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AMERICAN FINANCIAL GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
INDEX TO MD&A
Page Page
Forward-Looking Statements 35 Results of Operations - Third Quarter 49
Overview 36 Segmented Statement of Earnings 49
Critical Accounting Policies 37 Property and Casualty Insurance 51
Liquidity and Capital Resources 37 Holding Company, Other and Unallocated 62
Real
Estate Entities Acquired from the
Ratios 37 Annuity Operations 64
Condensed Consolidated Cash Flows 38 Discontinued Annuity Operations 65
Results
of Operations - First Nine
Parent and Subsidiary Liquidity 39 Months 66
Investments 40 Segmented Statement of Earnings 66
Uncertainties 42 Property and Casualty Insurance 67
Managed Investment Entities 43 Holding Company, Other and Unallocated 76
Real
Estate Entities Acquired from the
Results of Operations 47 Annuity Operations 79 General 47 Discontinued Annuity Operations 79 FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as "anticipates", "believes", "expects", "projects", "estimates", "intends", "plans", "seeks", "could", "may", "should", "will" or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings, investment activities, and the amount and timing of share repurchases; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate changes; and improved loss experience. Actual results and/or financial condition could differ materially from those contained in or implied by such forward-looking statements for a variety of reasons including but not limited to: •changes in financial, political and economic conditions, including changes in interest and inflation rates, currency fluctuations and extended economic recessions or expansions in theU.S. and/or abroad; •performance of securities markets; •new legislation or declines in credit quality or credit ratings that could have a material impact on the valuation of securities in AFG's investment portfolio; •the availability of capital; •changes in insurance law or regulation, including changes in statutory accounting rules, including modifications to capital requirements; •the effects of the COVID-19 outbreak, including the effects on the international and national economy and credit markets, legislative or regulatory developments affecting the insurance industry, quarantines or other travel or health-related restrictions; •changes in the legal environment affecting AFG or its customers; •tax law and accounting changes; •levels of natural catastrophes and severe weather, terrorist activities (including any nuclear, biological, chemical or radiological events), incidents of war or losses resulting from pandemics, civil unrest and other major losses; •disruption caused by cyber-attacks or other technology breaches or failures by AFG or its business partners and service providers, which could negatively impact AFG's business and/or expose AFG to litigation; •development of insurance loss reserves and establishment of other reserves, particularly with respect to amounts associated with asbestos and environmental claims; •availability of reinsurance and ability of reinsurers to pay their obligations; •competitive pressures; •the ability to obtain adequate rates and policy terms; •changes in AFG's credit ratings or the financial strength ratings assigned by major ratings agencies to AFG's operating subsidiaries; and 35
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
•the impact of the conditions in the international financial markets and the
global economy relating to AFG's international operations.
The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements. 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 most of 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. Sale of the Annuity Business OnMay 28, 2021 , AFG sold its annuity business consisting ofGreat American Life Insurance Company ("GALIC") and its two insurance subsidiaries,Annuity Investors Life Insurance Company andManhattan National Life Insurance Company , as well as a broker-dealer affiliate,Great American Advisors, Inc. , and insurance distributor,AAG Insurance Agency, Inc. toMassachusetts Mutual Life Insurance Company ("MassMutual"). Total proceeds from the sale were$3.57 billion . AFG realized an after-tax non-core gain on the sale of$656 million . Beginning with the first quarter of 2021 the results of the annuity businesses sold are reported as discontinued operations, in accordance with generally accepted accounting principles ("GAAP"), which included adjusting prior period results to reflect these operations as discontinued. Results of Operations Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses. As discussed above, AFG's former annuity operations are reported as discontinued operations. AFG reported net earnings from continuing operations attributable to shareholders of$219 million ($2.56 per share, diluted) for the third quarter of 2021 compared to$88 million ($1.00 per share, diluted) for the third quarter of 2020, reflecting higher underwriting profit and higher net investment income in the third quarter of 2021 compared to the third quarter of 2020 and the impact of special A&E charges recorded in the third quarter of 2020, partially offset by net realized losses on securities in the third quarter of 2021 compared to net realized gains on securities in the third quarter of 2020. AFG reported net earnings from continuing operations attributable to shareholders of$726 million ($8.45 per share, diluted) for the first nine months of 2021 compared to$60 million ($0.66 per share, diluted) for the first nine months of 2020 reflecting higher underwriting profit and net investment income, net realized gains on securities in 2021 compared to net realized losses in 2020 and the impact of special A&E charges recorded in 2020, partially offset by higher interest charges on borrowed money and holding company expenses.
Outlook
The COVID-19 pandemic began to have a significant impact on global, social and
economic activity during the first quarter of 2020. AFG has taken actions under
its business continuity plan to minimize risk to the Company's employees and to
prevent any significant disruption to AFG's business, agents or policyholders.
Management believes that AFG's strong financial position and current liquidity
and capital at its subsidiaries will give AFG the flexibility to continue to
effectively address and respond to the ongoing uncertainties presented by the
pandemic. AFG's insurance subsidiaries continue to have capital at or in excess
of the levels required by ratings agencies in order to maintain their current
ratings, and the parent company does not have any near-term debt maturities.
As a result of the contracted economy, exposures in many of AFG's property and
casualty businesses changed due to workforce reduction, fewer miles driven and
reduced revenue. This has and may continue to lead to lower frequency in certain
lines while there has and may continue to be COVID-19 related increases in claim
frequency in other lines of business.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape, such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG's business interruption coverages require direct physical damage to covered property for business interruption coverage to apply and the vast majority of AFG's property policies also contain virus exclusions.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A - "Accounting Policies" to the financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and, thus, impact amounts reported in the future. The areas related to AFG's continuing operations where management believes the degree of judgment required to determine amounts recorded in the financial statements is most significant are as follows: •the establishment of insurance reserves, especially asbestos and environmental-related reserves, •the recoverability of reinsurance, •the establishment of asbestos and environmental liabilities of former railroad and manufacturing operations, and •the valuation of investments, including the determination of impairment allowances.
For a discussion of these policies, see Management's Discussion and Analysis -
"Critical Accounting Policies" in AFG's 2020 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Ratios
AFG's debt to total capital ratio on a consolidated basis is shown below
(dollars in millions):
December 31,
September 30, 2021 2020 2019
Principal amount of long-term debt $ 1,993 $ 1,993 $ 1,493
Total capital 7,055 7,486
6,883
Ratio of debt to total capital:
Including subordinated debt 28.2 % 26.6 % 21.7 %
Excluding subordinated debt 18.7 % 17.6 % 14.8 %
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, noncontrolling interests and
shareholders' equity (excluding unrealized gains (losses) related to fixed
maturity investments).
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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):
Nine months ended
2021 2020
Net cash provided by operating activities $ 1,425 $ 1,696
Net cash used in investing activities (103) (772)
Net cash provided by (used in) financing activities (1,299) 509
Net change in cash and cash equivalents $ 23 $ 1,433
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 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 $78 million
during the first nine months of 2021 and increased cash flows from operating
activities by $99 million in the first nine months of 2020, accounting for a
$177 million decline in cash flows from operating activities in the 2021 period
compared to the 2020 period. 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 $1.50 billion in the first nine months of 2021 compared to
$1.60 billion in the first nine months of 2020, a decrease of $94 million .
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.
In May 2021 , AFG sold its annuity business to MassMutual for initial cash
proceeds of $3.54 billion . This increase in cash provided by investing
activities was partially offset by a decrease in cash and cash equivalents of
$2.06 billion representing balances held in the annuity subsidiaries that were
sold. Excluding the impact of the May 2021 sale of the annuity business, net
cash used in investing activities was $1.58 billion for the first nine months of
2021 compared to $772 million in the first nine months of 2020, an increase of
$808 million . As discussed below (under net cash provided by (used in) financing
activities), AFG's discontinued annuity operations had net cash flows from
annuity policyholders of $477 million in 2021 through the May 31, 2021 effective
date of the sale compared to $260 million in the first nine months of 2020. In
addition to the investment of funds provided by the insurance operations,
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
$99 million source of cash in the first nine months of 2021 compared to a
$60 million use of cash in the 2020 period, accounting for a $159 million
decrease in net cash used in investing activities in the first nine months of
2021 compared to the same 2020 period. See Note A - "Accounting Policies -
Managed Investment Entities" and Note G - "Managed Investment Entities" to the
financial statements.
Net Cash Provided by (Used in) Financing Activities AFG's financing activities
consist primarily of issuances and retirements of long-term debt, issuances and
repurchases of common stock, dividend payments and, prior to the sale of the
annuity business, transactions with annuity policyholders. Net cash used in
financing activities was $1.30 billion for the first nine months of 2021
compared to net cash provided by financing activities of $509 million in the
first nine months of 2020, a decrease in net cash provided by financing
activities of $1.81 billion . Net annuity receipts exceeded annuity surrenders,
benefits, withdrawals and transfers by $477 million in 2021 through the May 31,
2021 effective date of the sale compared to $260 million in the first nine
months of 2020, accounting for a $217 million increase in net cash provided by
financing activities in the 2021 period compared to the 2020 period. In the
first nine months of 2020, AFG issued
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued$150 million of 5.625% Subordinated Debentures due in 2060,$300 million of 5.25% Senior Notes due in 2030 and$200 million of 4.50% Subordinated Debentures due in 2060. The net proceeds of these offerings contributed$635 million to net cash provided by financing activities in the first nine months of 2020. During the first nine months of 2021, AFG repurchased$318 million of its Common Stock compared to$233 million in the 2020 period. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of$2.00 per share inAugust 2021 and$14.00 per share inJune 2021 totaling$1.36 billion , which resulted in total cash dividends paid of$1.48 billion in the first nine months of 2021 compared to$119 million in the first nine months of 2020. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG's Balance Sheet. Retirements of managed investment entity liabilities exceeded issuances by$36 million in the first nine months of 2021 compared to$49 million in the first nine months of 2020, accounting for a$13 million increase in net cash provided by financing activities in the 2021 period compared to the 2020 period. See Note A - "Accounting Policies - Managed Investment Entities" and Note G - "Managed Investment Entities" to the financial statements.
Parent and Subsidiary Liquidity
Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and investments or to generate cash through borrowings, sales of other assets, or similar transactions. As discussed above, AFG sold its annuity business to MassMutual for proceeds of$3.57 billion (including$34 million in preliminary post-closing adjustments). AFG's capital and liquidity was significantly enhanced as a result of the transaction. During the first nine months of 2021, AFG repurchased 2,769,182 shares of its Common Stock for$318 million and declared special cash dividends of$14.00 per share in May,$2.00 per share in July, and$4.00 per share in September totaling$1.70 billion . In addition, onNovember 2, 2021 , AFG declared a special cash dividend of$4.00 per share, payable onNovember 22, 2021 . The aggregate amount of this special dividend will be approximately$340 million . Management will continue to evaluate opportunities for deploying AFG's significant remaining excess capital, including returning capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases. In addition, excess capital will be deployed into AFG's core businesses as management identifies the potential for healthy, profitable organic growth, and opportunities to expand the Specialty property and casualty niche businesses through acquisitions and start-ups that meet target return thresholds.
In 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. 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 2020 or the first nine months of 2021.
Under a tax allocation agreement with AFG, its 80%-owned
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 additional marketable securities. In addition, the insurance
subsidiaries generally hold a significant amount of highly liquid, short
duration investments.
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
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued deficiencies, inadequate premium rates or reinsurer insolvencies. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG's insurance subsidiaries are adequate to maintain its business and rating agency ratings. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries' investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.
Investments
AFG's investment portfolio atSeptember 30, 2021 , contained$10.43 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income and$29 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG's investment portfolio includes$712 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and$281 million in equity securities carried at fair value with holding gains and losses included in net investment income. Fair values for AFG's portfolio are determined by AFG's internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on published closing prices. For AFG's fixed maturity portfolio, approximately 84% was priced using pricing services atSeptember 30, 2021 and the balance was priced primarily by using non-binding broker quotes. When prices obtained for the same security vary, AFG's internal investment professionals select the price they believe is most indicative of an exit price. The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage-backed securities ("MBS") are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers' prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG's internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, AFG communicates directly with pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the services to value specific securities. In general, the fair value of AFG's fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating 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 atSeptember 30, 2021 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional. Fair value of fixed maturity portfolio $
10,456
Percentage impact on fair value of 100 bps increase in interest rates (2.0 %)
Pretax impact on fair value of fixed maturity portfolio
$
(209)
Approximately 88% of the fixed maturities atSeptember 30, 2021 , were rated "investment grade" (credit rating ofAAA to BBB) by nationally recognized rating agencies, 4% were rated "non-investment grade" and 8% 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 19% of AFG's fixed maturity portfolio atSeptember 30, 2021 . AFG's municipal bond portfolio is high quality, with 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. AtSeptember 30, 2021 , approximately 90% of the municipal bond portfolio was held in revenue bonds, with the remaining 10% held in general obligation bonds. 40
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet atSeptember 30, 2021 , is shown in the following table (dollars in millions). Approximately$1.06 billion of available for sale fixed maturity securities had no unrealized gains or losses atSeptember 30, 2021 . Securities Securities With With Unrealized Unrealized Gains Losses Available for Sale Fixed Maturities Fair value of securities $
7,212
Amortized cost of securities, net of allowance for expected credit
losses
$ 6,973 $ 2,170 Gross unrealized gain (loss)$ 239 $ (14) Fair value as % of amortized cost 103 % 99 % Number of security positions 1,761 394 Number individually exceeding$2 million gain or loss 3 - Concentration of gains (losses) by type or industry (exceeding 5% of unrealized): States and municipalities$ 77 $ - Mortgage-backed securities 54 (1) Other asset-backed securities 25 (5) Other financial institutions 8 (1) Collateralized loan obligations 5 (2) U.S. Government and government agencies 3 (1) Percentage rated investment grade 93 % 94 % The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities atSeptember 30, 2021 , based on their fair values. Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. Securities Securities With With Unrealized Unrealized Gains Losses Maturity One year or less 10 % 1 % After one year through five years 32 % 15 % After five years through ten years 11 % 6 % After ten years 3 % 1 % 56 % 23 %
Collateralized loan obligations and other asset-backed securities
(average life of approximately 3 years)
34 % 74 %
Mortgage-backed securities (average life of approximately 3 years)
10 % 3 %
100 % 100 %
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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 September 30, 2021
Securities with unrealized gains:
Exceeding $500,000 (104 securities) $ 1,226 $ 93 108 %
$500,000 or less (1,657 securities) 5,986 146
103 %
$ 7,212 $ 239 103 %
Securities with unrealized losses:
Exceeding $500,000 (1 security) $ 1 $ (1) 50 %
$500,000 or less (393 securities) 2,155 (13) 99 %
$ 2,156 $ (14) 99 %
The following table (dollars in millions) summarizes the unrealized losses for
all securities with unrealized losses by issuer quality and the length of time
those securities have been in an unrealized loss position:
Aggregate Aggregate Fair
Fair Unrealized Value as
Value Loss % of Cost
Securities with Unrealized Losses at
Investment grade fixed maturities with losses for:
Less than one year (214 securities)
$ 1,740 $ (7) 100 % One year or longer (68 securities) 285 (3) 99 %$ 2,025 $ (10) 100 %
Non-investment grade fixed maturities with losses for:
Less than one year (61 securities)
$ 99 $ (1) 99 % One year or longer (51 securities) 32 (3) 91 %$ 131 $ (4) 97 % When a decline in the value of a specific investment is considered to be other-than-temporary, an allowance for credit losses (impairment) is charged to earnings (accounted for as a realized loss). The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors as detailed in AFG's 2020 Form 10-K under Management's Discussion and Analysis - "Investments." Based on its analysis, 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 atSeptember 30, 2021 . Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers' creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG's ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, increases in the allowance for credit losses could be material to results of operations in future periods. Significant declines in the fair value of AFG's investment portfolio could have a significant adverse effect on AFG's liquidity. For information on AFG's realized gains (losses) on securities, see "Results of Operations - Realized Gains (Losses) on Securities."
Uncertainties
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. See "Special asbestos and
environmental reserve charges" under "Results of Operations - Property and
Casualty Insurance Segment - Net prior year reserve development" for the
quarters ended
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
Analysis - "Uncertainties - Asbestos and Environmental-related ("A&E") Insurance
Reserves" in AFG's 2020 Form 10-K.
MANAGED INVESTMENT ENTITIES
Accounting standards require AFG to consolidate its investments in
collateralized loan obligation ("CLO") entities that it manages and owns an
interest in (in the form of debt). See Note A - "Accounting Policies - Managed
Investment Entities" and Note G - "Managed Investment Entities" to the financial
statements. The effect of consolidating these entities is shown in the tables
below (in millions). The "Before CLO Consolidation" columns include AFG's
investment and earnings in the CLOs on an unconsolidated basis.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
CONDENSED CONSOLIDATING BALANCE SHEET
Managed
Before CLO Investment Consol. Consolidated
Consolidation Entities Entries As Reported
September 30, 2021
Assets:
Cash and investments $ 16,483 $ - $ (96) (*) $ 16,387
Assets of managed investment entities - 5,130 - 5,130
Other assets 8,425 - - (*) 8,425
Total assets $ 24,908 $ 5,130 $ (96) $ 29,942
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 14,406 $ - $ - $ 14,406
Liabilities of managed investment entities - 5,090 (56) (*) 5,034
Long-term debt and other liabilities 5,262 - - 5,262
Total liabilities 19,668 5,090 (56) 24,702
Shareholders' equity:
Common Stock and Capital surplus 1,400 40 (40) 1,400
Retained earnings 3,680 - - 3,680
Accumulated other comprehensive income, net of tax 160 - - 160
Total shareholders' equity 5,240 40 (40) 5,240
Noncontrolling interests - - - -
Total equity 5,240 40 (40) 5,240
Total liabilities and equity $ 24,908 $ 5,130 $ (96) $ 29,942
December 31, 2020
Assets:
Cash and investments $ 13,550 $ - $ (56) (*) $ 13,494
Assets of managed investment entities - 4,971 - 4,971
Other assets 7,361 - (1) (*) 7,360
Assets of discontinued annuity operations 47,885 - - 47,885
Total assets $ 68,796 $ 4,971 $ (57) $ 73,710
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 13,195 $ - $ - $ 13,195
Liabilities of managed investment entities - 4,971 (57) (*) 4,914
Long-term debt and other liabilities 4,354 - - 4,354
Liabilities of discontinued annuity operations 44,458 - - 44,458
Total liabilities 62,007 4,971 (57) 66,921
Shareholders' equity:
Common Stock and Capital surplus 1,367 - - 1,367
Retained earnings 4,149 - - 4,149
Accumulated other comprehensive income, net of tax 1,273 - - 1,273
Total shareholders' equity 6,789 - - 6,789
Noncontrolling interests - - - -
Total equity 6,789 - - 6,789
Total liabilities and equity $ 68,796 $ 4,971 $ (57) $ 73,710
(*)Elimination of the fair value of AFG's investment in CLOs and related accrued
interest.
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REPUBLIC BANCORP INC /KY/ – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Global Mobile Phone Insurance Market Report 2021: Market Size, Forecast, Insights, and Competitive Landscape 2016-2027 – ResearchAndMarkets.com
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