. As a result, the 2021 review resulted in no net change to AFG's property and casualty insurance segment's asbestos and environmental reserves.
A comprehensive external study of AFG's A&E reserves was completed in the third
quarter of 2020. As a result of the 2020 external study, AFG's property and
casualty insurance segment recorded a
increase its asbestos reserves by
environmental reserves by
43 -------------------------------------------------------------------------------- Table of Contents Over the past few years, the focus of AFG's asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG's insureds with these exposures have been the driver of the property and casualty segment's asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims. The increase in property and casualty environmental reserves in 2020 was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and its estimate of future, but as yet unreported, claims. AFG has updated its view of legal defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. An in-depth internal review of AFG's A&E reserves was completed in the third quarter of 2019. As a result of the 2019 internal review, AFG's property and casualty insurance segment recorded an$18 million pretax special charge to increase its asbestos reserves by$3 million (net of reinsurance) and its environmental reserves by$15 million (net of reinsurance). The increase in property and casualty environmental reserves relates to updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites. Contingencies related to Subsidiaries' Former Operations The A&E studies and reviews discussed above encompassed reserves for various environmental and occupational injury and disease claims and other contingencies arising out of the railroad operations disposed of by American Premier's predecessor and certain manufacturing operations disposed of by American Premier and its subsidiaries and byGreat American Financial Resources, Inc. AFG recorded a minor charge to increase liabilities for those operations as a result of the 2021 internal review, a pretax special charge of$21 million as a result of the 2020 comprehensive external study and a pretax special charge of$11 million as a result of the 2019 internal review. For a discussion of the charges recorded for those operations, see "Results of Operations - Holding Company, Other and Unallocated." Liabilities for claims and contingencies arising from these former railroad and manufacturing operations totaled$95 million atDecember 31, 2021 . For a discussion of the uncertainties in determining the ultimate liability, see Note M - "Contingencies" to the financial statements.
MANAGED INVESTMENT ENTITIES
Accounting standards require AFG to consolidate its investments in
collateralized loan obligation ("CLO") entities that it manages and owns an
interest in (in the form of debt). See Note A - "Accounting Policies - Managed
Investment Entities" and Note G - "Managed Investment Entities" to the financial
statements. The effect of consolidating these entities is shown in the tables
below (in millions). The "Before CLO Consolidation" columns include AFG's
investment and earnings in the CLOs on an unconsolidated basis.
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CONDENSED CONSOLIDATING BALANCE SHEET
Managed
Before CLO Investment Consol. Consolidated
Consolidation Entities Entries As Reported
December 31, 2021
Assets:
Cash and investments $ 15,821 $ - $ (76) (*) $ 15,745
Assets of managed investment entities - 5,296 - 5,296
Other assets 7,890 - - (*) 7,890
Total assets $ 23,711 $ 5,296 $ (76) $ 28,931
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 14,115 $ - $ - $ 14,115
Liabilities of managed investment entities - 5,296 (76) (*) 5,220
Long-term debt and other liabilities 4,584 - - 4,584
Total liabilities 18,699 5,296 (76) 23,919
Shareholders' equity:
Common Stock and Capital surplus 1,415 - - 1,415
Retained earnings 3,478 - - 3,478
Accumulated other comprehensive income, net of tax 119 - - 119
Total shareholders' equity 5,012 - - 5,012
Total liabilities and shareholders' equity $ 23,711 $ 5,296 $ (76) $ 28,931
December 31, 2020
Assets:
Cash and investments $ 13,550 $ - $ (56) (*) $ 13,494
Assets of managed investment entities - 4,971 - 4,971
Other assets 7,361 - (1) (*) 7,360
Assets of discontinued annuity operations 47,885 - - 47,885
Total assets $ 68,796 $ 4,971 $ (57) $ 73,710
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 13,195 $ - $ - $ 13,195
Liabilities of managed investment entities - 4,971 (57) (*) 4,914
Long-term debt and other liabilities 4,354 - - 4,354
Liabilities of discontinued annuity operations 44,458 - - 44,458
Total liabilities 62,007 4,971 (57) 66,921
Shareholders' equity:
Common Stock and Capital surplus 1,367 - - 1,367
Retained earnings 4,149 - - 4,149
Accumulated other comprehensive income, net of tax 1,273 - - 1,273
Total shareholders' equity 6,789 - - 6,789
Total liabilities and shareholders' equity $ 68,796 $ 4,971 $ (57)
(*)Elimination of the fair value of AFG's investment in CLOs and related accrued
interest.
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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Managed
Before CLO Investment Consol. Consolidated
Consolidation (a) Entities Entries As Reported
Three months ended December 31, 2021
Revenues:
Property and casualty insurance net earned premiums $ 1,452 $ - $ - $ 1,452
Net investment income 212 - (3) (b) 209
Realized gains (losses) on securities 7 - - 7
Income of managed investment entities:
Investment income - 46 - 46
Gain (loss) on change in fair value of assets/liabilities - 2 (1) (b) 1
Other income 47 - (4) (c) 43
Total revenues 1,718 48 (8) 1,758
Costs and Expenses:
Insurance benefits and expenses 1,182 - - 1,182
Expenses of managed investment entities - 47 (7) (b)(c) 40
Interest charges on borrowed money and other expenses 91 - - 91
Total costs and expenses 1,273 47 (7) 1,313
Earnings from continuing operations before income taxes 445 1 (1) 445
Provision for income taxes 90 - - 90
Net earnings from continuing operations, including noncontrolling interests
355 1 (1) 355
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
- - - - Net earnings attributable to shareholders $ 355 $ 1$ (1) $ 355 Three months endedDecember 31, 2020 Revenues: Property and casualty insurance net earned premiums $ 1,325 $ - $ -$ 1,325 Net investment income 153 - (6) (b) 147 Realized gains (losses) on: Securities 122 - - 122 Subsidiaries 53 - - 53 Income of managed investment entities: Investment income - 47 - 47 Gain (loss) on change in fair value of assets/liabilities - (1) 2 (b) 1 Other income 22 - (4) (c) 18 Total revenues 1,675 46 (8) 1,713 Costs and Expenses: Insurance benefits and expenses 1,220 - - 1,220 Expenses of managed investment entities - 46 (8) (b)(c) 38 Interest charges on borrowed money and other expenses 111 - - 111 Total costs and expenses 1,331 46 (8) 1,369 Earnings from continuing operations before income taxes 344 - - 344 Provision for income taxes 77 - - 77
Net earnings from continuing operations, including noncontrolling interests
267 - - 267 Net earnings from discontinued operations 427 - - 427
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
2 - - 2 Net earnings attributable to shareholders $ 692 $ - $ - $ 692 (a)Includes income of$3 million in the fourth quarter of 2021 and$6 million in the fourth quarter of 2020, representing the change in fair value of AFG's CLO investments plus$4 million in both the fourth quarter of 2021 and 2020, in CLO management fees earned. (b)Elimination of the change in fair value of AFG's investments in the CLOs, including$3 million and$4 million in the fourth quarter of 2021 and 2020, respectively, in distributions recorded as interest expense by the CLOs. (c)Elimination of management fees earned by AFG. 46
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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED
Before Managed
CLO Investment Consol. Consolidated
Consol. (a) Entities Entries As Reported
Year ended December 31, 2021
Revenues:
Property and casualty insurance net earned premiums $ 5,404 $ - $ - $ 5,404
Net investment income 750 - (20) (b) 730
Realized gains (losses) on:
Securities 110 - - 110
Subsidiaries 4 - - 4
Income of managed investment entities:
Investment income - 181 - 181
Gain (loss) on change in fair value of assets/liabilities - 3 7 (b) 10
Other income 129 - (16) (c) 113
Total revenues 6,397 184 (29) 6,552
Costs and Expenses:
Insurance benefits and expenses 4,704 - - 4,704
Expenses of managed investment entities - 183 (28) (b)(c) 155
Interest charges on borrowed money and other expenses 358 - - 358
Total costs and expenses 5,062 183 (28) 5,217
Earnings from continuing operations before income taxes 1,335 1 (1) 1,335
Provision for income taxes 254 - - 254
Net earnings from continuing operations, including noncontrolling interests
1,081 1 (1) 1,081 Net earnings from discontinued operations 914 - - 914
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
- - - - Net earnings attributable to shareholders$ 1,995 $ 1$ (1) $ 1,995 Year endedDecember 31, 2020 Revenues: Property and casualty insurance net earned premiums$ 5,099 $ - $ -$ 5,099 Net investment income 460 - 1 (b) 461 Realized gains (losses) on: Securities (75) - - (75) Subsidiaries 23 - - 23 Income of managed investment entities: Investment income - 201 - 201 Gain (loss) on change in fair value of assets/liabilities - (11) (9) (b) (20) Other income 95 - (15) (c) 80 Total revenues 5,602 190 (23) 5,769 Costs and Expenses: Insurance benefits and expenses 4,896 - - 4,896 Expenses of managed investment entities - 190 (23) (b)(c) 167 Interest charges on borrowed money and other expenses 367 - - 367 Total costs and expenses 5,263 190 (23) 5,430 Earnings from continuing operations before income taxes 339 - - 339 Provision for income taxes 25 - - 25
Net earnings from continuing operations, including noncontrolling interests
314 - - 314 Net earnings from discontinued operations 407 - - 407
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
(11) - - (11) Net earnings attributable to shareholders$ 732 $ - $ -
$ 732
(a)Includes income of$20 million in 2021 and a loss of$1 million in 2020, representing the change in fair value of AFG's CLO investments plus$16 million and$15 million in 2021 and 2020, respectively, in CLO management fees earned. (b)Elimination of the change in fair value of AFG's investments in the CLOs, including$12 million and$8 million in 2021 and 2020, respectively, in distributions recorded as interest expense by the CLOs. (c)Elimination of management fees earned by AFG. 47
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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED
Before Managed
CLO Investment Consol. Consolidated
Consol. (a) Entities Entries As Reported
Year ended December 31, 2019
Revenues:
Property and casualty insurance net earned premiums $ 5,185 $ - $ - $ 5,185
Net investment income 533 - (1) (b) 532
Realized gains (losses) on securities 155 - - 155
Income of managed investment entities:
Investment income - 269 - 269
Gain (loss) on change in fair value of assets/liabilities - (8) (6) (b) (14)
Other income 101 - (15) (c) 86
Total revenues 5,974 261 (22) 6,213
Costs and Expenses:
Insurance benefits and expenses 4,996 - - 4,996
Expenses of managed investment entities - 261 (22) (b)(c) 239
Interest charges on borrowed money and other expenses 344 - - 344
Total costs and expenses 5,340 261 (22) 5,579
Earnings from continuing operations before income taxes 634 - - 634
Provision for income taxes 143 - - 143
Net earnings from continuing operations, including noncontrolling interests
491 - - 491 Net earnings from discontinued operations 378 - - 378
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
(28) - - (28) Net earnings attributable to shareholders$ 897 $ - $ -
$ 897
(a)Includes income of$1 million representing the change in fair value of AFG's CLO investments plus$15 million in CLO management fees earned. (b)Elimination of the change in fair value of AFG's investments in the CLOs, including$7 million in distributions recorded as interest expense by the CLOs. (c)Elimination of management fees earned by AFG. 48 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
General
AFG's net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. In addition to discontinued operations, core net operating earnings excludes realized gains (losses) on securities because such gains and losses are influenced significantly by financial markets, interest rates and the timing of sales. In addition, special charges related to coverage that AFG no longer writes, such as asbestos and environmental exposures, are excluded from core earnings. InJanuary 2021 , AFG entered into a definitive agreement to sell its Annuity business to MassMutual. Beginning with the first quarter of 2021 and through theMay 31, 2021 effective date of the sale, the results of its annuity segment and the run-off life and long-term care operations are reported as discontinued operations, which included adjusting prior period results to reflect these operations as discontinued. AFG recorded$914 million in non-core net earnings from the discontinued annuity operations in 2021, which includes a$656 million after tax gain on the sale, compared to$407 million and$378 million in 2020 and 2019, respectively. See "Discontinued Annuity Operations" below for details of the impact of the discontinued annuity operations on AFG's net earnings attributable to shareholders for the fourth quarter of 2020 and years end 2021, 2020 and 2019. InDecember 2019 , AFG initiated actions to exit theLloyd's of London insurance market, which included placing its Lloyd's subsidiaries including its Lloyd'sManaging Agency ,Neon Underwriting Ltd. , into run-off. Neon and its predecessor, Marketform, have failed to achieve AFG's profitability objectives since AFG's purchase of Marketform in 2008. Consistent with the treatment of other items that are not indicative of AFG's ongoing operations (both favorable and unfavorable), beginning with the first quarter of 2020, AFG's core net operating earnings for its property and casualty insurance segment excludes the run-off operations of Neon ("Neon exited lines"). InDecember 2020 , AFG soldGAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded$111 million in non-core losses related to the runoff of the Neon business in 2020, which included a$23 million gain on the sale of the business. In conjunction with the sale, AFG recognized a tax benefit of$72 million , resulting in a net$39 million non-core after-tax loss from the Neon exited lines in 2020. In 2021, AFG recognized a non-core after tax gain of$3 million related to contingent consideration received from the sale of Neon. 49 -------------------------------------------------------------------------------- Table of Contents The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes core net operating earnings is a useful tool for investors and analysts in analyzing ongoing operating trends and for management to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business. Three months ended December 31, Year ended December 31, 2021 2020 2021 2020 2019 Components of net earnings attributable to shareholders: Core operating earnings before income taxes$ 438 $ 227 $ 1,232 $ 609 $ 589 Pretax non-core items: Realized gains (losses) on securities 7 122 110 (75) 155 Special A&E charges - - - (68) (29) Neon exited lines (*) - - 4 (122) (76) Loss on retirement of debt - (5) - (5) (5) Other - - (11) - - Earnings before income taxes 445 344 1,335 339 634 Provision for income taxes: Core operating earnings 87 52 239 128 117 Non-core items: Realized gains (losses) on securities 3 25 23 (16) 33 Special A&E charges - - - (14) (6) Neon exited lines (*) - 1 1 (72) - Loss on retirement of debt - (1) - (1) (1) Other - - (9) - - Total provision for income taxes 90 77 254 25 143 Net earnings from continuing operations, including noncontrolling interests 355 267 1,081 314 491 Net earnings from discontinued operations - 427 914 407 378 Less net earnings (loss) attributable to noncontrolling interests: Core operating earnings - - - - (10) Neon exited lines (*) - 2 - (11) (18) Total net earnings (loss) attributable to noncontrolling interests - 2 - (11) (28) Net earnings attributable to shareholders$ 355 $ 692 $ 1,995 $ 732 $ 897 Net earnings: Core net operating earnings$ 351 $ 175 $ 993 $ 481 $ 482 Realized gains (losses) on securities 4 97 87 (59) 122 Special A&E charges - - - (54) (23) Neon exited lines (*) - (3) 3 (39) (58) Loss on retirement of debt - (4) - (4) (4) Other - - (2) - - Net earnings from continuing operations 355 265 1,081 325 519 Discontinued annuity operations - 427 914 407 378 Net earnings attributable to shareholders$ 355 $ 692 $ 1,995 $ 732 $ 897 Diluted per share amounts: Core net operating earnings$ 4.12 $ 2.01 $ 11.59 $ 5.40 $ 5.29 Realized gains (losses) on securities 0.06 1.10 1.01 (0.67) 1.34 Special A&E charges - - - (0.61) (0.25) Neon exited lines (*) - (0.04) 0.04 (0.45) (0.64) Loss on retirement of debt - (0.04) - (0.04) (0.04) Other - - (0.02) - - Diluted per share amounts, continuing operations 4.18 3.03 12.62 3.63 5.70 Discontinued annuity operations - 4.90 10.68 4.57 4.15 Net earnings attributable to shareholders$ 4.18 $ 7.93 $ 23.30 $ 8.20 $ 9.85
(*)As discussed above, the Neon run-off operations are considered property and
casualty insurance non-core earnings (losses). In 2021, AFG recognized a
non-core after tax gain of
received from the sale of Neon.
50 -------------------------------------------------------------------------------- Table of Contents AFG reported net earnings attributable to shareholders of$355 million in the fourth quarter of 2021 compared to$692 million in the fourth quarter of 2020 reflecting higher core net operating earnings, the impact of a loss on retirement of debt in the fourth quarter of 2020, lower net realized gains on securities in the fourth quarter of 2021 compared to the fourth quarter of 2020 and net earnings from the discontinued annuity operations in the fourth quarter of 2020. Core net operating earnings for the fourth quarter of 2021 increased$176 million compared to the fourth quarter of 2020 reflecting higher underwriting profit, higher net investment income and income from the sale of real estate in the fourth quarter of 2021. Net earnings attributable to shareholders were$2.00 billion for the full-year of 2021 compared to$732 million in 2020 reflecting higher core net operating earnings, net realized gains on securities in 2021 compared to net realized losses in 2020, the impact of special A&E charges and non-core losses from the Neon exited lines in 2020 and higher net earnings from the discontinued annuity operations in 2021 (through the sale date) compared to 2020. The discontinued annuity operations includes an after-tax gain from the sale of the annuity subsidiaries of$656 million in 2021. Core net operating earnings increased$512 million in 2021 compared to 2020 reflecting higher underwriting profit, higher net investment income and income from the sale of real estate in the fourth quarter of 2021, partially offset by higher interest charges on borrowed money and higher holding company expenses. Realized gains (losses) on securities in 2021 and 2020 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date. Net earnings attributable to shareholders decreased$165 million for the full-year of 2020 compared to the same period in 2019 due primarily to net realized losses on securities in 2020 compared to net realized gains in 2019 and higher special A&E charges in 2020 compared to 2019, partially offset by higher earnings from the discontinued annuity operations and lower losses from the Neon exited lines in 2020 compared to 2019. Core net operating earnings decreased$1 million in 2020 compared to 2019 reflecting higher interest charges on borrowed money and lower investment income due to lower market interest rates, lower dividend income and the negative impact of the COVID-19 pandemic on partnerships and similar investments and AFG-managed CLOs, partially offset by higher underwriting profit and lower holding company expenses.
RESULTS OF OPERATIONS - QUARTERS ENDED
Segmented Statement of Earnings
Subsequent to the agreement to sell the Annuity subsidiaries, AFG reports its
continuing operations as two segments: (i) Property and casualty insurance
("P&C") and (ii) Other, which includes holding company costs and income and
expenses related to the managed investment entities ("MIEs").
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AFG's net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months endedDecember 31, 2021 and 2020 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions): Other Holding Co., other P&C Annuity Consol. MIEs and unallocated Total Non-core reclass GAAP Total Three months endedDecember 31, 2021 Revenues: Property and casualty insurance net earned premiums$ 1,452 $ - $ - $ -$ 1,452 $ -$ 1,452 Net investment income 196 - (3) 16 209 - 209 Realized gains (losses) on securities - - - - - 7 7 Income of MIEs: Investment income - - 46 - 46 - 46 Gain (loss) on change in fair value of assets/liabilities - - 1 - 1 - 1 Other income 18 - (4) 29 43 - 43 Total revenues 1,666 - 40 45 1,751 7 1,758 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 822 - - - 822 - 822 Commissions and other underwriting expenses 351 - - 9 360 - 360 Interest charges on borrowed money - - - 23 23 - 23 Expenses of MIEs - - 40 - 40 - 40 Other expenses 8 - - 60 68 - 68 Total costs and expenses 1,181 - 40 92 1,313 - 1,313 Earnings (loss) from continuing operations before income taxes 485 - - (47) 438 7 445 Provision (credit) for income taxes 102 - - (15) 87 3 90
Net earnings from continuing operations, including noncontrolling
interests
383 - - (32) 351 4 355 Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests - - - - - - - Core Net Operating Earnings 383 - - (32) 351
Non-core earnings attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - - 4 4 (4) - Net Earnings Attributable to Shareholders$ 383 $ - $ - $ (28)$ 355 $ -$ 355 52
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Other
Holding Co.,
other and Neon exited
P&C Annuity Consol. MIEs unallocated Total Non-core reclass lines (b) GAAP Total
Three months ended December 31, 2020
Revenues:
Property and casualty insurance net earned premiums $ 1,299 $ - $ - $ - $ 1,299 $ - $ 26 $ 1,325
Net investment income 122 20 (6) 11 147 - - 147
Realized gains (losses) on:
Securities - - - - - 122 - 122
Subsidiaries - - - - - - 53 53
Income of MIEs:
Investment income - - 47 - 47 - - 47
Gain (loss) on change in fair value of assets/liabilities - - 1 - 1 - - 1
Other income - - (4) 22 18 - - 18
Total revenues 1,421 20 38 33 1,512 122 79 1,713
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 778 - - - 778 - 52 830
Commissions and other underwriting expenses 358 - - 5 363 - 27 390
Interest charges on borrowed money - - - 24 24 - - 24
Expenses of MIEs - - 38 - 38 - - 38
Other expenses 11 11 - 60 82 5 - 87
Total costs and expenses 1,147 11 38 89 1,285 5 79 1,369
Earnings (loss) from continuing operations before income taxes 274 9 - (56) 227 117 - 344
Provision (credit) for income taxes 58 2 - (8) 52 24 1 77
Net earnings from continuing operations, including noncontrolling
interests
216 7 - (48) 175 93 (1) 267 Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests - - - - - - 2 2 Core Net Operating Earnings 216 7 - (48) 175
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - - 97 97 (97) - - Discontinued operations, net of tax - 429 - (2) 427 - - 427 Neon exited lines (b) (3) - - - (3) - 3 - Loss on retirement of debt, net of tax - - - (4) (4) 4 - - Net Earnings Attributable to Shareholders$ 213 $ 436 $ - $ 43$ 692 $ - $ -$ 692 (a)See the reconciliation of core earnings to GAAP net earnings under "Results of Operations - General" for details on the tax and noncontrolling interest impacts of these reconciling items. (b)As discussed under "Results of Operations - General," the Neon run-off operations are considered property and casualty insurance non-core earnings (losses). Property and Casualty Insurance Segment - Results of Operations Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company's performance. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses and loss adjustment expenses, and commissions and other underwriting expenses to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect net investment income, other income, other expenses or federal income taxes. AFG's property and casualty insurance operations contributed$485 million in GAAP and core pretax earnings in the fourth quarter of 2021 compared to$274 million in the fourth quarter of 2020, an increase of$211 million (77%). The increase in GAAP and core pretax earnings reflects higher underwriting profit and significantly higher net investment income in the fourth quarter of 2021 compared to the fourth quarter of 2020 and income for the sale of real estate in the fourth quarter of 2021. Improved results from alternative investments (partnerships and similar investments and AFG-managed CLOs) were partially offset by lower other net investment income, due primarily to lower market interest rates. 53
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The following table details AFG's GAAP and core earnings before income taxes from its property and casualty insurance operations for the three months endedDecember 31, 2021 and 2020 (dollars in millions): Three months
ended
2021 2020 % Change Gross written premiums$ 1,737 $ 1,707 2 % Reinsurance premiums ceded (467) (491) (5 %) Net written premiums 1,270 1,216 4 % Change in unearned premiums 182 83 119 % Net earned premiums 1,452 1,299 12 % Loss and loss adjustment expenses 822 778 6 % Commissions and other underwriting expenses 351 358 (2 %) Core underwriting gain 279 163 71 % Net investment income 196 122 61 % Other income and expenses, net 10 (11) (191 %) Core earnings before income taxes 485 274 77 % Pretax non-core Neon exited lines (*) - - - %
GAAP earnings before income taxes and noncontrolling
interests
$ 485 $ 274 77 % (*)InDecember 2019 , AFG initiated actions to exit theLloyd's of London insurance market, which included placing its Lloyd's subsidiaries including its Lloyd'sManaging Agency ,Neon Underwriting Ltd. ("Neon"), into run-off. As discussed under "Results of Operations - General," following theDecember 2019 decision to exit theLloyd's of London insurance market, the results from the Neon exited lines are treated as non-core earnings (losses). Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months endedDecember 31, 2020 (in millions): Three
months ended
Excluding
Neon Neon
exited lines exited lines Total
Gross written premiums $ 1,707 $ 14 $ 1,721
Reinsurance premiums ceded (491) (1) (492)
Net written premiums 1,216 13 1,229
Change in unearned premiums 83 13 96
Net earned premiums 1,299 26 1,325
Loss and loss adjustment expenses 778 52 830
Commissions and other underwriting expenses 358 27 385
Underwriting gain (loss) 163 (53) 110
Net investment income 122 - 122
Gain on sale of subsidiaries - 53 53
Other income and expenses, net (11) - (11)
Earnings before income taxes and noncontrolling
interests $ 274 $ - $ 274
Three months ended December 31,
Combined Ratios: 2021 2020 Change
Specialty lines
Loss and LAE ratio 56.5 % 58.6 % (2.1 %)
Underwriting expense ratio 24.2 % 27.6 % (3.4 %)
Combined ratio 80.7 %
86.2 % (5.5 %)
Aggregate - including exited lines
Loss and LAE ratio 56.6 % 62.6 % (6.0 %)
Underwriting expense ratio 24.2 % 29.0 % (4.8 %)
Combined ratio 80.8 % 91.6 % (10.8 %)
54
-------------------------------------------------------------------------------- Table of Contents Starting in 1986, AFG's statutory combined ratio has been better than theU.S. industry average for 34 of the 36 years. Management believes that AFG's insurance operations have performed better than the industry as a result of its specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives.
AFG reports the underwriting performance of its Specialty property and casualty
insurance business in the following sub-segments: (i) Property and
transportation, (ii) Specialty casualty and (iii) Specialty financial.
To understand the overall profitability of particular lines, the timing of
claims payments and the related impact of investment income must be considered.
Certain "short-tail" lines of business (primarily property coverages) generally
have quick loss payouts, which reduce the time funds are held, thereby limiting
investment income earned thereon. In contrast, "long-tail" lines of business
(primarily liability coverages and workers' compensation) generally have payouts
that are either structured over many years or take many years to settle, thereby
significantly increasing investment income earned on related premiums received.
Gross Written Premiums
Gross written premiums ("GWP") for AFG's property and casualty insurance segment
were $1.74 billion for the fourth quarter of 2021 compared to $1.72 billion for
the fourth quarter of 2020, an increase of $16 million (1%). Detail of AFG's
property and casualty gross written premiums is shown below (dollars in
millions):
Three months ended December 31,
2021 2020
GWP % GWP % % Change
Property and transportation $ 558 32 % $ 647 38 % (14 %)
Specialty casualty 968 56 % 865 50 % 12 %
Specialty financial 211 12 % 195 11 % 8 %
Total specialty 1,737 100 % 1,707 99 % 2 %
Neon exited lines - - % 14 1 % (100 %)
Aggregate $ 1,737 100 % $ 1,721 100 % 1 %
Reinsurance Premiums Ceded
Reinsurance premiums ceded ("Ceded") for AFG's property and casualty insurance
segment were 27% of gross written premiums for the fourth quarter of 2021
compared to 29% of gross written premiums for the fourth quarter of 2020, a
decrease of 2 percentage points. Detail of AFG's property and casualty
reinsurance premiums ceded is shown below (dollars in millions):
Three months ended
2021 2020 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (141) 25 % $ (207) 32 % (7 %)
Specialty casualty (340) 35 % (300) 35 % - %
Specialty financial (38) 18 % (32) 16 % 2 %
Other specialty 52 48
Total specialty (467) 27 % (491) 29 % (2 %)
Neon exited lines - - % (1) 7 % (7 %)
Aggregate $ (467) 27 % $ (492) 29 % (2 %)
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Net Written Premiums
Net written premiums ("NWP") for AFG's property and casualty insurance segment
were $1.27 billion for the fourth quarter of 2021 compared to $1.23 billion for
the fourth quarter of 2020, an increase of $41 million (3%). Detail of AFG's
property and casualty net written premiums is shown below (dollars in millions):
Three months ended December 31,
2021 2020
NWP % NWP % % Change
Property and transportation $ 417 33 % $ 440 36 % (5 %)
Specialty casualty 628 49 % 565 46 % 11 %
Specialty financial 173 14 % 163 13 % 6 %
Other specialty 52 4 % 48 4 % 8 %
Total specialty 1,270 100 % 1,216 99 % 4 %
Neon exited lines - - % 13 1 % (100 %)
Aggregate $ 1,270 100 % $ 1,229 100 % 3 %
Net Earned Premiums
Net earned premiums ("NEP") for AFG's property and casualty insurance segment
were $1.45 billion for the fourth quarter of 2021 compared to $1.33 billion for
the fourth quarter of 2020, an increase of $127 million (10%). Detail of AFG's
property and casualty net earned premiums is shown below (dollars in millions):
Three months ended December 31,
2021 2020
NEP % NEP % % Change
Property and transportation $ 597 41 % $ 521 39 % 15 %
Specialty casualty 636 44 % 572 43 % 11 %
Specialty financial 165 11 % 158 12 % 4 %
Other specialty 54 4 % 48 4 % 13 %
Total specialty 1,452 100 % 1,299 98 % 12 %
Neon exited lines - - % 26 2 % (100 %)
Aggregate $ 1,452 100 % $ 1,325 100 % 10 %
The $16 million (1%) increase in gross written premiums in the fourth quarter of
2021 compared to the fourth quarter of 2020 reflects an increase in the
Specialty casualty and Specialty financial sub-segments, partially offset by a
decrease in the Property and transportation sub-segment. Overall average renewal
rates increased approximately 7% in the fourth quarter of 2021.
Property and transportation Gross written premiums decreased $89 million (14%)
in the fourth quarter of 2021 compared to the fourth quarter of 2020. This
decrease was due primarily to the timing of premium in the crop business and the
timing of the renewal of a large account in the transportation business. Average
renewal rates increased 6% for this group in the fourth quarter of 2021.
Reinsurance premiums ceded as a percentage of gross written premiums decreased
7 percentage points for the fourth quarter of 2021 compared to the fourth
quarter of 2020 reflecting lower cessions in the crop insurance operations,
partially offset by higher cessions in the transportation businesses.
Specialty casualty Gross written premiums increased $103 million (12%) in the
fourth quarter of 2021 compared to the fourth quarter of 2020. Significant
renewal rate increases and increased exposures contributed to higher premiums in
the excess liability and excess and surplus businesses. The mergers and
acquisitions liability and executive liability businesses also contributed
meaningfully to the year-over-year growth. Average renewal rates for this group
increased approximately 7% in the fourth quarter of 2021. Excluding rate
decreases in the workers' compensation business, renewal rates for this group
increased approximately 11%. Reinsurance premiums ceded as a percentage of gross
written premiums were comparable in the fourth quarter of 2021 and the fourth
quarter of 2020.
Specialty financial Gross written premiums increased $16 million (8%) in the
fourth quarter of 2021 compared to the fourth quarter of 2020 due primarily to
the favorable impact of economic recovery in the surety business and strong rate
increases and new business opportunities in the fidelity business. Average
renewal rates for this group increased approximately 7% in the fourth quarter of
2021. Reinsurance premiums ceded as a percentage of gross written premiums
increased 2 percentage points in the fourth quarter of 2021 compared to the
fourth quarter of 2020 reflecting higher cessions in the innovative markets
business.
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Other specialty The amounts shown as reinsurance premiums ceded represent
business assumed by AFG's internal reinsurance program from the operations that
make up AFG's other Specialty property and casualty insurance sub-segments.
Reinsurance premiums assumed increased $4 million (8%) in the fourth quarter of
2021 compared to the fourth quarter of 2020 reflecting an increase in premiums
retained, primarily from businesses in the Specialty casualty sub-segment.
Combined Ratio
Performance measures such as the combined ratio are often used by property and
casualty insurers to help users of their financial statements better understand
the company's performance. The combined ratio is the sum of the loss and loss
adjustment expenses ("LAE") and underwriting expense ratios. These ratios are
calculated by dividing each of the respective expenses by net earned premiums.
The table below (dollars in millions) details the components of the combined
ratio for AFG's property and casualty insurance segment:
Three months ended December 31, Three months ended December 31,
2021 2020 Change 2021 2020
Property and transportation
Loss and LAE ratio 66.0 % 63.3 % 2.7 %
Underwriting expense ratio 14.5 % 22.5 % (8.0 %)
Combined ratio 80.5 % 85.8 % (5.3 %)
Underwriting profit $ 116 $ 74
Specialty casualty
Loss and LAE ratio 53.5 % 59.0 % (5.5 %)
Underwriting expense ratio 24.5 % 25.0 % (0.5 %)
Combined ratio 78.0 % 84.0 % (6.0 %)
Underwriting profit $ 140 $ 91
Specialty financial
Loss and LAE ratio 31.7 % 35.6 % (3.9 %)
Underwriting expense ratio 53.8 % 51.2 % 2.6 %
Combined ratio 85.5 % 86.8 % (1.3 %)
Underwriting profit $ 24 $ 20
Total Specialty
Loss and LAE ratio 56.5 % 58.6 % (2.1 %)
Underwriting expense ratio 24.2 % 27.6 % (3.4 %)
Combined ratio 80.7 % 86.2 % (5.5 %)
Underwriting profit $ 281 $ 179
Aggregate - including exited lines
Loss and LAE ratio 56.6 % 62.6 % (6.0 %)
Underwriting expense ratio 24.2 % 29.0 % (4.8 %)
Combined ratio 80.8 % 91.6 % (10.8 %)
Underwriting profit $ 279 $ 110
The Specialty property and casualty insurance operations generated an
underwriting profit of $281 million for the fourth quarter of 2021 compared to
$179 million in the fourth quarter of 2020, an increase of $102 million (57%).
The higher underwriting profit in the fourth quarter of 2021 reflects higher
underwriting profits in each of the Specialty property and casualty
sub-segments. Overall catastrophe losses were $25 million (1.8 points on the
combined ratio) in the fourth quarter of 2021 compared to catastrophe losses of
$20 million (1.5 points) and related net reinstatement premium recoveries of
$3 million in the fourth quarter of 2020.
Property and transportation Underwriting profit for this group was $116 million
for the fourth quarter of 2021 compared to $74 million in the fourth quarter of
2020, an increase of $42 million (57%). Higher underwriting profitability in the
crop operations more than offset lower underwriting profits in the
transportation businesses. Catastrophe losses for this group were $15 million
(2.5 points on the combined ratio) in the fourth quarter of 2021 compared to
$6 million (1.2 points) in the fourth quarter of 2020.
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Specialty casualty Underwriting profit for this group was $140 million for the
fourth quarter of 2021 compared to $91 million in the fourth quarter of 2020, an
increase of $49 million (54%). This increase reflects higher underwriting
profitability in the workers' compensation, excess liability, excess and
surplus, targeted markets and executive liability businesses in the fourth
quarter of 2021 compared to the fourth quarter of 2020. Catastrophe losses were
$3 million (0.6 points on the combined ratio) in the fourth quarter of 2021
compared to catastrophe losses of $5 million (0.8 points) and related net
reinstatement premium recoveries of $3 million in the fourth quarter of 2020.
Specialty financial Underwriting profit for this group was $24 million for the
fourth quarter of 2021 compared to $20 million in the fourth quarter of 2020, an
increase of $4 million (20%). This increase reflects higher underwriting
profitability in the trade credit, surety and fidelity businesses. Catastrophe
losses were $6 million (3.7 points on the combined ratio) in the fourth quarter
of 2021 compared to $7 million (4.5 points) in the fourth quarter of 2020.
Other specialty This group reported an underwriting profit of $1 million for the
fourth quarter of 2021 compared to an underwriting loss of $6 million in the
fourth quarter of 2020, a change of $7 million (117%), reflecting lower losses
in the business assumed by AFG's internal reinsurance program from the
operations that make up AFG's other Specialty sub-segments in the fourth quarter
of 2021 compared to the fourth quarter of 2020.
Neon exited lines In December 2019 , AFG initiated actions to exit the Lloyd's of
London insurance market, which included placing its Lloyd's subsidiaries
including its Lloyd's Managing Agency , Neon Underwriting Ltd. , into run-off. In
December 2020 , AFG completed the sale of GAI Holding Bermuda and its
subsidiaries, comprising the legal entities that own Neon. AFG recorded
$53 million in non-core underwriting losses (including $8 million of net adverse
prior year reserve development) related to this business in the fourth quarter
of 2020. These losses were offset by a $53 million gain on the sale of Neon
recorded in the fourth quarter of 2020.
Consistent with the treatment of other items that are not indicative of AFG's
ongoing operations (both favorable and unfavorable), the $53 million
underwriting loss at Neon and offsetting gain on sale in the fourth quarter of
2020 are treated as non-core.
Aggregate Aggregate underwriting results for AFG's property and casualty
insurance segment include an underwriting loss of $53 million at Neon in the
fourth quarter of 2020, due primarily to catastrophe losses and several large
claims. Aggregate underwriting results for AFG's property and casualty insurance
segment also include adverse prior year reserve development of $2 million in the
fourth quarter of 2021 and $16 million in the fourth quarter of 2020 related to
business outside of the Specialty group that AFG no longer writes.
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Losses and Loss Adjustment Expenses
AFG's overall loss and LAE ratio was 56.6% for the fourth quarter of 2021
compared to 62.6% for fourth quarter of 2020, a decrease of 6.0 percentage
points. The components of AFG's property and casualty losses and LAE amounts and
ratio are detailed below (dollars in millions):
Three
months ended
Amount Ratio Change in
2021 2020 2021 2020 Ratio
Property and transportation
Current year, excluding COVID-19 related and
catastrophe losses $ 381 $ 352 63.9 % 67.5 % (3.6 %)
Prior accident years development (2) (29) (0.4 %) (5.6 %) 5.2 %
Current year COVID-19 related losses - - - % 0.2 % (0.2 %)
Current year catastrophe losses 15 6 2.5 % 1.2 % 1.3 %
Property and transportation losses and LAE and
ratio $ 394 $ 329 66.0 % 63.3 % 2.7 %
Specialty casualty
Current year, excluding COVID-19 related and
catastrophe losses $ 391 $ 336 61.3 % 59.0 % 2.3 %
Prior accident years development (55) (6) (8.6 %) (1.1 %) (7.5 %)
Current year COVID-19 related losses 1 2 0.2 % 0.3 % (0.1 %)
Current year catastrophe losses 3 5 0.6 % 0.8 % (0.2 %)
Specialty casualty losses and LAE and ratio
53.5 % 59.0 % (5.5 %) Specialty financial Current year, excluding COVID-19 related and catastrophe losses $ 58$ 58 35.5 % 36.5 % (1.0 %) Prior accident years development (13) (6) (8.2 %) (3.6 %) (4.6 %) Current year COVID-19 related losses 1 (3) 0.7 % (1.8 %) 2.5 % Current year catastrophe losses 6 7 3.7 % 4.5 % (0.8 %)
Specialty financial losses and LAE and ratio $ 52
31.7 % 35.6 % (3.9 %) Total Specialty Current year, excluding COVID-19 related and catastrophe losses$ 866 $ 774 59.5 % 59.5 % - % Prior accident years development (73) (32) (5.0 %) (2.4 %) (2.6 %) Current year COVID-19 related losses 2 - 0.2 % - % 0.2 % Current year catastrophe losses 25 20 1.8 % 1.5 % 0.3 %
Total Specialty losses and LAE and ratio
56.5 % 58.6 % (2.1 %) Aggregate - including exited lines Current year, excluding COVID-19 related and catastrophe losses$ 866 $ 797 59.6 % 60.1 % (0.5 %) Prior accident years development (71) (8) (5.0 %) (0.6 %) (4.4 %) Current year COVID-19 related losses 2 - 0.2 % - % 0.2 % Current year catastrophe losses 25 41 1.8 % 3.1 % (1.3 %) Aggregate losses and LAE and ratio$ 822 $ 830 56.6 % 62.6 % (6.0 %) Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG's Specialty property and casualty insurance operations was 59.5% for both the fourth quarter of 2021 and the fourth quarter of 2020.
Property and transportation The 3.6 percentage points decrease in the loss and
LAE ratio for the current year, excluding COVID-19 related and catastrophe
losses reflects a decrease in the loss and LAE ratio in the crop operations.
59 -------------------------------------------------------------------------------- Table of Contents Specialty casualty The 2.3 percentage points increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects an increase in the loss and LAE ratios of the targeted markets and general liability businesses.
Specialty financial The 1.0 percentage points decrease in the loss and LAE
ratio for the current year, excluding COVID-19 related and catastrophe losses
reflects a decrease in the loss and LAE ratio of the fidelity business,
partially offset by an increase in the loss and LAE ratio of the surety,
equipment leasing and trade credit businesses.
Net prior year reserve development AFG's Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of$73 million in the fourth quarter of 2021 compared to$32 million in the fourth quarter of 2020, an increase of$41 million (128%). Property and transportation Net favorable reserve development of$2 million in the fourth quarter of 2021 reflects lower than expected claim frequency in the aviation business and lower than anticipated claim severity in the ocean marine business, partially offset by higher than expected claim severity in the property and inland marine business. Net favorable reserve development of$29 million in the fourth quarter of 2020 reflects lower than anticipated claim frequency and severity in the aviation, transportation and agricultural businesses. Specialty casualty Net favorable reserve development of$55 million in the fourth quarter of 2021 reflects lower than anticipated claim severity in the workers' compensation businesses. Net favorable reserve development of$6 million in the fourth quarter of 2020 reflects lower than anticipated claim severity in the workers' compensation businesses, partially offset by higher than expected claim severity in general liability contractor claims and the public sector and excess liability businesses. Specialty financial Net favorable reserve development of$13 million in the fourth quarter of 2021 reflects lower than anticipated claim frequency in the surety and trade credit businesses. Net favorable reserve development of$6 million in the fourth quarter of 2020 reflects lower than anticipated claim frequency and severity in the fidelity and surety businesses and lower than expected claim severity in the financial institutions business. Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net favorable reserve development of$3 million in the fourth quarter of 2021 and net adverse reserve development of$9 million in the fourth quarter of 2020, which includes adverse reserve development of$11 million in the fourth quarter of 2020 associated with AFG's internal reinsurance program. Both periods include the amortization of deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001. Aggregate Aggregate net prior accident years reserve development for AFG's property and casualty insurance segment for the fourth quarter of 2021 and 2020 includes net adverse reserve development of$8 million in the fourth quarter of 2020 related to Neon exited lines discussed above under "Neon exited lines." Aggregate net prior accident years reserve development for AFG's property and casualty insurance segment also includes net adverse reserve development of$2 million in the fourth quarter of 2021 and$16 million in the fourth quarter of 2020 related to business outside the Specialty group that AFG no longer writes. Catastrophe losses AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available atDecember 31, 2021 , AFG's exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 100, 250 or 500 years as a percentage of AFG's Shareholders' Equity is shown below: Approximate impact of modeled loss Industry Model on AFG's Shareholders' Equity 100-year event 1% 250-year event 1% 500-year event 2% AFG maintains comprehensive property catastrophe reinsurance coverage for its property and casualty insurance operations, including a$20 million per occurrence net retention, for losses up to$125 million in the vast majority of circumstances. In certain unlikely events, AFG's ultimate loss under this coverage could be as high as$39 million for a 60 -------------------------------------------------------------------------------- Table of Contents single occurrence. AFG further maintains supplemental fully collateralized reinsurance coverage up to 94% of$325 million for catastrophe losses in excess of$125 million of traditional catastrophe reinsurance through a catastrophe bond. Catastrophe losses of$25 million in the fourth quarter of 2021 resulted primarily from storms in multiple regions ofthe United States ,Kentucky tornadoes andColorado fires. Catastrophe losses of$41 million in the fourth quarter of 2020 resulted primarily fromHurricanes Delta , Laura, Sally and Zeta and theNashville explosion. Commissions and Other Underwriting Expenses AFG's property and casualty commissions and other underwriting expenses ("U/W Exp ") were$351 million in the fourth quarter of 2021 compared to$385 million for the fourth quarter of 2020, a decrease of$34 million (9%). AFG's underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 24.2% for the fourth quarter of 2021 compared to 29.0% for the fourth quarter of 2020, a decrease of 4.8 percentage points. Detail of AFG's property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):
Three months ended
2021 2020 Change in
U/W Exp % of NEP U/W Exp % of NEP % of NEP
Property and transportation $ 87 14.5 %$ 118 22.5 % (8.0 %) Specialty casualty 156 24.5 % 144 25.0 % (0.5 %) Specialty financial 89 53.8 % 82 51.2 % 2.6 % Other specialty 19 36.3 % 14 36.7 % (0.4 %) Total Specialty 351 24.2 % 358 27.6 % (3.4 %) Neon exited lines - 27 Aggregate $ 351 24.2 %$ 385 29.0 % (4.8 %) Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums decreased 8.0 percentage points in the fourth quarter of 2021 compared to the fourth quarter of 2020 reflecting higher profitability-based ceding commissions received from reinsurers in the crop business and the impact of higher premiums on the ratio in the property and inland marine business. Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums decreased 0.5 percentage points in the fourth quarter of 2021 compared to the fourth quarter of 2020 reflecting higher ceding commissions received from reinsurers as a result of growth in the excess liability business. Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums increased 2.6 percentage points in the fourth quarter of 2021 compared to the fourth quarter of 2020 reflecting higher underwriting expenses in the surety and equipment leasing businesses and higher profitability-based ceding commissions paid in the fidelity business. Aggregate Aggregate commissions and other underwriting expenses for AFG's property and casualty insurance segment includes$27 million in the fourth quarter of 2020 related to the Neon exited lines. See "Neon exited lines" above for information about AFG's exit from theLloyd's of London insurance market in 2020. 61 -------------------------------------------------------------------------------- Table of Contents Property and Casualty Net Investment Income Net investment income in AFG's property and casualty insurance operations was$196 million in the fourth quarter of 2021 compared to$122 million (excluding the Neon exited lines) in the fourth quarter of 2020, an increase of$74 million (61%). The average invested assets and overall yield earned on investments held by AFG's property and casualty insurance operations are provided below (dollars in millions): Three months ended December 31, % 2021 2020 Change Change Net investment income: Net investment income excluding alternative investments $ 80$ 81 $ (1) (1 %) Alternative investments 116 41 75 183 % Total net investment income $ 196$ 122 $ 74 61 % Average invested assets (at amortized cost)$ 13,552 $ 12,135 $ 1,417 12 % Yield (net investment income as a % of average invested assets) 5.79 % 4.02 % 1.77 % Tax equivalent yield (*) 5.92 % 4.12 % 1.80 %
(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully
taxable equivalent yield.
The property and casualty insurance segment's increase in net investment income for the fourth quarter of 2021 compared to the fourth quarter of 2020 reflects the impact of growth in the property and casualty insurance segment and higher earnings from alternative investments, partially offset by the effect of lower market interest rates. The property and casualty insurance segment's overall yield on investments (net investment income as a percentage of average invested assets) was 5.79% for the fourth quarter of 2021 compared to 4.02% for the fourth quarter of 2020, an increase of 1.77 percentage points. The annualized return earned on alternative investments (partnerships and similar investments and AFG-managed CLOs) was 26.3% in the fourth quarter of 2021 compared to 17.0% in the prior year period. In addition to the property and casualty segment's net investment income from ongoing operations discussed above, the Neon exited lines reported less than$1 million in net investment income in the fourth quarter of 2020. Property and Casualty Other Income and Expenses, Net Other income and expenses, net for AFG's property and casualty insurance operations was net income of$10 million for the fourth quarter of 2021 compared to a net expense of$11 million for the fourth quarter of 2020, a change of$21 million (191%). The table below details the items included in other income and expenses, net for AFG's property and casualty insurance operations (in millions): Three months ended December 31, 2021 2020 Other income: Income from the sale of real estate $ 12 $ - Other 6 - Total other income 18 - Other expenses: Amortization of intangibles 1 3 Interest expense on funds withheld 6 6 Other 1 2 Total other expenses 8 11 Other income and expenses, net $ 10
In addition to the property and casualty segment's other income and expenses, net from ongoing operations discussed above, the Neon exited lines incurred a net expense of less than$1 million in other income and expenses, net in the fourth quarter of 2020. 62 -------------------------------------------------------------------------------- Table of Contents Holding Company, Other and Unallocated - Results of Operations AFG's net GAAP pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled$47 million for the fourth quarter of 2021 compared to$61 million for the fourth quarter of 2020, a decrease of$14 million (23%). AFG's net core pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled$47 million for the fourth quarter of 2021 compared to$56 million for the fourth quarter of 2020, a decrease of$9 million (16%). The following table details AFG's GAAP and core loss from continuing operations before income taxes from operations outside of its property and casualty insurance segment for the three months endedDecember 31, 2021 and 2020 (dollars in millions): Three months ended December 31, 2021 2020 % Change Revenues: Net investment income $ 16$ 11 45 % Other income - P&C fees 22 17 29 % Other income 7 5 40 % Total revenues 45 33 36 %
Costs and Expenses:
Property and casualty insurance - commissions and other
underwriting expenses
9 5 80 % Other expense - expenses associated with P&C fees 13 12 8 % Other expenses (*) 47 48 (2 %) Costs and expenses, excluding interest charges on borrowed money 69 65 6 %
Loss before income taxes, excluding realized gains and
losses and interest charges on borrowed money
(24) (32) (25 %) Interest charges on borrowed money 23 24 (4 %)
Core loss from continuing operations before income
taxes, excluding realized gains and losses
(47) (56) (16 %) Pretax non-core loss on retirement of debt - (5) (100 %)
GAAP loss from continuing operations before income
taxes, excluding realized gains and losses
$ (47)$ (61) (23 %)
(*)Excludes a pretax non-core loss on retirement of debt of
fourth quarter of 2020.
Holding Company and Other - Net Investment Income AFG recorded net investment income on investments held outside of its property and casualty insurance segment of$16 million in the fourth quarter of 2021 compared to$11 million in the fourth quarter of 2020, an increase of$5 million (45%), reflecting income in the fourth quarter of 2021 from purchases of fixed maturity investments at the holding company and the impact of the stock market performance on a small portfolio of securities held by the parent company that are carried at fair value through net investment income. These securities increased in value by$7 million in the fourth quarter of 2021 compared to$9 million in the fourth quarter of 2020. Holding Company and Other - P&C Fees and Related Expenses Summit, a workers' compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG's property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the fourth quarter of 2021, AFG collected$19 million in fees for these services compared to$17 million in the fourth quarter of 2020. Management views this fee income, net of the$13 million in the fourth quarter of 2021 and$12 million in the fourth quarter of 2020, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. In addition, AFG's property and casualty insurance businesses collected$3 million in fees from AFG's disposed annuity operations during the fourth quarter of 2021 as compensation for certain services provided under a transition services agreement. The expenses related to providing such services are embedded in property and casualty underwriting expenses. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG's segmented results. 63 -------------------------------------------------------------------------------- Table of Contents Holding Company and Other - Other Income Other income in the table above includes$4 million in both the fourth quarter of 2021 and the fourth quarter of 2020, in management fees paid to AFG by the AFG-managed CLOs (AFG's consolidated managed investment entities). The management fees are eliminated in consolidation - see the other income line in the Consolidate MIEs column under "Results of Operations - Segmented Statement of Earnings." Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance segment of$3 million and$1 million in the fourth quarter of 2021 and the fourth quarter of 2020, respectively. Holding Company and Other - Other Expenses Excluding the non-core loss on retirement of debt discussed below, AFG's holding companies and other operations outside of its property and casualty insurance segment recorded other expenses of$47 million in the fourth quarter of 2021 compared to$48 million in the fourth quarter of 2020, a decrease of$1 million (2%). This decrease is due primarily to the impact of lower holding company expenses related to employee benefit plans that are tied to stock market performance in the fourth quarter of 2021 compared to the fourth quarter of 2020, partially offset by higher expenses associated with certain incentive compensation plans that are tied to AFG's financial performance. Holding Company and Other - Interest Charges on Borrowed Money AFG's holding companies and other operations outside of its property and casualty insurance segment recorded interest expense of$23 million in the fourth quarter of 2021 compared to$24 million in the fourth quarter of 2020, a decrease of$1 million (4%). The decrease in interest expense for the fourth quarter of 2021 as compared to the fourth quarter of 2020 reflects the redemption of$150 million of 6% Subordinated Debentures inNovember 2020 . Holding Company and Other - Loss on Retirement of Debt InNovember 2020 , AFG redeemed its$150 million outstanding principal amount of 6% Subordinated Debentures due in 2055 and wrote off unamortized debt issuance costs of$5 million . Realized Gains (Losses) on Securities AFG's realized gains (losses) on securities were net gains of$7 million in the fourth quarter of 2021 compared to$122 million in the fourth quarter of 2020, a decrease of$115 million (94%). Realized gains (losses) on securities consisted of the following (in millions): Three
months ended
2021 2020 Realized gains (losses) before impairments: Disposals $ 3$ 2 Change in the fair value of equity securities 6 120 Change in the fair value of derivatives (2) (1) 7 121 Change in allowance for impairments on securities - 1 Realized gains (losses) on securities $
7
The$6 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2021 includes gains of$12 million on investments in capital goods companies and$2 million on investments in energy and natural gas companies, partially offset by losses of$5 million on investments in healthcare companies,$2 million on investments in banks and financing companies and$3 million on investments in media companies. The$120 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2020 includes gains of$28 million on investments in banks and financing companies,$23 million on investments in media companies,$15 million on investments in energy and natural gas companies,$12 million on investments in technology companies,$9 million on investments in retail companies and$5 million on investments in real estate investment trusts. 64 -------------------------------------------------------------------------------- Table of Contents Realized Gains (Losses) on Subsidiaries OnSeptember 28, 2020 , AFG announced that it had reached a definitive agreement to sellGAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded a$30 million loss in the third quarter of 2020 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. In the fourth quarter of 2020, the estimated loss was adjusted at the closing date to a gain of$23 million based on the final proceeds and the final net assets disposed, which reflects$53 million of non-core losses in the fourth quarter of 2020 at Neon. See Note C - "Acquisitions and Sale of Businesses" to the financial statements. Consolidated Income Taxes on Continuing Operations AFG's consolidated provision for income taxes was$90 million for the fourth quarter of 2021 compared to$77 million in the fourth quarter of 2020, an increase of$13 million (17%). The following is a reconciliation of income taxes at the statutory rate to the provision for income taxes as shown in the segmented statement of earnings (dollars in millions):
Three months ended
2021 2020
Amount % of EBT Amount % of EBT
Earnings before income taxes ("EBT") $ 445 $ 344
Income taxes at statutory rate $ 93 21 % $ 72 21 %
Effect of:
Employee stock ownership plan dividend paid
deduction (6) (1 %) (1) - %
Stock-based compensation (1) - % (1) - %
Tax exempt interest (2) - % (3) (1 %)
Change in valuation allowance (5) (1 %) (148) (43 %)
Dividend received deduction (1) - % - - %
Tax benefit related to sale of Neon - - % 1 - %
Nondeductible expenses 2 - % 1 - %
Foreign operations - - % 152 44 %
Other 10 1 % 4 1 %
Provision for income taxes $ 90 20 % $ 77 22 %
See Note L - "Income Taxes" to the financial statements for an analysis of items
affecting AFG's effective tax rate.
Consolidated Noncontrolling Interests in Continuing Operations
AFG's consolidated net earnings (loss) from continuing operations attributable
to noncontrolling interests was net earnings of
quarter of 2020 reflecting earnings at Neon, which was sold in
Real Estate Entities Acquired from the Annuity Operations Beginning with the first quarter of 2021, the results of the annuity businesses sold are reported as discontinued operations, in accordance with GAAP, which included adjusting prior period results to reflect these operations as discontinued. Prior to the completion of the sale, AFG's property and casualty insurance operations acquired approximately$480 million in real estate-related partnerships and AFG parent acquired approximately$100 million of directly owned real estate from those operations. GAAP pretax earnings from continuing operations includes the earnings from these entities through theMay 31, 2021 effective date of the sale and certain other expenses that were retained from the annuity operations. Discontinued Annuity Operations AFG's discontinued annuity operations, which were sold inMay 2021 , contributed$540 million in GAAP pretax earnings in the fourth quarter of 2020. 65 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - YEARS ENDEDDECEMBER 31, 2021 , 2020 AND 2019 Segmented Statement of Earnings Subsequent to the agreement to sell the Annuity subsidiaries, AFG reports its continuing operations as two segments: (i) Property and casualty insurance ("P&C") and (ii) Other, which includes holding company costs and income and expenses related to the managed investment entities ("MIEs"). AFG's net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the years endedDecember 31, 2021 , 2020 and 2019 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions): Other Holding Co., other P&C Annuity Consol. MIEs and unallocated Total Non-core reclass GAAP Total Year endedDecember 31, 2021 Revenues: Property and casualty insurance net earned premiums$ 5,404 $ - $ - $ -$ 5,404 $ -$ 5,404 Net investment income 663 51 (20) 36 730 - 730 Realized gains (losses) on: Securities - - - - - 110 110 Subsidiaries - - - - - 4 4 Income of MIEs: Investment income - - 181 - 181 - 181 Gain (loss) on change in fair value of assets/liabilities - - 10 - 10 - 10 Other income 27 - (16) 102 113 - 113 Total revenues 6,094 51 155 138 6,438 114 6,552 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 3,157 - - - 3,157 - 3,157 Commissions and other underwriting expenses 1,514 - - 33 1,547 - 1,547 Interest charges on borrowed money - - - 94 94 - 94 Expenses of MIEs - - 155 - 155 - 155 Other expenses 33 1 - 219 253 11 264 Total costs and expenses 4,704 1 155 346 5,206 11 5,217 Earnings (loss) from continuing operations before income taxes 1,390 50 - (208) 1,232 103 1,335 Provision (credit) for income taxes 279 11 - (51) 239 15 254
Net earnings from continuing operations, including noncontrolling
interests
1,111 39 - (157) 993 88 1,081 Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests - - - - - - - Core Net Operating Earnings 1,111 39 - (157) 993
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - - 87 87 (87) - Discontinued operations, net of tax - 914 - - 914 - 914 Neon exited lines (b) 3 - - - 3 (3) - Other, net of tax - - - (2) (2) 2 - Net Earnings Attributable to Shareholders$ 1,114 $ 953 $ - $ (72)$ 1,995 $ -$ 1,995 66
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Other
Holding Co. , other Neon exited
P&C Annuity Consol. MIEs and unallocated Total Non-core reclass lines (b) GAAP Total
Year ended December 31, 2020
Revenues:
Property and casualty insurance net earned premiums $ 4,899 $ - $ - $ - $ 4,899 $ - $ 200 $ 5,099
Net investment income 404 49 1 12 466 - (5) 461
Realized gains (losses) on:
Securities - - - - - (75) - (75)
Subsidiaries - - - - - - 23 23
Income of MIEs:
Investment income - - 201 - 201 - - 201
Gain (loss) on change in fair value of assets/liabilities - - (20) - (20) - - (20)
Other income 8 1 (15) 86 80 - - 80
Total revenues 5,311 50 167 98 5,626 (75) 218 5,769
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 3,006 - - - 3,006 47 218
3,271
Commissions and other underwriting expenses 1,487 - - 21 1,508 - 117
1,625
Interest charges on borrowed money - - - 88 88 - - 88 Expenses of MIEs - - 167 - 167 - - 167 Other expenses 42 31 - 175 248 26 5 279 Total costs and expenses 4,535 31 167 284 5,017 73 340 5,430 Earnings (loss) from continuing operations before income taxes 776 19 - (186) 609 (148) (122)
339
Provision (credit) for income taxes 164 4 - (40) 128 (31) (72)
25
Net earnings from continuing operations, including noncontrolling
interests
612 15 - (146) 481 (117) (50)
314
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests - - - - - - (11) (11) Core Net Operating Earnings 612 15 - (146) 481
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - - (59) (59) 59 - - Discontinued operations, net of tax - 413 - (6) 407 - - 407 Neon exited lines (b) (39) - - - (39) - 39 - Special A&E charges, net of tax (37) - - (17) (54) 54 - - Loss on retirement of debt, net of tax - - - (4) (4) 4 - - Net Earnings Attributable to Shareholders$ 536 $ 428 $ - $ (232)$ 732 $ - $ -$ 732 67
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Other
Holding Co., other
P&C Annuity Consol. MIEs and unallocated Total Non-core reclass GAAP Total
Year ended December 31, 2019
Revenues:
Property and casualty insurance net earned premiums $ 5,185 $ - $ - $ - $ 5,185 $ - $ 5,185
Net investment income 472 37 (1) 24 532 - 532
Realized gains (losses) on securities - - - - - 155 155
Income of MIEs:
Investment income - - 269 - 269 - 269
Gain (loss) on change in fair value of assets/liabilities - - (14) - (14) - (14)
Other income 11 - (15) 90 86 - 86
Total revenues 5,668 37 239 114 6,058 155 6,213
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 3,207 - - - 3,207 64 3,271
Commissions and other underwriting expenses 1,672 - - 23 1,695 30 1,725
Interest charges on borrowed money - - - 68 68 - 68
Expenses of MIEs - - 239 - 239 - 239
Other expenses 46 16 - 198 260 16 276
Total costs and expenses 4,925 16 239 289 5,469 110 5,579
Earnings (loss) from continuing operations before income taxes 743 21 - (175) 589 45 634
Provision (credit) for income taxes 150 4 - (37) 117 26 143
Net earnings from continuing operations, including noncontrolling
interests
593 17 - (138) 472 19 491 Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests (10) - - - (10) (18) (28) Core Net Operating Earnings 603 17 - (138) 482
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - - 122 122 (122) - Discontinued operations, net of tax - 377 - 1 378 - 378 Special A&E charges, net of tax (14) - - (9) (23) 23 - Neon exited lines charge (58) - - - (58) 58 - Loss on retirement of debt, net of tax - - - (4) (4) 4 - Net Earnings Attributable to Shareholders$ 531 $ 394 $ - $ (28)$ 897 $ -$ 897 (a)See the reconciliation of core earnings to GAAP net earnings under "Results of Operations - General" for details on the tax and noncontrolling interest impacts of these reconciling items. (b)As discussed under "Results of Operations - General," the Neon run-off operations are considered property and casualty insurance non-core earnings (losses). Property and Casualty Insurance Segment - Results of Operations AFG's property and casualty insurance operations contributed$1.39 billion in GAAP pretax earnings in 2021 compared to$607 million in 2020, an increase of$787 million (130%). Property and casualty core pretax earnings were$1.39 billion in 2021 compared to$776 million in 2020, an increase of$614 million (79%). The increase in GAAP pretax earnings reflects higher core pretax earnings and the impact of losses in the Neon exited lines in 2020. The increase in GAAP pretax earnings also reflects the impact of a pretax non-core special A&E charge of$47 million in 2020. The increase in core pretax earnings reflects higher core underwriting profit and significantly higher net investment income in 2021 compared to 2020 and income from the sale of real estate in the fourth quarter of 2021. Improved results from alternative investments (partnerships and similar investments and AFG-managed CLOs) were partially offset by lower other net investment income, due primarily to lower interest rates. AFG's property and casualty insurance operations contributed$607 million in GAAP pretax earnings in 2020 compared to$649 million in 2019, a decrease of$42 million (6%). Property and casualty core pretax earnings were$776 million in 2020 compared to$743 million in 2019, an increase of$33 million (4%). The decrease in GAAP pretax earnings reflects pretax non-core special A&E charges of$47 million in 2020 compared to$18 million in 2019 and higher non-core losses in 68
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the Neon exited lines, partially offset by higher core pretax earnings. The
increase in core pretax earnings reflects higher core underwriting results,
partially offset by lower net investment income in 2020 compared to 2019.
The following table details AFG's GAAP and core earnings before income taxes from its property and casualty insurance operations for the years endedDecember 31, 2021 , 2020 and 2019 (dollars in millions): Year ended December 31, % Change 2021 2020 2019 2021 - 2020 2020 - 2019 Gross written premiums$ 7,946 $ 6,995 $ 7,299 14 % (4 %) Reinsurance premiums ceded (2,373) (2,003) (1,957) 18 % 2 % Net written premiums 5,573 4,992 5,342 12 % (7 %) Change in unearned premiums (169) (93) (157) 82 % (41 %) Net earned premiums 5,404 4,899 5,185 10 % (6 %) Loss and loss adjustment expenses (a) 3,157 3,006 3,207 5 % (6 %) Commissions and other underwriting expenses 1,514 1,487 1,672 2 % (11 %) Core underwriting gain 733 406 306 81 % 33 % Net investment income 663 404 472 64 % (14 %) Other income and expenses, net (6) (34) (35) (82 %) (3 %) Core earnings before income taxes 1,390 776 743 79 % 4 % Pretax non-core special A&E charges - (47) (18) (100 %) 161 % Pretax non-core Neon exited lines (b) 4 (122) (76) (103 %) 61 % GAAP earnings before income taxes and noncontrolling interests$ 1,394 $ 607 $ 649 130 % (6 %)
(a)Excludes pretax non-core special A&E charges of
(b)In
subsidiaries including its Lloyd's
Operations - General," following the
exited lines are treated as non-core earnings (losses). Each line item in the table above has been adjusted to remove the impact from
the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings
(loss) before income taxes in the property and casualty insurance operations for the year ended
December 31, 2020
Excluding Neon Neon
exited lines exited lines Total
Gross written premiums $ 6,995 $ 92 $ 7,087
Reinsurance premiums ceded (2,003) (71) (2,074)
Net written premiums 4,992 21 5,013
Change in unearned premiums (93) 179 86
Net earned premiums 4,899 200 5,099
Loss and loss adjustment expenses 3,006 218 3,224
Commissions and other underwriting
expenses 1,487 117 1,604
Underwriting gain (loss) 406 (135) 271
Net investment income 404 (5) 399
Gain on sale of subsidiaries - 23 23
Other income and expenses, net (34) (5) (39)
Earnings (loss) before income taxes and noncontrolling interests 776 (122) 654
Pretax non-core special A&E charges (47) - (47)
GAAP earnings (loss) before income taxes and noncontrolling interests
$ 729
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Year ended December 31, Change
Combined Ratios: 2021 2020 2019 2021 - 2020 2020 - 2019
Specialty lines
Loss and LAE ratio 58.4 % 60.9 % 61.5 % (2.5 %) (0.6 %)
Underwriting expense ratio 28.0 % 30.4 % 32.2 % (2.4 %) (1.8 %)
Combined ratio 86.4 % 91.3 % 93.7 % (4.9 %) (2.4 %)
Aggregate - including exited lines
Loss and LAE ratio 58.5 % 64.1 % 63.0 % (5.6 %) 1.1 %
Underwriting expense ratio 28.0 % 31.4 % 32.8 % (3.4 %) (1.4 %)
Combined ratio 86.5 % 95.5 % 95.8 % (9.0 %) (0.3 %)
AFG reports the underwriting performance of its Specialty property and casualty
insurance business in the following sub-segments: (i) Property and
transportation, (ii) Specialty casualty and (iii) Specialty financial.
Gross Written Premiums
Gross written premiums ("GWP") for AFG's property and casualty insurance segment
were $7.95 billion in 2021 compared to $7.09 billion in 2020, an increase of
$859 million (12%). GWP decreased $212 million (3%) in 2020 compared to 2019.
Detail of AFG's property and casualty gross written premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2021 2020 2019 2021 - 2020 2020 - 2019
GWP % GWP % GWP %
Property and transportation $ 3,263 41 % $ 2,813 40 % $ 2,759 38 % 16 % 2 %
Specialty casualty 3,890 49 % 3,444 49 % 3,768 52 % 13 % (9 %)
Specialty financial 793 10 % 738 10 % 772 10 % 7 % (4 %)
Total specialty 7,946 100 % 6,995 99 % 7,299 100 % 14 % (4 %)
Neon exited lines - - % 92 1 % - - % (100 %) - %
Aggregate $ 7,946 100 % $ 7,087 100 % $ 7,299 100 % 12 % (3 %)
Reinsurance Premiums Ceded
Reinsurance premiums ceded ("Ceded") for AFG's property and casualty insurance
segment were 30% of gross written premiums for the year ended December 31, 2021 ,
29% for the year ended December 31, 2020 and 27% for the year ended December 31,
2019 , an increase of 1 percentage point for 2021 compared to 2020 and
2 percentage points for 2020 compared to 2019. Detail of AFG's property and
casualty reinsurance premiums ceded is shown below (dollars in millions):
Year ended December 31, Change in % of GWP
2021 2020 2019 2021 - 2020 2020 - 2019
Ceded % of GWP Ceded % of GWP Ceded % of GWP
Property and transportation $ (1,106) 34 % $ (926) 33 % $ (883) 32 % 1 % 1 %
Specialty casualty (1,350) 35 % (1,140) 33 % (1,067) 28 % 2 % 5 %
Specialty financial (135) 17 % (134) 18 % (155) 20 % (1 %) (2 %)
Other specialty 218 197 148
Total specialty (2,373) 30 % (2,003) 29 % (1,957) 27 % 1 % 2 %
Neon exited lines - - % (71) 77 % - - % (77 %) 77 %
Aggregate $ (2,373) 30 % $ (2,074) 29 % $ (1,957) 27 % 1 % 2 %
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Net Written Premiums
Net written premiums ("NWP") for AFG's property and casualty insurance segment
were $5.57 billion in 2021 compared to $5.01 billion in 2020, an increase of
$560 million (11%). NWP decreased $329 million (6%) in 2020 compared to 2019.
Detail of AFG's property and casualty net written premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2021 2020 2019 2021 - 2020 2020 - 2019
NWP % NWP % NWP %
Property and transportation $ 2,157 40 % $ 1,887 38 % $ 1,876 35 % 14 % 1 %
Specialty casualty 2,540 46 % 2,304 46 % 2,701 51 % 10 % (15 %)
Specialty financial 658 12 % 604 12 % 617 12 % 9 % (2 %)
Other specialty 218 4 % 197 4 % 148 2 % 11 % 33 %
Total specialty 5,573 102 % 4,992 100 % 5,342 100 % 12 % (7 %)
Neon exited lines - - % 21 - % - - % (100 %) - %
Aggregate $ 5,573 100 % $ 5,013 100 % $ 5,342 100 % 11 % (6 %)
Net Earned Premiums
Net earned premiums ("NEP") for AFG's property and casualty insurance segment
were $5.40 billion in 2021 compared to $5.10 billion in 2020, an increase of
$305 million (6%). NEP decreased $86 million (2%) in 2020 compared to 2019.
Detail of AFG's property and casualty net earned premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2021 2020 2019 2021 - 2020 2020 - 2019
NEP % NEP % NEP %
Property and transportation $ 2,144 40 % $ 1,871 37 % $ 1,828 35 % 15 % 2 %
Specialty casualty 2,408 44 % 2,235 44 % 2,597 50 % 8 % (14 %)
Specialty financial 642 12 % 613 12 % 610 12 % 5 % - %
Other specialty 210 4 % 180 3 % 150 3 % 17 % 20 %
Total specialty 5,404 100 % 4,899 96 % 5,185 100 % 10 % (6 %)
Neon exited lines - - % 200 4 % - - % (100 %) - %
Aggregate $ 5,404 100 % $ 5,099 100 % $ 5,185 100 % 6 % (2 %)
The $859 million (12%) increase in gross written premiums in 2021 compared to
2020 reflects an increase in each of the Specialty property and casualty
sub-segments due primarily to an improving economy, new business opportunities,
higher renewal rates and increased exposures. Overall average renewal rates
increased approximately 9% in 2021. Excluding the workers' compensation
business, renewal pricing increased nearly 12%.
The $212 million (3%) decrease in gross written premiums in 2020 compared to
2019 reflects a decrease in the Specialty casualty and Specialty financial
sub-segments, partially offset by an increase in the Property and transportation
sub-segment. Overall average renewal rates increased approximately 11% in 2020.
Excluding rate decreases in the workers' compensation business, renewal pricing
increased nearly 15%.
Property and transportation Gross written premiums increased $450 million (16%)
in 2021 compared to 2020, due primarily to higher premiums in the crop insurance
business as a result of higher commodity futures pricing and rate increases,
higher premiums in the transportation businesses as a result of new accounts,
combined with strong renewals and increased exposures in the alternative risk
transfer business. Average renewal rates increased approximately 6% for this
group in 2021. Reinsurance premiums ceded as a percentage of gross written
premiums increased 1 percentage point in 2021 compared to 2020 reflecting growth
in the crop insurance operations, which cede a larger percentage of premiums
than the other businesses in the Property and transportation sub-segment and the
impact of reinstatement premiums in 2021 related to winter storms in Texas and a
large property loss.
Gross written premiums increased $54 million (2%) in 2020 compared to 2019, due
primarily to growth and new business opportunities in the property and inland
marine and ocean marine businesses, partially offset by lower premiums in the
transportation businesses, primarily from the return of premiums and reduced
exposures as a result of the COVID-19 pandemic and premium reductions in two
large national accounts. Average renewal rates increased nearly 6% for this
group in 2020. Reinsurance premiums ceded as a percentage of gross written
premiums increased 1 percentage point in 2020 compared to 2019 reflecting higher
cessions in the transportation businesses.
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Specialty casualty Gross written premiums increased $446 million (13%) in 2021
compared to 2020. Significant renewal rate increases and new business
opportunities contributed to higher premiums in the excess and surplus
businesses and renewal rate increases, strong account retention and new business
opportunities contributed to premium growth in the targeted markets businesses.
The mergers and acquisitions liability and executive liability businesses also
contributed meaningfully to the year-over-year growth. Average renewal rates
increased approximately 11% for this group in 2021. Excluding rate decreases in
the workers' compensation business, renewal rates for this group increased
approximately 17% in 2021. Reinsurance premiums ceded as a percentage of gross
written premiums increased 2 percentage points in 2021 compared to 2020
reflecting growth in the excess and surplus, mergers and acquisitions liability
and environmental businesses, which cede a larger percentage of premiums than
the other businesses in the Specialty casualty sub-segment.
Gross written premiums decreased $324 million (9%) in 2020 compared to 2019 due
primarily to the run-off of Neon. Excluding the $567 million in gross written
premiums from the Neon exited lines in 2019, gross written premiums increased
approximately 8% in 2020 compared to 2019. This increase reflects growth in the
excess and surplus, excess liability, targeted markets and directors and
officers businesses, primarily the result of renewal rate increases, new
business opportunities and higher retentions on renewal business, partially
offset by lower premiums in the workers' compensation businesses due to reduced
exposures as a result of the COVID-19 pandemic coupled with renewal rate
decreases. Average renewal rates increased approximately 14% for this group in
2020. Excluding rate decreases in the workers' compensation business, renewal
rates for this group increased nearly 24% in 2020. Reinsurance premiums ceded as
a percentage of gross written premiums increased 5 percentage points in 2020
compared to 2019 reflecting growth in the excess and surplus and public sector
businesses, which cede a larger percentage of premiums than many of the
businesses in the Specialty casualty sub-segment and higher cessions in the
professional liability business.
Specialty financial Gross written premiums increased $55 million (7%) in 2021
compared to 2020 due primarily to renewal rate increases and new business
opportunities within the lender services and fidelity businesses and the
favorable impact of economic recovery in the surety business. Average renewal
rates for this group increased approximately 7% in 2021. Reinsurance premiums
ceded as a percentage of gross written premiums decreased 1 percentage point in
2021 compared to 2020 reflecting lower cessions in the financial institutions
business due to reduced premiums from certain collateral protection insurance
that is 100% reinsured.
Gross written premiums decreased $34 million (4%) in 2020 compared to 2019 due
primarily to lower premiums from the impact of various state regulations
regarding policy cancellations and the placement of forced coverage in the
financial institutions business and COVID-related economic impacts on the surety
business and heightened risk selection that has reduced new business in the
trade credit business, partially offset by higher premiums in the fidelity
business. Average renewal rates for this group increased nearly 8% in 2020.
Reinsurance premiums ceded as a percentage of gross written premiums decreased
2 percentage points in 2020 compared to 2019 reflecting lower cessions in the
financial institutions business.
Other specialty The amounts shown as reinsurance premiums ceded represent
business assumed by AFG's internal reinsurance program from the operations that
make up AFG's other Specialty property and casualty insurance sub-segments.
Reinsurance premiums assumed increased $21 million (11%) in 2021 compared to
2020 reflecting an increase in premiums retained, primarily from businesses in
the Specialty casualty sub-segment.
Reinsurance premiums assumed increased $49 million (33%) in 2020 compared to
2019 reflecting an increase in premiums retained, primarily from businesses in
the Specialty casualty sub-segment.
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Combined Ratio
The table below (dollars in millions) details the components of the combined
ratio for AFG's property and casualty insurance segment for 2021, 2020 and 2019:
Year ended December 31, Change Year ended December 31,
2021 2020 2019 2021 - 2020 2020 - 2019 2021 2020 2019
Property and transportation
Loss and LAE ratio 65.1 % 64.6 % 71.0 % 0.5 % (6.4 %)
Underwriting expense ratio 22.0 % 25.8 % 24.7 % (3.8 %) 1.1 %
Combined ratio 87.1 % 90.4 % 95.7 % (3.3 %) (5.3 %)
Underwriting profit $ 279 $ 181 $ 79
Specialty casualty
Loss and LAE ratio 58.1 % 62.5 % 61.1 % (4.4 %) 1.4 %
Underwriting expense ratio 26.2 % 27.5 % 32.2 % (1.3 %) (4.7 %)
Combined ratio 84.3 % 90.0 % 93.3 % (5.7 %) (3.3 %)
Underwriting profit $ 377 $ 223 $ 175
Specialty financial
Loss and LAE ratio 33.2 % 39.5 % 31.5 % (6.3 %) 8.0 %
Underwriting expense ratio 51.9 % 52.3 % 53.5 % (0.4 %) (1.2 %)
Combined ratio 85.1 % 91.8 % 85.0 % (6.7 %) 6.8 %
Underwriting profit $ 96 $ 50 $ 92
Total Specialty
Loss and LAE ratio 58.4 % 60.9 % 61.5 % (2.5 %) (0.6 %)
Underwriting expense ratio 28.0 % 30.4 % 32.2 % (2.4 %) (1.8 %)
Combined ratio 86.4 % 91.3 % 93.7 % (4.9 %) (2.4 %)
Underwriting profit $ 737 $ 426 $ 325
Aggregate - including exited lines
Loss and LAE ratio 58.5 % 64.1 % 63.0 % (5.6 %) 1.1 %
Underwriting expense ratio 28.0 % 31.4 % 32.8 % (3.4 %) (1.4 %)
Combined ratio 86.5 % 95.5 % 95.8 % (9.0 %) (0.3 %)
Underwriting profit $ 733 $ 224 $ 212
The Specialty property and casualty insurance operations generated an
underwriting profit of $737 million in 2021 compared to $426 million in 2020, an
increase of $311 million (73%). The higher underwriting profit in 2021 reflects
higher underwriting profits in each of the Specialty property and casualty
sub-segments. Underwriting results for the Specialty property and casualty
insurance operations include $16 million in COVID-19 related losses (0.3 points
on the combined ratio) in 2021 compared to $95 million (1.9 points) in 2020.
Overall catastrophe losses were $86 million (1.6 points on the combined ratio)
and related net reinstatement premiums were $12 million for 2021 compared to
catastrophe losses of $91 million (1.9 points) and related net reinstatement
premiums of $2 million for 2020.
The Specialty property and casualty insurance operations generated an
underwriting profit of $426 million in 2020 compared to $325 million in 2019, an
increase of $101 million (31%), reflecting higher underwriting profits in the
Property and transportation and Specialty casualty sub-segments, partially
offset by lower underwriting profit in the Specialty financial sub-segment.
Underwriting results for the Specialty property and casualty insurance
operations include $95 million in COVID-19 related losses (1.9 points on the
combined ratio) in 2020. Overall catastrophe losses were $91 million (1.9 points
on the combined ratio) and related net reinstatement premiums were $2 million
for 2020 compared to catastrophe losses of $60 million (1.2 points) and related
net reinstatement premiums of $1 million for 2019.
Property and transportation Underwriting profit for this group was $279 million
in 2021 compared to $181 million in 2020, an increase of $98 million (54%). This
increase reflects higher underwriting profitability in the crop and ocean marine
businesses. COVID-19 related losses for this group were $7 million (0.4 points
on the combined ratio) in 2020. Catastrophe losses were $49 million (2.3 points
on the combined ratio), primarily the result of winter storms in Texas ,
Hurricane Ida and Kentucky tornadoes, and related net reinstatement premiums
were $9 million in 2021 compared to catastrophe losses of $47 million
(2.5 points) in 2020.
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Underwriting profit for this group was$181 million in 2020 compared to$79 million in 2019, an increase of$102 million (129%). This increase reflects higher underwriting profitability in the crop operations following record levels of prevented planting claims in 2019 and, to a lesser extent, higher favorable prior year reserve development in the transportation businesses and improved underwriting results in the aviation business and theSingapore branch. COVID-19 related losses for this group were$7 million (0.4 points on the combined ratio) in 2020. Catastrophe losses were$47 million (2.5 points on the combined ratio) in 2020 compared to$32 million (1.8 points) in 2019. Specialty casualty Underwriting profit for this group was$377 million in 2021 compared to$223 million in 2020, an increase of$154 million (69%). This increase reflects higher underwriting profitability in the excess and surplus, excess liability, workers' compensation, targeted markets and general liability businesses in 2021 compared to 2020. COVID-19 related losses were$9 million (0.4 points on the combined ratio) in 2021 compared to$60 million (2.7 points) in 2020, primarily in the workers' compensation and executive liability businesses. Catastrophe losses were$9 million (0.4 points on the combined ratio) and related net reinstatement premiums were$1 million in 2021 compared to catastrophe losses of$14 million (0.6 points) and related net reinstatement premiums of$2 million in 2020. Underwriting profit for this group was$223 million in 2020 compared to$175 million in 2019, an increase of$48 million (27%). This increase reflects higher year-over-year underwriting profitability in the excess and surplus and excess liability businesses and the impact of$36 million of underwriting losses at Neon in 2019, partially offset by lower year-over-year underwriting profits in the targeted markets and workers' compensation businesses. See "Neon exited lines" under "Property and Casualty Insurance Segment - Results of Operations" for the quarters endedDecember 31, 2021 and 2020 for information about AFG's exit from theLloyd's of London insurance market in 2020. COVID-19 related losses were$60 million (2.7 points on the combined ratio) in 2020, primarily in the workers' compensation and executive liability businesses. Catastrophe losses were$14 million (0.6 points on the combined ratio) and related net reinstatement premiums were$2 million in 2020 compared to catastrophe losses of$17 million (0.7 points) and related net reinstatement premiums of$1 million in 2019. Specialty financial Underwriting profit for this group was$96 million in 2021 compared to$50 million in 2020, an increase of$46 million (92%) due primarily to higher year-over-year underwriting profitability in the surety, financial institutions, innovative markets and trade credit businesses. COVID-19 related losses were$7 million (1.1 points on the combined ratio) in 2021 compared to$26 million (4.3 points) in 2020, primarily related to trade credit insurance. Catastrophe losses were$26 million (4.0 points on the combined ratio) and related net reinstatement premiums were$2 million in 2021 compared to catastrophe losses of$26 million (4.3 points) in 2020. Underwriting profit for this group was$50 million in 2020 compared to$92 million in 2019, a decrease of$42 million (46%) due primarily to lower underwriting profitability in the trade credit, surety and innovative markets businesses and higher year-over year catastrophe losses in the financial institutions business. COVID-19 related losses were$26 million (4.3 points on the combined ratio) in 2020 primarily related to trade credit insurance. Catastrophe losses were$26 million (4.3 points on the combined ratio) in 2020 compared to$10 million (1.6 points) in 2019. Other specialty This group reported an underwriting loss of$15 million in 2021 compared to$28 million in 2020, a decrease of$13 million (46%). This decrease reflects lower losses in the business assumed by AFG's internal reinsurance program from the operations that make up AFG's other Specialty sub-segments in 2021 compared to 2020. This group reported an underwriting loss of$28 million in 2020 compared to$21 million in 2019, an increase of$7 million (33%). This increase reflects higher losses in the business assumed by AFG's internal reinsurance program from the operations that make up AFG's other Specialty sub-segments in 2020 compared to 2019. Aggregate Aggregate underwriting results for AFG's property and casualty insurance segment include asbestos and environmental reserve charges of$47 million in 2020 and$18 million in 2019, an underwriting loss of$135 million at Neon in 2020, due primarily to catastrophe losses, COVID-19 related charges and several large claims, and the$76 million Neon exited lines charge in 2019. See "Asbestos and Environmental-related ("A&E") Insurance Reserves," under "Uncertainties" and "Neon exited lines" under "Property and Casualty Insurance Segment - Results of Operations" for the quarters endedDecember 31, 2021 and 2020. Aggregate underwriting results for AFG's property and casualty insurance segment also include adverse prior year reserve development of$4 million in 2021,$20 million in 2020 and$19 million in 2019, related to business outside of the Specialty group that AFG no longer writes. 74 -------------------------------------------------------------------------------- Table of Contents Losses and Loss Adjustment Expenses AFG's overall loss and LAE ratio was 58.5%, 64.1% and 63.0% in 2021, 2020 and 2019, respectively. The components of AFG's property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions): Year ended December 31, Amount Ratio Change in Ratio 2021 2020 2019 2021 2020 2019 2021 - 2020 2020 - 2019 Property and transportation Current year, excluding COVID-19 related and catastrophe losses$ 1,448 $ 1,261 $ 1,332 67.6 % 67.4 % 72.8 % 0.2 % (5.4 %) Prior accident years development (103) (107) (67) (4.8 %) (5.7 %) (3.6 %) 0.9 % (2.1 %) Current year COVID-19 related losses - 7 - - % 0.4 % - % (0.4 %) 0.4 % Current year catastrophe losses 49 47 32 2.3 % 2.5 % 1.8 % (0.2 %) 0.7 % Property and transportation losses and LAE and ratio$ 1,394 $ 1,208 $ 1,297 65.1 % 64.6 % 71.0 % 0.5 % (6.4 %) Specialty casualty Current year, excluding COVID-19 related and catastrophe losses$ 1,521 $ 1,419 $ 1,657 63.2 % 63.5 % 63.8 % (0.3 %) (0.3 %) Prior accident years development (140) (97) (88) (5.9 %) (4.3 %) (3.4 %) (1.6 %) (0.9 %) Current year COVID-19 related losses 9 60 - 0.4 % 2.7 % - % (2.3 %) 2.7 % Current year catastrophe losses 9 14 17 0.4 % 0.6 % 0.7 % (0.2 %) (0.1 %) Specialty casualty losses and LAE and ratio$ 1,399 $ 1,396 $ 1,586 58.1 % 62.5 % 61.1 % (4.4 %) 1.4 % Specialty financial Current year, excluding COVID-19 related and catastrophe losses$ 231 $ 218 $ 220 36.1 % 35.4 % 36.2 % 0.7 % (0.8 %) Prior accident years development (51) (28) (38) (8.0 %) (4.5 %) (6.3 %) (3.5 %) 1.8 % Current year COVID-19 related losses 7 26 - 1.1 % 4.3 % - % (3.2 %) 4.3 % Current year catastrophe losses 26 26 10 4.0 % 4.3 % 1.6 % (0.3 %) 2.7 % Specialty financial losses and LAE and ratio$ 213 $ 242 $ 192 33.2 % 39.5 % 31.5 % (6.3 %) 8.0 % Total Specialty Current year, excluding COVID-19 related and catastrophe losses$ 3,334 $ 3,013 $ 3,315 61.7 % 61.5 % 64.0 % 0.2 % (2.5 %) Prior accident years development (283) (213) (187) (5.2 %) (4.4 %) (3.7 %) (0.8 %) (0.7 %) Current year COVID-19 related losses 16 95 - 0.3 % 1.9 % - % (1.6 %) 1.9 % Current year catastrophe losses 86 91 60 1.6 % 1.9 % 1.2 % (0.3 %) 0.7 % Total Specialty losses and LAE and ratio$ 3,153 $ 2,986 $ 3,188 58.4 % 60.9 % 61.5 % (2.5 %) (0.6 %) Aggregate - including exited lines Current year, excluding COVID-19 related and catastrophe losses$ 3,334 $ 3,155 $ 3,354 61.7 % 61.9 % 64.6 % (0.2 %) (2.7 %) Prior accident years development (279) (127) (143) (5.1 %) (2.5 %) (2.8 %) (2.6 %) 0.3 % Current year COVID-19 related losses 16 115 - 0.3 % 2.2 % - % (1.9 %) 2.2 % Current year catastrophe losses 86 128 60 1.6 % 2.5 % 1.2 % (0.9 %) 1.3 % Aggregate losses and LAE and ratio$ 3,157 $ 3,271 $ 3,271 58.5 % 64.1 % 63.0 % (5.6 %) 1.1 % Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG's Specialty property and casualty insurance operations was 61.7% in 2021, 61.5% in 2020 and 64.0% in 2019. Property and transportation The 0.2 percentage points increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2021 compared to 2020 reflects an increase in the loss and LAE ratio in the property and inland marine business, partially offset by a decrease in the loss and LAE ratio in the crop operations. 75 -------------------------------------------------------------------------------- Table of Contents The 5.4 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2020 compared to 2019 reflects a decrease in the loss and LAE ratio in the crop operations due to a high level of prevented planting claims resulting from excess rain in 2019 and, to a lesser extent, lower loss and LAE ratios in the aviation and transportation businesses due primarily to rate increases and lower claim frequency in 2020, and lower loss and LAE ratios in non-crop agricultural businesses and theSingapore branch in 2020 compared to 2019. Specialty casualty The 0.3 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2021 compared to 2020 reflects a decrease in the loss and LAE ratios of the excess and surplus businesses, partially offset by an increase in the loss and LAE ratios of the targeted markets businesses. The 0.3 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2020 compared to 2019 reflects a decrease in the loss and LAE ratios of the workers' compensation, targeted markets, executive liability and excess and surplus businesses, partially offset by the impact of the Neon exited lines in 2019, which has a lower loss and LAE ratio than many of the other businesses in the Specialty casualty group. Excluding the impact of the Neon exited lines, the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses decreased 2.1 percentage points in 2020 compared to 2019.
Specialty financial The 0.7 percentage points increase in the loss and LAE
ratio for the current year, excluding COVID-19 related and catastrophe losses in
2021 compared to 2020 reflects an increase in the loss and LAE ratio of the
financial institutions and trade credit businesses, partially offset by a
decrease in the loss and LAE ratio of the fidelity business.
The 0.8 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2020 compared to 2019 reflects a decrease in the loss and LAE ratio of the financial institutions business, partially offset by an increase in the loss and LAE ratio of the fidelity business. Net prior year reserve development AFG's Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $283 million in 2021 compared to $213 million in 2020 and $187 million in 2019, an increase of $70 million (33%) and an increase of $26 million (14%), respectively. Property and transportation Net favorable reserve development of $103 million in 2021 reflects lower than anticipated claim frequency and severity in the transportation businesses, lower than expected losses in the crop business, lower than expected claim severity in the ocean marine business and lower than expected claim frequency in the aviation business.
Net favorable reserve development of $107 million in 2020 reflects lower than
expected claim frequency and severity in the aviation, transportation and
agricultural businesses.
Net favorable reserve development of $67 million in 2019 reflects lower than
expected claim frequency and severity at National Interstate and lower than
expected losses in the crop business.
Specialty casualty Net favorable reserve development of $140 million in 2021 reflects lower than anticipated claim severity in the workers' compensation businesses, partially offset by higher than anticipated claim severity in the general liability and targeted markets businesses. Net favorable reserve development of $97 million in 2020 reflects lower than anticipated claim severity in the workers' compensation businesses and lower than anticipated claim frequency in the executive liability business, partially offset by higher than expected claim frequency and severity in general liability contractor claims and the excess and surplus and excess liability businesses and higher than anticipated claim severity in the targeted markets businesses.
Net favorable reserve development of $88 million in 2019 reflects lower than
anticipated claim frequency and severity in the workers' compensation
businesses, partially offset by higher than expected claim severity in the
excess and surplus businesses and higher than expected claim frequency in
product liability contractor claims.
Specialty financial Net favorable reserve development of $51 million in 2021
reflects lower than anticipated claim frequency in the surety and trade credit
businesses and lower than expected claim frequency and severity in the financial
institutions business.
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Net favorable reserve development of $28 million in 2020 reflects lower than
anticipated claim frequency in the trade credit business and lower than
anticipated claim frequency and severity in the financial institutions, fidelity
and surety businesses.
Net favorable reserve development of $38 million in 2019 reflects lower than
expected claim frequency and severity in the surety and financial institutions
businesses and lower than anticipated claim severity in the trade credit
business.
Other specialty In addition to the reserve development discussed above, total
Specialty prior year reserve development includes net adverse reserve
development of $11 million, $19 million and $6 million in 2021, 2020, and 2019,
respectively. The net adverse reserve development reflects $16 million,
$24 million and $12 million in 2021, 2020 and 2019, respectively, of adverse
development associated with AFG's internal reinsurance program, partially offset
by the amortization of the deferred gains on the retroactive reinsurance
transactions entered into in connection with the sale of businesses in 1998 and
2001.
Asbestos and environmental reserve charges As previously discussed under
"Uncertainties - Asbestos and Environmental-related ("A&E") Insurance Reserves,"
AFG has established property and casualty reserves for claims related to
environmental exposures and asbestos claims. While there was no charge recorded
in the property and casualty business in 2021, total charges recorded to
increase reserves (net of reinsurance recoverable) for A&E exposures of AFG's
property and casualty group (included in loss and loss adjustment expenses) were
$47 million in 2020 and $18 million in 2019.
Neon exited lines AFG recorded net adverse prior year reserve development of
$19 million in 2020 and $7 million in 2019 related to Neon's exited lines of
business (included in loss and loss adjustment expenses). See "Neon exited
lines" under "Property and Casualty Insurance Segment - Results of Operations"
for the quarters ended December 31, 2021 and 2020 for information about AFG's
exit of the Lloyd's of London insurance market in 2020.
Aggregate Aggregate net prior accident years reserve development for AFG's
property and casualty insurance segment includes the special A&E charges and
reserve development related to the Neon exited lines mentioned above and net
adverse reserve development of $4 million, $20 million and $19 million in 2021,
2020 and 2019, respectively, related to business outside the Specialty group
that AFG no longer writes.
Covid-19 related losses
AFG's Specialty property and casualty insurance operations recorded $16 million
in reserve charges related to COVID-19 in 2021 primarily related to the workers'
compensation and trade credit businesses, and recorded favorable development of
approximately $19 million of accident year 2020 reserves primarily based on loss
experience in the trade credit and executive liability businesses. Underwriting
results for AFG's Specialty property and casualty insurance operations in 2020
include $95 million of reserve charges related to COVID-19. Approximately 70% of
AFG's 2020 COVID-19 related losses were reported in the workers' compensation,
executive liability and trade credit businesses, with the remainder spread
across numerous other businesses. Given the uncertainties surrounding the
ultimate number and scope of claims relating to the pandemic, approximately 61%
of the $92 million in cumulative COVID-19 related losses are held as incurred
but not reported reserves at December 31, 2021.
In addition, underwriting results for the Neon exited lines includes $20 million
of COVID-19 related losses in 2020.
Catastrophe losses AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. AFG recorded net catastrophe losses of $86 million in 2021 primarily from winter storms inTexas in the first quarter; storms in multiple regions ofthe United States in the second, third and fourth quarters; Hurricane Ida in the third quarter andKentucky tornadoes andColorado fires in the fourth quarter. Catastrophe losses of $128 million in 2020 resulted primarily from storms and tornadoes in multiple regions ofthe United States in the first quarter; storms and tornadoes in multiple regions ofthe United States and civil unrest in the second quarter; Hurricanes Hanna, Laura and Sally, Tropical Storm Isaias, storms and tornadoes in multiple regions ofthe United States and multiple wildfires in west coast states in the third quarter and Hurricanes Laura, Sally, Delta and Zeta and theNashville explosion in the fourth quarter. Catastrophe losses of $60 million in 2019 resulted primarily from winter storms in multiple regions ofthe United States in the first quarter; storms and tornadoes in multiple regions ofthe United States in the second quarter; Hurricane Dorian and Tropical Storm Imelda in the third quarter and Typhoons Faxai and Hagibis, storms and tornadoes in the south-centralUnited States and the Kincade fire inCalifornia in the fourth quarter. 77 -------------------------------------------------------------------------------- Table of Contents Commissions and Other Underwriting Expenses AFG's property and casualty commissions and other underwriting expenses ("U/W Exp ") were $1.51 billion in 2021 compared to $1.60 billion in 2020, a decrease of $90 million (6%). AFG's underwriting expense ratio was 28.0% in 2021 compared to 31.4% in 2020, a decrease of 3.4 percentage points.
AFG's property and casualty U/
$1.70 billion in 2019, a decrease of $98 million (6%). AFG's underwriting
expense ratio was 31.4% in 2020 compared to 32.8% in 2019, a decrease of
1.4 percentage points.
Detail of AFG's property and casualty commissions and other underwriting
expenses and underwriting expense ratios is shown below (dollars in millions):
Year ended December 31, Change in % of NEP
2021 2020 2019 2021 - 2020 2020 - 2019
U/W Exp % of NEP U/W Exp % of NEP U/W Exp % of NEP
Property and transportation $ 471 22.0 % $ 482 25.8 % $ 452 24.7 % (3.8 %) 1.1 %
Specialty casualty 632 26.2 % 616 27.5 % 836 32.2 % (1.3 %) (4.7 %)
Specialty financial 333 51.9 % 321 52.3 % 326 53.5 % (0.4 %) (1.2 %)
Other specialty 78 37.2 % 68 38.5 % 58 37.9 % (1.3 %) 0.6 %
Total Specialty 1,514 28.0 % 1,487 30.4 % 1,672 32.2 % (2.4 %) (1.8 %)
Neon exited lines - 117 30
Total Aggregate $ 1,514 28.0 % $ 1,604 31.4 % $ 1,702 32.8 % (3.4 %) (1.4 %)
Property and transportation Commissions and other underwriting expenses as a
percentage of net earned premiums decreased 3.8 percentage points in 2021
compared to 2020 reflecting higher profitability-based ceding commissions
received from reinsurers in the crop business and the impact of higher premiums
on the ratio in the property and inland marine business in 2021 compared to
2020.
Commissions and other underwriting expenses as a percentage of net earned
premiums increased 1.1 percentage points in 2020 compared to 2019 reflecting
lower profitability-based ceding commissions received from reinsurers in the
crop business.
Specialty casualty Commissions and other underwriting expenses as a percentage
of net earned premiums decreased 1.3 percentage points in 2021 compared to 2020
reflecting higher ceding commissions received from reinsurers as a result of
growth in the excess liability businesses.
Commissions and other underwriting expenses as a percentage of net earned
premiums decreased 4.7 percentage points in 2020 compared to 2019 due to the
runoff of Neon. Neon has a higher expense ratio than many of the other
businesses in the Specialty casualty sub-segment. Excluding Neon exited lines,
the underwriting expense ratio decreased 1.5 percentage points in 2020 compared
to 2019 reflecting higher ceding commissions received from reinsurers as a
result of growth in the excess liability business.
Specialty financial Commissions and other underwriting expenses as a percentage
of net earned premiums decreased 0.4 percentage points in 2021 compared to 2020
reflecting the impact of higher premiums on the ratio in 2021 compared to 2020.
Commissions and other underwriting expenses as a percentage of net earned
premiums decreased 1.2 percentage points in 2020 compared to 2019 reflecting the
impact of higher premiums on the ratio in the fidelity and equipment leasing
businesses and lower travel expenses.
Aggregate Aggregate commissions and other underwriting expenses for AFG's
property and casualty insurance segment includes $117 million of underwriting
expenses in the Neon run-off operations in 2020 and $30 million related to the
Neon exited lines charge in 2019 representing contractual employee severance
benefits and other incurred exit costs. See "Neon exited lines" under "Property
and Casualty Insurance Segment - Results of Operations" for the quarters ended
December 31, 2021 and 2020.
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Property and Casualty Net Investment Income
Net investment income in AFG's property and casualty insurance operations was
$663 million in 2021 compared to $404 million (excluding the Neon exited lines)
in 2020, an increase of $259 million (64%). Net investment income in AFG's
property and casualty operations was $404 million (excluding the Neon exited
lines) in 2020 compared to $472 million in 2019, a decrease of $68 million
(14%). The average invested assets and overall yield earned on investments held
by AFG's property and casualty insurance operations are provided below (dollars
in millions):
Year ended December 31, 2021 - 2020 2020 - 2019
2021 2020 2019 Change % Change Change % Change
Net investment income:
Net investment income excluding
alternative investments $ 323 $ 345 $ 398 $ (22) (6 %) $ (53) (13 %)
Alternative investments 340 59 74 281 476 % (15) (20 %)
Total net investment income $ 663 $ 404 $ 472 $ 259 64 % $ (68) (14 %)
Average invested assets (at
amortized cost) $ 12,944 $ 11,760 $ 11,348 $ 1,184 10 % $ 412 4 %
Yield (net investment income as
a % of average invested assets) 5.12 % 3.44 % 4.16 % 1.68 % (0.72 %)
Tax equivalent yield (*) 5.25 % 3.56 % 4.32 % 1.69 % (0.76 %)
(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully
taxable equivalent yield.
The property and casualty insurance segment's increase in net investment income
in 2021 compared to 2020 reflects significantly higher earnings from alternative
investments (partnerships and similar investments and AFG-managed CLOs),
partially offset by the effect of lower fixed maturity yields, lower short-term
interest rates and lower dividend income. The property and casualty insurance
segment's overall yield on investments (net investment income as a percentage of
average invested assets) was 5.12% in 2021 compared to 3.44% in 2020, an
increase of 1.68 percentage points. The annualized return earned on alternative
investments was 25.3% in 2021 compared to 6.6% in 2020.
The decrease in net investment income in 2020 compared to 2019 reflects lower
earnings from alternative investments in 2020 as a result of the negative impact
of the COVID-19 pandemic on financial markets, lower short-term interest rates
and lower dividend income, partially offset by growth in the property and
casualty insurance segment. The property and casualty insurance segment's
overall yield on investments was 3.44% in 2020 compared to 4.16% in 2019, a
decrease of 0.72 percentage points. The annualized return earned on alternative
investments was 6.6% in 2020 compared to 10.3% in 2019.
In addition to the property and casualty segment's net investment income from
ongoing operations discussed above, the Neon exited lines reported a $5 million
loss in 2020 in net investment income, primarily from changes in the fair value
of equity securities.
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Property and Casualty Other Income and Expenses, Net
Other income and expenses, net for AFG's property and casualty insurance
operations was a net expense of $6 million in 2021, $34 million in 2020, and
$35 million in 2019, a decrease of $28 million (82%) in 2021 compared to 2020
and $1 million (3%) in 2020 compared to 2019. The table below details the items
included in other income and expenses, net for AFG's property and casualty
insurance operations (in millions):
Year ended December 31,
2021 2020
2019
Other income: Income from the sale of real estate $ 10 $ - $ - Other 17 8 11 Total other income 27 8 11 Other expenses: Amortization of intangibles 6 12 11 Interest expense on funds withheld 25 24 24 Other 2 6 11 Total other expenses 33 42 46 Other income and expenses, net $ (6) $ (34) $
(35)
In addition to the property and casualty segment's other income and expenses,
net from ongoing operations discussed above, the Neon exited lines incurred a
net expense of $5 million in other income and expenses, net during 2020.
Holding Company, Other and Unallocated - Results of Operations
AFG's net GAAP pretax loss outside of its property and casualty insurance
segment (excluding realized gains and losses) totaled $219 million in 2021
compared to $212 million in 2020, an increase of $7 million (3%). AFG's net core
pretax loss outside of its property and casualty insurance segment (excluding
realized gains and losses) totaled $208 million in 2021 compared to $186 million
in 2020, an increase of $22 million (12%).
AFG's net GAAP pretax loss outside of its property and casualty insurance
segment (excluding realized gains and losses) totaled $212 million in 2020
compared to $191 million in 2019, an increase of $21 million (11%). AFG's net
core pretax loss outside of its property and casualty insurance segment
(excluding realized gains and losses) totaled $186 million in 2020 compared to
$175 million in 2019, an increase of $11 million (6%).
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The following table details AFG's GAAP and core loss from continuing operations
before income taxes from operations outside of its property and casualty
insurance segment in 2021, 2020 and 2019 (dollars in millions):
Year ended December 31, % Change
2021 2020 2019 2021 - 2020 2020 - 2019
Revenues:
Net investment income $ 36 $ 12 $ 24 200 % (50 %)
Other income - P&C fees 80 67 69 19 % (3 %)
Other income 22 19 21 16 % (10 %)
Total revenues 138 98 114 41 % (14 %)
Costs and Expenses:
Property and casualty insurance - commissions
and other underwriting expenses 33 21 23 57 % (9 %)
Other expense - expenses associated with P&C
fees 47 46 46 2 % - %
Other expenses (*) 172 129 152 33 % (15 %)
Costs and expenses, excluding interest charges
on borrowed money 252 196 221 29 % (11 %)
Loss before income taxes, excluding realized
gains and losses and interest charges on
borrowed money (114) (98) (107) 16 % (8 %)
Interest charges on borrowed money 94 88 68 7 % 29 %
Core loss from continuing operations before
income taxes, excluding realized gains and
losses (208) (186) (175) 12 % 6 %
Pretax non-core special A&E charges - (21) (11) (100 %) 91 %
Pretax non-core loss on retirement of debt - (5) (5) (100 %) - %
Pretax non-core loss on pension settlement (11) - - - % - %
GAAP loss from continuing operations before
income taxes, excluding realized gains and
losses $ (219) $ (212) $ (191) 3 % 11 %
(*)Excludes a pretax non-core loss of $11 million related to the settlement of
pension liabilities of a small former manufacturing operation in 2021, pretax
non-core special A&E charges of $21 million and $11 million in 2020 and 2019,
respectively, and a pretax non-core loss on retirement of debt of $5 million in
both 2020 and 2019.
Holding Company and Other - Net Investment Income
AFG recorded net investment income on investments held outside of its property
and casualty insurance segment of $36 million, $12 million and $24 million in
2021, 2020 and 2019, respectively. The $24 million (200%) increase in 2021
compared to 2020 and the $12 million (50%) decrease in 2020 compared to 2019 are
due primarily to the impact of the stock market performance on a small portfolio
of securities held by the parent company that are carried at fair value through
net investment income. These securities increased in value by $14 million,
$5 million and $13 million in 2021, 2020 and 2019, respectively. The increase in
net investment income in 2021 also reflects income from directly owned real
estate acquired from the annuity group prior to the sale of the annuity business
and purchases of fixed maturity investments at the holding company.
Holding Company and Other - P&C Fees and Related Expenses
Summit, a workers' compensation insurance subsidiary, collects fees from a small
group of unaffiliated insurers for providing underwriting, policy administration
and claims services. In addition, certain of AFG's property and casualty
insurance businesses collect fees from customers for ancillary services such as
workplace safety programs and premium financing. In 2021, AFG collected
$73 million in fees for these services compared to $67 million in 2020 and
$69 million in 2019. Management views this fee income, net of the $47 million in
2021 and $46 million in 2020 and 2019, in expenses incurred to generate such
fees, as a reduction in the cost of underwriting its property and casualty
insurance policies. In addition, AFG's property and casualty insurance
businesses collected $7 million in fees from AFG's disposed annuity operations
subsequent to the May 2021 sale as compensation for certain services provided
under a transition services agreement. The expenses related to providing such
services are embedded in property and casualty underwriting expenses. Consistent
with internal management reporting, these fees and the related expenses are
netted and recorded as a reduction of commissions and other underwriting
expenses in AFG's segmented results.
Holding Company and Other - Other Income
Other income in the table above includes $16 million in 2021 and $15 million in
both 2020 and 2019, in management fees paid to AFG by the AFG-managed CLOs
(AFG's consolidated managed investment entities). The management fees are
eliminated in consolidation - see the other income line in the Consolidated MIEs
column under "Results of Operations -
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Segmented Statement of Earnings." Excluding amounts eliminated in consolidation,
AFG recorded other income outside of its property and casualty insurance segment
of $6 million in 2021, $4 million in 2020 and $6 million in 2019.
Holding Company and Other - Other Expenses
Excluding the non-core special A&E charges, the non-core loss on retirement of
debt and the non-core loss on pension settlement discussed below, AFG's holding
companies and other operations outside of its property and casualty insurance
segment recorded other expenses of $172 million in 2021 compared to $129 million
in 2020, an increase of $43 million (33%). This increase reflects higher holding
company expenses related to employee benefit plans that are tied to stock market
performance and higher expenses associated with certain incentive compensation
plans that are tied to AFG's financial performance in 2021 compared to 2020.
Excluding the non-core special A&E charges and the non-core loss on retirement
of debt discussed below, AFG's holding companies and other operations outside of
its property and casualty insurance segment recorded other expenses of
$129 million in 2020 compared to $152 million in 2019, a decrease of $23 million
(15%). This decrease reflects lower holding company expenses related to employee
benefit plans that are tied to stock market performance and lower expenses
associated with certain incentive compensation plans in 2020 compared to 2019.
Holding Company and Other - Interest Charges on Borrowed Money
AFG's holding companies and other operations outside of its property and
casualty insurance segment recorded interest expense of $94 million in 2021,
$88 million in 2020 and $68 million in 2019. The $6 million (7%) increase in
interest expense in 2021 compared to 2020 and the $20 million (29%) increase in
interest expense in 2020 compared to 2019 reflect higher average indebtedness.
The following table details the principal amount of AFG's long-term debt
balances as of December 31, 2021, December 31, 2020 and December 31, 2019
(dollars in millions):
December 31,
December 31, 2021 December 31, 2020 2019
Direct obligations of AFG:
4.50% Senior Notes due June 2047 $ 590 $ 590 $ 590
3.50% Senior Notes due August 2026 425 425 425
5.25% Senior Notes due April 2030 300 300 -
5.125% Subordinated Debentures due December 2059 200 200 200
4.50% Subordinated Debentures due September 2060 200 200 -
6% Subordinated Debentures due November 2055 - - 150
5.625% Subordinated Debentures due June 2060 150 150 -
5.875% Subordinated Debentures due March 2059 125 125 125
Other 3 3 3
Total principal amount of Holding Company Debt $ 1,993
$ 1,993 $ 1,493
Weighted Average Interest Rate 4.6 % 4.6 % 4.6 %
The increase in interest expense in 2021 compared to 2020 and in 2020 compared
to 2019 reflect the following financial transactions completed by AFG between
January 1, 2019 and December 31, 2021:
•Issued $125 million of 5.875% Subordinated Debentures in March 2019
•Issued $200 million of 5.125% Subordinated Debentures in December 2019
•Redeemed $150 million of 6-1/4% Subordinated Debentures in December 2019
•Issued $300 million of 5.25% Senior Notes in April 2020
•Issued $150 million of 5.625% Subordinated Debentures in May 2020
•Issued $200 million of 4.50% Subordinated Debentures in September 2020
•Redeemed $150 million of 6% Subordinated Debentures in November 2020
Holding Company and Other - Special A&E Charges
As a result of the in-depth internal reviews and comprehensive external study of
A&E exposures discussed under "Uncertainties - Asbestos and
Environmental-related ("A&E") Insurance Reserves," AFG's holding companies and
other operations outside of its property and casualty insurance segment recorded
a minor charge in 2021, which is included in AFG's core operating earnings,
compared to pretax non-core special charges of $21 million in 2020 and
$11 million in 2019 to increase liabilities related to the A&E exposures of
AFG's former railroad and manufacturing operations. The charges are due to
relatively small movements across several sites that reflect changes in the
scope and costs of investigation and an increase in estimated ongoing operation
and maintenance costs. AFG has also increased its reserve for asbestos and toxic
substance exposures arising out of these operations. Total charges recorded to
increase liabilities
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for A&E exposures of AFG's former railroad and manufacturing operations
(included in other expenses) were $9 million in 2021, $28 million in 2020 and
$19 million in 2019.
Holding Company and Other - Loss on Retirement of Debt
In November 2020, AFG redeemed its $150 million outstanding principal amount of
6% Subordinated Debentures due in 2055 and wrote off unamortized debt issuance
costs of $5 million. In December 2019, AFG redeemed its $150 million outstanding
principal amount of 6-1/4% Subordinated Debentures due in 2054 at par value and
wrote off unamortized debt issuance costs of $5 million.
Holding Company and Other - Loss on Pension Settlement
In the second quarter of 2021, AFG settled pension liabilities related to a
small former manufacturing operation resulting in a pretax non-core loss of
$11 million.
Realized Gains (Losses) on Securities
AFG's realized gains (losses) on securities were net gains of $110 million in
2021 compared to net losses of $75 million in 2020, a change of $185 million
(247%). AFG's consolidated realized gains (losses) on securities were net losses
of $75 million in 2020 compared to net gains of $155 million in 2019, a change
of $230 million (148%). Realized gains (losses) on securities consisted of the
following (in millions):
Year ended December 31,
2021 2020 2019
Realized gains (losses) before impairments:
Disposals $ 5 $ 8 $ 4
Change in the fair value of equity securities 110 (69) 155
Change in the fair value of derivatives (6)
(1) 4
109
(62) 163
Change in allowance and impairments on securities 1 (13) (8) Realized gains (losses) on securities $ 110
$ (75) $ 155
The $110 million net realized gain from the change in the fair value of equity securities in 2021 includes gains of $29 million on investments in energy and natural gas companies, $18 million on investments in banks and financing companies, $17 million on investments in media companies, $14 million on investments in healthcare companies and $9 million on investments in capital goods companies. The $69 million net realized loss from the change in the fair value of equity securities in 2020 includes losses of $24 million on investments in banks and financing companies, $31 million on investments in energy and natural gas companies, $14 million on real estate investment trusts, $11 million from investments in media companies and $5 million on investments in insurance companies. The $155 million net realized gain from the change in the fair value of equity securities in 2019 includes gains of $64 million on investments in banks and financing companies, $19 million on investments in media companies, $16 million on investments in technology companies, $14 million on investments in insurance companies, $7 million on investments in healthcare companies and $6 million on investments in real estate investment trusts. Realized Gains (Losses) on Subsidiaries In 2021, AFG recognized a pretax gain on sale of subsidiary of $4 million related to contingent consideration received on the sale of Neon. See "Results of Operations - General" for the discussion of the December 2019 decision to exit theLloyd's of London insurance market. On September 28, 2020, AFG announced that it had reached a definitive agreement to sellGAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded a $30 million loss in the third quarter of 2020 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. In the fourth quarter of 2020, the estimated loss was adjusted at the closing date to a gain of $23 million based on the final proceeds and the final net assets disposed, which reflects $53 million of non-core losses in the fourth quarter of 2020 at Neon. See Note C - "Acquisitions and Sale of Businesses" to the financial statements. 83 -------------------------------------------------------------------------------- Table of Contents Consolidated Income Taxes on Continuing Operations AFG's consolidated provision for income taxes on continuing operations was $254 million in 2021 compared to $25 million in 2020, an increase of $229 million (916%). AFG's consolidated provision for income taxes on continuing operations was $25 million in 2020 compared to $143 million in 2019, a decrease of $118 million (83%). See Note L - "Income Taxes" to the financial statements for an analysis of items affecting AFG's effective tax rate. Consolidated Noncontrolling Interests in Continuing Operations AFG's consolidated net earnings (loss) from continuing operations attributable to noncontrolling interests was a net loss of $11 million in 2020 compared to $28 million in 2019, a decrease of $17 million (61%). Each period reflects losses at Neon, AFG'sUnited-Kingdom -based Lloyd's insurer, which was sold in December 2020. See Note C - "Acquisitions and Sale of Businesses" to the financial statements. Net losses from continuing operations attributable to noncontrolling interests in 2019 includes $18 million related to the $76 million non-core charge for costs associated with AFG's plans to exit theLloyd's of London insurance market in 2020. See "Neon exited lines" under "Property and Casualty Insurance Segment - Results of Operations" for the quarters ended December 31, 2021 and 2020. Real Estate Entities Acquired from the Annuity Operations Beginning with the first quarter of 2021, the results of the annuity businesses to be sold are reported as discontinued operations, in accordance with GAAP, which included adjusting prior period results to reflect these operations as discontinued. Prior to the completion of the sale, AFG's property and casualty insurance operations acquired approximately $480 million in real estate-related partnerships and AFG parent acquired approximately $100 million of directly owned real estate from those operations. GAAP pretax earnings from continuing operations includes the earnings from these entities through the May 31, 2021 effective date of the sale and certain other expenses that will be retained from the annuity operations.
The retained real estate entities contributed $51 million in GAAP pretax
earnings through the May 31, 2021 effective date of the sale compared to
$49 million in 2020, an increase of $2 million (4%). This increase reflects
higher earnings from the real estate-related partnerships through the sale date
compared to 2020.
The retained real estate entities contributed $49 million in GAAP pretax
earnings in 2020 compared to $37 million in 2019, an increase of $12 million
(32%). This increase reflects higher earnings from the real estate-related
partnerships in 2020 compared to 2019.
Discontinued Annuity Operations
AFG's discontinued annuity operations, which were sold on May 31, 2021,
contributed $324 million in GAAP pretax earnings (excluding the gain on the sale
of the annuity operations) in 2021 compared to $509 million in 2020, a decrease
of $185 million (36%), reflecting the following:
•lower net realized gains on securities through the date of the sale in May 2021
compared to 2020,
•significantly higher earnings from partnerships and similar investments,
•the negative impact from the run-off of higher yielding investments and lower
short-term interest rates,
•the positive impact of strong stock market performance in 2021,
•the negative impact of lower than expected interest rates in both 2021 and 2020
on the accounting for fixed indexed annuities ("FIAs"),
•the negative impact of unlocking actuarial assumptions in the third quarter of
2020, and
•the negative impact of the amortization of the deferred loss related to the
annuity block reinsurance transaction entered into in the fourth quarter of 2020
and other reinsurance impacts in 2021.
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AFG's discontinued annuity operations contributed $509 million in GAAP pretax
earnings in 2020 compared to $474 million in 2019, an increase of $35 million
(7%), reflecting the following:
•higher net realized gains on securities in 2020 compared to 2019,
•lower earnings from partnerships and similar investments,
•the positive impact of strong stock market performance in 2019,
•the negative impact of significantly lower than expected interest rates in both
2020 and 2019 on the accounting for FIAs,
•higher charges from the unlocking of actuarial assumptions in the third quarter
of 2020 compared to the third quarter of 2019, and
•the negative impact of the amortization of the deferred loss related to the
annuity block reinsurance transaction entered into in the fourth quarter of
2020.
The following table details AFG's earnings before and after income taxes and the
gain on the sale from its discontinued annuity operations for the years ended
December 31, 2021, 2020 and 2019 (dollars in millions):
Year ended December 31, % Change
2021 (*) 2020 2019 2021 - 2020 2020 - 2019
Pretax annuity earnings historically reported as
core operating earnings:
Pretax annuity earnings before items below $ 106 $ 325 $ 311 (67 %) 5 %
Earnings on partnerships and similar investments 139 15 77 827 % (81 %)
Total pretax annuity earnings historically
reported as core operating earnings 245 340 388 (28 %) (12 %)
Pretax amounts previously reported outside of
annuity core earnings:
Unlocking - (46) (1) (100 %) 4,500 %
Impact of reinsurance, derivatives related to
FIAs and other impacts of changes in the stock
market and interest rates on FIAs over or under
option costs (33) (142) (46) (77 %) 209 %
Realized gains on securities 112 365 132 (69 %) 177 %
Run-off life and long-term care - (8) 1 (100 %) (900 %)
Total pretax amounts previously reported outside
of annuity core earnings 79 169 86 (53 %) 97 %
GAAP pretax earnings from discontinued annuity
operations, excluding the gain on the sale of
the discontinued annuity operations 324 509 474 (36 %) 7 %
Provision for income taxes 66 102 96 (35 %) 6 %
GAAP net earnings from discontinued annuity
operations, excluding the sale of the
discontinued annuity operations 258 407 378 (37 %) 8 %
Gain on sale of discontinued annuity operations,
net of tax 656 - - - % - %
GAAP net earnings from discontinued annuity
operations $ 914 $ 407 $ 378 125 % 8 %
(*)Results through the May 31, 2021 effective date of the sale.
RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note A - "Accounting Policies - Credit Losses on Financial Instruments" to
the financial statements for a discussion of accounting guidance adopted on
January 1, 2020, which provides a new credit 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.
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HORACE MANN EDUCATORS CORP /DE/ – 10-K – I Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
REINSURANCE GROUP OF AMERICA INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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