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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 28 Results of Operations - Fourth Quarter 50
Overview 28 Segmented Statement of Earnings 50
Critical Accounting Policies 29 Property and Casualty Insurance 51
Liquidity and Capital Resources 29 Holding Company, Other and Unallocated 59
Ratios 29
Condensed Consolidated Cash Flows 30 Results of Operations - Full Year 62
Parent and Subsidiary Liquidity 31 Segmented Statement of Earnings 62
Condensed Parent Only Cash Flows 33 Property and Casualty Insurance 64
Off-Balance Sheet Arrangements 33 Holding Company, Other and Unallocated 76
Investments 33 Real Estate
Entities Acquired from the
Uncertainties 36 Annuity Operations 80 Managed Investment Entities 42 Discontinued Annuity Operations 80 Results of Operations 47 Recent Accounting Standards 81 General 47 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. AtDecember 31, 2022 , AFG (parent) held approximately$879 million in cash and investments and had$500 million available under a bank line of credit, which expires inDecember 2025 . 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. AFG's former annuity operations are reported as discontinued operations. AFG reported net earnings from continuing operations attributable to shareholders of$276 million ($3.24 per share, diluted) for the fourth quarter of 2022 compared to$355 million ($4.18 per share, diluted) in the fourth quarter of 2021. The year-over-year decrease was due primarily to lower returns on AFG's alternative investment portfolio as compared to the very strong performance of this portfolio in the fourth quarter of 2021 and lower underwriting profit in the crop operations. These items were partially offset by higher investment income other than from alternative investments. 28 -------------------------------------------------------------------------------- Table of Contents Full year 2022 net earnings from continuing operations attributable to shareholders were$898 million ($10.53 per share, diluted) compared to$1.08 billion ($12.62 per share, diluted) in 2021. Higher underwriting profit and higher investment income outside of alternative investments were more than offset by net realized losses on securities in 2022 compared to net realized gains on securities in 2021 and lower returns on AFG's alternative investment portfolio compared to the very strong performance of this portfolio in 2021. Sale of the Annuity Business InMay 2021 , AFG sold its annuity business, includingGreat American Life Insurance Company and its two insurance subsidiaries,Annuity Investors Life Insurance Company andManhattan National Life Insurance Company toMassachusetts 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 in the first six months of 2021.
Outlook
AFG's financial condition, results of operations and cash flows are impacted by the economic, legal and regulatory environment. Inflation, supply chain disruption, labor shortages and other economic conditions may impact premium levels, loss cost trends and investment returns. 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 macro-economic environment, the conflict betweenRussia andUkraine and the lingering effects of the COVID-19 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. Management expects continued premium growth and strong underwriting results in the ongoing favorable property and casualty insurance market. In addition, the deployment of cash in the rising interest rate environment during 2022 will continue to have a positive impact on investment income on fixed maturity investments in 2023.
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 where management believes the degree of judgment required to determine amounts recorded in the financial statements is most significant are as follows: •the valuation of investments, including the determination of impairment allowances, •the establishment of insurance reserves, especially asbestos and environmental-related reserves, •the recoverability of reinsurance, and •the establishment of asbestos and environmental liabilities of former railroad and manufacturing operations. 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.
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,
2022 2021
Principal amount of long-term debt $ 1,521 $ 1,993
Total capital 6,099 6,869
Ratio of debt to total capital:
Including subordinated debt 24.9 % 29.0 %
Excluding subordinated debt 13.9 % 19.2 %
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-------------------------------------------------------------------------------- Table of Contents 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,
2022 2021 2020
Net cash provided by operating activities $ 1,153 $ 1,714 $ 2,183
Net cash used in investing activities (1,051) (436) (1,564)
Net cash used in financing activities (1,361) (1,957) (123)
Net change in cash and cash equivalents $ (1,259) $ (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. AFG's discontinued annuity
operations, which were sold in May 2021 , 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 $183 million in 2022 and $144 million in 2021
and increased cash flows from operating activities by $25 million in 2020,
resulting in a $39 million decrease in cash flows from operating activities in
2022 compared to 2021 and a $169 million decrease in cash flows from operating
activities in 2021 compared to 2020. 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 cash provided by
operating activities was $1.34 billion , $1.86 billion and $2.16 billion in 2022,
2021 and 2020, respectively, reflecting the absence of operating cash flows from
the disposed annuity operations.
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 the May 2021 sale, its discontinued annuity operations.
Cash proceeds from the sale of the annuity operations in excess of cash and cash
equivalents held in the annuity subsidiaries that were sold was a $1.51 billion
source of cash provided by investing activities in 2021. Investing activities
also include 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 $180 million use of cash in 2022
compared to a $43 million use of cash in 2021, resulting in a $137 million
increase in net cash used in investing activities in 2022 compared to 2021. See
Note A - "Accounting Policies - Managed Investment Entities" and Note H -
"Managed Investment Entities" to the financial statements. Excluding the impact
of the sale of the annuity operations and the activity of the managed investment
entities, net cash used in investing activities was $871 million in 2022
compared to $1.90 billion in 2021, a decrease of $1.03 billion as the
opportunistic investment of cash on hand in the property and casualty operations
during the rising interest rate environment in 2022 was more than offset by the
absence of investing activities from the disposed annuity operations.
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Net cash used in investing activities was$436 million in 2021 compared to$1.56 billion in 2020, a decrease of$1.13 billion . Excluding the impact of theMay 2021 sale of the annuity business ($1.51 billion source of cash), 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 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. See Note C - "Acquisitions and Sale of Businesses" and Note H - "Managed Investment Entities" to the financial statements. Net investment activity in the managed investment entities was a$43 million use of cash in 2021 compared to$281 million in 2020, accounting for a$238 million decrease in net cash used in investing activities in 2021 compared to 2020.Net Cash 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$1.36 billion in 2022 compared to$1.96 billion in 2021, a decrease in net cash used in financing activities of$596 million . Debt retirements were a$477 million use of cash in 2022 compared to no debt retirements in 2021. In 2022, AFG repurchased$11 million of its Common Stock compared to$319 million in 2021, resulting in a$308 million decrease in net cash used in financing activities in 2022 compared to 2021. AFG paid cash dividends totaling$1.21 billion in 2022 compared to$2.37 billion in 2021, resulting in a net$1.16 billion decrease in net cash used in financing activities in 2022 compared to 2021. Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by$477 million in 2021 through theMay 31, 2021 effective date of the sale, resulting in a$477 million decrease in net cash used by financing activities in 2022 compared to 2021. 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$324 million in 2022 compared to$193 million in 2021, resulting in a$131 million increase in net cash provided by financing activities in 2022 compared to 2021. See Note A - "Accounting Policies - Managed Investment Entities" and Note H - "Managed Investment Entities" to the financial statements. Net cash used in financing activities was$1.96 billion in 2021 compared to$123 million in 2020, an increase 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 a reinsurance agreement 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 2020, which resulted in total cash dividends of$2.37 billion in 2021 compared to$334 million in 2020. Issuances of managed investment entity liabilities exceeded retirements by$193 million in 2021 compared to$221 million in 2020, resulting in a$28 million decrease in net cash provided by financing activities in 2021 compared to 2020.
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. AFG's capital and liquidity was significantly enhanced as a result of the 2021 sale of its annuity business to MassMutual for proceeds of$3.57 billion . By the end of the second quarter of 2022, AFG had deployed the proceeds from this sale primarily through special cash dividends, share repurchases, debt retirements and the purchase of Verikai. AFG's ongoing operations continue to generate significant excess capital for future returns of capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases or to be deployed into its property and casualty businesses as management identifies the potential for profitable organic growth, and opportunities to expand through acquisitions and start-ups that meet target return thresholds. 31 -------------------------------------------------------------------------------- Table of Contents During 2022, AFG repurchased 89,368 shares of its Common Stock for$11 million and paid special cash dividends totaling$1.02 billion ($2.00 per share in March,$8.00 per share in May and$2.00 per share in November). In addition, onFebruary 1, 2023 , AFG declared a special cash dividend of$4.00 per share (aggregate of approximately$340 million ) payable onFebruary 28, 2023 . AFG may, at any time and from time to time, seek to retire or purchase its outstanding debt through cash purchases or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as management may determine, and will depend on prevailing market conditions, AFG's liquidity requirements, contractual restrictions and other factors. During 2022, AFG repurchased$472 million principal amount of its senior notes for$477 million cash. 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 . InDecember 2021 , AFG acquiredVerikai, Inc. , a machine learning and artificial intelligence company that utilizes a predictive risk tool to assess insurance risk, for$120 million using cash on hand at the parent.
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. 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 2022 or 2021.
Under a tax allocation agreement with AFG, all 80% (or more) owned
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, 2022 , AFG's insurance companies owned publicly traded equity securities with a fair value of$1.01 billion . 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$11.97 billion atDecember 31, 2022 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. 32 -------------------------------------------------------------------------------- Table of Contents 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 economic 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
2022 2021 2020
Net cash provided by operating activities $ 327 $ 833 $ 483
Net cash provided by (used in) investing activities 992 2,167 (294)
Net cash used in financing activities (1,683) (2,626) (140)
Net change in cash and cash equivalents $ (364)
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$327 million in 2022 compared to$833 million in 2021 and$483 million in 2020. The$506 million decrease in net cash provided by operating activities in 2022 as compared to 2021 and the$350 million increase in net cash provided by operating activities in 2021 as compared to 2020 were due primarily to higher cash dividends received from subsidiaries in 2021. 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$992 million in 2022 and$2.17 billion in 2021 compared to net cash used in investing activities of$294 million in 2020. The$992 million in net cash provided by investing activities in 2022 is substantially lower than the$2.17 billion in net cash provided by investing activities in 2021 due to proceeds of$3.57 billion related to theMay 2021 sale of the annuity business partially offset by the$120 million purchase of Verikai inDecember 2021 . 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 . 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$1.68 billion in 2022 compared to$2.63 billion in 2021 and$140 million in 2020. The$943 million decrease in net cash used in financing activities in 2022 as compared to 2021 reflects lower dividends paid to shareholders (due primarily to special dividends of$12.00 per share in 2022 compared to special dividends of$26.00 per share in 2021) partially offset by the impact of net retirements of long-term debt in 2022. 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.
Off-Balance Sheet Arrangements
See Note P - "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, 2022 , contained$10.10 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 33 -------------------------------------------------------------------------------- Table of Contents income and$32 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG's investment portfolio includes$672 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and$338 million in equity securities carried at fair value with holding gains and losses included in net investment income.
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, 2022 , the average life of AFG's fixed maturities was about 4.2 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 87% was priced using pricing services atDecember 31, 2022 and 7% was priced 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 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 had atDecember 31, 2022 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional. Fair value of fixed maturity portfolio $
10,127
Percentage impact on fair value of 100 bps increase in interest rates (3.0 %)
Pretax impact on fair value of fixed maturity portfolio
$
(304)
Approximately 92% of the fixed maturities held by AFG atDecember 31, 2022 , were rated "investment grade" (credit rating ofAAA to BBB) by nationally recognized rating agencies, 4% were rated "non-investment grade" and 4% 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 12% of AFG's fixed maturity portfolio atDecember 31, 2022 . 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, 2022 , approximately 93% of the municipal bond portfolio was held in revenue bonds, with the remaining 7% held in general obligation bonds. 34 -------------------------------------------------------------------------------- Table of Contents Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet atDecember 31, 2022 , is shown in the following table (dollars in millions). Approximately$296 million of available for sale fixed maturity securities had no unrealized gains or losses atDecember 31, 2022 . Securities Securities With With Unrealized Unrealized Gains Losses Available for Sale Fixed Maturities Fair value of securities $
915
Amortized cost of securities, net of allowance for expected credit
losses
$ 876 $ 9,553 Gross unrealized gain (loss)$ 39 $ (669) Fair value as % of amortized cost 104 % 93 % Number of security positions 335 1,841 Number individually exceeding$2 million gain or loss 1 64 Concentration of gains (losses) by type or industry (exceeding 5% of unrealized): Mortgage-backed securities$ 23 $ (183) Banking 5 (18) States and municipalities 3 (51) Other asset-backed securities 1 (184) Collateralized loan obligations 1 (67) Asset managers 1 (47) Percentage rated investment grade 82 % 95 % The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities atDecember 31, 2022 , 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 9 % 3 % After one year through five years 22 % 26 % After five years through ten years 22 % 8 % After ten years 9 % 2 % 62 % 39 %
Collateralized loan obligations and other asset-backed securities
(average life of approximately 3.5 years)
20 % 44 %
Mortgage-backed securities (average life of approximately 6 years)
18 % 17 %
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, 2022
Securities with unrealized gains:
Exceeding $500,000 (16 securities) $ 122 $ 15 114 %
$500,000 or less (319 securities) 793 24
103 %
$ 915 $ 39 104 %
Securities with unrealized losses:
Exceeding $500,000 (355 securities) $ 4,130 $ (497) 89 %
$500,000 or less (1,486 securities) 4,754 (172) 97 %
$ 8,884 $ (669) 93 %
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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 (1,244 securities)
$ 6,203 $ (405) 94 % One year or longer (308 securities) 2,232 (227) 91 %$ 8,435 $ (632) 93 %
Non-investment grade fixed maturities with losses for:
Less than one year (202 securities)
$ 337 $ (20) 94 % One year or longer (87 securities) 112 (17) 87 %$ 449 $ (37) 92 %
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, 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, 2022 . 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
36 -------------------------------------------------------------------------------- Table of Contents liability and subtracting case reserves for loss and LAE. See Note O - "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.
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
premiums for the year ended
Gross Loss Reserves
Total Gross Written
Case IBNR LAE Reserves Premiums
Statutory Line of Business
Other liability - occurrence $ 980 $ 2,787 $ 720 $ 4,487 $ 1,589
Workers' compensation 923 1,200 344 2,467 1,239
Other liability - claims made 235 620 386 1,241 829
Commercial auto/truck liability/medical 385 400 150 935
623
Special property (fire, allied lines, inland marine, earthquake) 463 253 32 748
2,391
Products liability - occurrence 102 253 158 513 219 Commercial multi-peril 158 146 84 388 407 Other lines 259 440 112 811 1,458 Total Statutory 3,505 6,099 1,986 11,590 8,755 Adjustments for GAAP: Foreign operations 149 183 42 374 305 Deferred gains on retroactive reinsurance - 15 - 15 - Loss reserve discounting (5) - - (5) - Other - - - - (3) Total Adjustments for GAAP 144 198 42 384 302 Total GAAP Reserves and Premiums$ 3,649 $ 6,297 $ 2,028 $ 11,974 $ 9,057
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 long-tail 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 $ 62 Workers' compensation 65 Other liability - claims made 22 Commercial auto/truck liability/medical 15 37
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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, 2022 , 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
4.8 % $ 2,005 $ 96 Workers' compensation (5.9 %) 2,107 (124) Other liability - claims made (2.7 %) 890 (24) Commercial auto/truck liability/medical (0.5 %) 706 (4) (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$109 million in 2022,$39 million in 2021 and$99 million in 2020 related to its other liability - occurrence coverage due primarily to continued claim severity increases in excess and umbrella liability coverages. While management applies the actuarial methods discussed in Note O - "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 24% of AFG's workers' compensation reserves at
respectively.
AFG recorded favorable prior year reserve development of$189 million and$169 million in 2022 and 2021, respectively, 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 . 38 -------------------------------------------------------------------------------- Table of Contents 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$24 million in 2022,$2 million in 2021 and$8 million in 2020 on its D&O business as claim frequency and severity were 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 prompt reporting and settlement of claims. The bodily injury and medical payments exposures are longer-tailed; although the claim reporting is relatively prompt, 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$32 million and$7 million in 2022 and 2021, respectively, for this line of business due to higher than anticipated severity. Favorable prior year reserve development of$16 million was recorded in 2020. Although severity trends were elevated at that time, they were generally lower than initially projected for prior 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 O - "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.
2022 2021 2020
Before reinsurance (gross) 90.9 % 87.4 % 97.1 %
Effect of reinsurance (3.6 %) (0.9 %) (1.6 %)
Actual (net of reinsurance) 87.3 % 86.5 % 95.5 %
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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,
2022 2021
Asbestos $ 220 $ 232
Environmental 165 176
A&E reserves, net of reinsurance recoverable 385 408
Reinsurance recoverable, net of allowance 140 147
Gross A&E reserves
$ 525 $ 555 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 39% 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 40 -------------------------------------------------------------------------------- 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$32 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. 2022 2021
2020
Number of policyholders with no indemnity payments:
Asbestos 103 100 97
Environmental 129 131 116
232 231 213
Number of policyholders with indemnity payments:
Asbestos 45 45 48
Environmental 25 20 22
70 65 70
Total 302 296 283
Amounts paid (net of reinsurance recoveries) for asbestos and environmental
claims, including LAE, were as follows (in millions):
2022 2021 2020
Asbestos $ 12 $ 8 $ 8
Environmental 11 6 -
Total $ 23 $ 14 $ 8
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. At December 31, 2022 , the property and casualty
insurance segment's three-year survival ratios compare favorably with industry
survival ratios published by A.M. Best (as of December 31, 2021 , 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 (12/31/2022) 24.3 27.7 25.6
Industry (12/31/2021) 8.5 5.7 7.7
During the third quarter of 2022, 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. AFG is continuing to evaluate the frequency of future
external studies.
During the 2022 and 2021 internal reviews, no new trends were identified and
recent claims activity was generally consistent with AFG's expectations
resulting from AFG's most recent external study in 2020. As a result, both the
2022 and 2021 reviews 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
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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. Contingencies related to Subsidiaries' Former Operations The A&E study 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 minor charges to increase liabilities for those operations as a result of the 2022 and 2021 internal reviews and a pretax special charge of$21 million as a result of the 2020 comprehensive external study. 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$96 million atDecember 31, 2022 . For a discussion of the uncertainties in determining the ultimate liability, see Note N - "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 H - "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, 2022
Assets:
Cash and investments $ 14,627 $ - $ (115) (*) $ 14,512
Assets of managed investment entities - 5,447 - 5,447
Other assets 8,872 - - (*) 8,872
Total assets $ 23,499 $ 5,447 $ (115) $ 28,831
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 15,220 $ - $ - $ 15,220
Liabilities of managed investment entities - 5,444 (112) (*) 5,332
Long-term debt and other liabilities 4,227 - - 4,227
Total liabilities 19,447 5,444 (112) 24,779
Shareholders' equity:
Common Stock and Capital surplus 1,453 3 (3) 1,453
Retained earnings 3,142 - - 3,142
Accumulated other comprehensive income (loss), net of tax (543) - - (543)
Total shareholders' equity 4,052 3 (3) 4,052
Total liabilities and shareholders' equity $ 23,499 $ 5,447 $ (115) $ 28,831
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 (loss), net of tax 119 - - 119
Total shareholders' equity 5,012 - - 5,012
Total liabilities and shareholders' equity $ 23,711 $ 5,296 $ (76)
(*)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, 2022
Revenues:
Property and casualty insurance net earned premiums $ 1,623 $ - $ - $ 1,623
Net investment income 168 - - (b) 168
Realized gains (losses) on securities 27 - - 27
Income of managed investment entities:
Investment income - 93 - 93
Gain (loss) on change in fair value of assets/liabilities - (1) (5) (b) (6)
Other income 29 - (5) (c) 24
Total revenues 1,847 92 (10) 1,929
Costs and Expenses:
Insurance benefits and expenses 1,413 - - 1,413
Expenses of managed investment entities - 92 (10) (b)(c) 82
Interest charges on borrowed money and other expenses 88 - - 88
Total costs and expenses 1,501 92 (10) 1,583
Earnings before income taxes 346 - - 346
Provision for income taxes 70 - - 70
Net earnings $ 276 $ - $ - $ 276
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 before income taxes 445 1 (1) 445
Provision for income taxes 90 - - 90
Net earnings $ 355 $ 1 $ (1) $ 355
(a)Includes income of less than $1 million in the fourth quarter of 2022 and
$3 million in the fourth quarter of 2021, representing the change in fair value
of AFG's CLO investments and $5 million and $4 million of income in the fourth
quarter of 2022 and 2021, respectively, in CLO management fees earned.
(b)Elimination of the change in fair value of AFG's investments in the CLOs,
including $5 million and $3 million in the fourth quarter of 2022 and 2021,
respectively, in distributions recorded as interest expense by the CLOs.
(c)Elimination of management fees earned by AFG.
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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, 2022
Revenues:
Property and casualty insurance net earned premiums $ 6,085 $ - $ - $ 6,085
Net investment income 707 - 10 (b) 717
Realized gains (losses) on securities (116) - - (116)
Income of managed investment entities:
Investment income - 268 - 268
Gain (loss) on change in fair value of assets/liabilities - (2) (29) (b) (31)
Other income 134 - (17) (c) 117
Total revenues 6,810 266 (36) 7,040
Costs and Expenses:
Insurance benefits and expenses 5,347 - - 5,347
Expenses of managed investment entities - 265 (35) (b)(c) 230
Interest charges on borrowed money and other expenses 340 - - 340
Total costs and expenses 5,687 265 (35) 5,917
Earnings from continuing operations before income taxes 1,123 1 (1) 1,123
Provision for income taxes 225 - - 225
Net earnings from continuing operations, including noncontrolling interests
898 1 (1) 898 Net earnings from discontinued operations - - - -
Less: Net earnings (loss) from continuing operations attributable to
noncontrolling interests
- - - - Net earnings attributable to shareholders$ 898 $ 1$ (1) $ 898 Year endedDecember 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)
(a)Includes a loss of$10 million in 2022 and income of$20 million in 2021, representing the change in fair value of AFG's CLO investments and$17 million and$16 million of income in 2022 and 2021, respectively, in CLO management fees earned. (b)Elimination of the change in fair value of AFG's investments in the CLOs, including$18 million and$12 million in 2022 and 2021, respectively, in distributions recorded as interest expense by the CLOs. (c)Elimination of management fees earned by AFG. 45
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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, 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 a loss of$1 million representing the change in fair value of AFG's CLO investments and$15 million of income in CLO management fees earned. (b)Elimination of the change in fair value of AFG's investments in the CLOs, including$8 million in distributions recorded as interest expense by the CLOs. (c)Elimination of management fees earned by AFG. 46 -------------------------------------------------------------------------------- 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 in 2020. See "Discontinued Annuity Operations" below for details of the impact of the discontinued annuity operations on AFG's net earnings attributable to shareholders for 2021 and 2020. 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, had 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$3 million related to contingent consideration received from the sale of Neon. 47 -------------------------------------------------------------------------------- Table of Contents The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes core net operating earnings is a useful tool for investors and analysts in analyzing ongoing operating trends and for management to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business. Three months ended December 31, Year ended December 31, 2022 2021 2022 2021 2020 Components of net earnings attributable to shareholders: Core operating earnings before income taxes$ 318 $ 438 $ 1,248 $ 1,232 $ 609 Pretax non-core items: Realized gains (losses) on securities 27 7 (116) 110 (75) Special A&E charges - - - - (68) Neon exited lines (*) - - - 4 (122) Gain (loss) on retirement of debt 1 - (9) - (5) Other - - - (11) - Earnings before income taxes 346 445 1,123 1,335 339 Provision for income taxes: Core operating earnings 63 87 255 239 128 Non-core items: Realized gains (losses) on securities 6 3 (24) 23 (16) Special A&E charges - - - - (14) Neon exited lines (*) - - - 1 (72) Gain (loss) on retirement of debt 1 - (2) - (1) Other - - (4) (9) - Total provision for income taxes 70 90 225 254 25 Net earnings from continuing operations, including noncontrolling interests 276 355 898 1,081 314 Net earnings from discontinued operations - - - 914 407 Less net earnings (loss) attributable to noncontrolling interests related to the Neon exited lines (*) - - - - (11) Net earnings attributable to shareholders$ 276 $ 355 $ 898 $ 1,995 $ 732 Net earnings: Core net operating earnings$ 255 $ 351 $ 993 $ 993 $ 481 Realized gains (losses) on securities 21 4 (92) 87 (59) Special A&E charges - - - - (54) Neon exited lines (*) - - - 3 (39) Gain (loss) on retirement of debt - - (7) - (4) Other - - 4 (2) - Net earnings from continuing operations 276 355 898 1,081 325 Discontinued annuity operations - - - 914 407 Net earnings attributable to shareholders$ 276 $ 355 $ 898 $ 1,995 $ 732 Diluted per share amounts: Core net operating earnings$ 2.99 $ 4.12 $ 11.63 $ 11.59 $ 5.40 Realized gains (losses) on securities 0.25 0.06 (1.06) 1.01 (0.67) Special A&E charges - - - - (0.61) Neon exited lines (*) - - - 0.04 (0.45) Gain (loss) on retirement of debt - - (0.09) - (0.04) Other - - 0.05 (0.02) - Diluted per share amounts, continuing operations 3.24 4.18 10.53 12.62 3.63 Discontinued annuity operations - - - 10.68 4.57 Net earnings attributable to shareholders$ 3.24 $ 4.18 $ 10.53 $ 23.30 $ 8.20
(*)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 on the sale of Neon.
48 -------------------------------------------------------------------------------- Table of Contents AFG reported net earnings attributable to shareholders of$276 million in the fourth quarter of 2022 compared to$355 million in the fourth quarter of 2021 reflecting lower core net operating earnings partially offset by higher net realized gains on securities in the fourth quarter of 2022 compared to the fourth quarter of 2021. Core net operating earnings for the fourth quarter of 2022 decreased$96 million compared to the fourth quarter of 2021 reflecting lower returns on AFG's alternative investment portfolio as compared to the very strong performance of this portfolio in the fourth quarter of 2021 and lower underwriting profit in the crop operations. These items were partially offset by higher investment income outside of alternative investments compared to the fourth quarter of 2021. Net earnings attributable to shareholders were$898 million for the full-year of 2022 compared to$2.00 billion in 2021 reflecting net earnings from the discontinued annuity operations in 2021 and net realized losses on securities in 2022 compared to net realized gains on securities in 2021. The discontinued annuity operations includes an after-tax gain on the sale of the annuity subsidiaries of$656 million in 2021. Core net operating earnings were comparable in 2022 and 2021 as higher underwriting profit and higher investment income outside of alternative investments were offset by lower returns on AFG's alternative investment portfolio compared to the very strong performance of this portfolio in 2021. Realized gains (losses) on securities in 2022 and 2021 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 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$512 million in 2021 compared to 2020 reflecting higher underwriting profit, higher net investment income and income from the sale of real estate in the fourth quarter of 2021, partially offset by higher interest charges on borrowed money and higher holding company expenses. 49 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - THREE MONTHS ENDEDDECEMBER 31, 2022 AND 2021 Segmented Statement of Earnings Subsequent to the sale of its annuity operations, AFG reports its operations as two segments: (i) Property and casualty insurance ("P&C") and (ii) Other, which includes holding company costs and income and expenses related to the managed investment entities ("MIEs"). AFG's net earnings, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months endedDecember 31, 2022 and 2021 identify such items by segment and reconcile net earnings to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions): Other Holding Co., other P&C Consol. MIEs and unallocated Total Non-core reclass GAAP Total Three months endedDecember 31, 2022 Revenues: Property and casualty insurance net earned premiums$ 1,623 $ - $ -$ 1,623 $ -$ 1,623 Net investment income 159 - 9 168 - 168 Realized gains (losses) on securities - - - - 27 27 Income of MIEs: Investment income - 93 - 93 - 93 Gain (loss) on change in fair value of assets/liabilities - (6) - (6) - (6) Other income - (5) 29 24 - 24 Total revenues 1,782 82 38 1,902 27 1,929 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 986 - - 986 - 986 Commissions and other underwriting expenses 419 - 8 427 - 427 Interest charges on borrowed money - - 20 20 - 20 Expenses of MIEs - 82 - 82 - 82 Other expenses 14 - 55 69 (1) 68 Total costs and expenses 1,419 82 83 1,584 (1) 1,583 Earnings before income taxes 363 - (45) 318 28 346 Provision for income taxes 73 - (10) 63 7 70 Core Net Operating Earnings 290 - (35)
255
Non-core earnings (loss) (*): Realized gains (losses) on securities, net of tax - - 21 21 (21) - Net Earnings$ 290 $ - $ (14)$ 276 $ -$ 276 50
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Other
Holding Co., other
P&C Consol. MIEs and unallocated Total Non-core reclass GAAP Total
Three months ended December 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 before income taxes 485 - (47) 438 7 445
Provision for income taxes 102 - (15) 87 3 90
Core Net Operating Earnings 383 - (32) 351
Non-core earnings (loss) (*):
Realized gains (losses) on securities, net of tax - - 4 4 (4) -
Net Earnings $ 383 $ - $ (28) $ 355 $ - $ 355
(*)See the reconciliation of core earnings to GAAP net earnings under "Results
of Operations - General" for details on the tax impacts of these reconciling
items.
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 $363 million in
pretax earnings in the fourth quarter of 2022 compared to $485 million in the
fourth quarter of 2021, a decrease of $122 million (25%). The decrease in pretax
earnings reflects lower returns on AFG's alternative investment portfolio as
compared to the very strong performance of this portfolio in the fourth quarter
of 2021 and lower underwriting profit in the crop operations. These items were
partially offset by higher investment income outside of alternative investments
compared to the fourth quarter of 2021.
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The following table details AFG's earnings before income taxes from its property
and casualty insurance operations for the three months ended December 31, 2022
and 2021 (dollars in millions):
Three months ended December 31,
2022 2021 % Change
Gross written premiums $ 1,845 $ 1,737 6 %
Reinsurance premiums ceded (507) (467) 9 %
Net written premiums 1,338 1,270 5 %
Change in unearned premiums 285 182 57 %
Net earned premiums 1,623 1,452 12 %
Loss and loss adjustment expenses 986 822 20 %
Commissions and other underwriting expenses 419 351 19 %
Underwriting gain 218 279 (22 %)
Net investment income 159 196 (19 %)
Other income and expenses, net (14) 10 (240 %)
Earnings before income taxes $ 363 $ 485 (25 %)
Three months ended December 31,
Combined Ratios: 2022 2021 Change
Specialty lines
Loss and LAE ratio 60.8 % 56.5 % 4.3 %
Underwriting expense ratio 25.8 % 24.2 % 1.6 %
Combined ratio 86.6 % 80.7 % 5.9 %
Aggregate - including exited lines
Loss and LAE ratio 60.7 % 56.6 % 4.1 %
Underwriting expense ratio 25.8 % 24.2 % 1.6 %
Combined ratio 86.5 % 80.8 % 5.7 %
Starting in 1986, AFG's statutory combined ratio has been better than the U.S.
industry average for 35 of the 37 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 $1.85 billion for the fourth quarter of 2022 compared to $1.74 billion for
the fourth quarter of 2021, an increase of $108 million (6%). Detail of AFG's
property and casualty gross written premiums is shown below (dollars in
millions):
Three months ended December 31,
2022 2021
GWP % GWP % % Change
Property and transportation $ 601 32 % $ 558 32 % 8 %
Specialty casualty 1,007 55 % 968 56 % 4 %
Specialty financial 237 13 % 211 12 % 12 %
$ 1,845 100 % $ 1,737 100 % 6 %
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Reinsurance Premiums Ceded
Reinsurance premiums ceded ("Ceded") for AFG's property and casualty insurance
segment were 27% of gross written premiums for both the fourth quarter of 2022
and the fourth quarter of 2021. Detail of AFG's property and casualty
reinsurance premiums ceded is shown below (dollars in millions):
Three months ended
2022 2021 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (178) 30 % $ (141) 25 % 5 %
Specialty casualty (352) 35 % (340) 35 % - %
Specialty financial (38) 16 % (38) 18 % (2 %)
Other specialty 61 52
$ (507) 27 % $ (467) 27 % - %
Net Written Premiums
Net written premiums ("NWP") for AFG's property and casualty insurance segment
were $1.34 billion for the fourth quarter of 2022 compared to $1.27 billion for
the fourth quarter of 2021, an increase of $68 million (5%). Detail of AFG's
property and casualty net written premiums is shown below (dollars in millions):
Three months ended December 31,
2022 2021
NWP % NWP % % Change
Property and transportation $ 423 32 % $ 417 33 % 1 %
Specialty casualty 655 49 % 628 49 % 4 %
Specialty financial 199 15 % 173 14 % 15 %
Other specialty 61 4 % 52 4 % 17 %
$ 1,338 100 % $ 1,270 100 % 5 %
Net Earned Premiums
Net earned premiums ("NEP") for AFG's property and casualty insurance segment
were $1.62 billion for the fourth quarter of 2022 compared to $1.45 billion for
the fourth quarter of 2021, an increase of $171 million (12%). Detail of AFG's
property and casualty net earned premiums is shown below (dollars in millions):
Three months ended December 31,
2022 2021
NEP % NEP % % Change
Property and transportation $ 682 42 % $ 597 41 % 14 %
Specialty casualty 686 42 % 636 44 % 8 %
Specialty financial 193 12 % 165 11 % 17 %
Other specialty 62 4 % 54 4 % 15 %
$ 1,623 100 % $ 1,452 100 % 12 %
Gross written premiums for the fourth quarter of 2022 increased $108 million
(6%) compared to the fourth quarter of 2021 reflecting new business
opportunities, increased exposures and renewal rate increases. Overall average
renewal rates increased approximately 5% in the fourth quarter of 2022.
Excluding overall rate decreases in the workers' compensation businesses,
renewal rates increased approximately 6%.
Property and transportation Gross written premiums increased $43 million (8%) in
the fourth quarter of 2022 compared to the fourth quarter of 2021. This increase
was due primarily to higher winter wheat commodity prices and new opportunities
in the crop business. Average renewal rates increased 7% for this group in the
fourth quarter of 2022. Reinsurance premiums ceded as a percentage of gross
written premiums increased 5 percentage points for the fourth quarter of 2022
compared to the fourth quarter of 2021 reflecting growth in crop insurance
products with higher cessions.
Specialty casualty Gross written premiums increased $39 million (4%) in the
fourth quarter of 2022 compared to the fourth quarter of 2021. New accounts and
strong account retention in the social services business, increased exposures
from payroll growth and new business in the workers' compensation businesses,
and additional opportunities in the excess and surplus operations contributed to
the higher year-over-year premiums. This growth was partially offset by lower
premiums in the mergers and acquisitions liability and executive liability
businesses. Average renewal rates for this
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group increased approximately 4% in the fourth quarter of 2022. Excluding rate
decreases in the workers' compensation business, renewal rates for this group
increased approximately 6%. Reinsurance premiums ceded as a percentage of gross
written premiums were comparable in the fourth quarter of 2022 and the fourth
quarter of 2021.
Specialty financial Gross written premiums increased $26 million (12%) in the
fourth quarter of 2022 compared to the fourth quarter of 2021 due primarily to
the growth in the financial institutions and commercial equipment leasing
businesses. Average renewal rates for this group increased approximately 4% in
the fourth quarter of 2022. Reinsurance premiums ceded as a percentage of gross
written premiums decreased 2 percentage points in the fourth quarter of 2022
compared to the fourth quarter of 2021 reflecting lower than previously
estimated reinstatement premiums related to Hurricane Ian, partially offset by
higher cessions in the innovative markets business.
Other specialty The amounts shown as reinsurance premiums ceded represent
business assumed by AFG's internal reinsurance program from the operations that
make up AFG's other Specialty property and casualty insurance sub-segments.
Reinsurance premiums assumed increased $9 million (17%) in the fourth quarter of
2022 compared to the fourth quarter of 2021 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,
2022 2021 Change 2022 2021
Property and transportation
Loss and LAE ratio 71.8 % 66.0 % 5.8 %
Underwriting expense ratio 18.2 % 14.5 % 3.7 %
Combined ratio 90.0 % 80.5 % 9.5 %
Underwriting profit $ 68 $ 116
Specialty casualty
Loss and LAE ratio 55.4 % 53.5 % 1.9 %
Underwriting expense ratio 25.9 % 24.5 % 1.4 %
Combined ratio 81.3 % 78.0 % 3.3 %
Underwriting profit $ 128 $ 140
Specialty financial
Loss and LAE ratio 33.8 % 31.7 % 2.1 %
Underwriting expense ratio 49.3 % 53.8 % (4.5 %)
Combined ratio 83.1 % 85.5 % (2.4 %)
Underwriting profit $ 33 $ 24
Total Specialty
Loss and LAE ratio 60.8 % 56.5 % 4.3 %
Underwriting expense ratio 25.8 % 24.2 % 1.6 %
Combined ratio 86.6 % 80.7 % 5.9 %
Underwriting profit $ 217 $ 281
Aggregate - including exited lines
Loss and LAE ratio 60.7 % 56.6 % 4.1 %
Underwriting expense ratio 25.8 % 24.2 % 1.6 %
Combined ratio 86.5 % 80.8 % 5.7 %
Underwriting profit $ 218 $ 279
The Specialty property and casualty insurance operations generated an
underwriting profit of $217 million for the fourth quarter of 2022 compared to
$281 million in the fourth quarter of 2021, a decrease of $64 million (23%).
Higher underwriting profit in the Specialty financial sub-segment was more than
offset by lower underwriting profit in the Property
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and transportation and Specialty casualty sub-segments. Overall catastrophe
losses were $11 million (0.9 points on the combined ratio), including a
$13 million favorable impact from lower than previously estimated reinstatement
premiums related to Hurricane Ian, in the fourth quarter of 2022 compared to
catastrophe losses of $25 million (1.8 points) in the fourth quarter of 2021.
Property and transportation Underwriting profit for this group was $68 million
for the fourth quarter of 2022 compared to $116 million in the fourth quarter of
2021, a decrease of $48 million (41%). The lower underwriting profit was
primarily the result of average underwriting profitability in the crop
operations when compared to the exceptionally strong crop results reported in
the 2021 period. Catastrophe losses for this group were $7 million (1.0 points
on the combined ratio), including a $1 million favorable impact from net
reinstatement premiums, in the fourth quarter of 2022 compared to $15 million
(2.5 points) in the fourth quarter of 2021.
Specialty casualty Underwriting profit for this group was $128 million for the
fourth quarter of 2022 compared to $140 million in the fourth quarter of 2021, a
decrease of $12 million (9%). Higher year-over-year underwriting profit in the
excess and surplus and excess liability businesses were more than offset by
lower underwriting profitability in the workers' compensation businesses.
Catastrophe losses were $7 million (1.1 points on the combined ratio), including
a $1 million favorable impact from net reinstatement premiums, in the fourth
quarter of 2022 compared to catastrophe losses of $3 million (0.5 points) in the
fourth quarter of 2021.
Specialty financial Underwriting profit for this group was $33 million for the
fourth quarter of 2022 compared to $24 million in the fourth quarter of 2021, an
increase of $9 million (38%). This increase reflects the favorable impact on
underwriting profit from lower than previously estimated reinstatement premiums
related to Hurricane Ian. Catastrophe losses were a favorable impact of
$3 million (1.9 points on the combined ratio) including a $10 million favorable
impact from the change in estimated reinstatement premiums in the fourth quarter
of 2022 compared to $6 million (3.7 points) in the fourth quarter of 2021.
Other specialty This group reported an underwriting loss of $12 million for the
fourth quarter of 2022 compared to an underwriting profit of $1 million in the
fourth quarter of 2021, a change of $13 million (1,300%), reflecting higher
losses in the business assumed by AFG's internal reinsurance program from the
operations that make up AFG's other Specialty sub-segments (primarily losses
from social inflation exposed operations in the Specialty casualty sub-segment)
in the fourth quarter of 2022 compared to the fourth quarter of 2021.
Aggregate Aggregate underwriting results for AFG's property and casualty
insurance segment include net favorable prior year reserve development of
development of
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 60.7% for the fourth quarter of 2022
compared to 56.6% for the fourth quarter of 2021, an increase of 4.1 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 December 31,
Amount Ratio Change in
2022 2021 2022 2021 Ratio
Property and transportation
Current year, excluding COVID-19 related and
catastrophe losses $ 494 $ 381 72.6 % 63.9 % 8.7 %
Prior accident years development (13) (2) (1.8 %) (0.4 %) (1.4 %)
Current year COVID-19 related losses - - - % - % - %
Current year catastrophe losses including the
impact of net reinstatement premiums 8 15 1.0 % 2.5 % (1.5 %)
Property and transportation losses and LAE and
ratio $ 489 $ 394 71.8 % 66.0 % 5.8 %
Specialty casualty
Current year, excluding COVID-19 related and
catastrophe losses $ 423 $ 391 61.6 % 61.3 % 0.3 %
Prior accident years development (50) (55) (7.3 %) (8.5 %) 1.2 %
Current year COVID-19 related losses - 1 - % 0.2 % (0.2 %)
Current year catastrophe losses including the
impact of net reinstatement premiums 8 3 1.1 % 0.5 % 0.6 %
Specialty casualty losses and LAE and ratio
55.4 % 53.5 % 1.9 % Specialty financial Current year, excluding COVID-19 related and catastrophe losses$ 67 $ 58 36.0 % 35.5 % 0.5 % Prior accident years development (8) (13) (4.1 %) (8.2 %) 4.1 % Current year COVID-19 related losses - 1 - % 0.7 % (0.7 %) Current year catastrophe losses including the impact of net reinstatement premiums 7 6 1.9 % 3.7 % (1.8 %)
Specialty financial losses and LAE and ratio
33.8 % 31.7 % 2.1 % Total Specialty Current year, excluding COVID-19 related and catastrophe losses$ 1,021 $ 866 63.5 % 59.5 % 4.0 % Prior accident years development (58) (73) (3.6 %) (5.0 %) 1.4 % Current year COVID-19 related losses - 2 - % 0.2 % (0.2 %) Current year catastrophe losses including the impact of net reinstatement premiums 24 25 0.9 % 1.8 % (0.9 %)
Total Specialty losses and LAE and ratio
60.8 % 56.5 % 4.3 % Aggregate - including exited lines Current year, excluding COVID-19 related and catastrophe losses$ 1,021 $ 866 63.5 % 59.5 % 4.0 % Prior accident years development (59) (71) (3.6 %) (4.9 %) 1.3 % Current year COVID-19 related losses - 2 - % 0.2 % (0.2 %) Current year catastrophe losses including the impact of net reinstatement premiums 24 25 0.8 % 1.8 % (1.0 %) Aggregate losses and LAE and ratio$ 986 $ 822 60.7 % 56.6 % 4.1 % 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 63.5% for the fourth quarter of 2022 compared to 59.5% in the fourth quarter of 2021, an increase of 4.0 percentage points.
Property and transportation The 8.7 percentage points increase in the loss and
LAE ratio for the current year, excluding COVID-19 related and catastrophe
losses is due primarily to lower profitability in the crop insurance business
56 -------------------------------------------------------------------------------- Table of Contents compared to the very strong results recorded in the 2021 quarter. Excluding crop, the loss and LAE ratio for the current year, excluding catastrophe losses was comparable to the fourth quarter of 2021. Specialty casualty The 0.3 percentage points increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects higher reported losses in the social services business, partially offset by improved results in the general liability business. Specialty financial The 0.5 percentage points increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects higher reported losses in lender-placed mortgage protection insurance in the financial institutions 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$58 million in the fourth quarter of 2022 compared to$73 million in the fourth quarter of 2021, a decrease of$15 million (21%). Property and transportation Net favorable reserve development of$13 million in the fourth quarter of 2022 reflects lower than expected claim severity in the ocean marine, aviation and property and inland marine businesses and lower than anticipated claim frequency in the trucking business. 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.
Specialty casualty Net favorable reserve development of
fourth quarter of 2022 reflects lower than anticipated claim frequency and
severity in the workers' compensation and excess and surplus businesses and
lower than expected claim frequency in the executive liability business. Net
favorable reserve development of
reflects lower than anticipated claim severity in the workers' compensation
businesses.
Specialty financial Net favorable reserve development of$8 million in the fourth quarter of 2022 reflects lower than anticipated claim frequency in the trade credit and financial institutions businesses. 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. Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of$13 million in the fourth quarter of 2022 and net favorable reserve development of$3 million in the fourth quarter of 2021. The fourth quarter of 2022 reflects net adverse reserve development associated with AFG's internal reinsurance program (primarily from social inflation exposed casualty businesses) and, to a lesser extent, both periods reflect 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 includes net favorable reserve
development of
development of
outside the Specialty group that AFG no longer writes.
Catastrophe losses AFG generally seeks to reduce its exposure to catastrophes (whether resulting from climate change or otherwise) through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available atDecember 31, 2022 and considering the reinsurance coverage in place for 2023, 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 2% 250-year event 2% 500-year event 2% 57
-------------------------------------------------------------------------------- Table of Contents Catastrophe losses of$24 million (before net reinstatement premiums) in the fourth quarter of 2022 resulted primarily from Winter Storm Elliott. 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. Commissions and Other Underwriting Expenses AFG's property and casualty commissions and other underwriting expenses ("U/W Exp ") were$419 million in the fourth quarter of 2022 compared to$351 million for the fourth quarter of 2021, an increase of$68 million (19%). AFG's underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 25.8% for the fourth quarter of 2022 compared to 24.2% for the fourth quarter of 2021, an increase of 1.6 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
2022 2021 Change in
U/W Exp % of NEP U/W Exp % of NEP % of NEP
Property and transportation $ 125 18.2 %$ 87 14.5 % 3.7 % Specialty casualty 177 25.9 % 156 24.5 % 1.4 % Specialty financial 94 49.3 % 89 53.8 % (4.5 %) Other specialty 23 34.8 % 19 36.3 % (1.5 %) $ 419 25.8 %$ 351 24.2 % 1.6 % Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums increased 3.7 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 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 increased 1.4 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 reflecting higher underwriting expenses in the workers' compensation business. Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased 4.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 reflecting the increase in net earned premiums in the fourth quarter of 2022 due to lower than previously estimated reinstatement premiums from Hurricane Ian and lower underwriting expenses in the international operations. Property and Casualty Net Investment Income Net investment income in AFG's property and casualty insurance operations was$159 million in the fourth quarter of 2022 compared to$196 million in the fourth quarter of 2021, a decrease of$37 million (19%). 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, % 2022 2021 Change Change Net investment income: Net investment income, excluding alternative investments $ 131$ 80 $ 51 64 % Alternative investments 28 116 (88) (76 %) Total net investment income $ 159$ 196 $ (37) (19 %) Average invested assets (at amortized cost)$ 14,304 $ 13,552 $ 752 6 % Yield (net investment income as a % of average invested assets) 4.45 % 5.79 % (1.34 %) Tax equivalent yield (*) 4.53 % 5.92 % (1.39 %)
(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully
taxable equivalent yield.
The decrease in the property and casualty insurance segment's net investment
income for the fourth quarter of 2022 compared to the fourth quarter of 2021
reflects lower returns on AFG's alternative investment portfolio (partnerships
and similar investments and AFG-managed CLOs) as compared to the very strong
performance of this portfolio in the prior year period, partially offset by the
impact of higher yields on fixed maturity investments and growth in the property
and casualty insurance segment. The property and casualty insurance segment's
overall yield on investments (net investment
58
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income as a percentage of average invested assets) was 4.45% for the fourth
quarter of 2022 compared to 5.79% for the fourth quarter of 2021, a decrease of
1.34 percentage points as higher yields on fixed maturity investments were more
than offset by lower returns on alternative investments. The annualized return
earned on alternative investments was 5.3% in the fourth quarter of 2022
compared to 26.3% in the prior year period.
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 $14 million for the fourth quarter of 2022
compared to net income of $10 million for the fourth quarter of 2021, a change
of $24 million (240%). 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
2022 2021
Other income:
Income related to the sale of real estate $ - $ 12
Other - 6
Total other income - 18
Other expenses:
Amortization of intangibles 4 1
Interest expense on funds withheld 8 6
Other 2 1
Total other expenses 14 8
Other income and expenses, net $
(14)
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$44 million for the fourth quarter of 2022 compared to$47 million for the fourth quarter of 2021, a decrease of$3 million (6%). AFG's net core pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled$45 million for the fourth quarter of 2022 compared to$47 million for the fourth quarter of 2021, a decrease of$2 million (4%). The following table details AFG's GAAP and core loss before income taxes from operations outside of its property and casualty insurance segment for the three months endedDecember 31, 2022 and 2021 (dollars in millions): Three months ended December 31, 2022 2021 % Change Revenues: Net investment income $ 9$ 16 (44 %) Other income - P&C fees 22 22 - % Other income 7 7 - % Total revenues 38 45 (16 %)
Costs and Expenses:
Property and casualty insurance - loss adjustment and
underwriting expenses
8 9 (11 %) Other expense - expenses associated with P&C fees 14 13 8 % Other expenses (*) 41 47 (13 %) Costs and expenses, excluding interest charges on borrowed money 63 69 (9 %)
Loss before income taxes, excluding realized gains and
losses and interest charges on borrowed money
(25) (24) 4 % Interest charges on borrowed money 20 23 (13 %)
Core loss before income taxes, excluding realized gains
and losses
(45) (47) (4 %) Pretax non-core gain on retirement of debt 1 - - %
GAAP loss before income taxes, excluding realized gains
and losses
$ (44)$ (47) (6 %)
(*)Excludes a pretax non-core gain on retirement of debt of
fourth quarter of 2022.
59 -------------------------------------------------------------------------------- Table of Contents Holding Company and Other - Net Investment Income AFG recorded net investment income on investments held outside of its property and casualty insurance segment of$9 million in the fourth quarter of 2022 compared to$16 million in the fourth quarter of 2021, a decrease of$7 million (44%), reflecting 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 less than$1 million in the fourth quarter of 2022 compared to an increase in value of$7 million in the fourth quarter of 2021. 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 2022, AFG collected$22 million in fees for these services compared to$19 million in the fourth quarter of 2021. Management views this fee income, net of the$14 million in the fourth quarter of 2022 and$13 million in the fourth quarter of 2021 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 less than$1 million and$3 million in fees from AFG's disposed annuity operations during the fourth quarter of 2022 and the fourth quarter of 2021, respectively, 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$5 million in the fourth quarter of 2022 and$4 million in the fourth quarter of 2021, 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$2 million and$3 million in the fourth quarter of 2022 and the fourth quarter of 2021, respectively. Holding Company and Other - Other Expenses Excluding the non-core gain 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$41 million in the fourth quarter of 2022 compared to$47 million in the fourth quarter of 2021, a decrease of$6 million (13%). This decrease is due primarily to the impact of lower holding company expenses related to deferred compensation obligations to employees that are tied to stock market performance in the fourth quarter of 2022 compared to the fourth quarter of 2021. 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$20 million in the fourth quarter of 2022 compared to$23 million in the fourth quarter of 2021, a decrease of$3 million (13%) reflecting the retirement of AFG's$425 million principal amount of 3.50% Senior Notes during the first six months of 2022.
Holding Company and Other - Gain on Retirement of Debt
During the fourth quarter of 2022, AFG retired
its senior notes, which resulted in a
60 -------------------------------------------------------------------------------- Table of Contents Realized Gains (Losses) on Securities AFG's realized gains (losses) on securities were net gains of$27 million in the fourth quarter of 2022 compared to$7 million in the fourth quarter of 2021, an increase of$20 million (286%). Realized gains (losses) on securities consisted of the following (in millions): Three
months ended
2022 2021
Realized gains (losses) before impairment allowances:
Disposals
$ (6)$ 3 Change in the fair value of equity securities 26 6 Change in the fair value of derivatives (1) (2) Other 10 - 29 7 Change in allowance for impairments on securities (2) - Realized gains (losses) on securities $
27
The$26 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2022 includes gains of$7 million on investments in banks and financing companies,$7 million on investments in energy and natural gas companies and$7 million on investments in retail companies, partially offset by losses of$7 million on investments in media companies. 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,$3 million on investments in media companies and$2 million on investments in banks and financing companies. Consolidated Income Taxes AFG's consolidated provision for income taxes was$70 million for the fourth quarter of 2022 compared to$90 million in the fourth quarter of 2021, a decrease of$20 million (22%). 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
2022 2021
Amount % of EBT Amount % of EBT
Earnings before income taxes ("EBT") $ 346 $ 445
Income taxes at statutory rate $ 73 21 % $ 93 21 %
Effect of:
Change in valuation allowance (10) (3 %) (5) (1 %)
Employee stock ownership plan dividend paid
deduction (1) - % (6) (1 %)
Stock-based compensation (1) - % (1) - %
Tax exempt interest (1) - % (2) - %
Dividend received deduction (1) - % (1) - %
Nondeductible expenses 3 1 % 2 - %
Foreign operations 1 - % - - %
Other 7 1 % 10 1 %
Provision for income taxes $ 70 20 % $ 90 20 %
See Note M - "Income Taxes" to the financial statements for an analysis of items
affecting AFG's effective tax rate.
61 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - YEARS ENDEDDECEMBER 31, 2022 , 2021 AND 2020 Segmented Statement of Earnings Subsequent to the sale of its annuity operations, 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, 2022 , 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 Consol. MIEs and unallocated Total Non-core reclass GAAP Total Year endedDecember 31, 2022 Revenues: Property and casualty insurance net earned premiums$ 6,085 $ - $ -$ 6,085 $ -$ 6,085 Net investment income 683 10 24 717 - 717 Realized gains (losses) on securities - - - - (116) (116) Income of MIEs: Investment income - 268 - 268 - 268 Gain (loss) on change in fair value of assets/liabilities - (31) - (31) - (31) Other income 12 (17) 122 117 - 117 Total revenues 6,780 230 146 7,156 (116) 7,040 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 3,629 - - 3,629 - 3,629 Commissions and other underwriting expenses 1,680 - 38 1,718 - 1,718 Interest charges on borrowed money - - 85 85 - 85 Expenses of MIEs - 230 - 230 - 230 Other expenses 52 - 194 246 9 255 Total costs and expenses 5,361 230 317 5,908 9 5,917 Earnings from continuing operations before income taxes 1,419 - (171) 1,248 (125) 1,123 Provision for income taxes 295 - (40) 255 (30) 225 Core Net Operating Earnings 1,124 - (131)
993
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax
- - (92) (92) 92 - Loss on retirement of debt, net of tax - - (7) (7) 7 - Other, net of tax - - 4 4 (4) - Net Earnings Attributable to Shareholders$ 1,124 $ - $ (226)$ 898 $ -$ 898 62
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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, 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 from continuing operations before income taxes 1,390 50 - (208) 1,232 103 1,335
Provision for income taxes 279 11 - (51) 239 15 254
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 63
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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 from continuing operations before income taxes 776 19 - (186) 609 (148) (122) 339 Provision 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 (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$1.42 billion in GAAP pretax earnings in 2022 compared to$1.39 billion in 2021, an increase of$25 million (2%). Property and casualty core pretax earnings were$1.42 billion in 2022 compared to$1.39 billion in 2021, an increase of$29 million (2%). The increase in GAAP and core pretax earnings reflects higher underwriting profit and higher investment income outside of alternative investments, partially offset by lower returns on AFG's alternative investment portfolio (partnerships and similar investments and AFG-managed CLOs) and higher other net expenses in 2022 compared to 2021. 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 64 -------------------------------------------------------------------------------- Table of Contents 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$47 million in 2020. The increase in core pretax earnings reflects higher core underwriting profit and significantly higher net investment income in 2021 compared to 2020 and income from the sale of real estate in the fourth quarter of 2021. Improved results from alternative investments were partially offset by lower other net investment income, due primarily to lower interest rates. The following table details AFG's GAAP and core earnings before income taxes from its property and casualty insurance operations for the years endedDecember 31, 2022 , 2021 and 2020 (dollars in millions): Year ended December 31, % Change 2022 2021 2020 2022 - 2021 2021 - 2020 Gross written premiums$ 9,057 $ 7,946 $ 6,995 14 % 14 % Reinsurance premiums ceded (2,851) (2,373) (2,003) 20 % 18 % Net written premiums 6,206 5,573 4,992 11 % 12 % Change in unearned premiums (121) (169) (93) (28 %) 82 % Net earned premiums 6,085 5,404 4,899 13 % 10 % Loss and loss adjustment expenses (a) 3,629 3,157 3,006 15 % 5 % Commissions and other underwriting expenses 1,680 1,514 1,487 11 % 2 % Core underwriting gain 776 733 406 6 % 81 % Net investment income 683 663 404 3 % 64 % Other income and expenses, net (40) (6) (34) 567 % (82 %) Core earnings before income taxes 1,419 1,390 776 2 % 79 % Pretax non-core special A&E charges - - (47) - % (100 %) Pretax non-core Neon exited lines (b) - 4 (122) (100 %) (103 %) GAAP earnings before income taxes and noncontrolling interests$ 1,419 $ 1,394 $ 607 2 % 130 %
(a)Excludes a pretax non-core special A&E charge 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
65
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Year ended December 31, Change
Combined Ratios: 2022 2021 2020 2022 - 2021 2021 - 2020
Specialty lines
Loss and LAE ratio 59.6 % 58.4 % 60.9 % 1.2 % (2.5 %)
Underwriting expense ratio 27.6 % 28.0 % 30.4 % (0.4 %) (2.4 %)
Combined ratio 87.2 % 86.4 % 91.3 % 0.8 % (4.9 %)
Aggregate - including exited lines
Loss and LAE ratio 59.7 % 58.5 % 64.1 % 1.2 % (5.6 %)
Underwriting expense ratio 27.6 % 28.0 % 31.4 % (0.4 %) (3.4 %)
Combined ratio 87.3 % 86.5 % 95.5 % 0.8 % (9.0 %)
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 $9.06 billion in 2022 compared to $7.95 billion in 2021, an increase of
$1.11 billion (14%). GWP increased $859 million (12%) in 2021 compared to 2020.
Detail of AFG's property and casualty gross written premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2022 2021 2020 2022 - 2021 2021 - 2020
GWP % GWP % GWP %
Property and transportation $ 4,060 45 % $ 3,263 41 % $ 2,813 40 % 24 % 16 %
Specialty casualty 4,115 45 % 3,890 49 % 3,444 49 % 6 % 13 %
Specialty financial 882 10 % 793 10 % 738 10 % 11 % 7 %
Total specialty 9,057 100 % 7,946 100 % 6,995 99 % 14 % 14 %
Neon exited lines - - % - - % 92 1 % - % (100 %)
Aggregate $ 9,057 100 % $ 7,946 100 % $ 7,087 100 % 14 % 12 %
Reinsurance Premiums Ceded
Reinsurance premiums ceded ("Ceded") for AFG's property and casualty insurance
segment were 31% of gross written premiums for the year ended December 31, 2022 ,
30% for the year ended December 31, 2021 and 29% for the year ended December 31,
2020 , an increase of 1 percentage point for 2022 compared to 2021 and
1 percentage point for 2021 compared to 2020. Detail of AFG's property and
casualty reinsurance premiums ceded is shown below (dollars in millions):
Year ended December 31, Change in % of GWP
2022 2021 2020 2022 - 2021 2021 - 2020
Ceded % of GWP Ceded % of GWP Ceded % of GWP
Property and transportation $ (1,545) 38 % $ (1,106) 34 % $ (926) 33 % 4 % 1 %
Specialty casualty (1,387) 34 % (1,350) 35 % (1,140) 33 % (1 %) 2 %
Specialty financial (171) 19 % (135) 17 % (134) 18 % 2 % (1 %)
Other specialty 252 218 197
Total specialty (2,851) 31 % (2,373) 30 % (2,003) 29 % 1 % 1 %
Neon exited lines - - % - - % (71) 77 % - % (77 %)
Aggregate $ (2,851) 31 % $ (2,373) 30 % $ (2,074) 29 % 1 % 1 %
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Net Written Premiums
Net written premiums ("NWP") for AFG's property and casualty insurance segment
were $6.21 billion in 2022 compared to $5.57 billion in 2021, an increase of
$633 million (11%). NWP increased $560 million (11%) in 2021 compared to 2020.
Detail of AFG's property and casualty net written premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2022 2021 2020 2022 - 2021 2021 - 2020
NWP % NWP % NWP %
Property and transportation $ 2,515 41 % $ 2,157 39 % $ 1,887 38 % 17 % 14 %
Specialty casualty 2,728 44 % 2,540 45 % 2,304 46 % 7 % 10 %
Specialty financial 711 11 % 658 12 % 604 12 % 8 % 9 %
Other specialty 252 4 % 218 4 % 197 4 % 16 % 11 %
Total specialty 6,206 100 % 5,573 100 % 4,992 100 % 11 % 12 %
Neon exited lines - - % - - % 21 - % - % (100 %)
Aggregate $ 6,206 100 % $ 5,573 100 % $ 5,013 100 % 11 % 11 %
Net Earned Premiums
Net earned premiums ("NEP") for AFG's property and casualty insurance segment
were $6.09 billion in 2022 compared to $5.40 billion in 2021, an increase of
$681 million (13%). NEP increased $305 million (6%) in 2021 compared to 2020.
Detail of AFG's property and casualty net earned premiums is shown below
(dollars in millions):
Year ended December 31, % Change
2022 2021 2020 2022 - 2021 2021 - 2020
NEP % NEP % NEP %
Property and transportation $ 2,487 41 % $ 2,144 40 % $ 1,871 37 % 16 % 15 %
Specialty casualty 2,659 44 % 2,408 44 % 2,235 44 % 10 % 8 %
Specialty financial 698 11 % 642 12 % 613 12 % 9 % 5 %
Other specialty 241 4 % 210 4 % 180 3 % 15 % 17 %
Total specialty 6,085 100 % 5,404 100 % 4,899 96 % 13 % 10 %
Neon exited lines - - % - - % 200 4 % - % (100 %)
Aggregate $ 6,085 100 % $ 5,404 100 % $ 5,099 100 % 13 % 6 %
The $1.11 billion (14%) increase in gross written premiums in 2022 compared to
2021 reflects growth in the crop insurance business. Excluding crop, gross and
net written premiums increased 8% and 9%, respectively, compared to 2021
reflecting increased exposures, new business opportunities and renewal rate
increases. Overall average renewal rates increased approximately 5% in 2022.
Excluding the workers' compensation business, renewal pricing increased
approximately 6%.
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%.
Property and transportation Gross written premiums increased $797 million (24%)
in 2022 compared to 2021 reflecting the impact of higher commodity futures
prices on the crop insurance business. Excluding crop, gross and net written
premiums grew 11% and 10%, respectively, reflecting new business opportunities,
increased exposures and rate increases. Average renewal rates increased
approximately 6% for this group in 2022. Reinsurance premiums ceded as a
percentage of gross written premiums increased 4 percentage points in 2022
compared to 2021 reflecting growth in crop insurance products with higher
cessions and higher cessions in the ocean marine business.
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.
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Specialty casualty Gross written premiums increased $225 million (6%) in 2022
compared to 2021 due primarily to increased exposures in the excess and surplus
businesses, rate increases and new business opportunities in the targeted
markets businesses and increased exposures resulting from payroll growth and new
business in the workers' compensation businesses. This premium growth was
partially offset by lower year-over-year premiums in the mergers and
acquisitions liability business. Average renewal rates increased approximately
5% for this group in 2022. Excluding overall rate decreases in the workers'
compensation businesses, renewal rates for this group increased approximately 7%
in 2022. Reinsurance premiums ceded as a percentage of gross written premiums
decreased 1 percentage point in 2022 compared to 2021 reflecting lower cessions
in the excess and surplus and excess liability businesses and lower gross
written premiums in the mergers and acquisitions liability business, which cedes
a larger percentage of premiums than the other businesses in the Specialty
casualty sub-segment.
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.
Specialty financial Gross written premiums increased $89 million (11%) in 2022
compared to 2021 due primarily to higher premiums in the financial institutions
business related to lender-placed mortgage protection insurance, rate increases
and new business opportunities in the fidelity and crime business and new
business opportunities in the innovative markets and commercial equipment
leasing businesses. Average renewal rates for this group increased approximately
5% in 2022. Reinsurance premiums ceded as a percentage of gross written premiums
increased 2 percentage points in 2022 compared to 2021 reflecting the impact of
reinstatement premiums related to Hurricane Ian and higher cessions in the
innovative markets business.
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.
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 $34 million (16%) in 2022 compared to
2021 reflecting an increase in premiums retained, primarily from businesses in
the Specialty casualty sub-segment.
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.
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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 2022, 2021 and 2020:
Year ended December 31, Change Year ended December 31,
2022 2021 2020 2022 - 2021 2021 - 2020 2022 2021 2020
Property and transportation
Loss and LAE ratio 69.8 % 65.1 % 64.6 % 4.7 % 0.5 %
Underwriting expense ratio 21.9 % 22.0 % 25.8 % (0.1 %) (3.8 %)
Combined ratio 91.7 % 87.1 % 90.4 % 4.6 % (3.3 %)
Underwriting profit $ 208 $ 279 $ 181
Specialty casualty
Loss and LAE ratio 54.7 % 58.1 % 62.5 % (3.4 %) (4.4 %)
Underwriting expense ratio 26.5 % 26.2 % 27.5 % 0.3 % (1.3 %)
Combined ratio 81.2 % 84.3 % 90.0 % (3.1 %) (5.7 %)
Underwriting profit $ 500 $ 377 $ 223
Specialty financial
Loss and LAE ratio 34.1 % 33.2 % 39.5 % 0.9 % (6.3 %)
Underwriting expense ratio 49.6 % 51.9 % 52.3 % (2.3 %) (0.4 %)
Combined ratio 83.7 % 85.1 % 91.8 % (1.4 %) (6.7 %)
Underwriting profit $ 114 $ 96 $ 50
Total Specialty
Loss and LAE ratio 59.6 % 58.4 % 60.9 % 1.2 % (2.5 %)
Underwriting expense ratio 27.6 % 28.0 % 30.4 % (0.4 %) (2.4 %)
Combined ratio 87.2 % 86.4 % 91.3 % 0.8 % (4.9 %)
Underwriting profit $ 780 $ 737 $ 426
Aggregate - including exited lines
Loss and LAE ratio 59.7 % 58.5 % 64.1 % 1.2 % (5.6 %)
Underwriting expense ratio 27.6 % 28.0 % 31.4 % (0.4 %) (3.4 %)
Combined ratio 87.3 % 86.5 % 95.5 % 0.8 % (9.0 %)
Underwriting profit $ 776 $ 733 $ 224
The Specialty property and casualty insurance operations generated an
underwriting profit of $780 million in 2022 compared to $737 million in 2021, an
increase of $43 million (6%), reflecting higher underwriting profit in the
Specialty casualty and Specialty financial sub-segments, partially offset by
lower underwriting profit in the Property and transportation sub-segment.
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. Overall catastrophe losses were $93 million (1.5 points
on the combined ratio), including $5 million in net reinstatement premiums, for
2022 compared to catastrophe losses of $98 million (1.7 points), including
$12 million in net reinstatement premiums, for 2021.
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%), reflecting higher underwriting profit 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 $98 million
(1.7 points on the combined ratio), including $12 million in net reinstatement
premiums, for 2021 compared to catastrophe losses of $93 million (1.9 points),
including $2 million in net reinstatement premiums, for 2020.
Property and transportation Underwriting profit for this group was $208 million
in 2022 compared to $279 million in 2021, a decrease of $71 million (25%),
reflecting lower year-over-year profitability in the crop operations compared to
the very strong results in 2021 and lower underwriting profit in the
transportation businesses, primarily the result of lower favorable prior year
reserve development. Catastrophe losses were $45 million (1.9 points on the
combined ratio), including $3 million in net reinstatement premiums, in 2022
compared to catastrophe losses of $58 million (2.7 points), including $9 million
in net reinstatement premiums, in 2021.
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Underwriting profit for this group was$279 million in 2021 compared to$181 million in 2020, an increase of$98 million (54%), reflecting 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$58 million (2.7 points on the combined ratio), including$9 million in net reinstatement premiums, in 2021 compared to catastrophe losses of$47 million (2.5 points) in 2020. Specialty casualty Underwriting profit for this group was$500 million in 2022 compared to$377 million in 2021, an increase of$123 million (33%), reflecting higher year-over-year underwriting profit in the workers' compensation, excess and surplus, executive liability and mergers and acquisitions liability businesses. COVID-19 related losses were$9 million (0.4 points on the combined ratio) in 2021. Catastrophe losses were$11 million (0.5 points on the combined ratio) in 2022 compared to catastrophe losses of$10 million (0.4 points), including$1 million in net reinstatement premiums, in 2021. 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. See "Neon exited lines" below for information about AFG's exit from theLloyd's of London insurance market in 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$10 million (0.4 points on the combined ratio), including$1 million in net reinstatement premiums, in 2021 compared to catastrophe losses of$16 million (0.6 points), including$2 million in net reinstatement premiums, in 2020. Specialty financial Underwriting profit for this group was$114 million in 2022 compared to$96 million in 2021, an increase of$18 million (19%) due primarily to higher year-over-year underwriting profit in the trade credit and financial institutions businesses. COVID-19 related losses were$7 million (1.1 points) in 2021. Catastrophe losses were$36 million (4.9 points on the combined ratio), including$3 million in net reinstatement premiums, in 2022 compared to catastrophe losses of$28 million (4.1 points), including$2 million in net reinstatement premiums, in 2021. 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$28 million (4.1 points on the combined ratio), including$2 million in net reinstatement premiums, in 2021 compared to$26 million (4.3 points) in 2020. Other specialty This group reported an underwriting loss of$42 million in 2022 compared to$15 million in 2021, an increase of$27 million (180%). 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 (primarily losses from social inflation exposed operations in the Specialty casualty sub-segment) in 2022 compared to 2021. 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. Neon exited lines 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. InDecember 2020 , AFG completed the sale ofGAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon. AFG recorded$135 million in non-core underwriting losses (including$19 million of net adverse prior year reserve development) related to this business in 2020. These losses were partially 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$135 million underwriting loss at Neon and partially 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 asbestos and environmental reserve charges of$47 million in 2020 and an underwriting loss of$135 million at Neon in 2020, due primarily to catastrophe losses, COVID-19 related charges and several large claims. See "Asbestos and Environmental-related ("A&E") Insurance Reserves," under "Uncertainties" and "Neon exited lines" above. Aggregate underwriting results for AFG's property and casualty insurance segment also include adverse prior year reserve development of$4 million in both 2022 and 2021 and$20 million in 2020, related to business outside of the Specialty group that AFG no longer writes. 70
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Losses and Loss Adjustment Expenses
AFG's overall loss and LAE ratio was 59.7%, 58.5% and 64.1% in 2022, 2021 and
2020, 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
2022 2021 2020 2022 2021 2020 2022 - 2021 2021 - 2020
Property and transportation
Current year, excluding COVID-19 related
and catastrophe losses $ 1,785 $ 1,448 $ 1,261 71.6 % 67.2 % 67.4 % 4.4 % (0.2 %)
Prior accident years development (92) (103) (107) (3.7 %) (4.8 %) (5.7 %) 1.1 % 0.9 %
Current year COVID-19 related losses - - 7 - % - % 0.4 % - % (0.4 %)
Current year catastrophe losses
including the impact of net
reinstatement premiums 42 49 47 1.9 % 2.7 % 2.5 % (0.8 %) 0.2 %
Property and transportation losses and
LAE and ratio $ 1,735 $ 1,394 $ 1,208 69.8 % 65.1 % 64.6 % 4.7 % 0.5 %
Specialty casualty
Current year, excluding COVID-19 related
and catastrophe losses $ 1,632 $ 1,521 $ 1,419 61.4 % 63.1 % 63.5 % (1.7 %) (0.4 %)
Prior accident years development (190) (140) (97) (7.2 %) (5.8 %) (4.3 %) (1.4 %) (1.5 %)
Current year COVID-19 related losses - 9 60 - % 0.4 % 2.7 % (0.4 %) (2.3 %)
Current year catastrophe losses
including the impact of net
reinstatement premiums 11 9 14 0.5 % 0.4 % 0.6 % 0.1 % (0.2 %)
Specialty casualty losses and LAE and
ratio $ 1,453 $ 1,399 $ 1,396 54.7 % 58.1 % 62.5 % (3.4 %) (4.4 %)
Specialty financial
Current year, excluding COVID-19 related
and catastrophe losses $ 252 $ 231 $ 218 36.0 % 36.0 % 35.4 % - % 0.6 %
Prior accident years development (47) (51) (28) (6.8 %) (8.0 %) (4.5 %) 1.2 % (3.5 %)
Current year COVID-19 related losses - 7 26 - % 1.1 % 4.3 % (1.1 %) (3.2 %)
Current year catastrophe losses
including the impact of net
reinstatement premiums 33 26 26 4.9 % 4.1 % 4.3 % 0.8 % (0.2 %)
Specialty financial losses and LAE and
ratio $ 238 $ 213 $ 242 34.1 % 33.2 % 39.5 % 0.9 % (6.3 %)
Total Specialty
Current year, excluding COVID-19 related
and catastrophe losses $ 3,826 $ 3,334 $ 3,013 62.8 % 61.6 % 61.5 % 1.2 % 0.1 %
Prior accident years development (289) (283) (213) (4.7 %) (5.2 %) (4.4 %) 0.5 % (0.8 %)
Current year COVID-19 related losses - 16 95 - % 0.3 % 1.9 % (0.3 %) (1.6 %)
Current year catastrophe losses
including the impact of net
reinstatement premiums 88 86 91 1.5 % 1.7 % 1.9 % (0.2 %) (0.2 %)
Total Specialty losses and LAE and ratio
59.6 % 58.4 % 60.9 % 1.2 % (2.5 %) Aggregate - including exited lines Current year, excluding COVID-19 related and catastrophe losses$ 3,826 $ 3,334 $ 3,155 62.8 % 61.6 % 61.9 % 1.2 % (0.3 %) Prior accident years development (285) (279) (127) (4.7 %) (5.2 %) (2.5 %) 0.5 % (2.7 %) Current year COVID-19 related losses - 16 115 - % 0.3 % 2.2 % (0.3 %) (1.9 %) Current year catastrophe losses including the impact of net reinstatement premiums 88 86 128 1.6 % 1.8 % 2.5 % (0.2 %) (0.7 %) Aggregate losses and LAE and ratio$ 3,629 $ 3,157 $ 3,271 59.7 % 58.5 % 64.1 % 1.2 % (5.6 %) 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 62.8% in 2022, 61.6% in 2021 and 61.5% in 2020. 71 -------------------------------------------------------------------------------- Table of Contents Property and transportation The 4.4 percentage points increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2022 compared to 2021 is due primarily to lower profitability in the crop insurance business compared to the very strong results recorded in the 2021. Excluding crop, the loss and LAE ratio for the current year, excluding catastrophe losses was comparable to 2021. The 0.2 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 ratio in the crop insurance operations, partially offset by an increase in the loss and LAE ratio in the property and inland marine business. Specialty casualty The 1.7 percentage points decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses in 2022 compared to 2021 reflects favorable trends in workers' compensation and the impact of higher rates in the executive liability, excess and surplus and excess liability businesses. The 0.4 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.
Specialty financial The loss and LAE ratio for the current year, excluding
COVID-19 related and catastrophe losses in 2022 is unchanged compared to the
2021 period.
The 0.6 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. Net prior year reserve development AFG's Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of$289 million in 2022 compared to$283 million in 2021 and$213 million in 2020, increases of$6 million (2%) and$70 million (33%), respectively. Property and transportation Net favorable reserve development of$92 million in 2022 reflects lower than anticipated losses in the crop business, lower than expected claim frequency in the trucking and ocean marine businesses and in theSingapore operations, lower than expected claim frequency and severity in the aviation business and lower than anticipated claim severity in the property and inland marine business. 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
expected claim frequency and severity in the aviation, transportation and
agricultural businesses.
Specialty casualty Net favorable reserve development of$190 million in 2022 reflects lower than anticipated claim severity in the workers' compensation businesses and lower than expected claim frequency in the executive liability and excess and surplus businesses, partially offset by higher than anticipated claim severity in the general liability, umbrella and excess liability and certain targeted markets businesses. 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. Specialty financial Net favorable reserve development of$47 million in 2022 reflects lower than anticipated claim frequency in the surety, trade credit and financial institutions businesses. 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. 72
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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. Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of$40 million ,$11 million and$19 million in 2022, 2021, and 2020, respectively. The net adverse reserve development reflects$44 million ,$16 million and$24 million in 2022, 2021, and 2020, respectively, of net adverse development associated with AFG's internal reinsurance program, primarily related to social inflation exposed business assumed from the Specialty casualty sub-segment. This adverse reserve development is 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 were no charges recorded in the property and casualty insurance business in 2022 or 2021, a charge of$47 million was recorded in 2020 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). Neon exited lines AFG recorded net adverse prior year reserve development of$19 million in 2020 related to Neon's exited lines of business (included in loss and loss adjustment expenses). See "Neon exited lines" above for information about AFG's exit of theLloyd'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 in both 2022 and 2021 and$20 million in 2020 related to business outside the Specialty group that AFG no longer writes. Covid-19 related losses During 2022, AFG's Specialty property and casualty insurance operations released$19 million of prior accident year COVID-19 reserves based on improved loss experience in the trade credit and workers' compensation businesses. In 2021, AFG's Specialty property and casualty insurance operations recorded$16 million in reserve charges related to COVID-19 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 50% of the$74 million in cumulative COVID-19 related losses are held as incurred but not reported reserves atDecember 31, 2022 .
In addition, underwriting results for the Neon exited lines includes
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$88 million in 2022 primarily from winter storms in multiple regions ofthe United States in the first quarter, storms in multiple regions ofthe United States in the second quarter, Hurricane Ian in the third quarter and Winter Storm Elliott in the fourth quarter. Catastrophe losses of$86 million in 2021 resulted 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. 73 -------------------------------------------------------------------------------- Table of Contents Commissions and Other Underwriting Expenses AFG's property and casualty commissions and other underwriting expenses ("U/W Exp ") were$1.68 billion in 2022 compared to$1.51 billion in 2021, an increase of$166 million (11%). AFG's underwriting expense ratio was 27.6% in 2022 compared to 28.0% in 2021, a decrease of 0.4 percentage points.
AFG's property and casualty U/
expense ratio was 28.0% in 2021 compared to 31.4% in 2020, a decrease of
3.4 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
2022 2021 2020 2022 - 2021 2021 - 2020
U/W Exp % of NEP U/W Exp % of NEP U/W Exp % of NEP
Property and transportation $ 544 21.9 % $ 471 22.0 % $ 482 25.8 % (0.1 %) (3.8 %)
Specialty casualty 706 26.5 % 632 26.2 % 616 27.5 % 0.3 % (1.3 %)
Specialty financial 346 49.6 % 333 51.9 % 321 52.3 % (2.3 %) (0.4 %)
Other specialty 84 34.7 % 78 37.2 % 68 38.5 % (2.5 %) (1.3 %)
Total Specialty 1,680 27.6 % 1,514 28.0 % 1,487 30.4 % (0.4 %) (2.4 %)
Neon exited lines - - 117
Total Aggregate $ 1,680 27.6 % $ 1,514 28.0 % $ 1,604 31.4 % (0.4 %) (3.4 %)
Property and transportation Commissions and other underwriting expenses as a
percentage of net earned premiums were comparable in 2022 and 2021.
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. Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums increased 0.3 percentage points in 2022 compared to 2021 reflecting higher underwriting expenses in the workers' compensation business. 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. Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased 2.3 percentage points in 2022 compared to 2021 reflecting lower profit-based commissions to agents in 2022 compared to 2021, and lower underwriting expenses in the international operations.
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.
Aggregate Aggregate commissions and other underwriting expenses for AFG's
property and casualty insurance segment includes
expenses in the Neon run-off operations in 2020. See "Neon exited lines" above.
74 -------------------------------------------------------------------------------- Table of Contents Property and Casualty Net Investment Income Net investment income in AFG's property and casualty insurance operations was$683 million in 2022 compared to$663 million in 2021, an increase of$20 million (3%). 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$259 million (64%). The average invested assets and overall yield earned on investments held by AFG's property and casualty insurance operations are provided below (dollars in millions): Year ended December 31, 2022 - 2021 2021 - 2020 2022 2021 2020 Change % Change Change % Change Net investment income: Net investment income, excluding alternative investments$ 418 $ 323 $ 345 $ 95 29 %$ (22) (6 %) Alternative investments 265 340 59 (75) (22 %) 281 476 % Total net investment income$ 683 $ 663 $ 404 $ 20 3 %$ 259 64 % Average invested assets (at amortized cost)$ 14,048 $ 12,944 $ 11,760 $ 1,104 9 %$ 1,184 10 % Yield (net investment income as a % of average invested assets) 4.86 % 5.12 % 3.44 % (0.26 %) 1.68 % Tax equivalent yield (*) 4.96 % 5.25 % 3.56 % (0.29 %) 1.69 %
(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully
taxable equivalent yield.
The increase in the property and casualty insurance segment's net investment
income in 2022 compared to 2021 reflects higher average investments and higher
yields on fixed maturities, partially offset by lower returns on AFG's
alternative investments (partnerships and similar investments and AFG-managed
CLOs) as compared to the very strong performance of alternative investments in
the prior year. The property and casualty insurance segment's overall yield on
investments (net investment income as a percentage of average invested assets)
was 4.86% in 2022 compared to 5.12% in 2021, a decrease of 0.26 percentage
points as higher yields on fixed maturity investments were more than offset by
lower returns on alternative investments. The annualized return earned on
alternative investments was 13.2% in 2022 compared to 25.3% in 2021.
The increase in net investment income in 2021 compared to 2020 reflects
significantly higher returns on alternative investments, 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 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.
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 $40 million in 2022, $6 million in 2021 and
$34 million in 2020, an increase of $34 million (567%) in 2022 compared to 2021
and a decrease of $28 million (82%) in 2021 compared to 2020. 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,
2022 2021 2020
Other income:
Income related to the sale of real estate $ 1 $ 10 $ -
Other 11 17 8
Total other income 12 27 8
Other expenses:
Amortization of intangibles 11 6 12
Interest expense on funds withheld 29 25 24
Other (*) 12 2 6
Total other expenses 52 33 42
Other income and expenses, net $ (40) $ (6)
$ (34)
(*)Includes $9 million of expenses in 2022 related to certain technology
initiatives.
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 $180 million in 2022
compared to $219 million in 2021, a decrease of $39 million (18%). AFG's net
core pretax loss outside of its property and casualty insurance segment
(excluding realized gains and losses) totaled $171 million in 2022 compared to
$208 million in 2021, a decrease of $37 million (18%).
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%).
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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 2022, 2021 and 2020 (dollars in millions):
Year ended December 31, % Change
2022 2021 2020 2022 - 2021 2021 - 2020
Revenues:
Net investment income $ 24 $ 36 $ 12 (33 %) 200 %
Other income - P&C fees 89 80 67 11 % 19 %
Other income 33 22 19 50 % 16 %
Total revenues 146 138 98 6 % 41 %
Costs and Expenses:
Property and casualty insurance - loss
adjustment and underwriting expenses 38 33 21 15 % 57 %
Other expense - expenses associated with P&C
fees 51 47 46 9 % 2 %
Other expenses (*) 143 172 129 (17 %) 33 %
Costs and expenses, excluding interest charges
on borrowed money 232 252 196 (8 %) 29 %
Loss before income taxes, excluding realized
gains and losses and interest charges on
borrowed money (86) (114) (98) (25 %) 16 %
Interest charges on borrowed money 85 94 88 (10 %) 7 %
Core loss from continuing operations before
income taxes, excluding realized gains and
losses (171) (208) (186) (18 %) 12 %
Pretax non-core special A&E charges - - (21) - % (100 %)
Pretax non-core loss on retirement of debt (9) - (5) - % (100 %)
Pretax non-core loss on pension settlement - (11) - (100 %) - %
GAAP loss from continuing operations before
income taxes, excluding realized gains and
losses $ (180) $ (219) $ (212) (18 %) 3 %
(*)Excludes pretax non-core losses on retirement of debt of $9 million in 2022
and $5 million in 2020, a pretax non-core loss of $11 million related to the
settlement of pension liabilities of a small former manufacturing operation in
2021 and a pretax non-core special A&E charge of $21 million in 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 $24 million, $36 million and $12 million in
2022, 2021 and 2020, respectively. The $12 million (33%) decrease in 2022
compared to 2021 and the $24 million (200%) increase in 2021 compared to 2020
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, all of which were sold in 2022. These
securities decreased in value by $7 million in 2022 compared to increasing in
value by $14 million in 2021 and $5 million in 2020. Excluding the change in
fair value of these equity securities, net investment income outside of AFG's
property and casualty insurance segment increased $9 million in 2022 compared to
2021 and $15 million in 2021 compared to 2020 reflecting an increase in average
investments, income from directly owned real estate investments acquired from
the annuity subsidiaries in conjunction with the sale of the annuity business in
May 2021 and, in 2022, the impact of higher interest rates.
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 2022, AFG collected
$82 million in fees for these services compared to $73 million in 2021 and
$67 million in 2020. Management views this fee income, net of the $51 million in
2022, $47 million in 2021 and $46 million in 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 $7 million in fees from AFG's disposed annuity operations
in both 2022 and 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, all of these fees and the related expenses are
netted and recorded as a reduction of commissions and other underwriting
expenses in AFG's segmented results.
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Holding Company and Other - Other Income
Other income in the table above includes $17 million in 2022, $16 million in
2021 and $15 million in 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 Consolidated MIEs
column under "Results of Operations - Segmented Statement of Earnings."
Excluding amounts eliminated in consolidation, AFG recorded other income outside
of its property and casualty insurance segment of $16 million in 2022,
$6 million in 2021 and $4 million in 2020. The increase in 2022 compared to 2021
is due primarily to income from the sale of real estate in 2022.
Holding Company and Other - Other Expenses
Excluding 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 $143 million in 2022 compared to $172 million in 2021, a decrease of
$29 million (17%). This decrease reflects lower holding company expenses related
to deferred compensation obligations to employees that are tied to stock market
performance, partially offset by higher charges to increase the liabilities
related to the A&E exposures of AFG's former railroad and manufacturing
operations.
Excluding the non-core special A&E charge, 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 deferred compensation obligations to employees 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.
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 $85 million in 2022,
$94 million in 2021 and $88 million in 2020. The $9 million (10%) decrease in
interest expense in 2022 compared to 2021 reflects lower average indebtedness
and the $6 million (7%) increase in interest expense in 2021 compared to 2020
reflects higher average indebtedness. The following table details the principal
amount of AFG's long-term debt balances as of December 31, 2022, December 31,
2021 and December 31, 2020 (dollars in millions):
December 31,
2022
2021 2020
Direct obligations of AFG:
4.50% Senior Notes due June 2047 $ 582 $
590 $ 590
3.50% Senior Notes due August 2026 - 425 425 5.25% Senior Notes due April 2030 261 300 300
5.125% Subordinated Debentures due December 2059 200 200
200
4.50% Subordinated Debentures due September 2060 200 200
200 5.625% Subordinated Debentures due June 2060 150 150 150 5.875% Subordinated Debentures due March 2059 125 125 125 Other 3 3 3
Total principal amount of Holding Company Debt $ 1,521 $ 1,993 $ 1,993
Weighted Average Interest Rate 4.9 %
4.6 % 4.6 %
The decrease in interest expense in 2022 compared to 2021 and the increase in
interest expense in 2021 compared to 2020 reflect the following financial
transactions completed by AFG between January 1, 2020 and December 31, 2022:
•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
•Redeemed $425 million of 3.50% Senior Notes in the first and second quarters of
2022
•Retired $8 million of 4.50% Senior Notes in the third and fourth quarters of
2022
•Retired $39 million of 5.25% Senior Notes in the third and fourth quarters of
2022
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
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operations outside of its property and casualty insurance segment recorded minor
charges in 2022 and 2021, which are included in AFG's core operating earnings,
compared to a pretax non-core special charge of $21 million in 2020 to increase
liabilities related to the A&E exposures of AFG's former railroad and
manufacturing operations. The charge is 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 for A&E
exposures of AFG's former railroad and manufacturing operations (included in
other expenses) were $17 million in 2022, $9 million in 2021 and $28 million in
2020.
Holding Company and Other - Loss on Retirement of Debt
During 2022, AFG retired $472 million principal amount of its senior notes,
which resulted in a $9 million pretax non-core loss. 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.
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 losses of $116 million in
2022 compared to net gains of $110 million in 2021, a change of $226 million
(205%). AFG's consolidated 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%). Realized gains (losses) on securities consisted of the
following (in millions):
Year ended December 31,
2022 2021 2020
Realized gains (losses) before impairment allowances:
Disposals
$ (15) $ 5 $ 8
Change in the fair value of equity securities (96) 110 (69)
Change in the fair value of derivatives (12) (6) (1)
Other 10 - -
(113) 109 (62)
Change in allowance for impairments on securities (3) 1 (13)
Realized gains (losses) on securities $ (116)
$ 110 $ (75)
The $96 million net realized loss from the change in the fair value of equity
securities in 2022 includes losses of $51 million on investments in banks and
financing companies, $21 million on investments in media companies, $14 million
on investments in healthcare companies, $7 million on investments in technology
companies and $3 million on investments in retail companies, partially offset by
gains of $17 million on investments in energy and natural gas companies.
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.
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Realized Gain 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 the Lloyd's of London insurance market.
In 2020, AFG recorded a $23 million gain on the sale of GAI Holding Bermuda and
its subsidiaries, comprising the legal entities that own Neon, to RiverStone
Holdings Limited. 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 on continuing operations was
$225 million in 2022 compared to $254 million in 2021, a decrease of $29 million
(11%). 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%). See Note M - "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 reflecting
losses at Neon, which was sold in 2020. See Note C - "Acquisitions and Sale of
Businesses" to the financial statements.
Real Estate Entities Acquired from the Annuity Operations
Beginning with the first quarter of 2021, the results of the disposed annuity
businesses 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 certain real estate-related partnerships and AFG
parent acquired certain 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.
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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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 and 2020 (dollars in millions):
Year ended December 31, % Change
2021 (*) 2020 2021 - 2020
Pretax annuity earnings historically reported as core
operating earnings:
Pretax annuity earnings before items below
$ 106 $ 325 (67 %) Earnings on partnerships and similar investments 139 15 827 %
Total pretax annuity earnings historically reported as core
operating earnings
245 340 (28 %)
Pretax amounts previously reported outside of annuity core
earnings:
Unlocking
- (46) (100 %)
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) (77 %) Realized gains on securities 112 365 (69 %) Run-off life and long-term care - (8) (100 %)
Total pretax amounts previously reported outside of annuity
core earnings
79 169 (53 %)
GAAP pretax earnings from discontinued annuity operations,
excluding the gain on the sale of the discontinued annuity
operations
324 509 (36 %) Provision for income taxes 66 102 (35 %)
GAAP net earnings from discontinued annuity operations,
excluding the sale of the discontinued annuity operations
258 407 (37 %) Gain on sale of discontinued annuity operations, net of tax 656 - - %
GAAP net earnings from discontinued annuity operations $ 914
$ 407 125 %
(*)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.
ACCOUNTING STANDARDS TO BE ADOPTED
In March 2020, the FASB issued Accounting Standards Update No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting ("ASU 2020-04"), as amended in December 2022 by
Accounting Standards Update No. 2022-06, Reference Rate Reform (Topic 848):
Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"). ASU 2020-04 provides
guidance to alleviate the burden in accounting for reference rate reform by
allowing certain expedients and exceptions in applying GAAP to contracts,
hedging relationships and other transactions impacted by reference rate reform.
The provisions apply only to those transactions that reference LIBOR or another
reference rate expected to be discontinued due to reference rate reform.
Adoption of the provisions of ASU 2020-04 are optional and are effective from
March 12, 2020 through December 31, 2024, as amended by ASU 2022-06. As of
December 31, 2022, AFG has not adopted any expedients or exceptions under ASU
2020-04. Management does not believe that the reference rate reform or the
adoption of this guidance will have a material impact on AFG's results of
operations or financial condition.
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New indictment accuses NC billionaire Greg Lindberg of misappropriating millions [The Charlotte Observer]
REINSURANCE GROUP OF AMERICA INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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