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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 33 Results of Operations - Third Quarter 46
Overview 34 Segmented Statement of Earnings 46
Critical Accounting Policies 35 Property and Casualty Insurance 48
Liquidity and Capital Resources 35 Holding Company, Other and Unallocated 58
Results of Operations - First Nine
Ratios 35 Months 61 Condensed Consolidated Cash Flows 35 Segmented Statement of Earnings 61 Parent and Subsidiary Liquidity 36 Property and Casualty Insurance 62 Investments 37 Holding Company, Other and Unallocated 71 Uncertainties 40 Real
Estate Entities Acquired from the
Managed Investment Entities 41 Annuity Operations 74 Results of Operations 44 Discontinued Annuity Operations 74 General 44 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 pandemic; •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; •the impact of the conditions in the international financial markets and the global economy relating to AFG's international operations; and •effects on AFG's reputation, including as a result of environmental, social and governance matters. 33
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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.
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 2 . 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. 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 of$165 million ($1.93 per share, diluted) for the third quarter of 2022 compared to$219 million ($2.56 per share, diluted) for the third quarter of 2021. Lower underwriting profit, lower net investment income, higher holding company expenses and higher net realized losses on securities in the third quarter of 2022 compared to the third quarter of 2021 were the drivers of these results, partially offset by lower interest charges on borrowed money. AFG reported net earnings from continuing operations of$622 million ($7.29 per share, diluted) for the first nine months of 2022 compared to$726 million ($8.45 per share, diluted) for the first nine months of 2021. Higher underwriting profit, higher net investment income, lower interest charges on borrowed money and lower holding company expenses in 2022 compared to 2021 were more than offset by net realized losses on securities in the first nine months of 2022 compared to net realized gains on securities in the first nine months of 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 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 a rising interest rate environment will continue to increase investment income on fixed maturity investments compared to 2021. 34
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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 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 2021 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, 2022 2021 2020
Principal amount of long-term debt $ 1,559 $ 1,993 $ 1,993
Total capital 6,074 6,869 7,486
Ratio of debt to total capital:
Including subordinated debt 25.7 % 29.0 % 26.6 %
Excluding subordinated debt 14.6 % 19.2 % 17.6 %
The ratio of debt to total capital is a non-GAAP measure that management
believes is useful for investors, analysts and ratings agencies to evaluate
AFG's financial strength and liquidity and to provide insight into how AFG
finances its operations. In addition, maintaining a ratio of debt, excluding
subordinated debt and debt secured by real estate (if any), to total capital of
35% or lower is a financial covenant in AFG's bank credit facility. The ratio is
calculated by dividing the principal amount of AFG's long-term debt by its total
capital, which includes long-term debt and shareholders' equity (excluding
unrealized gains (losses) related to fixed maturity investments).
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
2022 2021
Net cash provided by operating activities $ 1,043 $ 1,425
Net cash used in investing activities (1,062) (103)
Net cash used in financing activities (1,318) (1,299)
Net change in cash and cash equivalents $
(1,337)
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
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued property and casualty premiums, claim and expense payments and recoveries from reinsurers. AFG's discontinued annuity operations, which were sold inMay 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 increased cash flows from operating activities by$133 million during the first nine months of 2022 and reduced cash flows from operating activities by$78 million in the first nine months of 2021, accounting for a$211 million increase in cash flows from operating activities in the 2022 period compared to the 2021 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$910 million in the first nine months of 2022 compared to$1.50 billion in the first nine months of 2021, a decrease of$593 million reflecting the sale of the 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 theMay 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$1.48 billion source of cash provided by investing activities in the first nine months of 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$260 million use of cash in the first nine months of 2022 compared to a$99 million source of cash in the comparable 2021 period, accounting for a$359 million increase in net cash used in investing activities in the first nine months of 2022 compared to the same 2021 period. See Note A - "Accounting Policies - Managed Investment Entities" and Note G - "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$802 million in the first nine months of 2022 compared to$1.68 billion in the first nine months of 2021, a decrease of$877 million as the opportunistic investment of cash on hand in the property and casualty operations during the rising interest rate environment in the first nine months of 2022 was more than offset by the absence of investing activities from the disposed annuity operations.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$1.32 billion for the first nine months of 2022 compared to$1.30 billion in the first nine months of 2021, an increase of$19 million . Debt retirements were a$436 million use of cash in the first nine months of 2022 compared to no debt retirements in the first nine months of 2021. During the first nine months of 2022, AFG repurchased$10 million of its Common Stock compared to$318 million in the comparable 2021 period, resulting in a$308 million decrease in net cash used in financing activities in the first nine months of 2022 compared to the first nine months of 2021. AFG paid cash dividends totaling$989 million in the first nine months of 2022 compared to$1.48 billion in the first nine months of 2021, resulting in a net$493 million decrease in cash used in financing activities in the first nine months of 2022 compared to the first nine months of 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, accounting for a$477 million increase in net cash used in financing activities in the 2022 period compared to the 2021 period. 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$105 million in the first nine months of 2022 compared to retirements exceeding issuances by$36 million in the first nine months of 2021, accounting for a$141 million decrease in net cash used in financing activities in the 2022 period compared to the 2021 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.
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued 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. Nevertheless, AFG continues to have significant excess capital available 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 healthy, profitable organic growth, and opportunities to expand through acquisitions and start-ups that meet target return thresholds. During the first nine months of 2022, AFG repurchased 80,701 shares of its Common Stock for$10 million and paid special cash dividends totaling$850 million ($2.00 per share in March and$8.00 per share in May). In addition, onNovember 2, 2022 , AFG declared a special cash dividend of$2.00 per share, payable onNovember 22, 2022 . The aggregate amount of this special dividend will be approximately$170 million . 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 the first nine months of 2022, AFG retired$434 million principal amount of its senior notes for$441 million cash ($5 million of which settled in early October). 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 predictive risk tools to assess insurance risk, for$120 million using cash on hand at the parent. AFG can borrow up to$500 million under its revolving credit facility, which expires inDecember 2025 . Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG's credit rating. The credit facility also includes provisions relating to the replacement of LIBOR with different floating rates in the event of the discontinuance of LIBOR. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during 2021 or the first nine months of 2022.
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. 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.
Investments
AtSeptember 30, 2022 , AFG's investment portfolio contained$10.03 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$30 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG's investment portfolio includes$692 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and$304 million in equity securities carried at fair value with holding gains and losses included in net investment income. 37
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued 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. AtSeptember 30, 2022 , approximately 86% of AFG's fixed maturity portfolio was priced using pricing services and 8% 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 atSeptember 30, 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 $
10,064
Percentage impact on fair value of 100 bps increase in interest rates (3.0 %)
Pretax impact on fair value of fixed maturity portfolio
$
(302)
AtSeptember 30, 2022 , approximately 91% of the fixed maturities held by AFG were rated "investment grade" (credit rating ofAAA to BBB) by nationally recognized rating agencies, 4% were rated "non-investment grade" and 5% 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 atSeptember 30, 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. AtSeptember 30, 2022 , approximately 92% of the municipal bond portfolio was held in revenue bonds, with the remaining 8% held in general obligation bonds. 38
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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, 2022 , is shown in the following table (dollars in millions). Approximately$322 million of available for sale fixed maturity securities had no unrealized gains or losses atSeptember 30, 2022 . Securities Securities With With Unrealized Unrealized Gains Losses Available for Sale Fixed Maturities Fair value of securities $
328
Amortized cost of securities, net of allowance for expected credit
losses
$ 301 $ 10,112 Gross unrealized gain (loss)$ 27 $ (728) Fair value as % of amortized cost 109 % 93 % Number of security positions 271 1,905 Number individually exceeding$2 million gain or loss 2 69 Concentration of gains (losses) by type or industry (exceeding 5% of unrealized): Mortgage-backed securities$ 22 $ (179) Media 3 (5) States and municipalities 2 (100) Other asset-backed securities - (171) Collateralized loan obligations - (72) Asset managers - (52) Percentage rated investment grade 54 % 94 % The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities atSeptember 30, 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 11 % 4 % After one year through five years 21 % 26 % After five years through ten years 13 % 9 % After ten years 4 % 3 % 49 % 42 %
Collateralized loan obligations and other asset-backed securities
(average life of approximately 3.5 years)
14 % 42 %
Mortgage-backed securities (average life of approximately 5.5 years)
37 % 16 %
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, 2022
Securities with unrealized gains:
Exceeding $500,000 (12 securities) $ 27 $ 11 169 %
$500,000 or less (259 securities) 301 16
106 %
$ 328 $ 27 109 %
Securities with unrealized losses:
Exceeding $500,000 (394 securities) $ 4,478 $ (533) 89 %
$500,000 or less (1,511 securities) 4,906 (195) 96 %
$ 9,384 $ (728) 93 %
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 (1,456 securities)
$ 7,806 $ (607) 93 % One year or longer (164 securities) 984 (81) 92 %$ 8,790 $ (688) 93 %
Non-investment grade fixed maturities with losses for:
Less than one year (219 securities)
$ 505 $ (28) 95 % One year or longer (66 securities) 89 (12) 88 %$ 594 $ (40) 94 % 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 2021 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, 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
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 "Asbestos and environmental reserves" under "Results of Operations - Property and Casualty Insurance Segment - Net prior year reserve development" for the quarters endedSeptember 30, 2022 and 2021 and Management's Discussion and Analysis - "Uncertainties - Asbestos and Environmental-related ("A&E") Insurance Reserves" in AFG's 2021 Form 10-K. 40
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AMERICAN FINANCIAL GROUP, INC. 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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.
CONDENSED CONSOLIDATING BALANCE SHEET
Managed
Before CLO Investment Consol. Consolidated
Consolidation Entities Entries As Reported
September 30, 2022
Assets:
Cash and investments $ 14,419 $ - $ (97) (*) $ 14,322
Assets of managed investment entities - 5,099 - 5,099
Other assets 10,111 - - (*) 10,111
Total assets $ 24,530 $ 5,099 $ (97) $ 29,532
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 15,852 $ - $ - $ 15,852
Liabilities of managed investment entities - 5,087 (85) (*) 5,002
Long-term debt and other liabilities 4,746 - - 4,746
Total liabilities 20,598 5,087 (85) 25,600
Shareholders' equity:
Common Stock and Capital surplus 1,443 12 (12) 1,443
Retained earnings 3,091 - - 3,091
Accumulated other comprehensive income (loss), net of tax (602) - - (602)
Total shareholders' equity 3,932 12 (12) 3,932
Total liabilities and shareholders' equity $ 24,530 $ 5,099 $ (97) $ 29,532
December 31, 2021
Assets:
Cash and investments $ 15,821 $ - $ (76) (*) $ 15,745
Assets of managed investment entities - 5,296 - 5,296
Other assets 7,890 - - (*) 7,890
Total assets $ 23,711 $ 5,296 $ (76) $ 28,931
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums $ 14,115 $ - $ - $ 14,115
Liabilities of managed investment entities - 5,296 (76) (*) 5,220
Long-term debt and other liabilities 4,584 - - 4,584
Total liabilities 18,699 5,296 (76) 23,919
Shareholders' equity:
Common Stock and Capital surplus 1,415 - - 1,415
Retained earnings 3,478 - - 3,478
Accumulated other comprehensive income, net of tax 119 - - 119
Total shareholders' equity 5,012 - - 5,012
Total liabilities and shareholders' equity $ 23,711 $ 5,296 $ (76)
(*)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.
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