e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2011
Commission File No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
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Incorporated under the Laws of Ohio
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IRS Employer I.D. No. 31-1544320 |
301 East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock
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New York Stock Exchange and Nasdaq Global Select Market |
7-1/8% Senior Debentures due February 3, 2034
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New York Stock Exchange |
7% Senior Notes due September 30, 2050
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Other securities for which reports are submitted pursuant to Section 15(d) of the Act:
9-7/8% Senior Notes due June 15, 2019
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definitions of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
State the aggregate market value of the voting and non -voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the
Registrants most recently
completed second fiscal quarter: $2.8 billion.
Indicate the number of shares outstanding of each of the Registrants classes of common stock, as
of the latest practicable date: 97,895,717 shares (excluding 14.9 million shares owned by
subsidiaries) as of February 1, 2012.
Documents Incorporated by Reference:
Proxy Statement for 2012 Annual Meeting of Stockholders (portions of which are incorporated by
reference into Part III hereof).
AMERICAN FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FORWARD-LOOKING STATEMENTS
The disclosures in this Form 10-K contain certain forward-looking statements that are subject to
numerous assumptions, risks or uncertainties. 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 and investment activities; 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
the following and those discussed in Item 1A Risk Factors.
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changes in financial, political and economic conditions, including changes in interest and
inflation rates, currency fluctuations and extended economic recessions or expansions in the
U.S. and abroad; |
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performance of securities markets; |
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AFGs ability to estimate accurately the likelihood, magnitude and timing of any losses in
connection with investments in the non-agency residential mortgage market; |
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new legislation or declines in credit quality or credit ratings that could have a material
impact on the valuation of securities in AFGs investment portfolio; |
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the availability of capital; |
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regulatory actions (including changes in statutory accounting rules); |
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changes in the legal environment affecting AFG or its customers; |
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tax law and accounting changes; |
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levels of natural catastrophes and severe weather, terrorist activities (including any
nuclear, biological, chemical or radiological events), incidents of war or losses resulting
from civil unrest and other major losses; |
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development of insurance loss reserves and establishment of other reserves, particularly
with respect to amounts associated with asbestos and environmental claims; |
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availability of reinsurance and ability of reinsurers to pay their obligations; |
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the unpredictability of possible future litigation if certain settlements of current
litigation do not become effective; |
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trends in persistency, mortality and morbidity; |
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competitive pressures, including those in the annuity bank distribution channels, the
ability to obtain adequate rates and policy terms; and |
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changes in AFGs credit ratings or the financial strength ratings assigned by major ratings
agencies to AFGs operating subsidiaries. |
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.
1
PART I
ITEM 1
Business
Introduction
American Financial Group, Inc. (AFG) is a holding company that, through subsidiaries, is engaged
primarily in property and casualty insurance, focusing on specialized commercial products for
businesses, and in the sale of traditional fixed and indexed annuities and a variety of
supplemental insurance products, such as Medicare supplement. Its address is 301 East Fourth
Street, Cincinnati, Ohio 45202; its phone number is (513) 579-2121. SEC filings, news releases,
AFGs Code of Ethics applicable to directors, officers and employees and other information may be
accessed free of charge through AFGs Internet site at: www.AFGinc.com. (Information on AFGs
Internet site is not part of this Form 10-K.)
Property and Casualty Insurance Operations
General
AFGs specialty property and casualty insurance operations consist of approximately 30 niche
insurance businesses offering a wide range of commercial coverages. These businesses report to a
single senior executive and operate under a business model that allows local decision-making for
underwriting, claims and policy servicing in each of the niche operations. These businesses are
managed by experienced professionals in particular lines of business or customer groups and operate
autonomously but with certain central controls and accountability. The decentralized approach
allows each unit the autonomy necessary to respond to local and specialty market conditions while
capitalizing on the efficiencies of centralized investment and administrative support functions.
AFGs property and casualty insurance operations employed approximately 5,200 persons as of
December 31, 2011.
The primary objectives of AFGs property and casualty insurance operations are to achieve solid
underwriting profitability and provide excellent service to its policyholders and agents.
Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of
losses, loss adjustment expenses (LAE), underwriting expenses and policyholder dividends to
premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does
not reflect investment income, other income, or federal income taxes.
While many costs included in underwriting are readily determined (commissions, administrative
expenses, and many of the losses on claims reported), the process of determining overall
underwriting results is highly dependent upon the use of estimates in the case of losses incurred
or expected but not yet reported or developed. Actuarial procedures and projections are used to
obtain point estimates of ultimate losses. While the process is imprecise and develops amounts
which are subject to change over time, management believes that the liabilities for unpaid losses
and loss adjustment expenses are adequate.
AFGs statutory combined ratio averaged 87.4% for the period 2009 to 2011 as compared to 102.7% for
the property and casualty industry over the same period (Source: A.M. Bests U.S.
Property/Casualty Review & Preview February 2012 Edition). AFG believes that its specialty
niche focus, product line diversification and underwriting discipline have contributed to the
Companys ability to consistently outperform the industrys underwriting results. Managements
philosophy is to refrain from writing business that is not expected to produce an underwriting
profit even if it is necessary to limit premium growth to do so.
2
Financial data is reported in accordance with U.S. generally accepted accounting principles
(GAAP) for shareholder and other investment purposes and reported on a statutory basis for
insurance regulatory purposes. Major differences for statutory accounting include charging policy
acquisition costs to expense as incurred rather
than spreading the costs over the periods covered by the policies; reporting investment grade bonds
and redeemable preferred stocks at amortized cost rather than fair value; netting of reinsurance
recoverables and prepaid reinsurance premiums against the corresponding liabilities rather than
reporting such items separately; and charging to surplus certain GAAP assets, such as furniture and
fixtures and agents balances over 90 days old.
Unless indicated otherwise, the financial information presented for the property and casualty
insurance operations herein is presented based on GAAP. Statutory information is provided for
industry comparisons or where comparable GAAP information is not readily available.
Property and Casualty Results
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
companys performance. See Note C Segments of Operations to the financial statements for the
reconciliation of AFGs operating profit by significant business segment to the Statement of
Earnings.
The following table shows the performance of AFGs property and casualty insurance operations
(dollars in millions):
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2011 |
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2010 |
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2009 |
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Gross written premiums |
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$ |
4,106 |
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$ |
3,589 |
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$ |
3,763 |
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Ceded reinsurance |
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(1,336 |
) |
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(1,181 |
) |
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(1,452 |
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Net written premiums |
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$ |
2,770 |
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$ |
2,408 |
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$ |
2,311 |
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Net earned premiums |
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$ |
2,759 |
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$ |
2,550 |
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$ |
2,412 |
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Loss and LAE |
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1,694 |
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1,457 |
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1,187 |
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Special asbestos and environmental (A&E) charge |
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50 |
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Underwriting expenses |
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835 |
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797 |
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808 |
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Underwriting gain |
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$ |
180 |
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$ |
296 |
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$ |
417 |
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GAAP ratios: |
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Loss and LAE ratio |
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63.2 |
% |
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57.2 |
% |
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49.2 |
% |
Underwriting expense ratio |
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30.2 |
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31.3 |
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33.5 |
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Combined ratio |
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93.4 |
% |
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88.5 |
% |
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82.7 |
% |
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Statutory ratios: |
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Loss and LAE ratio |
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60.4 |
% |
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53.5 |
% |
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46.2 |
% |
Underwriting expense ratio |
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32.3 |
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33.8 |
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36.1 |
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Combined ratio |
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92.7 |
% |
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87.3 |
% |
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82.3 |
% |
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Industry statutory combined ratio (a) |
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All lines |
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107.5 |
% |
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101.0 |
% |
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99.5 |
% |
Commercial lines |
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108.2 |
% |
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102.7 |
% |
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103.0 |
% |
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(a) |
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Ratios are derived from A.M. Bests U.S. Property/Casualty Review & Preview (February 2012 Edition). |
As with other property and casualty insurers, AFGs operating results can be adversely affected by
unpredictable catastrophe losses. Certain natural disasters (hurricanes, earthquakes, tornadoes,
floods, etc.) and other incidents of major loss (explosions, civil disorder, terrorist events,
fires, etc.) are classified as catastrophes by industry associations. Losses from these incidents
are usually tracked separately from other business of insurers because of their sizable effects on
overall operations. Total net losses to AFGs insurance operations from catastrophes, primarily
hailstorms, hurricanes and tornadoes, were $46 million in 2011, $49 million in 2010 and $18 million
in 2009.
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.
AFGs exposure to a catastrophic earthquake or windstorm that industry models indicate could occur
once in every 500 years (a 500-year event) is expected to be less than 2.5% of AFGs
shareholders equity.
3
Property and Casualty Insurance Products
AFG is focused on growth opportunities in what it believes to be more profitable specialty
businesses where AFG personnel are experts in particular lines of business or customer groups. The
following are examples of AFGs specialty businesses:
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Property and Transportation |
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Inland and Ocean Marine
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Provides coverage primarily
for builders risk,
contractors equipment,
property, motor truck cargo,
marine cargo, boat dealers,
marina operators/dealers and
excursion vessels. |
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Agricultural-related
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Provides federally reinsured
multi-peril crop (allied
lines) insurance covering
most perils as well as
crop-hail, equine mortality
and other coverages for
full-time operating
farms/ranches and
agribusiness operations on a
nationwide basis. |
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Commercial Automobile
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Provides coverage for
vehicles (such as buses and
trucks) in a broad range of
businesses including the
moving and storage and
transportation industries,
and a specialized physical
damage product for the
trucking industry. |
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Specialty Casualty |
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Executive and Professional
Liability
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Markets coverage for
directors and officers of
businesses and non-profit
organizations; errors and
omissions; and provides
non-U.S. medical malpractice
insurance. |
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Umbrella and Excess Liability
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Provides higher layer
liability coverage in excess
of primary layers. |
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Excess and Surplus
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Provides liability, umbrella
and excess coverage for
unique, volatile or hard to
place risks, using rates and
forms that generally do not
have to be approved by state
insurance regulators. |
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General Liability
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Provides coverage for
contractor-related
businesses, energy
development and production
risks, and environmental
liability risks. |
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Targeted Programs
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Includes coverage (primarily
liability and property) for
social service agencies,
leisure, entertainment and
non-profit organizations,
customized solutions for
other targeted markets and
alternative risk programs
using agency captives. |
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Workers Compensation
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Provides coverage for
prescribed benefits payable
to employees who are injured
on the job. |
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Specialty Financial |
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Fidelity and Surety
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Provides fidelity and crime
coverage for government,
mercantile and financial
institutions and surety
coverage for various types of
contractors and public and
private corporations. |
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Lease and Loan Services
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Provides coverage for
insurance risk management
programs for lending and
leasing institutions,
including equipment leasing
and collateral and mortgage
protection. |
4
Management believes specialization is the key element to the underwriting success of these business
units. These specialty businesses are opportunistic and their premium volume will vary based on
prevailing market conditions. AFG continually evaluates expansion in existing markets and
opportunities in new specialty markets that meet its profitability objectives. For example, in
July 2010, a majority-owned subsidiary of AFG acquired Vanliner Group, Inc. (Vanliner), a market
leader in providing insurance for the moving and storage industry. Likewise, AFG will withdraw
from markets that do not meet its profit objectives or business strategy, such as the withdrawal
from certain program business in 2010 and 2011.
Premium Distribution
The following table shows the net written premiums by sub-segment for AFGs property and casualty
insurance operations for 2011 (net written premiums for 2007 are given to show changes over a
four-year period)(dollars in millions):
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2011 |
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2007 |
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Property and transportation |
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$ |
1,436 |
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$ |
1,132 |
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Specialty casualty |
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867 |
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1,022 |
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Specialty financial |
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398 |
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488 |
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Other |
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69 |
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70 |
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$ |
2,770 |
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$ |
2,712 |
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The geographic distribution of statutory direct written premiums by AFGs U.S.-based insurers
in 2011 compared to 2007 is shown below. Amounts exclude business written under special
arrangements on behalf of, and fully reinsured to, the purchasers of several divisions sold.
Approximately 5% of AFGs direct written premiums in 2011 were derived from non U.S.-based
insurers, primarily Marketform, a majority-owned United Kingdom-based Lloyds insurer acquired in
2008.
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2011 |
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2007 |
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California |
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12.0 |
% |
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14.7 |
% |
Illinois |
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8.0 |
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6.1 |
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Texas |
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6.8 |
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8.0 |
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New York |
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4.8 |
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4.4 |
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Florida |
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4.5 |
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7.4 |
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Kansas |
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4.1 |
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3.2 |
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Iowa |
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3.8 |
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* |
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Missouri |
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3.2 |
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2.1 |
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Indiana |
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2.9 |
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2.5 |
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South Dakota |
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2.7 |
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* |
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Pennsylvania |
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2.6 |
% |
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2.4 |
% |
Ohio |
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2.4 |
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2.3 |
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Georgia |
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2.4 |
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2.3 |
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Nebraska |
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2.3 |
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2.0 |
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North Carolina |
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2.2 |
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2.3 |
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North Dakota |
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2.2 |
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* |
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New Jersey |
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2.1 |
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2.1 |
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Minnesota |
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2.1 |
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* |
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Oklahoma |
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2.0 |
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2.7 |
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Other |
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26.9 |
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35.5 |
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100.0 |
% |
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100.0 |
% |
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(*) |
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less than 2%, included in Other |
Ratings
The following table shows independent ratings and 2011 net written premiums (in millions) of AFGs
major property and casualty insurance subsidiaries. Such ratings are generally based on concerns
for policyholders and agents and are not directed toward the protection of investors. During 2010,
AFGs principal property and casualty insurance companies were upgraded by Standard & Poors
(S&P) to A+. AFG believes that maintaining an S&P rating of at least A- is important to
compete successfully in certain lines of business.
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Ratings |
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Net Written |
|
Company |
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AM Best |
|
S&P |
|
Premiums |
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Great American Pool(*) |
|
A |
|
A+ |
|
$ |
1,847 |
|
National Interstate |
|
A |
|
not rated |
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|
442 |
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Marketform Lloyds Syndicate |
|
A |
|
A+ |
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|
146 |
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Republic Indemnity |
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A |
|
A+ |
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|
135 |
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Mid-Continent |
|
A |
|
A+ |
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|
127 |
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American Empire Surplus Lines |
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A+ |
|
A+ |
|
|
35 |
|
Other |
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38 |
|
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$ |
2,770 |
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(*) |
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The Great American Pool represents Great American Insurance Company (GAI) and 10 subsidiaries. |
5
Reinsurance
Consistent with standard practice of most insurance companies, AFG reinsures a portion of its
business with other insurance companies and assumes a relatively small amount of business from
other insurers. AFG uses reinsurance for two primary purposes: (i) to provide higher limits of
coverage than it would otherwise be willing to provide (i.e. large line capacity) and (ii) to
protect its business by reducing the impact of catastrophes. The availability and cost of
reinsurance are subject to prevailing market conditions, which may affect the volume and
profitability of business that is written. AFG is subject to credit risk with respect to its
reinsurers, as the ceding of risk to reinsurers does not relieve AFG of its liability to its
insureds until claims are fully settled.
The commercial marketplace requires large policy limits ($25 million or more) in several of AFGs
lines of business, including certain executive and professional liability, umbrella and excess
liability, and fidelity and surety coverages. Since these limits exceed managements desired
exposure to an individual risk, AFG generally enters into reinsurance agreements to reduce its net
exposure under such policies to an acceptable level. Reinsurance continues to be available for
this large line capacity exposure with satisfactory pricing and terms.
AFG has taken steps to limit its exposure to wind and earthquake losses by purchasing catastrophe
reinsurance. In addition, AFG purchases catastrophe reinsurance for its workers compensation
businesses. Although the cost of catastrophe reinsurance varies depending on exposure and the
level of worldwide loss activity, AFG has been able to obtain reinsurance coverage in adequate
amounts at acceptable rates due to managements decision to limit overall exposure to catastrophe
losses through individual risk selection (including minimizing coastal and known fault-line
exposures) and the Companys limited historical catastrophe losses.
In addition to the large line capacity and catastrophe reinsurance programs discussed above, AFG
purchases reinsurance on a product-by-product basis. AFG regularly reviews the financial strength
of its current and potential reinsurers. These reviews include consideration of credit ratings,
available capital, claims paying history and expertise. This process periodically results in the
transfer of risks to more financially secure reinsurers. Substantially all reinsurance is ceded to
companies with investment grade or better S&P ratings or is secured by funds withheld or other
collateral. Under funds withheld arrangements, AFG retains ceded premiums to fund ceded losses
as they become due from the reinsurer. Recoverables from the following companies were individually
between 5% and 11% of AFGs total reinsurance recoverable (net of payables to reinsurers) at
December 31, 2011: Everest Reinsurance Company, Munich Reinsurance America, Inc. and Swiss
Reinsurance America Corporation. In addition, AFG has a reinsurance recoverable from Ohio Casualty
Insurance Company of $212 million related to that companys purchase of AFGs commercial lines
business in 1998.
Reinsurance is provided on one of two bases, facultative or treaty. Facultative reinsurance is
generally provided on a risk by risk basis. Individual risks are ceded and assumed based on an
offer and acceptance of risk by each party to the transaction. AFG purchases facultative
reinsurance, both pro rata and excess of loss, depending on the risk and available reinsurance
markets. Treaty reinsurance provides for risks meeting prescribed criteria to be automatically
ceded and assumed according to contract provisions.
The following table presents (by type of coverage) the amount of each loss above the specified
retention maximum generally covered by treaty reinsurance programs (in millions) as of January 1,
2012:
|
|
|
|
|
|
|
|
|
|
|
Retention |
|
|
Reinsurance |
|
Coverage |
|
Maximum |
|
|
Coverage(a) |
|
California Workers Compensation |
|
$ |
3 |
|
|
$ |
147 |
|
Other Workers Compensation |
|
|
2 |
|
|
|
48 |
|
Commercial Umbrella |
|
|
4 |
|
|
|
46 |
|
Property General |
|
|
3 |
|
|
|
98 |
|
Property Catastrophe |
|
|
26 |
|
|
|
154 |
|
|
|
|
(a) |
|
Reinsurance covers substantial portions of losses in excess of retention.
However, in general, losses resulting from terrorism are not covered. |
6
In addition to the coverage shown above, AFG reinsures a portion of its crop insurance business
through the Federal Crop Insurance Corporation (FCIC). The FCIC offers both proportional (or
quota share) and non-proportional coverages. The proportional coverage provides that a fixed
percentage of risk is assumed by the FCIC. The non-proportional coverage allows AFG to select
desired retention of risk on a state-by-state, county, crop or plan basis. AFG typically reinsures
15% to 25% of gross written premium with the FCIC. AFG also purchases quota share reinsurance in
the private market. This quota share provides for a ceding commission to AFG and a profit sharing
provision. During 2011, AFG reinsured 52.5% of premiums not reinsured by the FCIC in the private
market and purchased stop loss protection coverage for the remaining portion of the business. AFG
expects to utilize similar levels of reinsurance in 2012. In 2010 and 2009, AFG reinsured
approximately 50% and 90%, respectively, of premiums not reinsured by the FCIC.
Included in the Balance Sheet caption recoverables from reinsurers were approximately $72 million
on paid losses and LAE and $2.2 billion on unpaid losses and LAE at December 31, 2011. These
amounts are net of allowances of approximately $26 million for doubtful collection of reinsurance
recoverables. The collectibility of a reinsurance balance is based upon the financial condition of
a reinsurer as well as individual claim considerations.
Reinsurance premiums ceded and assumed are presented in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Reinsurance ceded |
|
$ |
1,336 |
|
|
$ |
1,181 |
|
|
$ |
1,452 |
|
Reinsurance ceded, excluding crop |
|
|
652 |
|
|
|
727 |
|
|
|
680 |
|
Reinsurance assumed including
involuntary pools and associations |
|
|
45 |
|
|
|
47 |
|
|
|
32 |
|
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated liability for unpaid losses and LAE of
AFGs insurance subsidiaries. This liability represents estimates of the ultimate net cost of all
unpaid losses and LAE and is determined by using case-basis evaluations, actuarial projections and
managements judgment. These estimates are subject to the effects of changes in claim amounts and
frequency and are periodically reviewed and adjusted as additional information becomes known. In
accordance with industry practices, such adjustments are reflected in current year operations.
Generally, reserves for reinsurance assumed and involuntary pools and associations are reflected in
AFGs results at the amounts reported by those entities.
7
The following table presents the development of AFGs liability for losses and LAE, net of
reinsurance, on a GAAP basis for the last ten years. The top line of the table shows the estimated
liability (in millions) for unpaid losses and LAE recorded at the balance sheet date for the
indicated years. The second line shows the re-estimated liability as of December 31, 2011. The
remainder of the table presents intervening development as percentages of the initially estimated
liability. The development results from additional information and experience in subsequent years,
particularly with regard to A&E charges, settlements and reallocations as detailed below. The
middle line shows a cumulative deficiency (redundancy), which represents the aggregate percentage
increase (decrease) in the liability initially estimated. The lower portion of the table indicates
the cumulative amounts paid as of successive periods as a percentage of the original loss reserve
liability. For purposes of this table, reserves of businesses sold are considered paid at the date
of sale. See Note O - Insurance - Property and Casualty Insurance Reserves to the financial
statements for an analysis of changes in AFGs estimated liability for losses and LAE, net and
gross of reinsurance, over the past three years on a GAAP basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Liability for unpaid losses
and loss adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As originally estimated |
|
$ |
3,338 |
|
|
$ |
3,466 |
|
|
$ |
2,901 |
|
|
$ |
3,155 |
|
|
$ |
3,619 |
|
|
$ |
3,791 |
|
|
$ |
3,868 |
|
|
$ |
4,154 |
|
|
$ |
3,899 |
|
|
$ |
4,164 |
|
|
$ |
4,282 |
|
As re-estimated at
December 31, 2011 |
|
$ |
4,306 |
|
|
$ |
4,289 |
|
|
$ |
3,444 |
|
|
$ |
3,310 |
|
|
$ |
3,332 |
|
|
$ |
3,280 |
|
|
$ |
3,268 |
|
|
$ |
3,756 |
|
|
$ |
3,673 |
|
|
$ |
4,095 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability re-estimated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
104.5 |
% |
|
|
104.4 |
% |
|
|
104.9 |
% |
|
|
106.3 |
% |
|
|
98.4 |
% |
|
|
97.4 |
% |
|
|
93.6 |
% |
|
|
95.2 |
% |
|
|
96.0 |
% |
|
|
98.3 |
% |
|
|
|
|
Two years later |
|
|
110.0 |
% |
|
|
109.7 |
% |
|
|
114.0 |
% |
|
|
106.1 |
% |
|
|
98.8 |
% |
|
|
92.3 |
% |
|
|
89.7 |
% |
|
|
91.6 |
% |
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
Three years later |
|
|
113.8 |
% |
|
|
118.0 |
% |
|
|
114.7 |
% |
|
|
107.7 |
% |
|
|
95.2 |
% |
|
|
89.5 |
% |
|
|
85.8 |
% |
|
|
90.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
121.1 |
% |
|
|
118.8 |
% |
|
|
118.0 |
% |
|
|
106.0 |
% |
|
|
93.6 |
% |
|
|
87.0 |
% |
|
|
84.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
122.8 |
% |
|
|
122.1 |
% |
|
|
118.5 |
% |
|
|
105.5 |
% |
|
|
92.1 |
% |
|
|
86.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
126.5 |
% |
|
|
123.0 |
% |
|
|
118.8 |
% |
|
|
104.4 |
% |
|
|
92.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
127.7 |
% |
|
|
123.6 |
% |
|
|
117.9 |
% |
|
|
104.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
128.6 |
% |
|
|
123.1 |
% |
|
|
118.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
128.2 |
% |
|
|
123.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
129.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative deficiency
(redundancy) (a) |
|
|
29.0 |
% |
|
|
23.7 |
% |
|
|
18.7 |
% |
|
|
4.9 |
% |
|
|
(7.9 |
%) |
|
|
(13.5 |
%) |
|
|
(15.5 |
%) |
|
|
(9.6 |
%) |
|
|
(5.8 |
%) |
|
|
(1.7 |
%) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
32.7 |
% |
|
|
42.2 |
% |
|
|
27.3 |
% |
|
|
25.4 |
% |
|
|
23.5 |
% |
|
|
22.3 |
% |
|
|
21.0 |
% |
|
|
24.0 |
% |
|
|
21.3 |
% |
|
|
23.3 |
% |
|
|
|
|
Two years later |
|
|
61.3 |
% |
|
|
60.9 |
% |
|
|
46.4 |
% |
|
|
40.8 |
% |
|
|
37.5 |
% |
|
|
34.8 |
% |
|
|
32.9 |
% |
|
|
37.2 |
% |
|
|
35.9 |
% |
|
|
|
|
|
|
|
|
Three years later |
|
|
74.4 |
% |
|
|
72.7 |
% |
|
|
58.8 |
% |
|
|
52.4 |
% |
|
|
46.9 |
% |
|
|
43.6 |
% |
|
|
41.6 |
% |
|
|
47.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
82.8 |
% |
|
|
80.3 |
% |
|
|
68.5 |
% |
|
|
60.1 |
% |
|
|
53.6 |
% |
|
|
49.9 |
% |
|
|
47.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
88.4 |
% |
|
|
86.2 |
% |
|
|
75.2 |
% |
|
|
65.6 |
% |
|
|
58.7 |
% |
|
|
54.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
93.4 |
% |
|
|
90.7 |
% |
|
|
80.1 |
% |
|
|
70.5 |
% |
|
|
62.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
97.0 |
% |
|
|
94.2 |
% |
|
|
84.4 |
% |
|
|
73.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
100.1 |
% |
|
|
96.9 |
% |
|
|
87.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
102.7 |
% |
|
|
99.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
104.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Cumulative deficiency (redundancy): |
|
Special A&E charges,
settlements and
reallocations |
|
|
9.4 |
% |
|
|
8.2 |
% |
|
|
9.8 |
% |
|
|
9.1 |
% |
|
|
2.9 |
% |
|
|
2.8 |
% |
|
|
1.6 |
% |
|
|
1.2 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
|
|
|
|
Other |
|
|
19.6 |
% |
|
|
15.5 |
% |
|
|
8.9 |
% |
|
|
(4.2 |
%) |
|
|
(10.8 |
%) |
|
|
(16.3 |
%) |
|
|
(17.1 |
%) |
|
|
(10.8 |
%) |
|
|
(7.1 |
%) |
|
|
(2.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29.0 |
% |
|
|
23.7 |
% |
|
|
18.7 |
% |
|
|
4.9 |
% |
|
|
(7.9 |
%) |
|
|
(13.5 |
%) |
|
|
(15.5 |
%) |
|
|
(9.6 |
%) |
|
|
(5.8 |
%) |
|
|
(1.7 |
%) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the net liability to the gross liability for unpaid losses and LAE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
As originally estimated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability shown above |
|
$ |
3,338 |
|
|
$ |
3,466 |
|
|
$ |
2,901 |
|
|
$ |
3,155 |
|
|
$ |
3,619 |
|
|
$ |
3,791 |
|
|
$ |
3,868 |
|
|
$ |
4,154 |
|
|
$ |
3,899 |
|
|
$ |
4,164 |
|
|
$ |
4,282 |
|
Add reinsurance
recoverables |
|
|
1,525 |
|
|
|
1,804 |
|
|
|
2,059 |
|
|
|
2,234 |
|
|
|
2,243 |
|
|
|
2,309 |
|
|
|
2,300 |
|
|
|
2,610 |
|
|
|
2,513 |
|
|
|
2,249 |
|
|
|
2,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability |
|
$ |
4,863 |
|
|
$ |
5,270 |
|
|
$ |
4,960 |
|
|
$ |
5,389 |
|
|
$ |
5,862 |
|
|
$ |
6,100 |
|
|
$ |
6,168 |
|
|
$ |
6,764 |
|
|
$ |
6,412 |
|
|
$ |
6,413 |
|
|
$ |
6,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As re-estimated at
December 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability shown above |
|
$ |
4,306 |
|
|
$ |
4,289 |
|
|
$ |
3,444 |
|
|
$ |
3,310 |
|
|
$ |
3,332 |
|
|
$ |
3,280 |
|
|
$ |
3,268 |
|
|
$ |
3,756 |
|
|
$ |
3,673 |
|
|
$ |
4,095 |
|
|
|
|
|
Add reinsurance
recoverables |
|
|
2,516 |
|
|
|
2,626 |
|
|
|
2,750 |
|
|
|
2,544 |
|
|
|
2,323 |
|
|
|
2,141 |
|
|
|
1,933 |
|
|
|
2,281 |
|
|
|
1,983 |
|
|
|
2,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability |
|
$ |
6,822 |
|
|
$ |
6,915 |
|
|
$ |
6,194 |
|
|
$ |
5,854 |
|
|
$ |
5,655 |
|
|
$ |
5,421 |
|
|
$ |
5,201 |
|
|
$ |
6,037 |
|
|
$ |
5,656 |
|
|
$ |
6,102 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative
Deficiency (redundancy) (a) |
|
|
40.3 |
% |
|
|
31.2 |
% |
|
|
24.9 |
% |
|
|
8.6 |
% |
|
|
(3.5 |
%) |
|
|
(11.1 |
%) |
|
|
(15.7 |
%) |
|
|
(10.7 |
%) |
|
|
(11.8 |
%) |
|
|
(4.8 |
%) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Gross cumulative
deficiency (redundancy): |
|
Special A&E charges,
settlements and
reallocations |
|
|
7.4 |
% |
|
|
6.2 |
% |
|
|
6.7 |
% |
|
|
6.1 |
% |
|
|
2.1 |
% |
|
|
2.1 |
% |
|
|
1.0 |
% |
|
|
0.7 |
% |
|
|
0.7 |
% |
|
|
0.8 |
% |
|
|
|
|
Other |
|
|
32.9 |
% |
|
|
25.0 |
% |
|
|
18.2 |
% |
|
|
2.5 |
% |
|
|
(5.6 |
%) |
|
|
(13.2 |
%) |
|
|
(16.7 |
%) |
|
|
(11.4 |
%) |
|
|
(12.5 |
%) |
|
|
(5.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40.3 |
% |
|
|
31.2 |
% |
|
|
24.9 |
% |
|
|
8.6 |
% |
|
|
(3.5 |
%) |
|
|
(11.1 |
%) |
|
|
(15.7 |
%) |
|
|
(10.7 |
%) |
|
|
(11.8 |
%) |
|
|
(4.8 |
%) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
In evaluating the re-estimated liability and cumulative deficiency (redundancy), it should be noted
that each percentage includes the effects of changes in amounts for prior periods. For example,
AFGs $50 million special A&E charge related to losses recorded in 2011, but incurred before 2001,
is included in the re-estimated liability and cumulative deficiency (redundancy) percentage for
each of the previous years shown. Conditions and trends that have affected development of the
liability in the past may not necessarily exist in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this table.
A significant portion of the adverse development in the tables is due to A&E exposures for which
AFG has been held liable under general liability policies written prior to 1987, even though such
coverage was not intended. Other factors affecting adverse development included changes in the
legal environment, including more liberal coverage decisions and higher jury awards, higher legal
fees, the general state of the economy and medical cost inflation.
The differences between the liability for losses and LAE reported in the annual statements filed
with the state insurance departments in accordance with statutory accounting principles (SAP) and
that reported in the accompanying consolidated financial statements in accordance with GAAP at
December 31, 2011 are as follows (in millions):
|
|
|
|
|
Liability reported on a SAP basis, net of $157 million
of retroactive reinsurance |
|
$ |
3,749 |
|
Reinsurance recoverables, net of allowance |
|
|
2,238 |
|
Other, including reserves of foreign insurers |
|
|
533 |
|
|
|
|
|
|
|
|
|
|
Liability reported on a GAAP basis |
|
$ |
6,520 |
|
|
|
|
|
Asbestos and Environmental (A&E) Reserves AFGs property and casualty group, like many others in
the industry, has A&E claims arising in most cases from general liability policies written more
than twenty-five years ago. The establishment of reserves for such A&E claims presents unique and
difficult challenges and is subject to uncertainties significantly greater than those presented by
other types of claims. For a discussion of these uncertainties, see Item 7 Managements
Discussion and Analysis Uncertainties Asbestos and Environmental related Insurance Reserves
and Note M Contingencies to the financial statements.
Management has conducted comprehensive studies of its asbestos and environmental reserves with the
aid of outside actuarial and engineering firms and specialty outside counsel every two years with
an in-depth internal review during the intervening years. Charges resulting from these studies and
reviews are included in Incurred losses and LAE in the table below. The 2011 comprehensive study
relied on a ground-up exposure analysis and considered products and non-products exposures, paid
claims history, the pattern of new claims, settlements and projected development. As a result of
the study, AFG recorded a $50 million special charge (net of reinsurance) in the second quarter of
2011 to increase the property and casualty groups A&E reserves. During the course of the in-depth
internal review in 2010, there were no newly identified emerging trends or issues that management
believes significantly impacted the overall adequacy of AFGs A&E reserves. Likewise, the 2009
comprehensive study resulted in only minor adjustments to A&E reserves. For a discussion of the
A&E reserve strengthening, see Managements Discussion and Analysis Results of Operations
Asbestos and Environmental Reserve Charges.
The following table (in millions) is a progression of the property and casualty groups A&E
reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at beginning of year |
|
$ |
342 |
|
|
$ |
378 |
|
|
$ |
399 |
|
Incurred losses and LAE |
|
|
50 |
|
|
|
8 |
|
|
|
4 |
|
Paid losses and LAE |
|
|
(30 |
) |
|
|
(44 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Reserves at end of year, net of
reinsurance recoverable |
|
|
362 |
|
|
|
342 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable, net of allowance |
|
|
92 |
|
|
|
74 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at end of year |
|
$ |
454 |
|
|
$ |
416 |
|
|
$ |
457 |
|
|
|
|
|
|
|
|
|
|
|
9
Marketing
The property and casualty insurance group directs its sales efforts primarily through independent
property and casualty insurance agents and brokers, although small portions are written through
employee agents. Independent agents and brokers generally receive a commission on the sale of each
policy. Some agents and brokers are eligible for a bonus commission based on the overall
profitability of policies placed with AFG by the broker or agent in a particular year. The
property and casualty insurance group writes insurance through several thousand agents and brokers.
Competition
AFGs property and casualty insurance businesses compete with other individual insurers, state
funds and insurance groups of varying sizes, some of which are mutual insurance companies
possessing competitive advantages in that all their profits inure to their policyholders. See Item
1A - Risk Factors. They also compete with self-insurance plans, captive programs and risk
retention groups. Due to the specialty nature of these coverages, competition is based primarily
on service to policyholders and agents, specific characteristics of products offered and reputation
for claims handling. Financial strength ratings, price, commissions and profit sharing terms are
also important factors. Management believes that sophisticated data analysis for refinement of
risk profiles, extensive specialized knowledge and loss prevention service have helped AFG compete
successfully.
Annuity and Supplemental Insurance Operations
General
AFGs annuity and supplemental insurance operations are conducted through Great American Financial
Resources, Inc. (GAFRI). GAFRIs primary insurance subsidiaries include Great American Life
Insurance Company (GALIC), Annuity Investors Life Insurance Company (AILIC), United Teacher
Associates Insurance Company (UTA) and Loyal American Life Insurance Company (Loyal). These
companies market retirement products, primarily fixed and indexed annuities, and various forms of
supplemental insurance such as Medicare supplement. All of these companies sell their products
through independent producers. GAFRI and its subsidiaries employed approximately 800 persons at
December 31, 2011.
Following is certain information concerning GAFRIs largest subsidiaries (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Statutory |
|
|
Policies |
|
|
Ratings |
Company |
|
Principal Products |
|
Premiums |
|
|
In Force |
|
|
AM Best |
|
S&P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GALIC |
|
Fixed and indexed annuities |
|
$ |
2,803 |
|
|
|
392,000 |
|
|
A |
|
A+ |
AILIC |
|
Fixed and indexed annuities |
|
|
301 |
|
|
|
137,000 |
|
|
A |
|
A+ |
UTA |
|
Supplemental insurance |
|
|
206 |
|
|
|
194,000 |
|
|
B++ |
|
not rated |
Loyal |
|
Supplemental insurance |
|
|
103 |
|
|
|
132,000 |
|
|
A- |
|
not rated |
AFG believes that the ratings assigned by independent insurance rating agencies are important
because agents, potential policyholders and school districts often use a companys rating as an
initial screening device in considering annuity products. AFG believes that (i) a rating in the
A category by A.M. Best is necessary to successfully market tax-deferred annuities to public
education employees and other non-profit groups and (ii) a rating in the A category by at least
one rating agency is necessary to successfully compete in other annuity markets. During 2010,
AFGs principal annuity subsidiaries were upgraded by S&P to A+ and its principal supplemental
insurance subsidiaries were downgraded one notch by A.M. Best to A- and B++. Ratings are an
important competitive factor; AFG believes that these entities can successfully compete in these
markets with their respective ratings.
10
Statutory premiums of AFGs annuity and supplemental insurance companies over the last three years
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
Non-403(b) indexed annuities |
|
$ |
1,549 |
|
|
$ |
735 |
|
|
$ |
402 |
|
Non-403(b) fixed annuities |
|
|
239 |
|
|
|
430 |
|
|
|
294 |
|
Bank fixed annuities |
|
|
971 |
|
|
|
737 |
|
|
|
314 |
|
403(b) fixed and indexed annuities |
|
|
257 |
|
|
|
305 |
|
|
|
337 |
|
Variable annuities |
|
|
70 |
|
|
|
73 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
Total annuities |
|
|
3,086 |
|
|
|
2,280 |
|
|
|
1,434 |
|
Supplemental insurance |
|
|
384 |
|
|
|
402 |
|
|
|
390 |
|
Life insurance |
|
|
35 |
|
|
|
39 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,505 |
|
|
$ |
2,721 |
|
|
$ |
1,868 |
|
|
|
|
|
|
|
|
|
|
|
Annuities
AFGs principal retirement products are Flexible Premium Deferred Annuities (FPDAs) and Single
Premium Deferred Annuities (SPDAs). Annuities are long-term retirement saving instruments that
benefit from income accruing on a tax-deferred basis. The issuer of the annuity collects premiums,
credits interest or earnings on the policy and pays out a benefit upon death, surrender or
annuitization. FPDAs are characterized by premium payments that are flexible in both amount and
timing as determined by the policyholder and are generally made through payroll deductions. SPDAs
are generally issued in exchange for a one-time lump-sum premium payment.
Annuity contracts are generally classified as either fixed rate (including indexed) or variable.
With a traditional fixed rate annuity, AFG seeks to maintain a desired spread between the yield on
its investment portfolio and the rate it credits. AFG accomplishes this by: (i) offering crediting
rates that it has the option to change after any initial guarantee period (subject to minimum
interest rate guarantees); (ii) designing annuity products that encourage persistency; and (iii)
maintaining an appropriate matching of assets and liabilities.
An indexed annuity provides policyholders with the opportunity to receive a crediting rate tied, in
part, to the performance of an existing market index (generally the S&P 500) while protecting
against the related downside risk through a guarantee of principal (excluding surrender charges).
AFG purchases call options designed to substantially offset the effect of the index participation
in the liabilities associated with indexed annuities.
As an ancillary product to its traditional fixed rate and indexed annuities, AFG offers variable
annuities. With a variable annuity, the earnings credited to the policy vary based on the
investment results of the underlying investment options chosen by the policyholder, generally
without any guarantee of principal except in the case of death of the insured. Premiums directed
to the underlying investment options maintained in separate accounts are invested in funds managed
by various independent investment managers. AFG earns a fee on amounts deposited into separate
accounts. Subject to contractual provisions, policyholders may also choose to direct all or a
portion of their premiums to various fixed rate options, in which case AFG earns a spread on
amounts deposited.
Supplemental and Life Insurance Products
AFG offers a variety of supplemental insurance products primarily to individuals age 55 and older.
Principal products include coverage for Medicare supplement, cancer and accidental injury. These
products are sold primarily through independent agents, including a former captive career agency
force that was sold by AFG in the fourth quarter of 2010. At December 31, 2011, AFGs reserves
related to Medicare supplement, cancer, accidental injury and similar products were $191 million,
net of reinsurance recoverables.
AFG ceased new sales of long-term care insurance beginning in January 2010. Renewal premiums on
approximately 60,000 policies will be accepted unless those policies lapse. At December 31, 2011,
AFGs long-term care insurance reserves were $490 million, net of reinsurance recoverables.
11
Although AFG no longer actively markets new life insurance products, it continues to service and
receive renewal premiums on its in-force block of approximately 211,000 policies and $21 billion
gross ($5 billion net) of life insurance in force at December 31, 2011. At December 31, 2011,
AFGs life insurance reserves were $492 million, net of reinsurance recoverables.
Marketing
The majority of AFGs FPDAs are sold in qualified markets under sections 403(b) and 457 of the
Internal Revenue Code. In the 403(b) and 457 markets, schools, government agencies and certain
other non-profit organizations may allow employees to save for retirement through contributions
made on a before-tax basis. Federal income taxes are not payable on pretax contributions or
earnings until amounts are withdrawn.
AFG sells its single premium non-403(b) fixed rate annuities, excluding bank production (discussed
below), primarily through a network of approximately 100 national marketing organizations (NMOs)
and managing general agents (MGAs) who, in turn, direct over 1,500 actively producing agents.
In 2011, AFG began selling its 403(b) fixed rate annuities directly through writing agents rather
than through NMOs and MGAs as it had historically done. AFG believes that, by eliminating the
costs associated with NMOs and MGAs in this market segment, it will be able to increase sales by
offering higher crediting rates to policyholders and higher commissions to writing agents while
still reducing its overall costs.
AFG also sells non-403(b) fixed rate annuities in banks through independent agents and brokers, as
well as through direct relationships with certain financial institutions.
Premiums generated through AFGs direct relationship with PNC Bank and through Regions Bank and
BB&T by independent brokers were the largest individual sources of annuity premiums in 2011 and
accounted for approximately 11%, 11% and 7%, respectively, of AFGs overall annuity premiums in
2011.
AFG is licensed to sell its fixed annuity products in all states except New York; it is licensed to
sell its variable products in all states except New York and Vermont. In 2011, the only states
that accounted for 5% or more of AFGs annuity premiums were Florida (11%), California (9%),
Michigan (6%), Pennsylvania (5%) and Ohio (5%). At December 31, 2011, AFG had approximately
448,000 annuity policies in force.
Competition
AFGs annuity and supplemental insurance businesses operate in highly competitive markets. They
compete with other insurers and financial institutions based on many factors, including: (i)
ratings; (ii) financial strength; (iii) reputation; (iv) service to policyholders and agents; (v)
product design (including interest rates credited, index participation and premium rates charged);
(vi) commissions; and (vii) number of school districts in which a company has approval to sell.
Since most policies are marketed and distributed through independent agents, the insurance
companies must also compete for agents.
No single insurer dominates the markets in which AFGs annuity and supplemental insurance
businesses compete. See Item 1A Risk Factors. Competitors include (i) individual insurers and
insurance groups, (ii) mutual funds and (iii) other financial institutions. In a broader sense,
AFGs annuity and supplemental insurance businesses compete for retirement savings with a variety
of financial institutions offering a full range of financial services. In the bank annuity market,
AFGs annuities compete directly against competitors bank annuities, certificates of deposit and
other investment alternatives at the point of sale.
Sales of annuities, including renewal premiums, are affected by many factors, including: (i)
competitive annuity products and rates; (ii) the general level and volatility of interest rates,
including the slope of the yield curve; (iii) the favorable tax treatment of annuities; (iv)
commissions paid to agents; (v) services offered; (vi) ratings from independent insurance rating
agencies; (vii) other alternative investments; (viii) performance and volatility of the equity
markets; (ix) media coverage of annuities; (x) regulatory developments regarding suitability and the sales
process; and (xi) general economic conditions.
12
Other Operations
Through subsidiaries, AFG is engaged in a variety of other operations, including commercial real
estate operations in Cincinnati (office buildings and The Cincinnatian Hotel), New Orleans (Le
Pavillon Hotel), Whitefield, New Hampshire (Mountain View Grand Resort), Chesapeake Bay (Skipjack
Cove Yachting Resort and Bay Bridge Marina), Charleston (Charleston Harbor Resort and Marina), Palm
Beach (Sailfish Marina and Resort), Florida City, Florida (retail commercial development) and
apartments in Louisville and Pittsburgh. These operations employed approximately 500 full-time
employees at December 31, 2011.
Investment Portfolio
General
A summary of AFGs fixed maturities and equity securities is shown in Note E to the financial
statements. For additional information on AFGs investments, see Item 7 Managements Discussion
and Analysis Investments. Portfolio yields are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on Fixed Maturities (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Excluding realized gains and losses |
|
|
5.7 |
% |
|
|
6.2 |
% |
|
|
6.9 |
% |
Including realized gains and losses |
|
|
5.8 |
% |
|
|
6.6 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on Equity Securities (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Excluding realized gains and losses |
|
|
4.8 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Including realized gains and losses |
|
|
18.5 |
% |
|
|
15.8 |
% |
|
|
20.7 |
% |
|
|
|
(a) |
|
Based on amortized cost; excludes effects of changes in unrealized
gains and losses. Realized losses include impairment charges. |
The table below compares total returns, which include changes in fair value, on AFGs fixed
maturities and equity securities to comparable public indices. While there are no directly
comparable indices to AFGs portfolio, the two shown below are widely used benchmarks in the
financial services industry. Both AFGs performance and the indices include changes in unrealized
gains and losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return on AFGs fixed maturities |
|
|
7.7 |
% |
|
|
10.9 |
% |
|
|
21.1 |
% |
Barclays Capital U.S. Universal Bond Index |
|
|
7.4 |
% |
|
|
7.2 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return on AFGs equity securities |
|
|
6.9 |
% |
|
|
17.4 |
% |
|
|
48.0 |
% |
Standard & Poors 500 Index |
|
|
2.1 |
% |
|
|
15.1 |
% |
|
|
26.5 |
% |
Fixed Maturity Investments
AFGs bond portfolio is invested primarily in taxable bonds. The following table shows AFGs
available for sale fixed maturities by Standard & Poors Corporation or comparable rating as of
December 31, 2011 (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair Value |
|
S&P or comparable rating |
|
Cost |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA, AA, A |
|
$ |
13,847 |
|
|
$ |
14,820 |
|
|
|
68 |
% |
BBB |
|
|
4,422 |
|
|
|
4,745 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
18,269 |
|
|
|
19,565 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
BB |
|
|
667 |
|
|
|
638 |
|
|
|
3 |
|
B |
|
|
584 |
|
|
|
547 |
|
|
|
3 |
|
CCC, CC, C |
|
|
720 |
|
|
|
723 |
|
|
|
3 |
|
D |
|
|
322 |
|
|
|
334 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
2,293 |
|
|
|
2,242 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,562 |
|
|
$ |
21,807 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
13
At December 31, 2011, approximately 77% of AFGs mortgage-backed securities (MBS), having a fair
value of $6.8 billion, were rated investment grade (BBB or better) by major rating firms. The
National Association of Insurance Commissioners (NAIC)
has retained third-party investment management firms to assist in the determination of appropriate
NAIC designations for MBS based not only on the probability of loss (which is the primary basis of
ratings by the major ratings firms), but also on the severity of loss and statutory carrying value.
At December 31, 2011, 97% (based on statutory carrying value of $6.5 billion) of AFGs MBS
portfolio held by its insurance companies had an NAIC designation of 1 or 2 (the highest of the six
designations).
Equity Investments
At December 31, 2011, AFG held common and perpetual preferred stocks with a fair value of $928
million, the largest of which was a $130 million common stock investment in Verisk Analytics,
Inc. (Verisk), a provider of risk information for insurance companies. AFG recorded after-tax
gains of $49 million in 2011, $17 million in 2010 and $49 million in 2009 on sales of a portion
of its investment in Verisk.
Regulation
AFGs insurance company subsidiaries are subject to regulation in the jurisdictions where they do
business. In general, the insurance laws of the various states establish regulatory agencies with
broad administrative powers governing, among other things, premium rates, solvency standards,
licensing of insurers, agents and brokers, trade practices, forms of policies, maintenance of
specified reserves and capital for the protection of policyholders, deposits of securities for the
benefit of policyholders, investment activities and relationships between insurance subsidiaries
and their parents and affiliates. Material transactions between insurance subsidiaries and their
parents and affiliates generally must receive prior approval of the applicable insurance regulatory
authorities and be disclosed. In addition, while differing from state to state, these regulations
typically restrict the maximum amount of dividends that may be paid by an insurer to its
shareholders in any twelve-month period without advance regulatory approval. Such limitations are
generally based on net earnings or statutory surplus. Under applicable restrictions, the maximum
amount of dividends available to AFG in 2012 from its insurance subsidiaries without seeking
regulatory clearance is approximately $546 million.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), among
other things, established a Federal Insurance Office (FIO) within the U.S. Treasury. Under this
law, regulations will need to be created for the FIO to carry out its mandate to focus on systemic
risk oversight. The FIO is required to gather information regarding the insurance industry and
submit to Congress a plan to modernize and improve insurance regulation in the U.S. At this time,
it is difficult to predict the extent to which the Dodd-Frank Act, or any resulting regulations,
will impact AFGs operations.
Marketform, AFGs UK-based Lloyds insurer, is subject to regulation by the European Unions
executive body, the European Commission. In 2014, Marketform will be required to adopt new capital
adequacy and risk management regulations known as Solvency II. Implementation is not expected to
be material to AFG.
Most states have created insurance guaranty associations to provide for the payment of claims of
insurance companies that become insolvent. Annual guaranty assessments for AFGs insurance
companies have not been material.
14
ITEM 1A
Risk Factors
In addition to the other information set forth in this report, the following factors could
materially affect AFGs business, financial condition, cash flows or future results. Any one of
these factors could cause AFGs actual results to vary materially from recent results or from
anticipated future results. The risks described below are not the only risks facing AFG.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect AFGs business, financial condition and/or
operating results.
Adverse developments in the financial markets and deterioration in global economic conditions could
have a material adverse effect on AFGs results of operations and financial condition.
The highly volatile debt and equity markets, lack of liquidity, widening credit spreads and the
collapse of several financial institutions during 2008 and early 2009 resulted in significant
realized and unrealized losses in AFGs investment portfolio. Although domestic economic
conditions and financial markets have improved, financial markets continue to be volatile and
there is continued uncertainty with regards to the global economy, particularly in Europe. See
Item 7A Quantitative and Qualitative Disclosures about Market Risk European Debt
Exposure. At December 31, 2011, AFGs net unrealized gain on fixed maturity investments was
$1.2 billion consisting of gross gains of $1.5 billion and gross losses of $249 million.
Although AFG intends to hold its investments with unrealized losses until they recover in value,
its intent may change for a variety of reasons as discussed in Item 7 Managements Discussion
and Analysis Investments. A change in AFGs ability or intent with regard to a security in
an unrealized loss position would result in the recognition of a realized loss.
AFGs investment performance could also be adversely impacted by the types of investments,
industry groups and/or individual securities in which it invests. As of December 31, 2011, 87%
of AFGs investment portfolio was invested in fixed maturity securities. Certain risks are
inherent in connection with fixed maturity securities including loss upon default and price
volatility in reaction to changes in interest rates and general market factors. AFGs equity
securities, which represent 4% of its investment portfolio, are subject to market price
volatility.
MBS represented about one-third of AFGs fixed maturity securities at December 31, 2011. AFGs
MBS portfolio will continue to be impacted by general economic conditions, including
unemployment levels, real estate values and other factors that could negatively affect the
creditworthiness of borrowers. MBS in which the underlying collateral is subprime mortgages
represented 3% of AFGs total fixed maturity portfolio at December 31, 2011; MBS in which the
underlying collateral is Alt-A mortgages (risk profile between prime and subprime) represented
approximately 3%. See Item 7A Quantitative and Qualitative Disclosures About Market Risk
Fixed Maturity Portfolio.
AFG cannot predict whether and the extent to which industry sectors in which it maintains
investments may suffer losses as a result of potential declines in commercial and economic
activity, or how any such decline might impact the ability of companies within the affected
industry sectors to pay interest or principal on their securities, or how the value of any
underlying collateral might be affected.
Investment returns are an important part of AFGs overall profitability. Accordingly, adverse
fluctuations in the fixed income or equity markets could adversely impact AFGs profitability,
financial condition or cash flows.
In addition, should economic conditions deteriorate or remain weak, it could have a material
adverse effect on AFGs insureds and reinsurers. However, the impact that this would have on AFGs
business cannot be predicted.
15
Intense competition could adversely affect AFGs profitability.
The property and casualty group operates in a highly competitive industry that is affected by many
factors that can cause significant fluctuations in its results of operations. The industry has
historically been subject to pricing cycles characterized by periods of intense competition and
lower premium rates (a downcycle) followed by periods of reduced competition, reduced
underwriting capacity due to lower policyholders surplus and higher premium rates (an upcycle).
The trend of AFGs underwriting results typically follows that of the industry and a prolonged
downcycle could adversely affect AFGs results of operations.
AFGs specialty insurance businesses compete with other individual insurers, state funds and
insurance groups of varying sizes, some of which are mutual insurance companies possessing
competitive advantages in that all their profits inure to their policyholders. In addition,
certain foreign insurers can write business in the U.S. on a tax-advantaged basis and therefore
hold a competitive advantage over AFG. AFG also competes with self-insurance plans, captive
programs and risk retention groups. Peer companies and major competitors in some or all of AFGs
specialty lines include the following companies and/or their subsidiaries: ACE Ltd., American
International Group Inc. (Chartis and Lexington Insurance), Arch Capital Group Ltd., Chubb Corp.,
Cincinnati Financial Corp., CNA Financial Corp., Liberty Mutual, Markel Corp., Munich Re Group
(Midland), Hartford Financial Services Group, HCC Insurance Holdings, Inc., Ironshore Insurance
Ltd., RLI Corp., The Travelers Companies Inc., Tokio Marine Holdings, Inc. (Philadelphia
Consolidated), W.R. Berkley Corp., Wells Fargo Corp. (Rural Community Insurance), XL Group Plc,
Fairfax Financial Holdings Limited (Zenith National) and Zurich Financial Services Group.
AFGs annuity and supplemental insurance businesses compete with individual insurers and insurance
groups, mutual funds and other financial institutions. Competitors include the following companies
and/or their subsidiaries: ING Life Insurance and Annuity Company, Metropolitan Life Insurance
Company, American International Group Inc., Western National Life Insurance Company, Life Insurance
Company of the Southwest, Midland National Life Insurance Company, Allianz Life Insurance Company
of North America, Aviva Life and Annuity Company, Mutual of Omaha Insurance Company and Bankers
Life and Casualty Company. Bank annuity premiums represented approximately one-third of AFGs
annuity premiums in 2011 and have been a key driver in the growth of AFGs annuity business over
the last three years. Approximately 89% of AFGs bank annuity premiums in 2011 were generated
through three large banks. Although AFG has been able to add several new banks in 2010 and 2011,
the failure to replace these banks if they significantly reduce sales of AFG annuitites could
adversely impact AFGs future profitability. In the bank annuity market, AFG competes directly
against competitors bank annuities, certificates of deposit and other investment alternatives at
the point of sale.
Competition is based on many factors, including service to policyholders and agents, product
design, reputation for claims handling, ratings and financial strength. Price, commissions, fees,
profit sharing terms, interest crediting rates, technology and distribution channels are also
important factors. Some of AFGs competitors have more capital and greater resources than AFG, and
may offer a broader range of products and lower prices than AFG offers. If competition limits
AFGs ability to write new or renewal business at adequate rates, its results of operations will be
adversely affected.
AFGs revenues could be negatively affected if it is not able to attract and retain independent
agents.
AFGs reliance on the independent agency market makes it vulnerable to a reduction in the amount of
business written by agents. Many of AFGs competitors also rely significantly on the independent
agency market. Accordingly, AFG must compete with other insurance carriers for independent agents
business. Some of its competitors offer a wider variety of products, lower price for insurance
coverage or higher commissions. Loss of a substantial portion of the business that AFG writes
through independent agents could adversely affect AFGs revenues and profitability.
16
The inability to obtain reinsurance or to collect on ceded reinsurance could adversely impact AFGs
results.
AFG relies on the use of reinsurance to limit the amount of risk it retains. The following amounts
of gross property and casualty premiums have been ceded to other insurers: 2011 $1.3 billion
(33%); 2010 $1.2 billion (33%) and 2009 $1.5 billion (39%). The availability and cost of
reinsurance are subject to prevailing market conditions, which are beyond AFGs control and which
may affect AFGs level of business and profitablility. AFG also reinsures the death benefits above
certain retained amounts on its run-off life insurance business. AFG is also subject to credit
risk with respect to its reinsurers, as AFG will remain liable to its insureds if any reinsurer is
unable to meet its obligations under agreements covering the reinsurance ceded.
AFG is subject to comprehensive regulation, and its ability to earn profits may be restricted by
these regulations.
As previously discussed under Item 1 Business Regulation, AFG is subject to comprehensive
regulation by government agencies in the states and countries where its insurance company
subsidiaries are domiciled and where these subsidiaries issue policies and handle claims. AFG must
obtain prior approval for certain corporate actions. The regulations may limit AFGs ability to
obtain rate increases or take other actions designed to increase AFGs profitability. Such
regulation is primarily intended for the protection of policyholders rather than securityholders.
In July 2010, the Dodd-Frank Act was signed into law. Among other things, this law established the
Federal Insurance Office within the U.S. Treasury and authorizes it to gather information regarding
the insurance industry and submit to Congress a plan to modernize and improve insurance regulation
in the U.S.
Existing insurance-related laws and regulations may become more restrictive in the future or new
restrictive laws may be enacted; it is not possible to predict the potential effects of these laws
and regulations. The costs of compliance or the failure to comply with existing or future
regulations could harm AFGs financial results and its reputation with customers.
The failure of AFGs insurance subsidiaries to maintain a commercially acceptable financial
strength rating would have a significant negative effect on their ability to compete successfully.
As discussed under Item 1 Business Property and Casualty Insurance Operations and Item 1 -
Business Annuity and Supplemental Insurance Operations General, financial strength ratings
are an important factor in establishing the competitive position of insurance companies and may be
expected to have an effect on an insurance companys sales. A downgrade out of the A category in
AFGs insurers claims-paying and financial strength ratings could significantly reduce AFGs
business volumes in certain lines of business, adversely impact AFGs ability to access the capital
markets and increase AFGs borrowing costs.
The continued threat of terrorism and ongoing military and other actions, as well as civil unrest,
may adversely affect AFGs financial results.
The continued threat of terrorism, both within the United States and abroad, and the ongoing
military and other actions and heightened security measures in response to these types of threats,
as well as civil unrest, may cause significant volatility and declines in the equity markets in the
United States, Europe and elsewhere, loss of life, property damage, additional disruptions to
commerce and reduced economic activity. Actual terrorist attacks could cause losses from insurance
claims related to AFGs property and casualty and life insurance operations with adverse financial
consequences. In addition, some of the assets in AFGs investment portfolios may be adversely
affected by declines in the capital markets and economic activity caused by the continued threat of
terrorism, ongoing military and other action, heightened security measures and civil unrest.
17
AFG may experience difficulties with technology or data security, which could have an adverse
effect on its business or reputation.
AFG uses computer systems to store, retrieve, evaluate and utilize company and customer data and
information. Systems failures or outages could compromise AFGs ability to perform business
functions in a timely manner, which could harm its ability to conduct business and hurt its
relationships with business partners and customers. In the event of a disaster such as a natural
catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, AFGs
systems may be inaccessible to employees, customers or business partners for an extended period of
time. Even if AFGs employees are able to report to work, they may be unable to perform their
duties for an extended period of time if the Companys data or systems are disabled or destroyed.
Despite the implementation of security measures, these systems may also be vulnerable to physical
break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive
problems. Any compromise of security could have a material adverse effect on AFGs business or
reputation and could subject AFG to liability if confidential customer information is
misappropriated from its computer systems.
AFGs property and casualty reserves may be inadequate, which could significantly affect AFGs
financial results.
AFGs property and casualty insurance subsidiaries record reserve liabilities for the estimated
payment of losses and loss adjustment expenses for both reported and unreported claims. Due to the
inherent uncertainty of estimating reserves, it has been necessary in the past, and will continue
to be necessary in the future, to revise estimated liabilities as reflected in AFGs reserves for
claims and related expenses. The historic development of reserves for losses and loss adjustment
expense may not necessarily reflect future trends in the development of these amounts.
Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on
historical information. To the extent that reserves are inadequate and are strengthened, the
amount of such increase is treated as a charge to earnings in the period in which the deficiency is
recognized.
AFGs results could be negatively impacted by severe weather conditions or other catastrophes.
AFG recorded catastrophe losses of $46 million in 2011 (primarily from tornadoes), $49 million in
2010 (primarily from hailstorms) and $18 million in 2009 (primarily from tornadoes). Catastrophes
(some of which are seasonal) can be caused by natural events such as hurricanes, windstorms,
tornadoes, floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by
man-made events, such as terrorist attacks and riots. While not considered a catastrophe by
industry standards, droughts could also have a significant adverse impact on AFGs crop insurance
results. The extent of losses from a catastrophe is a function of the amount of insured exposure
in the area affected by the event and the severity of the event. In addition, certain catastrophes
could result in both property and non-property claims from the same event. A severe catastrophe or
a series of catastrophes could result in losses exceeding AFGs reinsurance protection and may have
a material adverse impact on its results of operations or financial condition.
Climate change and related regulation could adversely affect AFGs property and casualty insurance
operations.
While AFG does not believe that its operations are likely to be impacted by existing laws and
regulations regarding climate change, it is possible that future regulation in this area could
result in additional compliance costs and demands on management time.
To the extent that global climate change meaningfully alters weather and tidal patterns, or sea
levels, it is possible that the AFGs property and casualty insurance operations could experience
an increase in claims, primarily in coastal areas and in AFGs crop and agricultural businesses.
18
Volatility in crop prices could negatively impact AFGs financial results.
Weather conditions and the level of crop prices in the commodities market heavily impact AFGs crop
insurance business. These factors are inherently unpredictable and could result in significant
volatility in the results of the crop insurance business from one year to the next. AFGs crop
results could also be negatively impacted by pests and disease.
Exposure to asbestos or environmental claims could materially adversely affect AFGs results of
operations and financial condition.
AFG has asbestos and environmental (A&E) exposures arising from its insurance operations and
former railroad and manufacturing operations. A&E liabilities are especially difficult to estimate
for many reasons, including the long delays between exposure and manifestation of any bodily injury
or property damage, difficulty in identifying the source of the asbestos or environmental
contamination, long reporting delays and difficulty in properly allocating liability for the
asbestos or environmental damage. Claimants continue to assert new theories of recovery, and from
time to time, there is proposed state and federal legislation regarding A&E liability, which would
also affect AFGs exposure. If AFG has not established adequate reserves to cover future claims,
AFGs results of operations and financial condition could be materially adversely affected.
Changes in interest rates could adversely impact the spread AFG earns on its annuity products.
The profitability of AFGs annuity business is largely dependent on spread (the difference between
what it earns on its investments and the crediting rate it pays on its annuity contracts). Most of
AFGs annuity products have guaranteed minimum crediting rates (ranging from 4% down to currently
1% on new business). During periods of falling interest rates, AFG may not be able to fully offset
the decline in investment earnings with lower crediting rates. During periods of rising rates,
there may be competitive pressure to increase crediting rates to avoid a decline in sales or
increased surrenders, thus resulting in lower spreads. In addition, an increase in surrenders
could require the sale of investments at a time when the prices of those assets are lower due to
the increase in market rates, which may result in realized investment losses.
Variations from the actuarial assumptions used to establish certain assets and liabilities in AFGs
annuity and supplemental insurance business could negatively impact AFGs reported financial
results.
The earnings on certain products sold by AFGs annuity and supplemental insurance business depend
significantly upon the extent to which actual experience is consistent with the assumptions used in
setting reserves and establishing and amortizing deferred policy acquisition costs (DPAC). These
assumptions relate to investment yields (and spreads over fixed annuity crediting rates),
mortality, surrenders, annuitizations, morbidity (frequency and severity of sickness), policy
persistency (percentage of policies remaining in force), and, on some policies, the ability to
obtain price increases. Developing such assumptions is complex and involves information obtained
from company-specific and industry-wide data, as well as general economic information. These
assumptions, and therefore AFGs results of operations, could be negatively impacted by changes in
any of the factors listed above. Although charges related to changes in these assumptions were
immaterial in 2011, AFG recorded a $25 million pretax charge in 2010 due primarily to the impact of
changes in assumptions related to future investment yields and annuitization and death benefits
partially offset by the impact of lower expected expenses and crediting rates in the fixed annuity
business.
19
AFGs ability to get price increases and
appropriate investment yields on its closed block of long-term care policies may adversely
affect AFGs profitability.
AFG ceased writing new long-term care insurance policies in January 2010. Previous policies
written are guaranteed renewable, but can be re-priced to reflect adverse experience, subject to
regulatory approval. Inability to get needed regulatory approval may adversely impact AFGs
results of operations.
In addition, given
the duration of the long-term
care product, AFG may be unable to purchase appropriate assets with
cash flows and durations necessary to match those of future claims in that business.
As a holding company, AFG is dependent on the operations of its insurance company subsidiaries to
meet its obligations and pay future dividends.
AFG is a holding company and a legal entity separate and distinct from its insurance company
subsidiaries. As a holding company without significant operations of its own, AFGs principal
sources of funds are dividends and other distributions from its insurance company subsidiaries. As
discussed under Regulation, state insurance laws limit the ability of insurance companies to pay
dividends or other distributions and require insurance companies to maintain specified levels of
statutory capital and surplus. AFGs rights to participate in any distribution of assets of its
insurance company subsidiaries are subject to prior claims of policyholders and creditors (except
to the extent that its rights, if any, as a creditor are recognized). Consequently, AFGs ability
to pay debts, expenses and cash dividends to its shareholders may be limited.
Adverse developments in the financial markets may limit AFGs access to capital.
Financial markets in the U.S. and elsewhere experienced extreme volatility during the latter part
of 2008 and early 2009. These circumstances exerted downward pressure on stock prices and limited
access to the equity and debt markets for certain issuers, including AFG.
The three-year revolving credit facility under which AFG can borrow up to $500 million expires in
August 2013. There is no assurance that this facility will be renewed. In addition, AFGs access
to funds through this facility is dependent on the ability of its banks to meet their funding
commitments. There were no borrowings outstanding under this agreement during 2011.
If AFG cannot obtain adequate capital or sources of credit on favorable terms, or at all, its
business, operating results and financial condition would be adversely affected.
AFG may be adversely impacted by a downgrade in the ratings of its debt securities.
AFGs debt securities are rated by Standard & Poors and Moodys independent corporate credit
rating agencies. AFGs senior indebtedness is currently rated BBB+ by Standard & Poors and Baa2
by Moodys. Securities ratings are subject to revision or withdrawal at any time by the assigning
rating organization. A security rating is not a recommendation to buy, sell or hold securities.
An unfavorable
change in either of these ratings could make it more expensive to access the capital markets and
may increase the interest rate charged under AFGs current multi-bank credit line.
AFG is a party to litigation which, if decided adversely, could impact its financial results.
AFG and its subsidiaries are named as defendants in a number of lawsuits. See Item 1 Business
Property and Casualty Insurance Operations Asbestos and Environmental (A&E) Reserves, Item
3 Legal Proceedings, and Item 7 Managements Discussion and Analysis Uncertainties.
Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain and
could result in liabilities that may vary from amounts AFG has currently recorded and a material
variance could have a material effect on AFGs business, operations, profitability or financial
condition.
20
Certain shareholders exercise substantial control over AFGs affairs, which may impede a change of
control transaction.
Carl H. Lindner III and S. Craig Lindner are each Co-Chief Executive Officers and Directors of
AFG. Carl H. Lindner III and S. Craig Lindner beneficially own 8.7% and 6.6%, respectively, of
AFGs outstanding Common Stock as of February 1, 2012. As a result, certain members of the
Lindner family have the ability to exercise significant influence over AFGs management,
including over matters requiring shareholder approval.
The price of AFG Common Stock may fluctuate significantly, which may make it difficult for holders
to resell common stock when they want or at a price they find attractive.
The price of AFGs Common Stock, listed on the NYSE and Nasdaq Global Select Market, constantly
changes. During 2011, AFGs Common Stock traded at prices ranging between $29.45 and $37.50.
AFGs Common Stock price can fluctuate as a result of a variety of factors, many of which are
beyond its control. These factors include but are not limited to:
|
|
actual or anticipated variations in quarterly operating results; |
|
|
actual or anticipated changes in the dividends paid on AFG Common Stock; |
|
|
recommendations by securities analysts; |
|
|
significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving AFG or its competitors; |
|
|
operating and stock price performance of other companies that investors deem comparable
to AFG; |
|
|
news reports relating to trends, concerns and other issues in AFGs lines of business; |
|
|
general economic conditions, including volatility in the financial markets; and |
|
|
geopolitical conditions such as acts or threats of terrorism or military conflicts. |
ITEM 2
Properties
Subsidiaries of AFG own several buildings in downtown Cincinnati. AFG and its affiliates occupy
about half of the aggregate 680,000 square feet of commercial and office space in these buildings.
AFGs insurance subsidiaries lease the majority of their office and storage facilities in numerous
cities throughout the United States, including Great Americans and GAFRIs home offices in
Cincinnati. In 2011, AFG consolidated operations from several leased and owned locations in
downtown Cincinnati into a new office tower in that city subject to a 15-year lease. National
Interstate occupies approximately 90% of the 177,000 square feet of office space on 17.5 acres of
land that it owns in Richfield, Ohio. See Item 1 Business Other Operations for a
discussion of AFGs other commercial real estate operations.
ITEM 3
Legal Proceedings
AFG and its subsidiaries are involved in various litigation, most of which arose in the ordinary
course of business, including litigation alleging bad faith in dealing with policyholders and
challenging certain business practices of insurance subsidiaries. Except for the following,
management believes that none of the litigation meets the threshold for disclosure under this Item.
AFGs insurance company subsidiaries and its 100%-owned subsidiary, American Premier Underwriters
(including its subsidiaries, American Premier), are parties to litigation and receive claims
alleging injuries and damages from asbestos, environmental and other substances and workplace
hazards and have established loss accruals for such potential liabilities; other than the A.P.
Green Industries proceedings discussed below, none of such litigation or claims is individually
material to AFG. The ultimate loss for these claims may vary materially from amounts currently
recorded as the conditions surrounding resolution of these claims continue to change.
21
American Premier is a party or named as a potentially responsible party in a number of proceedings
and claims by regulatory agencies and private parties under various environmental protection laws,
including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
seeking to impose responsibility on American Premier for hazardous waste or discharge remediation
costs at certain
railroad sites formerly owned by its predecessor, Penn Central Transportation Company (PCTC), and
at certain other sites where hazardous waste or discharge allegedly generated by PCTCs railroad
operations and American Premiers former manufacturing operations is present. It is difficult to
estimate American Premiers liability for remediation costs at these sites for a number of reasons,
including the number and financial resources of other potentially responsible parties involved at a
given site, the varying availability of evidence by which to allocate responsibility among such
parties, the wide range of costs for possible remediation alternatives, changing technology and the
period of time over which these matters develop. Nevertheless, American Premier believes that its
accruals for potential environmental liabilities are adequate to cover the probable amount of such
liabilities, based on American Premiers estimates of remediation costs and related expenses and
its estimates of the portions of such costs that will be borne by other parties. Such estimates are
based on information currently available to American Premier and are subject to future change as
additional information becomes available.
As previously reported, Great American Insurance Company and certain other insurers were parties to
declaratory judgment coverage litigation brought in 2001 in the United States District Court for
the Southern District of Ohio (arising from claims alleging asbestos exposure resulted in bodily
injury) under insurance policies issued during the 1970s and 1980s to Bigelow-Liptak Corporation
and related companies, subsequently known as A.P. Green Industries, Inc. (A.P. Green).
A.P. Green sought to recover defense and indemnity expenses related to those claims from a number
of insurers, including Great American.
In February 2002, A.P. Green filed petitions for bankruptcy under Chapter 11 of the Bankruptcy Code
in the United States Bankruptcy Court for the Western District of Pennsylvania (In Re Global
Industrial Technologies, Inc., et al, filed February 14, 2002) and subsequently (in 2002) commenced
adversary proceedings in that Court against Great American Insurance Company and other companies to
obtain an adjudication of the insureds rights under the above-referenced insurance policies.
In 2003, Great American Insurance Company entered into an agreement, which was approved by the
Bankruptcy Court, for the settlement of coverage litigation related to A.P. Green asbestos claims.
The settlement of $123.5 million (Great American has the option to pay in cash or over time with
5.25% interest) has been fully accrued and allows up to 10% of the settlement to be paid in AFG
Common Stock. The settlement agreement is conditioned upon confirmation of a plan of
reorganization that includes an injunction prohibiting the assertion against Great American of any
present or future asbestos personal injury claims under policies issued to A.P. Green and related
companies.
During 2007, the Bankruptcy Court confirmed the A. P. Green Plan of Reorganization which includes
the injunction required by Great Americans settlement agreement. Certain parties subsequently
appealed the confirmation.
On May 3, 2011, in connection with the appeal of the 2007 bankruptcy court confirmation, the Third
Circuit Court of Appeals issued an opinion holding that two non-settling insurers had standing to
challenge the trust established to administer silica claims which had been approved as part of the
plan of bankruptcy along with the trust established to administer asbestos claims. The court also
vacated the order confirming the Plan of Reorganization and remanded the Plan to the bankruptcy
court for further proceedings on this limited issue. While the bankruptcy court had previously
concluded that the trust to administer silica claims was a valid and legitimate trust, the Third
Circuit held that a fuller evidentiary hearing is required on remand. Management believes that
resolution of this issue ultimately will not impact the Great American settlement.
22
PART II
ITEM 5
Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
AFG Common Stock is listed and traded on the New York Stock Exchange and the Nasdaq Global Select
Market under the symbol AFG. The information presented in the table below represents the high and
low sales prices per share reported on the NYSE Composite Tape.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
35.21 |
|
|
$ |
32.19 |
|
|
$ |
28.64 |
|
|
$ |
23.90 |
|
Second Quarter |
|
|
36.19 |
|
|
|
33.94 |
|
|
|
30.25 |
|
|
|
25.40 |
|
Third Quarter |
|
|
36.05 |
|
|
|
29.45 |
|
|
|
30.88 |
|
|
|
26.69 |
|
Fourth Quarter |
|
|
37.50 |
|
|
|
29.66 |
|
|
|
32.75 |
|
|
|
30.04 |
|
There were approximately 7,200 shareholders of record of AFG Common Stock at February 1, 2012. AFG
declared and paid quarterly dividends of $.1625 per share in January, April and July 2011. In
August 2011, AFG increased its quarterly dividend to $.175 and declared and paid its first dividend
at that rate in October 2011. In 2010, AFG declared and paid quarterly dividends of $.1375 per
share in January, April and July and $.1625 per share in October. The ability of AFG to pay
dividends will be dependent upon, among other things, the availability of dividends and payments
under intercompany tax allocation agreements from its insurance company subsidiaries.
Issuer Purchases of Equity Securities AFG repurchased shares of its common stock during 2011 as
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares |
|
|
|
Total |
|
|
|
|
|
|
Purchased as |
|
|
that May |
|
|
|
Number |
|
|
Average |
|
|
Part of Publicly |
|
|
Yet be Purchased |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Under the Plans |
|
|
|
Purchased |
|
|
Per Share |
|
|
or Programs |
|
|
or Programs (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2,457,721 |
|
|
$ |
34.04 |
|
|
|
2,457,721 |
|
|
|
10,250,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
2,710,121 |
|
|
$ |
34.79 |
|
|
|
2,710,121 |
|
|
|
7,540,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
2,635,444 |
|
|
$ |
32.25 |
|
|
|
2,635,444 |
|
|
|
4,905,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October |
|
|
152,700 |
|
|
$ |
31.09 |
|
|
|
152,700 |
|
|
|
4,752,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November |
|
|
727,000 |
|
|
$ |
35.17 |
|
|
|
727,000 |
|
|
|
4,025,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
598,400 |
|
|
$ |
36.20 |
|
|
|
598,400 |
|
|
|
3,427,041 |
|
|
|
|
(a) |
|
Represents the remaining shares that may be repurchased under the Plans authorized
by AFGs Board of Directors in August 2010 and February 2011. In February 2012,
AFGs Board of Directors authorized the repurchase of five million additional
shares. |
In addition, AFG acquired 2,467 shares of its common stock (at $36.48 per share) in October 2011,
1,900 shares (at $35.73 per share) in November 2011, and 16,384 shares (at an average of $36.62 per
share) in December 2011 in connection with its stock incentive plans.
23
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods indicated (dollars in millions, except
per share data).
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|
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|
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|
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|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Earnings Statement Data (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
4,750 |
|
|
$ |
4,497 |
|
|
$ |
4,320 |
|
|
$ |
4,293 |
|
|
$ |
4,379 |
|
Operating Earnings Before Income Taxes |
|
|
560 |
|
|
|
689 |
|
|
|
812 |
|
|
|
316 |
|
|
|
639 |
|
Earnings from Continuing Operations |
|
|
320 |
|
|
|
423 |
|
|
|
530 |
|
|
|
200 |
|
|
|
413 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Less: Net Earnings (Loss) Attributable to
Noncontrolling Interests |
|
|
(23 |
) |
|
|
(56 |
) |
|
|
11 |
|
|
|
4 |
|
|
|
32 |
|
Net Earnings Attributable to Shareholders |
|
|
343 |
|
|
|
479 |
|
|
|
519 |
|
|
|
196 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations |
|
$ |
3.39 |
|
|
$ |
4.38 |
|
|
$ |
4.49 |
|
|
$ |
1.71 |
|
|
$ |
3.24 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.01 |
|
Net Earnings Attributable to Shareholders |
|
|
3.39 |
|
|
|
4.38 |
|
|
|
4.49 |
|
|
|
1.71 |
|
|
|
3.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations |
|
$ |
3.33 |
|
|
$ |
4.33 |
|
|
$ |
4.45 |
|
|
$ |
1.67 |
|
|
$ |
3.09 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.01 |
|
Net Earnings Attributable to Shareholders |
|
|
3.33 |
|
|
|
4.33 |
|
|
|
4.45 |
|
|
|
1.67 |
|
|
|
3.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Paid Per Share of Common Stock |
|
$ |
.6625 |
|
|
$ |
.575 |
|
|
$ |
.52 |
|
|
$ |
.50 |
|
|
$ |
.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges Including
Annuity Benefits (b) |
|
|
1.95 |
|
|
|
2.41 |
|
|
|
2.58 |
|
|
|
1.63 |
|
|
|
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
36,042 |
|
|
$ |
32,454 |
|
|
$ |
27,683 |
|
|
$ |
26,428 |
|
|
$ |
25,808 |
|
Long-term Debt |
|
|
934 |
|
|
|
952 |
|
|
|
828 |
|
|
|
1,030 |
|
|
|
937 |
|
Shareholders Equity |
|
|
4,545 |
|
|
|
4,470 |
|
|
|
3,781 |
|
|
|
2,490 |
|
|
|
3,046 |
|
|
|
|
(a) |
|
New accounting guidance issued by the Financial Accounting Standards Board limits the types
of costs incurred in issuing or renewing insurance contracts that can be deferred. AFG will
adopt this guidance retrospectively on January 1, 2012. See Note A Accounting Policies
Recent Accounting Standards to the financial statements for disclosures of the impact of
adopting the guidance. |
|
(b) |
|
Fixed charges are computed on a total enterprise basis. For purposes of calculating the
ratios, earnings have been computed by adding to pretax earnings the fixed charges and the
noncontrolling interests in earnings of subsidiaries having fixed charges and the undistributed
equity in losses of investees. Fixed charges include interest (including annuity benefits as
indicated), amortization of debt premium/discount and expense, preferred dividend and
distribution requirements of subsidiaries and a portion of rental expense deemed to be
representative of the interest factor. |
|
|
|
The ratio of earnings to fixed charges excluding annuity benefits was 6.61, 9.09, 11.06, 4.75
and 8.49 for 2011, 2010, 2009, 2008 and 2007, respectively. Although the ratio of earnings to
fixed charges excluding annuity benefits is not required or encouraged to be disclosed under
Securities and Exchange Commission rules, some investors and lenders may not consider interest
credited to annuity policyholders accounts a borrowing cost for an insurance company, and
accordingly, believe this ratio is meaningful. |
24
ITEM 7
Managements Discussion and Analysis
of Financial Condition and Results of Operations
INDEX TO MD&A
GENERAL
Following is a discussion and analysis of the financial statements and other statistical data that
management believes will enhance the understanding of AFGs financial condition and results of
operations. This discussion should be read in conjunction with the financial statements beginning
on page F-1.
As discussed in Note A Accounting Policies Recent Accounting Standards, certain historical
amounts presented herein will be retrospectively restated in 2012 to reflect the adoption of new
accounting guidance related to deferred policy acquisition costs (DPAC).
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 best done 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.
At December 31, 2011, AFG (parent) held approximately $456 million in cash and securities and
had $500 million available under a bank line of credit expiring in August 2013.
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 and in the sale of
traditional fixed and indexed annuities and a variety of supplemental insurance products such as
Medicare supplement.
The property and casualty business is cyclical in nature with periods of high competition resulting
in low premium rates, sometimes referred to as a soft market or downcycle followed by periods
of reduced competition and higher premium rates, referred to as a hard market or upcycle. For
the past several years, AFGs property and casualty insurance operations have experienced soft
market conditions.
AFG reported net earnings attributable to shareholders of $343 million ($3.33 per share diluted) in
2011 compared to $479 million ($4.33 per share diluted) in 2010.
25
Improved operating results in the annuity and supplemental insurance group were more than offset by
a second quarter 2011 special charge to strengthen reserves for asbestos and other environmental
exposures, primarily within the property and casualty run-off operations, lower underwriting profit
and lower investment income in the on-going property and casualty operations and a fourth quarter
charge for a valuation allowance against deferred tax assets.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A to the financial statements. The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles 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 make accounting policies critical are as follows:
|
|
|
the establishment of insurance reserves, especially asbestos and environmental-related
reserves, |
|
|
|
the recoverability of reinsurance, |
|
|
|
the recoverability of deferred acquisition costs, |
|
|
|
the establishment of asbestos and environmental reserves of former railroad and
manufacturing operations, and |
|
|
|
the valuation of investments, including the determination of other-than-temporary
impairments. |
See Liquidity and Capital Resources Uncertainties for a discussion of insurance reserves,
recoverables from reinsurers, and contingencies related to American Premiers former operations and
Liquidity and Capital Resources Investments for a discussion of impairments on investments.
Deferred policy acquisition costs (DPAC) and certain liabilities related to annuities and
universal life insurance products are amortized in relation to the present value of expected gross
profits on the policies. Assumptions considered in determining expected gross profits involve
significant judgment and include managements estimates of assumed interest rates and investment
spreads, surrenders, annuitizations, renewal premiums and mortality. Should actual experience
require management to change its assumptions (commonly referred to as unlocking), a charge or
credit would be recorded to adjust DPAC or annuity liabilities to the levels they would have been
if the new assumptions had been used from the inception date of each policy.
Reserves for future policy benefits related to AFGs closed block of long-term care business are
established (and related acquisition costs are amortized) over the life of the policies based on
policy benefit assumptions as of the date of issuance, including investment yields, mortality,
morbidity, persistency, and expenses. Once these assumptions are established for a given policy or
group of policies, they are not changed over the life of the policy unless a loss recognition event
(premium deficiency) occurs. Loss recognition occurs when, based on current expectations as of the
measurement date, existing contract liabilities plus the present value of future premiums,
including reasonably expected rate increases, are not expected to cover the present value of future
claims payments and related settlement and maintenance costs as well as unamortized acquisition
costs. Adverse changes in any of the reserve assumptions in future periods could result in loss
recognition and charges to earnings for AFGs long-term care business.
26
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFGs 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 25% 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, |
|
|
|
2011 |
|
|
2010 |
|
Long-term debt |
|
$ |
934 |
|
|
$ |
952 |
|
Total capital |
|
|
5,017 |
|
|
|
5,050 |
|
Ratio of debt to total capital: |
|
|
|
|
|
|
|
|
Including debt secured by real estate |
|
|
18.6 |
% |
|
|
18.9 |
% |
Excluding debt secured by real estate |
|
|
17.6 |
% |
|
|
17.8 |
% |
The ratio of debt to total capital is a non-GAAP measure that management believes is useful for
investors, analysts and independent ratings agencies to evaluate AFGs financial strength and
liquidity and to provide insight into how AFG finances its operations. It is calculated by
dividing AFGs 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 and appropriated retained earnings related to managed investment entities).
AFGs ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.95
for the year ended December 31, 2011. Excluding annuity benefits, this ratio was 6.61 for 2011.
Although the ratio excluding annuity benefits is not required or encouraged to be disclosed under
Securities and Exchange Commission rules, it is presented because interest credited to annuity
policyholder accounts is not always considered a borrowing cost for an insurance company.
The NAICs model law for risk based capital (RBC) applies to both life and 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 December 31, 2011, the
capital ratios of all AFG insurance companies substantially exceeded the RBC requirements.
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 marketable securities or to generate cash through
borrowings, sales of other assets, or similar transactions.
AFG can borrow up to $500 million under its revolving credit facility which expires in August 2013.
There were no borrowings under this agreement, or any other parent company short-term borrowing
arrangements, during 2011.
During 2011, AFG repurchased 9.3 million shares of its Common Stock for $315 million. During 2010,
AFG issued $132 million of 7% Senior Notes due 2050 and repurchased 10.3 million shares of its
Common Stock for $292 million. During 2009, AFG retired $136 million of 7-1/8% Senior Debentures
at maturity, issued $350 million of 9-7/8% Senior Notes due 2019 and repurchased 3.3 million shares
of its Common Stock for $81 million.
All debentures and notes issued by AFG (and AAG Holding Company, a GAFRI subsidiary) 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.
Under tax allocation agreements with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to
(or recover taxes from) AFG based on each subsidiarys contribution to amounts due under AFGs
consolidated tax return.
27
Subsidiary Liquidity Great American Life Insurance Company (GALIC), a wholly-owned annuity and
supplemental insurance subsidiary, is a member of the Federal Home Loan Bank of Cincinnati
(FHLB). The FHLB makes advances and provides other banking services to member institutions,
which provides the annuity and supplemental insurance operations with a substantial additional
source of liquidity. In the fourth quarter of 2011, the FHLB advanced GALIC $240 million at
interest rates ranging from .02% to .03% over LIBOR (average rate of .31% at December 31, 2011).
These advances must be repaid within 5 to 7 years, but GALIC has the option to prepay all or a
portion of the advances on a monthly basis. GALIC has invested the proceeds from the advances in
fixed maturity securities for the purpose of earning a spread over the interest payments due to the
FHLB.
National Interstate Corporation (NATL), a 52%-owned property and casualty insurance subsidiary,
can borrow up to $75 million, subject to certain conditions, under an unsecured credit agreement
expiring in December 2012. Amounts borrowed
bear interest at rates ranging from .45% to .9% (currently .65%) over LIBOR based on NATLs credit
rating. There was $22 million outstanding under this agreement at December 31, 2011. The maximum
outstanding balance under this agreement during 2011 was $22 million.
The liquidity requirements of AFGs insurance subsidiaries relate primarily to the liabilities
associated with their products as well as operating costs and expenses, payments of dividends and
taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from
premiums and investment income have generally provided more than sufficient funds to meet these
requirements without requiring a sale of investments or contributions from AFG. 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-term investments.
The excess cash flow of AFGs property and casualty group allows it to extend the duration of its
investment portfolio somewhat beyond that of its claim reserves.
In the annuity business, where profitability is largely dependent on earning a spread between
invested assets and annuity liabilities, the duration of investments is generally maintained close
to that of liabilities. In a rising interest rate environment, significant protection from
withdrawals exists in the form of temporary and permanent surrender charges on AFGs annuity
products.
With declining rates, AFG receives some protection (from spread compression) due to the ability to
lower crediting rates, subject to contractually guaranteed minimum interest rates (GMIRs). AFG
began selling new policies with GMIRs below 2% in 2003; almost all new business since late 2010 has
been issued with a 1% GMIR. At December 31, 2011, the average crediting rate on AFGs annuities
was approximately 3.1%, while the average GMIR was approximately 2.5%. This margin provides AFG
the flexibility to lower its crediting rates by up to 60 basis points on average in the future
should market interest rates continue to remain low for a long period of time.
For statutory accounting purposes, equity securities of non-affiliates are generally carried at
fair value. At December 31, 2011, AFGs insurance companies owned publicly traded equity
securities with a fair value of $895 million. In addition, GAIs investment in NATL common stock
had a fair value of $252 million and a statutory carrying value of $199 million at December 31,
2011. Decreases in market prices could adversely affect the insurance groups 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 groups dividend-paying capability.
AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits
and operating 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. 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.
28
Contractual Obligations The following table shows an estimate (based on historical
patterns and expected trends) of payments to be made for insurance reserve liabilities, as well as
scheduled payments for major contractual obligations (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
One Year |
|
|
2-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
Annuity, life, accident and
health liabilities (a) |
|
$ |
17,147 |
|
|
$ |
1,618 |
|
|
$ |
3,230 |
|
|
$ |
3,905 |
|
|
$ |
8,394 |
|
Property and casualty unpaid
losses and loss adjustment
expenses (b) |
|
|
6,520 |
|
|
|
1,700 |
|
|
|
1,800 |
|
|
|
1,100 |
|
|
|
1,920 |
|
Long-term debt, including
interest |
|
|
2,096 |
|
|
|
107 |
|
|
|
165 |
|
|
|
200 |
|
|
|
1,624 |
|
Operating leases |
|
|
412 |
|
|
|
52 |
|
|
|
93 |
|
|
|
70 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (c) |
|
$ |
26,175 |
|
|
$ |
3,477 |
|
|
$ |
5,288 |
|
|
$ |
5,275 |
|
|
$ |
12,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reserve projections include anticipated cash benefit payments only. Projections do
not include any impact for future earnings or additional premiums. |
|
(b) |
|
Dollar amounts and time periods are estimates based on historical net payment patterns
applied to the gross reserves and do not represent actual contractual obligations.
Based on the same assumptions, AFG projects reinsurance recoveries related to these
reserves totaling $2.2 billion as follows: Within 1 year $600 million; 2-3 years -
$600 million; 4-5 years $400 million; and thereafter $638 million. Actual
payments and their timing could differ significantly from these estimates. |
|
(c) |
|
AFGs $74 million liability for unrecognized tax benefits (including $15 million in
interest) as of December 31, 2011, is not included because the period of payment
cannot be reliably estimated. |
AFG has no material contractual purchase obligations or other long-term liabilities at
December 31, 2011.
Off-Balance Sheet Arrangements See Note P Additional Information Financial
Instruments with Off-Balance Sheet Risk 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.
AFGs investment portfolio at December 31, 2011, contained $21.8 billion in Fixed
maturities classified as available for sale and $928 million in Equity securities,
all carried at fair value with unrealized gains and losses included in a separate component of
shareholders equity on an after-tax basis. In addition, $440 million in fixed
maturities were classified as trading with changes in unrealized holding gains or losses included
in investment income.
As detailed under Net Unrealized Gain on Marketable Securities in Note E to the financial
statements, unrealized gains and losses on AFGs fixed maturity and equity securities are included
in Shareholders Equity after adjustments for related changes in DPAC and certain liabilities
related to annuities, noncontrolling interests and deferred income taxes. DPAC applicable to
annuity products is adjusted for the impact of unrealized gains or losses on investments as if
these gains or losses had been realized, with corresponding increases or decreases (net of tax)
included in accumulated other comprehensive income in AFGs Balance Sheet.
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. At December 31, 2011, the average life of AFGs fixed maturities was
about six years.
Fair values for AFGs portfolio are determined by AFGs 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 closing prices obtained from the pricing
services. For mortgage-backed securities (MBS), which comprise approximately 30% of AFGs
fixed maturities, prices for each security are generally obtained from both pricing services and
broker quotes. For the remainder of AFGs fixed maturity portfolio, approximately 93% are priced
using pricing services and the balance is priced primarily using non-binding broker
quotes. When prices obtained for the same security vary, AFGs internal investment professionals
select the price they believe is most indicative of an exit price.
29
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 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 AFGs internal investment professionals who are familiar with the securities being
priced and the markets in which they trade to ensure the fair value determination is
representative of an exit price. To validate the appropriateness of the prices obtained, these
investment managers consider widely published indices (as benchmarks), recent trades, changes in
interest rates, general economic conditions and the credit quality of the specific issuers. In
addition, the Company communicates directly with the pricing service regarding the methods and
assumptions used in pricing, including verifying, on a test basis, the inputs used by the service
to value specific securities. Prices obtained from a broker or pricing service are adjusted only
in cases where they are deemed not to be representative of an appropriate exit price (fewer than
1% of the securities).
In general, the fair value of AFGs 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 AFGs fixed
maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve
would have at December 31, 2011 (dollars in millions). Increases or decreases from the 100 basis
points illustrated would be approximately proportional.
|
|
|
|
|
Fair value of fixed maturity portfolio |
|
$ |
22,247 |
|
Pretax impact on fair value of 100 bps
increase in interest rates |
|
$ |
(1,046 |
) |
Pretax impact as % of total fixed maturity portfolio |
|
|
(4.7 |
%) |
Approximately 90% of the fixed maturities held by AFG at December 31, 2011, were rated investment
grade (credit rating of AAA to BBB) by nationally recognized rating agencies. 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.
MBS are subject to significant prepayment risk due to the fact that, in periods of declining
interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher
rate mortgages to take advantage of lower rates. Although interest rates have been low for the
last few years, a weak housing market and uncertain economic conditions have led to tighter lending
standards, which have resulted in fewer buyers being able to refinance the mortgages underlying
much of AFGs non-agency RMBS portfolio.
30
Summarized information for AFGs MBS (including those classified as trading) at December 31, 2011,
is shown (in millions) in the table below. Agency-backed securities are those issued by a U.S.
government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime.
The majority of the Alt-A securities and substantially all of the subprime securities are backed by
fixed rate mortgages. The average life of the residential and commercial MBS is approximately 4
and 5 years, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Rated |
|
|
|
Amortized |
|
|
|
|
|
|
Fair Value as |
|
|
Unrealized |
|
|
Investment |
|
Collateral type |
|
Cost |
|
|
Fair Value |
|
|
% of Cost |
|
|
Gain (Loss) |
|
|
Grade |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency-backed |
|
$ |
340 |
|
|
$ |
354 |
|
|
|
104 |
% |
|
$ |
14 |
|
|
|
100 |
% |
Non-agency prime |
|
|
2,058 |
|
|
|
2,112 |
|
|
|
103 |
|
|
|
54 |
|
|
|
68 |
|
Alt-A |
|
|
787 |
|
|
|
739 |
|
|
|
94 |
|
|
|
(48 |
) |
|
|
44 |
|
Subprime |
|
|
686 |
|
|
|
653 |
|
|
|
95 |
|
|
|
(33 |
) |
|
|
29 |
|
Commercial |
|
|
2,665 |
|
|
|
2,877 |
|
|
|
108 |
|
|
|
212 |
|
|
|
100 |
|
Other |
|
|
22 |
|
|
|
25 |
|
|
|
114 |
|
|
|
3 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,558 |
|
|
$ |
6,760 |
|
|
|
103 |
% |
|
$ |
202 |
|
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The National Association of Insurance Commissioners (NAIC) assigns creditworthiness designations
on a scale of 1 to 6 with 1 being the highest quality and 6 being the lowest quality. The NAIC
retained a third-party investment management firm to assist in the determination of appropriate
NAIC designations for mortgage-backed securities based not only on the probability of loss (which
is the primary basis of ratings by the major ratings firms), but also on the severity of loss and
statutory carrying value. At December 31, 2011, 97% (based on statutory carrying value of $6.5
billion) of AFGs MBS securities had an NAIC designation of 1 or 2.
Municipal bonds represented approximately 18% of AFGs fixed maturity portfolio at December 31,
2011. AFGs 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. At December 31, 2011, approximately 80% of the municipal bond portfolio was held in
revenue bonds, with the remaining 20% held in general obligation bonds. State general obligation
securities of California, Illinois, New Jersey and New York collectively represented only 2% of
this portfolio.
31
Summarized information for the unrealized gains and losses recorded in AFGs Balance Sheet at
December 31, 2011, is shown in the following table (dollars in millions). Approximately $133
million of available for sale Fixed maturities and $36 million of Equity securities had no
unrealized gains or losses at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
|
With |
|
|
With |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Gains |
|
|
Losses |
|
Available for Sale Fixed Maturities |
|
|
|
|
|
|
|
|
Fair value of securities |
|
$ |
18,623 |
|
|
$ |
3,051 |
|
Amortized cost of securities |
|
$ |
17,129 |
|
|
$ |
3,300 |
|
Gross unrealized gain (loss) |
|
$ |
1,494 |
|
|
$ |
(249 |
) |
Fair value as % of amortized cost |
|
|
109 |
% |
|
|
92 |
% |
Number of security positions |
|
|
3,763 |
|
|
|
846 |
|
Number individually exceeding
$2 million gain or loss |
|
|
146 |
|
|
|
11 |
|
Concentration of gains (losses) by
type or industry (exceeding 5% of
unrealized): |
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
388 |
|
|
$ |
(186 |
) |
Banks, savings and credit institutions |
|
|
85 |
|
|
|
(33 |
) |
Gas and electric services |
|
|
172 |
|
|
|
(2 |
) |
States and municipalities |
|
|
267 |
|
|
|
(3 |
) |
Percentage rated investment grade |
|
|
94 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
|
|
|
|
|
|
Fair value of securities |
|
$ |
665 |
|
|
$ |
227 |
|
Cost of securities |
|
$ |
453 |
|
|
$ |
255 |
|
Gross unrealized gain (loss) |
|
$ |
212 |
(*) |
|
$ |
(28 |
) |
Fair value as % of cost |
|
|
147 |
% |
|
|
89 |
% |
Number of security positions |
|
|
131 |
|
|
|
83 |
|
Number individually exceeding
$2 million gain or loss |
|
|
12 |
|
|
|
4 |
|
|
|
|
(*) |
|
Includes $121 million on AFGs investment in Verisk Analytics, Inc. |
The table below sets forth the scheduled maturities of AFGs available for sale fixed maturity
securities at December 31, 2011, based on their fair values. Asset- backed securities and other
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 |
|
Maturity |
|
Gains |
|
|
Losses |
|
One year or less |
|
|
3 |
% |
|
|
1 |
% |
After one year through five years |
|
|
26 |
|
|
|
19 |
|
After five years through ten years |
|
|
35 |
|
|
|
15 |
|
After ten years |
|
|
10 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
40 |
|
Mortgage-backed securities (average
life of approximately four years) |
|
|
26 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
32
The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity
securities by dollar amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Aggregate |
|
|
Aggregate |
|
|
Value as |
|
|
|
Fair |
|
|
Unrealized |
|
|
% of Cost |
|
Fixed Maturities at December 31, 2011 |
|
Value |
|
|
Gain (Loss) |
|
|
Basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized gains: |
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $500,000 (841 issues) |
|
$ |
10,121 |
|
|
$ |
1,093 |
|
|
|
112 |
% |
$500,000 or less (2,922 issues) |
|
|
8,502 |
|
|
|
401 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,623 |
|
|
$ |
1,494 |
|
|
|
109 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $500,000 (151 issues) |
|
$ |
982 |
|
|
$ |
(164 |
) |
|
|
86 |
% |
$500,000 or less (695 issues) |
|
|
2,069 |
|
|
|
(85 |
) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,051 |
|
|
$ |
(249 |
) |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes (dollars in millions) the unrealized loss for all securities
with unrealized losses by issuer quality and length of time those securities have been in an
unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Aggregate |
|
|
Aggregate |
|
|
Value as |
|
|
|
Fair |
|
|
Unrealized |
|
|
% of Cost |
|
Securities with Unrealized Losses at December 31, 2011 |
|
Value |
|
|
Loss |
|
|
Basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed maturities with losses for: |
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (292 issues) |
|
$ |
1,528 |
|
|
$ |
(52 |
) |
|
|
97 |
% |
One year or longer (129 issues) |
|
|
367 |
|
|
|
(41 |
) |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,895 |
|
|
$ |
(93 |
) |
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade fixed maturities with losses for: |
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (250 issues) |
|
$ |
859 |
|
|
$ |
(58 |
) |
|
|
94 |
% |
One year or longer (175 issues) |
|
|
297 |
|
|
|
(98 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,156 |
|
|
$ |
(156 |
) |
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities with losses for: |
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (61 issues) |
|
$ |
169 |
|
|
$ |
(19 |
) |
|
|
90 |
% |
One year or longer (4 issues) |
|
|
4 |
|
|
|
(1 |
) |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
173 |
|
|
$ |
(20 |
) |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred equity securities with losses for: |
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (9 issues) |
|
$ |
23 |
|
|
$ |
(1 |
) |
|
|
96 |
% |
One year or longer (9 issues) |
|
|
31 |
|
|
|
(7 |
) |
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54 |
|
|
$ |
(8 |
) |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
|
When a decline in the value of a specific investment is considered to be
other-than-temporary, a provision for impairment is charged to earnings (accounted for as a
realized loss) and the cost basis of that investment is reduced by the amount of the charge. The
determination of whether unrealized losses are other-than-temporary requires judgment based on
subjective as well as objective factors. Factors considered and resources used by management
include:
|
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) |
|
historical operating, balance sheet and cash flow data contained in issuer SEC
filings and news releases, |
|
d) |
|
near-term prospects for improvement in the issuer and/or its industry, |
|
e) |
|
third party research and communications with industry specialists, |
|
f) |
|
financial models and forecasts, |
|
g) |
|
the continuity of dividend payments, maintenance of investment grade ratings and
hybrid nature of certain investments, |
|
h) |
|
discussions with issuer management, and |
|
i) |
|
ability and intent to hold the investment for a period of time sufficient to allow
for anticipated recovery in fair value. |
33
Based on its analysis of the factors listed above, management believes (i) AFG will recover its
cost basis in the securities with unrealized losses and (ii) that AFG has the ability to hold the
securities until they recover in value and had no intent to sell them at December 31, 2011.
Although AFG has the ability to continue holding its 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 AFGs ability or intent change with regard to 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, charges for other-than-temporary impairment could
be material to results of operations in future periods. Significant declines in the fair value of
AFGs investment portfolio could have a significant adverse effect on AFGs liquidity. For
information on AFGs realized gains (losses) on securities, including charges for
other-than-temporary impairment, see Managements Discussion and Analysis 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: (a) the accumulation of case estimates for losses reported prior to
the close of the accounting periods on direct business written (case reserves); (b) estimates
received from ceding reinsurers and insurance pools and associations; (c) estimates of claims
incurred but not reported or IBNR (including possible development on known claims); (d) estimates
(based on experience) of expense for investigating and adjusting claims; and (e) 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 first estimating the ultimate unpaid reserve liability and subtracting case reserves and
LAE.
In determining managements best estimate of the ultimate liability, management (including Company
actuaries) considers items such as the effect of inflation on medical, hospitalization, material,
repair and replacement costs, the nature and maturity of lines of insurance, general economic
trends and the legal environment.
In addition, historical trends adjusted for changes in underwriting standards, policy provisions,
product mix and other factors are analyzed using actuarial reserve development techniques.
Weighing all of the factors, the management team determines a single or point estimate that it
records as its best estimate of the ultimate liabilities. Ranges of loss reserves are not
developed by Company actuaries. This reserve analysis and review is completed each quarter and for
every line of business.
Each quarterly review includes in-depth analysis of over 500 subdivisions of the business,
employing multiple actuarial techniques. For each particular subdivision, actuaries use informed,
professional judgment to adjust these techniques as necessary to respond to specific conditions in
the data or within the business.
Some of the standard actuarial methods employed for the quarterly reserve analysis may include (but
may not be limited to):
|
|
|
Case Incurred Development Method |
|
|
|
Paid Development Method |
|
|
|
Projected Claim Count Times Projected Claim Severity |
|
|
|
Bornhuetter-Ferguson Method |
|
|
|
Incremental Paid LAE to Paid Loss Methods |
34
Management believes that each method has particular strengths and weaknesses and that no single
estimation method is most accurate in all situations. When applied to a particular group of
claims, the relative strengths and weaknesses of each method can change over time based on the
facts and circumstances. Ultimately, the estimation methods chosen are those which management
believes produce the most reliable indication for the particular liabilities under review.
The period of time from the occurrence of a loss through the settlement of the liability is
referred to as the tail. Generally, the same actuarial methods are considered for both
short-tail and long-tail lines of business because most of them work properly for both. The
methods are designed to incorporate the effects of the differing length of time to settle
particular claims. For short-tail lines, management tends to give more weight to the Case Incurred
and Paid Development methods, although the various methods tend to produce similar results. For
long-tail lines, more judgment is involved, and more weight may be given to the
Bornhuetter-Ferguson method and the Projected Claim Count times Projected Claim Severity method.
Liability claims for long-tail lines are more susceptible to litigation and can be significantly
affected by changing contract interpretation and the legal environment. Therefore, the estimation
of loss reserves for these classes is more complex and subject to a higher degree of variability.
The level of detail in which data is analyzed varies among the different lines of business. Data
is generally analyzed by major product or by coverage within product, using countrywide data;
however, in some situations, data may be reviewed by state for a few large volume states.
Appropriate segmentation of the data is determined based on data volume, data credibility, mix of
business, and other actuarial considerations.
Supplementary statistical information is also reviewed to determine which methods are most
appropriate to use or if adjustments are needed to particular methods. Such information includes:
|
|
|
Open and closed claim counts |
|
|
|
Average case reserves and average incurred on open claims |
|
|
|
Closure rates and statistics related to closed and open claim percentages |
|
|
|
Average closed claim severity |
|
|
|
Ultimate claim severity |
|
|
|
Projected ultimate loss ratios |
Within each line, results of individual methods are reviewed, supplementary statistical information
is analyzed, and all data from underwriting, operating and claim management are considered in
deriving managements best estimate of the ultimate liability. This estimate may be the result of
one method, or a weighted average of several methods, or a judgmental selection as the management
team determines is appropriate.
35
The following table shows (in millions) the breakdown of AFGs property and casualty reserves
between case reserves, IBNR reserves and LAE reserves (estimated amounts required to adjust, record
and settle claims, other than the claim payments themselves).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loss Reserves at December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Case |
|
|
IBNR |
|
|
LAE |
|
|
Reserve |
|
Statutory Line of Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability occurrence |
|
$ |
507 |
|
|
$ |
1,268 |
|
|
$ |
265 |
|
|
$ |
2,040 |
|
Workers compensation |
|
|
744 |
|
|
|
348 |
|
|
|
130 |
|
|
|
1,222 |
|
Special property (fire, allied lines,
inland marine, earthquake) |
|
|
527 |
|
|
|
30 |
|
|
|
25 |
|
|
|
582 |
|
Other liability claims made |
|
|
210 |
|
|
|
272 |
|
|
|
61 |
|
|
|
543 |
|
Commercial auto/truck liability/medical |
|
|
162 |
|
|
|
253 |
|
|
|
87 |
|
|
|
502 |
|
Commercial multi-peril |
|
|
142 |
|
|
|
92 |
|
|
|
88 |
|
|
|
322 |
|
Other lines |
|
|
191 |
|
|
|
337 |
|
|
|
167 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Statutory Reserves |
|
|
2,483 |
|
|
|
2,600 |
|
|
|
823 |
|
|
|
5,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves of foreign operations |
|
|
285 |
|
|
|
270 |
|
|
|
7 |
|
|
|
562 |
|
Deferred gains on retroactive reinsurance |
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
74 |
|
Loss reserve discounting |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Other |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments for GAAP |
|
|
264 |
|
|
|
343 |
|
|
|
7 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GAAP Reserves |
|
$ |
2,747 |
|
|
$ |
2,943 |
|
|
$ |
830 |
|
|
$ |
6,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While current factors and reasonably likely changes in variable factors are considered in
estimating the liability for unpaid losses, there is no method or system that can eliminate the
risk of actual ultimate results differing from such estimates. As shown in footnote (a) to the
reserve development table (loss triangle) on page 8, the original estimates of AFGs liability for
losses and loss adjustment expenses, net of reinsurance, over the past 10 years have developed
through December 31, 2011, to be deficient (for three years) by as much as 19.6% and redundant (for
seven years) by as much as 17.1% (excluding the effect of special charges for asbestos and
environmental exposures). This development illustrates the historical impact caused by variability
in factors considered in estimating insurance reserves.
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 AFGs 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 4%)
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.
36
The estimated cumulative impact that a 1% change in cost trends would have on net earnings is shown
below (in millions).
|
|
|
|
|
|
|
Effect of 1% |
|
|
|
Change in |
|
Line of business |
|
Cost Trends |
|
Other liability occurrence |
|
$ |
17 |
|
Workers compensation |
|
|
23 |
|
Other liability claims made |
|
|
9 |
|
Commercial auto/truck liability/medical |
|
|
6 |
|
Commercial multi-peril |
|
|
4 |
|
The judgments and uncertainties surrounding managements reserve estimation process and the
potential for reasonably possible variability in managements most recent reserve estimates may
also be viewed by looking at how recent historical estimates of reserves have developed. The
following table shows (in millions) what the impact on AFGs net earnings would be on the more
significant lines of business if the December 31, 2011, reserves (net of reinsurance) developed at
the same rate as the average development of the most recent five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-yr. Average |
|
|
Net Reserves(**) |
|
|
Effect on Net |
|
|
|
Development(*) |
|
|
December 31, 2011 |
|
|
Earnings(**) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability occurrence |
|
|
(5.5 |
%) |
|
$ |
742 |
|
|
$ |
41 |
|
Workers compensation |
|
|
(.8 |
%) |
|
|
838 |
|
|
|
7 |
|
Other liability claims made |
|
|
(5.9 |
%) |
|
|
398 |
|
|
|
23 |
|
Commercial auto/truck liability/
medical |
|
|
(2.6 |
%) |
|
|
361 |
|
|
|
9 |
|
Commercial multi-peril |
|
|
.9 |
% |
|
|
192 |
|
|
|
(2 |
) |
|
|
|
(*) |
|
Unfavorable (favorable), net of tax effect. |
|
(**) |
|
Excludes asbestos and environmental liabilities. |
The following discussion describes key assumptions and important variables that affect the
estimate of the reserve for loss and loss adjustment expenses 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:
|
|
|
Unpredictability of judicial decisions regarding coverage issues |
|
|
|
Magnitude of jury awards |
|
|
|
Timing of claims reporting |
AFG recorded favorable development of $50 million in 2011, $108 million in 2010 and $55 million in
2009 related to its other liability-occurrence coverage where both the frequency and severity of
claims were lower than previously projected.
While management applies the actuarial methods mentioned above, 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.
Uncertainty has emerged regarding AFGs potential exposure for claims arising from the use of
Chinese drywall. The potential exposure arises from insured policyholders who may have been
associated with the installation of Chinese drywall in residential construction. AFG continues to
monitor judicial decisions and settlements in this evolving area and is evaluating the possible
implications of recent events on its potential exposure. While the ultimate liability is
uncertain, management believes that AFGs reserves for claims arising from the use of Chinese
drywall are adequate.
37
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 interpretations |
|
|
|
Future medical cost inflation |
|
|
|
Timing of claims reporting |
Approximately one-half of AFGs workers compensation business is currently written in California.
Major reforms passed by the California state legislature in 2003 and in 2004 reduced employer
premiums and set treatment standards for injured workers in that state. AFGs subsidiary that
writes workers compensation business in California recorded favorable prior year loss development
of $5 million in 2011, $11 million in 2010 and $20 million in 2009 due primarily to the business
written in California prior to 2008.
For several years after the reforms, the impact on claim settlements was more favorable than
originally anticipated for claims incurred in 2003 to 2007, resulting in favorable development
through 2011. However, this trend has subsided and the favorable development has flattened for
more recent years. In both California and countrywide, economic conditions over the last couple
years have led to longer duration of claims resulting in higher claim severity.
Several methods (including development methods and those based on claim count and severity) are
weighted together to produce indications of reserve need. Management continues to review the
frequency, severity and loss and LAE ratios implied by the indications from the standard tests and
considers the uncertainties of future costs in determining the appropriate reserve level.
Other Liability Claims Made
This long-tail line of business consists mostly of directors and officers liability. Some of the
important variables affecting estimation of loss reserves for other liability claims made
include:
|
|
|
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 that trigger coverage under directors
and officers liability policies. Recent economic conditions have led to increased claims for
small account business and not-for-profit organizations.
AFG recorded favorable prior year loss development of $66 million in 2011, $40 million in 2010 and
$26 million in 2009 on its directors and officers liability business as claim severity was
significantly less than expected for claims incurred prior to 2010. Claims incurred in 2010 have
developed adversely as economic conditions have driven severity higher than originally anticipated.
The legal professional liability business, which has been in run-off since 2008, had favorable
development of $17 million in 2011, $18 million in 2010 and $14 million in 2009 after several years
of modest adverse development; as this run-off liability has matured, the claim severity trends
have stabilized.
While management applies the actuarial methods mentioned above, more judgment is involved in
arriving at the final reserve to be held. The selection of methods vary by subdivision of the data
within this line. Some businesses within this line use the Paid Development method while others
use the Case Incurred Development method and the Bornhuetter-Ferguson method.
38
Commercial Auto/Truck Liability/Medical
This line of business is a mix of coverage protecting the insured against legal liability for
property damage or personal injury to others arising from the operation of commercial motor
vehicles. The property damage liability exposure is usually short-tail with relatively quick
reporting and settlement of claims. The
bodily injury and medical payments exposures are longer-tailed; although the claim reporting is
relatively quick, the final settlement can take longer to achieve.
Some of the important variables affecting estimation of loss reserves for commercial auto/truck
liability/medical are similar to other liability occurrence and include:
|
|
|
Magnitude of jury awards |
|
|
|
Unpredictability of judicial decisions regarding coverage issues |
|
|
|
Litigious climate and trends |
|
|
|
Change in frequency of severe accidents |
|
|
|
Health care costs and utilization of medical services by injured parties |
AFG recorded favorable prior year loss development of $8 million in 2011, $26 million in 2010 and
$6 million in 2009 for this line of business as claim severity was lower than in prior assumptions.
Commercial Multi-Peril
This long-tail line of business consists of two or more coverages protecting the insured from
various property and liability risk exposures. The commercial multi-peril line of business
includes coverage similar to other liability occurrence, so in general, variables affecting
estimation of loss reserves for commercial multi-peril include those mentioned above for other
liability occurrence. In addition, this line includes reserves for a run-off book of
homebuilders business covering contractors liability for construction defects. Variables
important to estimating the liabilities for this coverage include:
|
|
|
Changing legal/regulatory interpretations of coverage |
|
|
|
Statutes of limitations and statutes of repose in filing claims |
|
|
|
Changes in policy forms and endorsements |
AFG recorded adverse prior year loss development of $13 million in 2011 and $19 million in 2010
after having favorable development of $2 million in 2009. The adverse development resulted from
higher claim frequency and severity in a block of program business related to motel/hotel,
apartments, restaurants, taverns and recreation. This adverse development more than offset
favorable development in coverage for non-profit organizations of $6 million in 2011, $13 million
in 2010 and $11 million in 2009 as claim severity was less than anticipated.
Reserves of Foreign Operations
Reserves of foreign operations relate primarily to the operations of Marketform Group, Limited,
AFGs 72%-owned United Kingdom-based Lloyds insurer. Historically, the largest line of business
written by Marketform has been non-U.S. medical malpractice, which provides coverage for injuries
and damages caused by medical care providers, including but not limited to, hospitals and their
physicians. Although Marketform offers this product in approximately 30 countries, the majority of
the business has been written in the United Kingdom, Australia and Italy.
Significant variables in estimating the loss reserves for the medical malpractice business
include:
|
|
|
Magnitude of court awards |
|
|
|
A slow moving judicial system including varying approaches to medical malpractice
claims among courts in different regions of Italy |
|
|
|
Third party claims administration in Italy |
|
|
|
Trends in claim costs, including medical cost inflation and, in Italy, escalating
tables used to establish damages for personal injury |
39
Marketform recorded adverse prior year reserve development of $44 million in 2011, $55 million in
2010 and $56 million in 2009 related primarily to its Italian public hospital medical malpractice
business, which it ceased writing in 2008. The development resulted from significant issues
related to third party administration of claims and a challenging legal environment in Italy.
Management believes that current reserves, which represent its best estimate of future liabilities,
are adequate. Nonetheless, it concluded that sufficient uncertainty exists with respect to Italian
public hospital medical malpractice reserves to leave open the 2007 year of account, in accordance
with Lloyds provisions until a larger percentage of claims have been paid and the ultimate
liabilities can be estimated with greater certainty. Included in AFGs liability for unpaid losses
and loss adjustment expenses at December 31, 2011, are reserves of $126 million related to this
business.
Traditional actuarial techniques are not applicable to the Italian public hospital medical
malpractice business due to the significant changes in this account over time. Accordingly, more
detailed methods are used, including claim count development times average severity, and uplifting
case reserves to historical severity levels.
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 with investment grade or better S&P ratings or is secured by funds withheld or other
collateral.
The availability and cost of reinsurance are subject to prevailing market conditions, which are
beyond AFGs control and which may affect AFGs 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
AFGs results of operations. AFGs gross and net combined ratios are shown in the table below.
See Item 1 Business Property and Casualty Operations Reinsurance for more information on
AFGs reinsurance programs. For additional information on the effect of reinsurance on AFGs
historical results of operations see Note O
Insurance Reinsurance and the gross loss development table under Item 1 Business
Property and Casualty Operations Loss and Loss Adjustment Expense Reserves.
The following table illustrates the effect that purchasing reinsurance has had on AFGs combined
ratio over the last three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Before reinsurance (gross) |
|
|
88.5 |
% |
|
|
85.2 |
% |
|
|
86.0 |
% |
Effect of reinsurance |
|
|
4.9 |
|
|
|
3.3 |
|
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
Actual (net of reinsurance) |
|
|
93.4 |
% |
|
|
88.5 |
% |
|
|
82.7 |
% |
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2011 |
|
|
2010 |
|
Asbestos |
|
$ |
292 |
|
|
$ |
276 |
|
Environmental |
|
|
70 |
|
|
|
66 |
|
|
|
|
|
|
|
|
A&E reserves, net of reinsurance recoverable |
|
|
362 |
|
|
|
342 |
|
Reinsurance recoverable, net of allowance |
|
|
92 |
|
|
|
74 |
|
|
|
|
|
|
|
|
Gross A&E reserves |
|
$ |
454 |
|
|
$ |
416 |
|
|
|
|
|
|
|
|
Asbestos reserves include claims asserting alleged injuries and damages from exposure to asbestos.
Environmental reserves include claims relating to polluted waste sites.
40
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 insurers liability. In recent years, a number of 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 potentially 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. AFG, along with other insurers, is and
will be subject to such non-products claims. It is difficult to predict whether insureds will be
successful in asserting claims under non-products coverage or whether AFG and other insurers will
be successful in asserting additional defenses. Therefore, the future impact of such efforts is
uncertain.
Approximately 59% of AFGs 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-product 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 for the periods 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
managements best estimate based on periodic comprehensive studies and internal reviews adjusted
for payments and identifiable changes, supplemented by managements 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. The casualty insurance industry is engaged in extensive litigation
over these coverage and liability issues as the volume and severity of claims against asbestos
defendants continue to increase. Environmental claims likewise present challenges in prediction,
due to uncertainty regarding the interpretation of insurance policies, complexities regarding
multi-party involvements at sites, evolving clean up standards and protracted time periods required
to assess the level of clean up required at contaminated sites.
Emerging trends, such as those named below, could impact AFGs reserves and payments:
|
|
|
There is a growing 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. |
|
|
|
AFGs insureds may make claims alleging significant non-products exposures. |
41
While management believes that AFGs 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 recent bankruptcy
filings, and unresolved issues such as
whether coverage exists, whether 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 income by
approximately $17 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Number of policyholders with no payments: |
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos |
|
|
113 |
|
|
|
122 |
|
|
|
71 |
|
Environmental |
|
|
98 |
|
|
|
132 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
254 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of policyholders with payments: |
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos |
|
|
58 |
|
|
|
54 |
|
|
|
110 |
|
Environmental |
|
|
26 |
|
|
|
20 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
74 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
295 |
|
|
|
328 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
Amounts paid (net of amounts received from reinsurers) for asbestos and environmental claims,
including loss adjustment expenses, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Asbestos |
|
$ |
13 |
|
|
$ |
27 |
|
|
$ |
11 |
|
Environmental |
|
|
17 |
|
|
|
17 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30 |
|
|
$ |
44 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
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, 2011, AFGs three year survival ratios were 17.4 times paid losses for the asbestos reserves
and 11.0 times paid losses for the total A&E reserves. Excluding amounts associated with the
settlements of asbestos-related coverage litigation for A.P. Green Industries (see Item 3 Legal
Proceedings) and another large claim, AFGs three year survival ratios were 10.9 and 7.6 times
paid losses for the asbestos reserves and total A&E reserves, respectively. Data published by
Conning Research & Consulting in June 2012 indicate that industry survival ratios were 8.5 for
asbestos reserves and 7.8 for total A&E reserves at December 31, 2010.
AFG has conducted comprehensive studies of its asbestos and environmental reserves with the aid of
outside actuarial and engineering firms and specialty outside counsel every two years with an
in-depth internal review during the intervening years.
In the second quarter of 2011, AFG completed a comprehensive study of its asbestos and
environmental exposures relating to the run-off operations of its property and casualty group and
its exposures related to former railroad and manufacturing operations and sites. The study relied
on a ground-up exposure analysis. With respect to asbestos, it considered products and
non-products exposures, paid claims history, the pattern of new claims, settlements and projected
development. As a result of the study, AFG recorded a $50 million special charge (net of
reinsurance) to increase the property and casualty groups asbestos reserves by $28 million and
its environmental reserves by $22 million. The property and casualty groups asbestos reserves
increase related primarily to exposures on business assumed from other insurers resulting from an
increase in anticipated aggregate exposures in several large settlements involving several
insurers in which AFG has a small proportional share. Some insurers have settled long-standing
asbestos exposures with their insureds and are seeking payment from reinsurers. Asbestos reserves
related to the property and casualty groups direct
42
asbestos
exposures were increased to reflect higher frequency and severity of mesothelioma and other cancer claims as well
as increased defense costs on many of these claims. These trends were partially offset by a
decline in the number of claims without serious injury and fewer new claims that required payment
being reported to AFG. The increase in the property and casualty groups environmental reserves
was attributed primarily to a small number of increases on specific environmental claims at
several sites. During the second quarter of 2010, an in-depth internal review of AFGs A&E
exposures was completed by AFGs internal A&E claims specialists and actuaries in consultation
with external actuaries and specialty outside counsel. During the second quarter of 2009, AFG
completed a comprehensive study of its A&E exposures with the assistance of outside actuarial and
engineering firms and specialty outside counsel. The 2010 in-depth internal review and the 2009
comprehensive study resulted in only minor adjustments to the A&E reserves. See Managements
Discussion and Analysis Results of Operations Asbestos and Environmental Reserve Charges for
the amount of A&E reserve strengthening recorded in 2011, 2010 and 2009.
Supplemental Insurance Reserves Long-term Care AFG, as well as other companies selling long-term
care products have relatively limited claims, lapse, and mortality experience over extended
periods, making it difficult to predict future claims. Long-term care claims tend to be much
higher in dollar amount and longer in duration than other health care products such as Medicare
supplement. In addition, long-term care claims are incurred much later in the life of a policy
than most other supplemental health products. These factors make it difficult to appropriately
price this product and were instrumental in AFGs decision to stop writing new policies beginning
in January 2010. AFGs long-term care products have level premiums and are guaranteed renewable.
Premium rates can potentially be increased in reaction to adverse experience. However, any rate
increases would require regulatory approval.
Reserves for future policy benefits under long-term care policies are established (and related
acquisition costs are amortized) over the life of the policies based on policy benefit assumptions
as of the date of issuance, including investment yields, mortality, morbidity, persistency, and
expenses. Once these assumptions are established for a given policy or group of policies, they are
not changed over the life of the policy unless a loss recognition event (premium deficiency)
occurs. Loss recognition occurs when, based on current expectations as of the measurement date,
existing contract liabilities plus the present value of future premiums, including reasonably
expected rate increases, are not expected to cover the present value of future claims payments and
related settlement and maintenance costs as well as unamortized acquisition costs. Based on loss
recognition testing at December 31, 2011, AFGs long-term care reserves plus the present value of
future premiums exceeded claims costs and unamortized acquisition expenses by approximately $25
million. Adverse changes in any of the reserve assumptions in future periods could result in loss
recognition for AFGs long-term care business. For example, a 1% change in claims costs or a 0.1%
change in investment yields in all future periods, excluding their effect on the Companys ability
to achieve future rate increases, would each impact the December 31, 2011, excess described above
by approximately $10 million. Once the excess is reduced to zero, the impact of adverse changes
in assumptions is recorded as a charge to earnings as either a reduction in unamortized acquisition
costs or an increase to contract reserves, net of any reinsurance recoverable.
Contingencies related to Subsidiaries Former Operations The A&E studies and reviews discussed
above encompassed reserves for various environmental and occupational injury and disease claims
and other contingencies arising out of the railroad operations disposed of by American Premiers
predecessor and certain manufacturing operations disposed of by American Premier and its
subsidiaries and by GAFRI. Charges resulting from the A&E studies and review were less than $10
million in 2011, 2010 and 2009. Liabilities for claims and contingencies arising from these
former operations totaled $92 million at December 31, 2011. For a discussion of the uncertainties
in determining the ultimate liability, see Note M Contingencies to the financial statements.
43
MANAGED INVESTMENT ENTITIES
Beginning in 2010, 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. The effect of consolidating these entities is shown in the tables
below (in millions). The Before CLO Consolidation columns include AFGs 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 |
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments |
|
$ |
25,675 |
|
|
$ |
|
|
|
$ |
(98 |
)(a) |
|
$ |
25,577 |
|
Assets of managed investment entities |
|
|
|
|
|
|
3,058 |
|
|
|
|
|
|
|
3,058 |
|
Other assets |
|
|
7,407 |
|
|
|
|
|
|
|
|
|
|
|
7,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
33,082 |
|
|
$ |
3,058 |
|
|
$ |
(98 |
) |
|
$ |
36,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses, loss adjustment expenses and
unearned premiums |
|
$ |
8,004 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,004 |
|
Annuity, life, accident and health benefits
and reserves |
|
|
17,147 |
|
|
|
|
|
|
|
|
|
|
|
17,147 |
|
Liabilities of managed investment entities |
|
|
|
|
|
|
2,885 |
|
|
|
(98 |
)(a) |
|
|
2,787 |
|
Long-term debt and other liabilities |
|
|
3,413 |
|
|
|
|
|
|
|
|
|
|
|
3,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
28,564 |
|
|
|
2,885 |
|
|
|
(98 |
) |
|
|
31,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and Capital surplus |
|
|
1,219 |
|
|
|
|
|
|
|
|
|
|
|
1,219 |
|
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriated managed investment entities |
|
|
|
|
|
|
173 |
|
|
|
|
|
|
|
173 |
|
Unappropriated |
|
|
2,596 |
|
|
|
|
|
|
|
|
|
|
|
2,596 |
|
Accumulated other comprehensive income |
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholdersequity |
|
|
4,372 |
|
|
|
173 |
|
|
|
|
|
|
|
4,545 |
|
Noncontrolling interests |
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
4,518 |
|
|
|
173 |
|
|
|
|
|
|
|
4,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
33,082 |
|
|
$ |
3,058 |
|
|
$ |
(98 |
) |
|
$ |
36,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments |
|
$ |
22,687 |
|
|
$ |
|
|
|
$ |
(17 |
)(a) |
|
$ |
22,670 |
|
Assets of managed investment entities |
|
|
|
|
|
|
2,537 |
|
|
|
|
|
|
|
2,537 |
|
Other assets |
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
29,934 |
|
|
$ |
2,537 |
|
|
$ |
(17 |
) |
|
$ |
32,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses, loss adjustment expenses and
unearned premiums |
|
$ |
7,947 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,947 |
|
Annuity, life, accident and health benefits
and reserves |
|
|
14,555 |
|
|
|
|
|
|
|
|
|
|
|
14,555 |
|
Liabilities of managed investment entities |
|
|
|
|
|
|
2,340 |
|
|
|
(17 |
)(a) |
|
|
2,323 |
|
Long-term debt and other liabilities |
|
|
3,009 |
|
|
|
|
|
|
|
|
|
|
|
3,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
25,511 |
|
|
|
2,340 |
|
|
|
(17 |
) |
|
|
27,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and Capital surplus |
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
|
1,271 |
|
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriated managed investment entities |
|
|
|
|
|
|
197 |
|
|
|
|
|
|
|
197 |
|
Unappropriated |
|
|
2,523 |
|
|
|
|
|
|
|
|
|
|
|
2,523 |
|
Accumulated other comprehensive income |
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,273 |
|
|
|
197 |
|
|
|
|
|
|
|
4,470 |
|
Noncontrolling interests |
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
4,423 |
|
|
|
197 |
|
|
|
|
|
|
|
4,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
29,934 |
|
|
$ |
2,537 |
|
|
$ |
(17 |
) |
|
$ |
32,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Elimination of the fair value of AFGs investment in CLOs. |
44
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed |
|
|
|
|
|
|
|
|
|
Before CLO |
|
|
Investment |
|
|
Consol. |
|
|
Consolidated |
|
|
|
Consolidation(a) |
|
|
Entities |
|
|
Entries |
|
|
As Reported |
|
Year ended December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums |
|
$ |
3,189 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,189 |
|
Investment income |
|
|
1,247 |
|
|
|
|
|
|
|
(6 |
)(b) |
|
|
1,241 |
|
Realized gains (losses) on securities |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
76 |
|
Realized gains (losses) on subsidiaries |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Income (loss) of managed investment entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
105 |
|
Loss on change in fair value of
assets/liabilities |
|
|
|
|
|
|
(29 |
) |
|
|
(4 |
)(b) |
|
|
(33 |
) |
Other income |
|
|
194 |
|
|
|
|
|
|
|
(19 |
)(c) |
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,703 |
|
|
|
76 |
|
|
|
(29 |
) |
|
|
4,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses |
|
|
3,671 |
|
|
|
|
|
|
|
|
|
|
|
3,671 |
|
Expenses of managed investment entities |
|
|
|
|
|
|
100 |
|
|
|
(29 |
)(b)(c) |
|
|
71 |
|
Interest on borrowed money and other expenses |
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
4,119 |
|
|
|
100 |
|
|
|
(29 |
) |
|
|
4,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes |
|
|
584 |
|
|
|
(24 |
) |
|
|
|
|
|
|
560 |
|
Provision for income taxes |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests |
|
|
344 |
|
|
|
(24 |
) |
|
|
|
|
|
|
320 |
|
Less: Net earnings (loss) attributable to
noncontrolling interests |
|
|
1 |
|
|
|
|
|
|
|
(24 |
)(d) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders |
|
$ |
343 |
|
|
$ |
(24 |
) |
|
$ |
24 |
|
|
$ |
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums |
|
$ |
3,001 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,001 |
|
Investment income |
|
|
1,208 |
|
|
|
|
|
|
|
(17 |
)(b) |
|
|
1,191 |
|
Realized gains (losses) on securities |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
101 |
|
Realized gains(losses) on subsidiaries |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Income (loss) of managed investment entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
93 |
|
Loss on change in fair value of
assets/liabilities |
|
|
|
|
|
|
(80 |
) |
|
|
10 |
(b) |
|
|
(70 |
) |
Other income |
|
|
209 |
|
|
|
|
|
|
|
(15 |
)(c) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,506 |
|
|
|
13 |
|
|
|
(22 |
) |
|
|
4,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses |
|
|
3,297 |
|
|
|
|
|
|
|
|
|
|
|
3,297 |
|
Expenses of managed investment entities |
|
|
|
|
|
|
77 |
|
|
|
(22 |
)(b)(c) |
|
|
55 |
|
Interest on borrowed money and other expenses |
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
3,753 |
|
|
|
77 |
|
|
|
(22 |
) |
|
|
3,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes |
|
|
753 |
|
|
|
(64 |
) |
|
|
|
|
|
|
689 |
|
Provision for income taxes |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests |
|
|
487 |
|
|
|
(64 |
) |
|
|
|
|
|
|
423 |
|
Less: Net earnings (loss) attributable to
noncontrolling interests |
|
|
8 |
|
|
|
|
|
|
|
(64 |
)(d) |
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders |
|
$ |
479 |
|
|
$ |
(64 |
) |
|
$ |
64 |
|
|
$ |
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $6 million and $17 million in 2011 and 2010, respectively, in investment income representing the change in
fair value of AFGs CLO investments plus $19 million and $15 million in 2011 and 2010, respectively, in CLO management
fees earned. |
|
(b) |
|
Elimination of the change in fair value of AFGs investments in the CLOs, including $10 million and $7 million 2011 and
2010, respectively, in distributions recorded as interest expense by the CLOs. |
|
(c) |
|
Elimination of management fees earned by AFG. |
|
(d) |
|
Allocate losses of CLOs attributable to other debt holders to noncontrolling interests. |
45
RESULTS OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 2011
General AFGs 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 table identifies such items and reconciles 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, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Core net operating earnings |
|
$ |
364 |
|
|
$ |
433 |
|
|
$ |
493 |
|
Realized gains (a) |
|
|
45 |
|
|
|
46 |
|
|
|
26 |
|
Special asbestos and environmental (A&E) charge(a) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
Valuation allowance against deferred tax assets(b) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to shareholders |
|
$ |
343 |
|
|
$ |
479 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Core net operating earnings |
|
$ |
3.53 |
|
|
$ |
3.92 |
|
|
$ |
4.23 |
|
Realized gains |
|
|
.45 |
|
|
|
.41 |
|
|
|
.22 |
|
Special asbestos and environmental charge |
|
|
(.37 |
) |
|
|
|
|
|
|
|
|
Valuation allowance against deferred tax assets |
|
|
(.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to shareholders |
|
$ |
3.33 |
|
|
$ |
4.33 |
|
|
$ |
4.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The tax effects of reconciling items are shown below (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Realized gains |
|
$ |
(27 |
) |
|
$ |
(36 |
) |
|
$ |
(8 |
) |
Special A&E charge |
|
|
21 |
|
|
|
|
|
|
|
|
|
In addition, realized gains are shown net of noncontrolling interests of ($1 million) in
2011, ($6 million) in 2010 and ($4 million) in 2009.
|
|
|
(b) |
|
The valuation allowance is net of $6 million in noncontrolling interest. |
Net earnings attributable to shareholders and core net earnings decreased in 2011 compared to 2010
due primarily to lower underwriting profit and lower investment income in the property and casualty
insurance operations partially offset by increased earnings in the annuity and supplemental
operations. Net earnings attributable to shareholders were also impacted by a second quarter 2011
special A&E charge and a fourth quarter 2011 charge for a valuation allowance against deferred tax
assets.
Net earnings attributable to shareholders and core net operating earnings decreased in 2010
compared to 2009 due primarily to lower underwriting profit and lower investment income in the
property and casualty insurance operations, partially offset by improved results in the annuity and
supplemental insurance operations. Net earnings attributable to shareholders also benefited from
higher realized gains in 2010 than in 2009.
Property and Casualty Insurance Underwriting AFG reports its 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. On the other hand, 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.
Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of
losses, loss adjustment expenses, underwriting expenses and policyholder dividends to premiums. A
combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect
investment income, other income or federal income taxes.
46
While AFG desires and seeks to earn an underwriting profit on all of its business, it is not always
possible to do so. As a result, AFG attempts to expand in the most profitable areas and control
growth or even reduce its involvement in the least profitable ones.
AFGs combined ratio has been better than the industry average for twenty-four of the last
twenty-six years. Management believes that AFGs 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.
Premiums and combined ratios for AFGs property and casualty insurance operations were as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Gross Written Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation |
|
$ |
2,273 |
|
|
$ |
1,778 |
|
|
$ |
1,816 |
|
Specialty casualty |
|
|
1,302 |
|
|
|
1,295 |
|
|
|
1,394 |
|
Specialty financial |
|
|
529 |
|
|
|
514 |
|
|
|
557 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,106 |
|
|
$ |
3,589 |
|
|
$ |
3,763 |
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation |
|
$ |
1,436 |
|
|
$ |
1,159 |
|
|
$ |
872 |
|
Specialty casualty |
|
|
867 |
|
|
|
864 |
|
|
|
923 |
|
Specialty financial |
|
|
398 |
|
|
|
323 |
|
|
|
448 |
|
Other |
|
|
69 |
|
|
|
62 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,770 |
|
|
$ |
2,408 |
|
|
$ |
2,311 |
|
|
|
|
|
|
|
|
|
|
|
Combined Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation |
|
|
92.0 |
% |
|
|
88.0 |
% |
|
|
74.1 |
% |
Specialty casualty |
|
|
95.5 |
|
|
|
94.6 |
|
|
|
93.2 |
|
Specialty financial |
|
|
85.1 |
|
|
|
74.8 |
|
|
|
74.1 |
|
Total Specialty |
|
|
91.6 |
|
|
|
88.0 |
|
|
|
82.4 |
|
Aggregate (including discontinued lines) |
|
|
93.4 |
% |
|
|
88.5 |
% |
|
|
82.7 |
% |
Gross and net written premiums increased in 2011 compared to 2010 due primarily to higher premiums
in the Property and transportation segment, particularly the crop and transportation businesses.
In addition, higher net written premiums in 2011 reflect the impact of a third quarter 2010
reinsurance transaction in the Specialty financial group. Overall renewal rate momentum in the
Specialty insurance operations was positive during the fourth quarter of 2011.
The Specialty insurance operations generated an underwriting profit of $231 million in 2011, $77
million lower than in 2010. Lower favorable reserve development, poor results in a block of
program business and lower profitability in the crop operations were partially offset by improved
results in the excess and surplus businesses. Results for 2011 include $120 million (4.3 points on
the combined ratio) of favorable reserve development compared to $170 million (6.7 points) in 2010.
Catastrophe losses totaled $46 million (1.7 points) in 2011 compared to $49 million (1.9 points)
in 2010.
Gross written premiums decreased 5% in 2010 compared to 2009 due primarily to competitive pressures
and lower spring agricultural commodity prices. Premiums resulting from National Interstates
third quarter acquisition of Vanliner, premium growth from Marketform and higher fall agricultural
commodity prices partially offset these declines. The increase in net written premiums in 2010
compared to 2009 is a result of decreased cessions under the crop reinsurance agreement, partially
offset by the decline in premiums resulting from the reinsurance transaction in the Specialty
financial group. Excluding crop operations, gross and net written premiums decreased 2% and 5%,
respectively, in 2010 compared to 2009. Average renewal rates in the Specialty insurance
operations during 2010 were flat compared to the prior year.
The Specialty insurance operations generated an underwriting profit of $308 million in 2010, $116
million lower than in 2009. In addition to soft market conditions, the reduced profit in 2010
compared to 2009 reflects a $35 million decrease in favorable prior year reserve development and a
$31 million increase in catastrophe losses. Results for 2010 include 6.7 points of favorable
reserve development compared to 8.5 points in 2009 and 1.9 points of catastrophe losses compared to .7 points in 2009.
47
Property and transportation gross and net written premiums increased in 2011 when compared to 2010
as a result of higher crop premiums resulting from higher spring agricultural commodity prices as
well as additional premiums related to National Interstates acquisition of Vanliner in July 2010.
This group reported an underwriting profit of $113 million, $27 million lower than in 2010. Lower
underwriting profits in the crop, property and inland marine and transportation businesses were
partially offset by lower catastrophe losses. Catastrophe losses for this group were $32 million
(2.3 points) in 2011 compared to $39 million (3.3 points) in 2010.
Gross written premiums for 2010 declined from 2009 primarily as a result of lower spring commodity
prices that had the effect of lowering AFGs crop premium volume. These declines were partially
offset by additional premiums from the Vanliner acquisition. AFG returned to historical levels of
50% cessions under its crop reinsurance agreement in 2010, compared to 90% in 2009, contributing to
a substantial increase in this groups net written premiums. Excluding crop, this groups net
written premiums for 2010 increased 9% from 2009, primarily as a result of the Vanliner
acquisition. This group reported an underwriting profit of $140 million in 2010, $96 million lower
than in 2009 due primarily to lower favorable reserve development and higher catastrophe losses.
Results for 2010 include 2.3 points of favorable reserve development compared to 5.7 points in 2009
and 3.3 points of catastrophe losses in 2010 compared to minimal catastrophe losses in 2009.
Specialty casualty gross and net written premiums for 2011 were up slightly when compared to the
2010 period. Growth in the international operations and higher premiums in the excess and surplus
and targeted markets operations more than offset the non-renewal of two major programs that did not
meet return thresholds and a decision to exit the excess workers compensation business. This
group reported an underwriting profit of $39 million in 2011, $8 million lower than the prior year.
Improved results in the excess and surplus businesses were more than offset by underwriting losses
in a block of program business and an $18 million decrease in favorable reserve development.
Gross and net written premiums decreased in 2010 compared to 2009 due primarily to competitive
market conditions in the excess and surplus markets and California workers compensation
businesses, as well as volume reductions resulting from decreased demand for general liability
coverages in the homebuilders market. Growth in gross written premiums in the Marketform and
environmental operations partially offset these declines. Increased retentions in the executive
liability operations helped to offset decreases in net written premiums. This group reported an
underwriting profit of $47 million in 2010, $16 million lower than in 2009. The decrease was
primarily due to lower underwriting profits in the California workers compensation business and
the general liability operations (primarily those that serve the homebuilders industry). These
decreases were partially offset by improved results in the executive liability and excess and
surplus operations.
Underwriting results for 2011, 2010 and 2009 include $44 million, $55 million and $56 million,
respectively, in adverse reserve development related to Marketform, primarily its run-off Italian
public hospital medical malpractice business.
Specialty financial net written premiums in 2011 were higher when compared to 2010 due primarily
to the impact of a third quarter 2010 reinsurance transaction that involved the sale of unearned
premiums related to the automotive lines of business. This group reported an underwriting profit
of $61 million in 2011, $51 million lower than in 2010. Lower favorable reserve development,
primarily in the run-off automobile residual value insurance (RVI) business, contributed to
this decline.
48
Gross written premiums decreased in 2010 compared to 2009, reflecting the decision to exit
certain automotive lines of business in 2009. During the third quarter of 2010, AFG ceded the
unearned premium related to these businesses in a reinsurance transaction, which resulted in a
reduction of approximately $100 million in net written premiums. Specialty financial
underwriting profit was $112 million in 2010 compared to $134 million in 2009. The lower
underwriting profit in 2010 reflects $51 million less of favorable prior year reserve development
in the RVI operations than was recorded in 2009.
Asbestos and Environmental Reserve Charges As previously discussed under Uncertainties Asbestos
and Environmental-related (A&E) Insurance Reserves, AFG has established property and casualty
insurance reserves for claims related to environmental exposures and asbestos claims. AFG also has
recorded liabilities for various environmental and occupational injury and disease claims arising
out of former railroad and manufacturing operations. Total charges recorded to increase reserves
(net of reinsurance recoverable) for A&E exposures of AFGs property and casualty group (included
in loss and loss adjustment expenses) and its former railroad and manufacturing operations
(included in other operating and general expenses) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Property and casualty group |
|
$ |
50 |
|
|
$ |
9 |
|
|
$ |
4 |
|
Former operations |
|
|
9 |
|
|
|
19 |
|
|
|
15 |
|
Loss development As shown in Note O Insurance Property and Casualty Insurance Reserves,
AFGs property and casualty operations recorded favorable loss development of $69 million in 2011,
$158 million in 2010 and $198 million in 2009 related to prior accident years. Major areas of
favorable (adverse) development were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Property and transportation |
|
$ |
26 |
|
|
$ |
27 |
|
|
$ |
52 |
|
Specialty casualty |
|
|
71 |
|
|
|
89 |
|
|
|
59 |
|
Specialty financial |
|
|
10 |
|
|
|
48 |
|
|
|
105 |
|
Other specialty |
|
|
13 |
|
|
|
6 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
120 |
|
|
|
170 |
|
|
|
205 |
|
Other, primarily asbestos and
environmental charges |
|
|
(51 |
) |
|
|
(12 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Aggregate (including discontinued lines) |
|
$ |
69 |
|
|
$ |
158 |
|
|
$ |
198 |
|
|
|
|
|
|
|
|
|
|
|
Favorable reserve development in the Property and transportation group in 2011, 2010 and 2009
reflects lower than expected loss frequency in crop products. The favorable reserve development in
this group also reflects lower severity in auto liability products in 2010 and lower than expected
loss frequency in ocean marine products and lower severity in farm and crop losses in 2009.
Favorable reserve development in the Specialty casualty group in 2011 is due primarily to lower
than expected claim severity in directors and officers liability, excess and surplus lines and the
run-off legal professional liability business, partially offset by adverse development due to
higher frequency and severity on run-off Italian public hospital medical malpractice liability
products written by Marketform and a block of U.S.-based program (motel/hotel, restaurants, taverns
and recreational) business. Favorable reserve development in the Specialty casualty group in 2010
is due to lower than expected severity on claims in general liability, directors and officers
liability and the run-off legal professional liability business, partially offset by adverse
development on run-off Italian medical malpractice liability products in Marketform. Favorable
reserve development in the Specialty casualty group in 2009 reflects lower severity on claims in
general liability and directors and officers liability as well as lower than expected frequency in
a block of program (leisure camps, fairs and festivals, and sports and leisure) business, partially
offset by adverse development on Marketforms run-off Italian medical malpractice reserves.
Favorable reserve development in the Specialty financial group in 2011 is due to lower than
expected frequency and severity in the surety, fidelity, crime and foreign credit businesses as
economic conditions did not affect these lines as adversely as had been anticipated. Favorable
reserve development in Specialty financial in 2010 and 2009 related to lower than expected
frequency and severity in the run-off RVI operations due to favorable trends in used car sale
prices and lower loss severity in AFGs surety, fidelity and crime products.
49
The development in Other specialty reflects adjustments to the deferred gain on the retroactive
insurance transaction entered into in connection with the sale of a business in 1998, net of
related amortization.
Annuity and Supplemental Insurance Operations Operating earnings before income taxes
(excluding realized gains (losses)) of the annuity and supplemental insurance segment increased $22
million (11%) to $224 million in 2011 due primarily to higher earnings in the fixed annuity and
Medicare supplement businesses, partially offset by higher mortality in the run-off life
operations, the impact of a decrease in the stock market on the variable annuity business and the
impact of lower interest rates on the indexed annuity business. The 2010 results were $40 million
(25%) higher than 2009 as expense savings and higher earnings in the fixed annuity and supplemental
insurance operations were partially offset by lower earnings in the variable annuity operations.
Statutory Annuity Premiums The following table summarizes AFGs annuity sales (statutory,
in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
403(b) Fixed and Indexed Annuities: |
|
|
|
|
|
|
|
|
|
|
|
|
First Year |
|
$ |
18 |
|
|
$ |
34 |
|
|
$ |
66 |
|
Renewal |
|
|
164 |
|
|
|
168 |
|
|
|
144 |
|
Single Sum |
|
|
75 |
|
|
|
103 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
257 |
|
|
|
305 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-403(b) Indexed Annuities |
|
|
1,549 |
|
|
|
735 |
|
|
|
402 |
|
Non-403(b) Fixed Annuities |
|
|
239 |
|
|
|
430 |
|
|
|
294 |
|
Bank Annuities |
|
|
971 |
|
|
|
737 |
|
|
|
314 |
|
Variable Annuities |
|
|
70 |
|
|
|
73 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
Total Annuity Premiums |
|
$ |
3,086 |
|
|
$ |
2,280 |
|
|
$ |
1,434 |
|
|
|
|
|
|
|
|
|
|
|
Bank annuities represent annuity premiums generated through banks by independent agents and
brokers, as well as through direct relationships with certain financial institutions.
The increase in annuity premiums in 2011 and 2010 is attributable to increased sales of indexed
annuities in the non-403(b) single premium market and higher sales through banks.
Increased sales of indexed annuities reflects the industry trend towards indexed annuities and
away from traditional fixed annuities, as well as AFGs introduction of new indexed products
and features. The increase in Bank Annuities premiums in 2011 reflects the addition of
several new banks.
Life, Accident and Health Premiums and Benefits The following table summarizes AFGs life,
accident and health premiums and benefits as shown in the Consolidated Statement of Earnings (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental insurance operations |
|
|
|
|
|
|
|
|
|
|
|
|
First Year |
|
$ |
38 |
|
|
$ |
63 |
|
|
$ |
85 |
|
Renewal |
|
|
367 |
|
|
|
361 |
|
|
|
330 |
|
Life operations (in run-off) |
|
|
25 |
|
|
|
27 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
430 |
|
|
$ |
451 |
|
|
$ |
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental insurance operations |
|
$ |
326 |
|
|
$ |
330 |
|
|
$ |
317 |
|
Life operations (in run-off) |
|
|
43 |
|
|
|
38 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
369 |
|
|
$ |
368 |
|
|
$ |
361 |
|
|
|
|
|
|
|
|
|
|
|
In January 2010, AFG ceased new sales of long-term care insurance. Renewal premiums will be
accepted unless those policies lapse.
50
Investment Income Over the past couple of years, yields available in the financial markets
on fixed maturity securities have generally declined, placing downward pressure on AFGs investment
portfolio yield. The $50 million increase in investment income in 2011 compared to 2010 reflects
higher average invested assets, primarily related to growth in the annuity business, partially
offset by lower yields on fixed maturity investments. The $9 million decrease in investment income
in 2010 compared to 2009 reflects lower yields on fixed maturity investments partially offset by
higher average invested assets. Investment income includes $27 million in 2011, $66 million in
2010 and $130 million in 2009 of interest income earned on interest-only and similar MBS, primarily
non-agency interest-only securities with interest rates that float inversely with short-term rates.
Realized Gains (Losses) on Securities Net realized gains (losses) on securities consisted
of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) before impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
Disposals |
|
$ |
156 |
|
|
$ |
134 |
|
|
$ |
115 |
|
Change in the fair value of derivatives |
|
|
(24 |
) |
|
|
43 |
|
|
|
154 |
|
Adjustments to annuity deferred policy
acquisition costs and related items |
|
|
(4 |
) |
|
|
(14 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128 |
|
|
|
163 |
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
Impairment charges: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
(68 |
) |
|
|
(86 |
) |
|
|
(271 |
) |
Adjustments to annuity deferred policy
acquisition costs and related items |
|
|
16 |
|
|
|
24 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
(62 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
76 |
|
|
$ |
101 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
Realized gains on disposals include gains of approximately $76 million in 2011, $26 million in 2010
and $76 million in 2009 on sales of shares of Verisk Analytics, Inc.
The change in fair value of derivatives includes net losses of less than $1 million in 2011, net
gains of $50 million in 2010 and $157 million in 2009 from the mark-to-market of MBS, primarily
interest-only securities with interest rates that float inversely with short-term rates. See Note
F Derivatives.
Approximately $57 million, $79 million and $221 million of the impairment charges in 2011, 2010 and
2009, respectively, related to fixed maturity investments, primarily corporate bonds and MBS.
Realized Losses on Subsidiaries In the third quarter of 2010, AFG recorded an impairment
charge of $22 million resulting from managements decision to de-emphasize the sale of supplemental
health insurance products through career agents, including the sale of a marketing subsidiary.
Partially offsetting this loss was National Interstates $7 million gain on the acquisition of
Vanliner in 2010. See Note I Goodwill and Other Intangibles and Note B Acquisition.
Other Income The $19 million decrease in other income in 2011 compared to 2010 reflects
$16 million in income recorded in the third quarter of 2010 from the sale of real estate and the
termination of leases by a tenant. When comparing other income for 2010 to 2009, this income was
more than offset by a decline in income from AFGs warranty business and lower fee income in
certain other businesses.
51
Annuity Benefits Annuity benefits reflect amounts accrued on annuity policyholders funds
accumulated. On deferred annuities (annuities in the accumulation phase), interest is generally
credited to policyholders accounts at their current stated interest rates. Furthermore, for
two-tier deferred annuities (annuities under which a higher interest amount can be earned if a
policy is annuitized rather than surrendered), additional reserves are accrued for (i) persistency
and premium bonuses and (ii) excess benefits expected to be paid for future deaths and
annuitizations. Changes in investment yields, crediting rates, actual surrender, death and
annuitization experience or modifications in actuarial assumptions can affect these additional
reserves and could result in charges (or credits) to earnings in the period the projections are
modified.
In the fourth quarters of 2011, 2010 and 2009, AFG conducted its detailed review of actual results
and future assumptions underlying its annuity operations. As a result of the reviews, AFG recorded
expense reductions of $10 million in 2011 and $3 million in 2010 and a charge of $5 million in 2009
to annuity benefits related to changes in these assumptions. Excluding these items, annuity
benefits increased $73 million in 2011 compared to 2010 and $17 million in 2010 compared to 2009
reflecting growth in the annuity business partially offset by lower average crediting rates. The
impact of changes in interest rates and stock market performance on the fair value of derivatives
related to the indexed annuity business also impacted the 2011 and 2010 results.
Annuity and Supplemental Insurance Acquisition Expenses Annuity and supplemental insurance
acquisition expenses include amortization of annuity, supplemental insurance and life business DPAC
as well as a portion of commissions on sales of insurance products. Annuity and supplemental
insurance acquisition expenses also include amortization of the present value of future profits of
businesses acquired (PVFP).
As a
result of the 2011 and 2010 reviews of actual results and future assumptions discussed above
in Annuity Benefits, AFG recorded write-offs of DPAC of $10 million in 2011 and $28 million in
2010 due primarily to the impact of changes in assumptions related to future investment yields, surrenders and
annuitization and death benefits partially offset by the impact of lower expected expenses and
crediting rates in the fixed annuity business. As a result of the 2009 review, AFG recorded an $8
million write-off of DPAC due primarily to the impact of changes in assumptions related to future
investment yields on the fixed annuity business. Excluding these charges, insurance acquisition
expenses remained unchanged in 2011 compared to 2010 and increased $24 million in 2010 compared to
2009 reflecting additional amortization due to growth in the annuity business.
The vast majority of this groups DPAC asset relates to its annuity and life insurance lines of
business. Unanticipated spread compression, decreases in the stock market, adverse mortality
experience, and higher than expected lapse rates could lead to further write-offs of DPAC or PVFP
in the future.
Interest Charges on Borrowed Money Interest expense increased $7 million (9%) in 2011
compared to 2010 and $11 million (16%) in 2010 compared to 2009 reflecting AFGs issuance of $132
million of 7% Senior Notes in September 2010.
Other Operating and General Expenses The $85 million decrease in 2010 compared to 2009
reflects the 2009 sale of a small subsidiary, lower expenses in AFGs warranty business due to the
run-off of certain products, and lower expenses in the annuity and supplemental insurance
operations.
Income Taxes See Note L Income Taxes to the financial statements for an analysis of
items affecting AFGs effective tax rate.
52
Noncontrolling Interests The following table details net earnings (loss) in consolidated
subsidiaries attributable to holders other than AFG (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
National Interstate |
|
$ |
15 |
|
|
$ |
19 |
|
|
$ |
21 |
|
Marketform |
|
|
(15 |
) |
|
|
(11 |
) |
|
|
(10 |
) |
Managed Investment Entities |
|
|
(24 |
) |
|
|
(64 |
) |
|
|
|
|
Other |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(23 |
) |
|
$ |
(56 |
) |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
Marketforms losses reflect adverse reserve development in its run-off Italian public hospital
medical malpractice business. As discussed in Notes A and H to the financial statements, the
losses of Managed Investment Entities in 2011 and 2010 represent CLO losses that ultimately inure
to holders of CLO debt other than AFG.
NEW ACCOUNTING STANDARDS
See Note A Recent Accounting Standards for a discussion of new accounting standards to be
adopted by AFG in 2012.
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair value
of financial instruments. AFGs exposures to market risk relate primarily to its investment
portfolio and annuity contracts, which are exposed to interest rate risk and, to a lesser extent,
equity price risk. To a much lesser extent, AFGs long-term debt is also exposed to interest rate
risk.
Fixed Maturity Portfolio The fair value of AFGs fixed maturity portfolio is directly impacted by
changes in market interest rates. AFGs fixed maturity portfolio is comprised of primarily fixed
rate investments with intermediate-term maturities. This practice is designed to allow flexibility
in reacting to fluctuations of interest rates. The portfolios of AFGs insurance operations are
managed with an attempt to achieve an adequate risk-adjusted return while maintaining sufficient
liquidity to meet policyholder obligations. AFGs annuity and run-off life operations attempt to
align the duration of their invested assets to the projected cash flows of policyholder
liabilities.
Consistent with the discussion in Item 7 Managements Discussion and Analysis Investments,
the following table demonstrates the sensitivity of the fair value of AFGs fixed maturity
portfolio to reasonably likely changes in interest rates by illustrating the estimated effect on
AFGs fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate
yield curve would have at December 31 (based on the duration of the portfolio, dollars in
millions). Increases or decreases from the 100 basis points illustrated would be approximately
proportional.
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Fair value of fixed maturity portfolio |
|
$ |
22,247 |
|
|
$ |
19,721 |
|
Pretax impact on fair value of 100 bps
increase in interest rates |
|
$ |
(1,046 |
) |
|
$ |
(868 |
) |
Pretax impact as % of total fixed maturity portfolio |
|
|
(4.7 |
%) |
|
|
(4.4 |
%) |
53
European Debt Exposure Certain European countries, including the so-called peripheral countries
(Greece, Portugal, Ireland, Italy and Spain) have been experiencing varying degrees of financial
stress over the past couple of years. There remains considerable uncertainty as to future
developments in the European debt crisis and the impact on global financial markets. Market
concerns over the direct and indirect exposure of European financial institutions to the peripheral
countries have resulted in widening of credit spreads and increased costs of funding for some
European financial institutions.
At December 31, 2011, AFG owned no sovereign debt issued by the peripheral countries. The total
exposure of AFGs fixed maturity portfolio to sovereign and non-sovereign (corporate industrial
and financial institution) debt at December 31, 2011, is shown in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
Carrying |
|
|
Fair |
|
|
Gain |
|
|
|
Value |
|
|
Value |
|
|
(Loss) |
|
European Industrials |
|
|
|
|
|
|
|
|
|
|
|
|
Eurozone (17 countries with euro as common currency) |
|
$ |
293 |
|
|
$ |
308 |
|
|
$ |
15 |
|
Non-Eurozone (primarily U.K., Switzerland and Sweden) |
|
|
404 |
|
|
|
445 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
Total European Industrials |
|
$ |
697 |
|
|
$ |
753 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Financials |
|
|
|
|
|
|
|
|
|
|
|
|
Eurozone (17 countries with euro as common currency) |
|
$ |
135 |
|
|
$ |
132 |
|
|
$ |
(3 |
) |
Non-Eurozone (primarily U.K., Switzerland and Sweden) |
|
|
285 |
|
|
|
273 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Total European Financials |
|
$ |
420 |
|
|
$ |
405 |
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Sovereign Debt |
|
|
|
|
|
|
|
|
|
|
|
|
Eurozone (primarily France, Germany and Netherlands) |
|
$ |
18 |
|
|
$ |
18 |
|
|
$ |
|
|
Non-Eurozone (primarily U.K. and Sweden) |
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Sovereign Debt |
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Exposure |
|
|
|
|
|
|
|
|
|
|
|
|
Eurozone |
|
$ |
446 |
|
|
$ |
458 |
|
|
$ |
12 |
|
Non-Eurozone |
|
|
702 |
|
|
|
731 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
Total European Exposure |
|
$ |
1,148 |
|
|
$ |
1,189 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
Annuity Contracts Substantially all of AFGs fixed rate annuity contracts permit AFG to
change crediting rates (subject to minimum interest rate guarantees as determined by applicable
law) enabling management to react to changes in market interest rates. In late 2003, AFG began
issuing products with guaranteed minimum crediting rates of less than 2% in states where required
approvals have been received. The guaranteed minimum crediting rate on virtually all new product
sales since 2010 is 1%. At December 31, 2011, approximately half of AFGs annuity contracts were
at, or within ten basis points of the guaranteed minimum crediting rate.
At December 31, 2011, the weighted-average stated crediting rate on the in-force block of AFGs
principal fixed annuity products was approximately 3.1%, and management estimates that the
crediting rate on this in-force business will remain approximately 3.1% over the next five years.
This rate reflects actuarial assumptions as to (i) expected investment spreads, (ii) deaths, (iii)
annuitizations, (iv) surrenders and (v) renewal premiums. Actual experience and changes in
actuarial assumptions may result in different effective crediting rates than those above. The
current stated crediting rates (excluding bonus interest) on new sales of AFGs fixed annuity
products generally range from 1.0% to 2.0%.
Actuarial assumptions used to estimate DPAC and certain annuity liabilities, as well as AFGs
ability to maintain spread, could be impacted if a low interest rate environment continues for an
extended period, or if increases in interest rates cause policyholder behavior to differ
significantly from current expectations.
54
Projected payments (in millions) in each of the subsequent five years and for all years
thereafter on AFGs fixed annuity liabilities at December 31 were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Fifth |
|
|
Thereafter |
|
|
Total |
|
|
Value(*) |
|
2011 |
|
$ |
1,373 |
|
|
$ |
1,500 |
|
|
$ |
1,495 |
|
|
$ |
1,772 |
|
|
$ |
1,941 |
|
|
$ |
7,339 |
|
|
$ |
15,420 |
|
|
$ |
15,314 |
|
2010 |
|
|
1,248 |
|
|
|
1,309 |
|
|
|
1,418 |
|
|
|
1,381 |
|
|
|
1,602 |
|
|
|
5,947 |
|
|
|
12,905 |
|
|
|
12,233 |
|
|
|
|
(*) |
|
Fair value excludes life contingent annuities in the payout phase (carrying value of $201 million and
$208 million at December 31, 2011 and 2010, respectively). |
AFGs indexed annuities represented approximately one-third of annuity benefits accumulated at
December 31, 2011. These annuities provide policyholders with a crediting rate tied, in part, to
the performance of an existing stock market index. AFG attempts to mitigate the risk in the
index-based component of these products through the purchase of call options on the appropriate
index. AFGs strategy is designed so that an increase in the liabilities, due to an increase in
the market index, will be generally offset by unrealized and realized gains on the call options
purchased by AFG. Both the index-based component of the annuities and the related call options are
considered derivatives and adjusted to fair value through current earnings as annuity benefits.
Adjusting these derivatives to fair value increased (decreased) annuity benefits expense by $42
million in 2011, ($21 million) in 2010 and $3 million in 2009.
Long-Term Debt The following table shows scheduled principal payments (in millions) on fixed-rate
long-term debt of AFG and its subsidiaries and related weighted average interest rates for each of
the subsequent five years and for all years thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
December 31, 2010 |
|
|
|
Scheduled |
|
|
|
|
|
|
|
|
Scheduled |
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
Payments |
|
|
Rate |
|
|
|
|
Payments |
|
|
Rate |
|
2012 |
|
$ |
1 |
|
|
|
5.9 |
% |
|
2011 |
|
$ |
9 |
|
|
|
10.2 |
% |
2013 |
|
|
2 |
|
|
|
5.9 |
|
|
2012 |
|
|
1 |
|
|
|
5.9 |
|
2014 |
|
|
2 |
|
|
|
5.9 |
|
|
2013 |
|
|
2 |
|
|
|
5.9 |
|
2015 |
|
|
14 |
|
|
|
5.7 |
|
|
2014 |
|
|
2 |
|
|
|
5.9 |
|
2016 |
|
|
45 |
|
|
|
6.1 |
|
|
2015 |
|
|
14 |
|
|
|
5.7 |
|
Thereafter |
|
|
799 |
|
|
|
8.4 |
|
|
Thereafter |
|
|
844 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
863 |
|
|
|
7.9 |
% |
|
Total |
|
$ |
872 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
$ |
940 |
|
|
|
|
|
|
Fair Value |
|
$ |
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No amounts were outstanding under AFGs bank credit facility at December 31, 2011 or 2010.
55
ITEM 8
Financial Statements and Supplementary Data
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
Selected Quarterly Financial Data has been included in Note N to the
Consolidated Financial Statements.
ITEM 9A
Controls and Procedures
AFGs management, with participation of its Co-Chief Executive Officers and its principal financial
officer, has evaluated AFGs disclosure controls and procedures (as defined in Exchange Act Rule
13a-15) as of the end of the period covered by this report. Based on that evaluation, AFGs
Co-CEOs and principal financial officer concluded that these controls and procedures are effective.
There have been no changes in AFGs internal control over financial reporting during the fourth
fiscal quarter of 2011 that materially affected, or are reasonably likely to materially affect,
AFGs internal control over financial reporting. There have been no significant changes in AFGs
internal controls or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
AFGs management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of management, including AFGs principal executive officers
and principal financial officer, AFG conducted an evaluation of the effectiveness of internal
control over financial reporting as of December 31, 2011, based on the criteria set forth in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
There are inherent limitations to the effectiveness of any system of internal controls and
procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective internal controls and procedures can only
provide reasonable assurance of achieving their control objectives.
Based on AFGs evaluation, management concluded that internal control over financial reporting was
effective as of December 31, 2011. The attestation report of AFGs independent registered public
accounting firm on AFGs internal control over financial reporting as of December 31, 2011, is set
forth below.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
American Financial Group, Inc.
We have audited American Financial Group, Inc. and subsidiaries (the Companys) internal control
over financial reporting as of December 31, 2011, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of internal control over
financial reporting included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, American Financial Group, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2011, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of American Financial Group, Inc. and
subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of earnings,
changes in equity and cash flows for each of the three years in the period ended December 31, 2011,
and our report dated February 28, 2012, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
February 28, 2012
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
American Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of American Financial Group, Inc. and
subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated
statements of earnings, changes in equity and cash flows for each of the three years in the period
ended December 31, 2011. Our audits also included the financial statement schedules listed in the
Index at Item 15(a). These financial statements and schedules are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of American Financial Group, Inc. and subsidiaries at
December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2011, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, in connection with implementing a
new accounting standard, the Company changed its method of accounting for certain variable interest
entities in 2010.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), American Financial Group, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2011, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2012, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
February 28, 2012
F-1
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,324 |
|
|
$ |
1,099 |
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturities, available for sale at fair value
(amortized cost $20,562 and $18,490) |
|
|
21,807 |
|
|
|
19,328 |
|
Fixed maturities, trading at fair value |
|
|
440 |
|
|
|
393 |
|
Equity securities, at fair value (cost $744 and $458) |
|
|
928 |
|
|
|
690 |
|
Mortgage loans |
|
|
401 |
|
|
|
468 |
|
Policy loans |
|
|
252 |
|
|
|
264 |
|
Real estate and other investments |
|
|
425 |
|
|
|
428 |
|
|
|
|
|
|
|
|
Total cash and investments |
|
|
25,577 |
|
|
|
22,670 |
|
|
|
|
|
|
|
|
|
|
Recoverables from reinsurers |
|
|
2,942 |
|
|
|
2,964 |
|
Prepaid reinsurance premiums |
|
|
409 |
|
|
|
422 |
|
Agents balances and premiums receivable |
|
|
565 |
|
|
|
535 |
|
Deferred policy acquisition costs |
|
|
1,105 |
|
|
|
1,244 |
|
Assets of managed investment entities |
|
|
3,058 |
|
|
|
2,537 |
|
Other receivables |
|
|
895 |
|
|
|
674 |
|
Variable annuity assets (separate accounts) |
|
|
548 |
|
|
|
616 |
|
Other assets |
|
|
757 |
|
|
|
606 |
|
Goodwill |
|
|
186 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
36,042 |
|
|
$ |
32,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
$ |
6,520 |
|
|
$ |
6,413 |
|
Unearned premiums |
|
|
1,484 |
|
|
|
1,534 |
|
Annuity benefits accumulated |
|
|
15,420 |
|
|
|
12,905 |
|
Life, accident and health reserves |
|
|
1,727 |
|
|
|
1,650 |
|
Payable to reinsurers |
|
|
475 |
|
|
|
320 |
|
Liabilities of managed investment entities |
|
|
2,787 |
|
|
|
2,323 |
|
Long-term debt |
|
|
934 |
|
|
|
952 |
|
Variable annuity liabilities (separate accounts) |
|
|
548 |
|
|
|
616 |
|
Other liabilities |
|
|
1,456 |
|
|
|
1,121 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
31,351 |
|
|
|
27,834 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common Stock, no par value |
|
|
|
|
|
|
|
|
200,000,000 shares authorized |
|
|
|
|
|
|
|
|
97,846,402 and 105,168,366 shares outstanding |
|
|
98 |
|
|
|
105 |
|
Capital surplus |
|
|
1,121 |
|
|
|
1,166 |
|
Retained earnings: |
|
|
|
|
|
|
|
|
Appropriated managed investment entities |
|
|
173 |
|
|
|
197 |
|
Unappropriated |
|
|
2,596 |
|
|
|
2,523 |
|
Accumulated other comprehensive income, net of tax |
|
|
557 |
|
|
|
479 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,545 |
|
|
|
4,470 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
146 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Total equity |
|
|
4,691 |
|
|
|
4,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
36,042 |
|
|
$ |
32,454 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums |
|
$ |
2,759 |
|
|
$ |
2,550 |
|
|
$ |
2,412 |
|
Life, accident and health premiums |
|
|
430 |
|
|
|
451 |
|
|
|
444 |
|
Investment income |
|
|
1,241 |
|
|
|
1,191 |
|
|
|
1,200 |
|
Realized gains (losses) on: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities (*) |
|
|
76 |
|
|
|
101 |
|
|
|
43 |
|
Subsidiaries |
|
|
(3 |
) |
|
|
(13 |
) |
|
|
(5 |
) |
Income (loss) of managed investment entities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
105 |
|
|
|
93 |
|
|
|
|
|
Loss on change in fair value of assets/liabilities |
|
|
(33 |
) |
|
|
(70 |
) |
|
|
|
|
Other income |
|
|
175 |
|
|
|
194 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,750 |
|
|
|
4,497 |
|
|
|
4,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
1,744 |
|
|
|
1,457 |
|
|
|
1,187 |
|
Commissions and other underwriting expenses |
|
|
835 |
|
|
|
797 |
|
|
|
808 |
|
Annuity benefits |
|
|
510 |
|
|
|
444 |
|
|
|
435 |
|
Life, accident and health benefits |
|
|
369 |
|
|
|
368 |
|
|
|
361 |
|
Annuity and supplemental insurance acquisition expenses |
|
|
213 |
|
|
|
231 |
|
|
|
187 |
|
Interest charges on borrowed money |
|
|
85 |
|
|
|
78 |
|
|
|
67 |
|
Expenses of managed investment entities |
|
|
71 |
|
|
|
55 |
|
|
|
|
|
Other operating and general expenses |
|
|
363 |
|
|
|
378 |
|
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
4,190 |
|
|
|
3,808 |
|
|
|
3,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes |
|
|
560 |
|
|
|
689 |
|
|
|
812 |
|
Provision for income taxes |
|
|
240 |
|
|
|
266 |
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling interests |
|
|
320 |
|
|
|
423 |
|
|
|
530 |
|
Less: Net earnings (loss) attributable to
noncontrolling interests |
|
|
(23 |
) |
|
|
(56 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders |
|
$ |
343 |
|
|
$ |
479 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Attributable to Shareholders per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.39 |
|
|
$ |
4.38 |
|
|
$ |
4.49 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
3.33 |
|
|
$ |
4.33 |
|
|
$ |
4.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of Common Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
101.3 |
|
|
|
109.2 |
|
|
|
115.7 |
|
Diluted |
|
|
102.9 |
|
|
|
110.5 |
|
|
|
116.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per Common Share |
|
$ |
.6625 |
|
|
$ |
.575 |
|
|
$ |
.52 |
|
|
|
|
(*) |
|
Consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains before impairments |
|
$ |
128 |
|
|
$ |
163 |
|
|
$ |
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on securities with impairment |
|
|
(31 |
) |
|
|
(50 |
) |
|
|
(373 |
) |
Non-credit portion recognized in other
comprehensive income (loss) |
|
|
(21 |
) |
|
|
(12 |
) |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
Impairment charges recognized in earnings |
|
|
(52 |
) |
|
|
(62 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized gains on securities |
|
$ |
76 |
|
|
$ |
101 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Dollars In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Accum. |
|
|
|
|
|
|
Noncon- |
|
|
|
|
|
|
Common |
|
|
and Capital |
|
|
Retained Earnings |
|
|
Other Comp |
|
|
|
|
|
|
trolling |
|
|
Total |
|
|
|
Shares |
|
|
Surplus |
|
|
Appro. |
|
|
Unappro. |
|
|
Inc. (Loss) |
|
|
Total |
|
|
Interests |
|
|
Equity |
|
Balance at December 31, 2008 |
|
|
115,599,169 |
|
|
$ |
1,351 |
|
|
$ |
|
|
|
$ |
1,842 |
|
|
$ |
(703 |
) |
|
$ |
2,490 |
|
|
$ |
112 |
|
|
$ |
2,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519 |
|
|
|
|
|
|
|
519 |
|
|
|
11 |
|
|
|
530 |
|
Other comprehensive income (loss),
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866 |
|
|
|
866 |
|
|
|
6 |
|
|
|
872 |
|
Change in foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
18 |
|
|
|
1 |
|
|
|
19 |
|
Change in unrealized pension and
other postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,402 |
|
|
|
18 |
|
|
|
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
(60 |
) |
Shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,026,891 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
18 |
|
Other benefit plans |
|
|
207,601 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Dividend reinvestment plan |
|
|
20,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Shares acquired and retired |
|
|
(3,291,835 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
(42 |
) |
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
(81 |
) |
Shares exchanged benefit plans |
|
|
(176,330 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Noncontrolling interest of acquired
business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Other |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
113,386,343 |
|
|
|
1,344 |
|
|
|
|
|
|
|
2,274 |
|
|
|
163 |
|
|
|
3,781 |
|
|
|
138 |
|
|
|
3,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
261 |
|
|
|
|
|
|
|
261 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
479 |
|
|
|
(56 |
) |
|
|
423 |
|
Other comprehensive income (loss),
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313 |
|
|
|
313 |
|
|
|
2 |
|
|
|
315 |
|
Change in foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 |
|
|
|
(54 |
) |
|
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of losses of managed
investment entities |
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
64 |
|
|
|
|
|
Dividends on Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
(64 |
) |
Shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,547,526 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
Other benefit plans |
|
|
479,514 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Dividend reinvestment plan |
|
|
17,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Shares acquired and retired |
|
|
(10,261,045 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
(170 |
) |
|
|
|
|
|
|
(292 |
) |
|
|
|
|
|
|
(292 |
) |
Shares exchanged benefit plans |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
105,168,366 |
|
|
|
1,271 |
|
|
|
197 |
|
|
|
2,523 |
|
|
|
479 |
|
|
|
4,470 |
|
|
|
150 |
|
|
|
4,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343 |
|
|
|
|
|
|
|
343 |
|
|
|
(23 |
) |
|
|
320 |
|
Other comprehensive income (loss),
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
80 |
|
|
|
5 |
|
|
|
85 |
|
Change in foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
|
(2 |
) |
Change in unrealized pension and
other postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
(17 |
) |
|
|
404 |
|
Allocation of losses of managed
investment entities |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
24 |
|
|
|
|
|
Dividends on Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
(68 |
) |
Shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,576,664 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
38 |
|
Other benefit plans |
|
|
387,746 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Dividend reinvestment plan |
|
|
15,763 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Stock-based compensation expense |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Shares acquired and retired |
|
|
(9,281,386 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
(202 |
) |
|
|
|
|
|
|
(315 |
) |
|
|
|
|
|
|
(315 |
) |
Shares exchanged benefit plans |
|
|
(20,751 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
|
97,846,402 |
|
|
$ |
1,219 |
|
|
$ |
173 |
|
|
$ |
2,596 |
|
|
$ |
557 |
|
|
$ |
4,545 |
|
|
$ |
146 |
|
|
$ |
4,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling interests |
|
$ |
320 |
|
|
$ |
423 |
|
|
$ |
530 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
192 |
|
|
|
214 |
|
|
|
198 |
|
Annuity benefits |
|
|
510 |
|
|
|
444 |
|
|
|
435 |
|
Realized gains on investing activities |
|
|
(74 |
) |
|
|
(92 |
) |
|
|
(34 |
) |
Net purchases of trading securities |
|
|
(45 |
) |
|
|
(11 |
) |
|
|
(51 |
) |
Deferred annuity and life policy acquisition costs |
|
|
(253 |
) |
|
|
(211 |
) |
|
|
(172 |
) |
Change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance and other receivables |
|
|
(228 |
) |
|
|
555 |
|
|
|
352 |
|
Other assets |
|
|
(101 |
) |
|
|
8 |
|
|
|
145 |
|
Insurance claims and reserves |
|
|
134 |
|
|
|
(413 |
) |
|
|
(421 |
) |
Payable to reinsurers |
|
|
155 |
|
|
|
(150 |
) |
|
|
(41 |
) |
Other liabilities |
|
|
246 |
|
|
|
2 |
|
|
|
(17 |
) |
Managed investment entities assets/liabilities |
|
|
(212 |
) |
|
|
89 |
|
|
|
|
|
Other operating activities, net |
|
|
23 |
|
|
|
6 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
667 |
|
|
|
864 |
|
|
|
915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(5,321 |
) |
|
|
(4,979 |
) |
|
|
(4,855 |
) |
Equity securities |
|
|
(397 |
) |
|
|
(223 |
) |
|
|
(21 |
) |
Mortgage loans |
|
|
(190 |
) |
|
|
(159 |
) |
|
|
(82 |
) |
Real estate, property and equipment |
|
|
(86 |
) |
|
|
(74 |
) |
|
|
(62 |
) |
Subsidiaries |
|
|
|
|
|
|
(128 |
) |
|
|
(5 |
) |
Proceeds from: |
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and redemptions of fixed maturities |
|
|
1,974 |
|
|
|
2,081 |
|
|
|
1,934 |
|
Repayments of mortgage loans |
|
|
269 |
|
|
|
71 |
|
|
|
11 |
|
Sales of fixed maturities |
|
|
1,293 |
|
|
|
1,540 |
|
|
|
2,207 |
|
Sales of equity securities |
|
|
198 |
|
|
|
49 |
|
|
|
127 |
|
Sales of real estate, property and equipment |
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
Sale of subsidiary |
|
|
9 |
|
|
|
|
|
|
|
|
|
Managed investment entities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(1,563 |
) |
|
|
(1,008 |
) |
|
|
|
|
Proceeds from sales and redemptions of investments |
|
|
1,391 |
|
|
|
1,018 |
|
|
|
|
|
Cash and cash equivalents of businesses
acquired or sold, net |
|
|
(5 |
) |
|
|
95 |
|
|
|
(23 |
) |
Other investing activities, net |
|
|
(14 |
) |
|
|
8 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,439 |
) |
|
|
(1,705 |
) |
|
|
(783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Annuity receipts |
|
|
3,326 |
|
|
|
2,282 |
|
|
|
1,434 |
|
Annuity surrenders, benefits and withdrawals |
|
|
(1,321 |
) |
|
|
(1,221 |
) |
|
|
(1,273 |
) |
Net transfers from (to) variable annuity assets |
|
|
39 |
|
|
|
7 |
|
|
|
(10 |
) |
Additional long-term borrowings |
|
|
2 |
|
|
|
159 |
|
|
|
581 |
|
Reductions of long-term debt |
|
|
(20 |
) |
|
|
(39 |
) |
|
|
(785 |
) |
Issuances of managed investment entities liabilities |
|
|
394 |
|
|
|
|
|
|
|
|
|
Retirement of managed investment entities liabilities |
|
|
(66 |
) |
|
|
(45 |
) |
|
|
|
|
Issuances of Common Stock |
|
|
39 |
|
|
|
32 |
|
|
|
15 |
|
Repurchases of Common Stock |
|
|
(315 |
) |
|
|
(292 |
) |
|
|
(81 |
) |
Cash dividends paid on Common Stock |
|
|
(67 |
) |
|
|
(63 |
) |
|
|
(60 |
) |
Other financing activities, net |
|
|
(14 |
) |
|
|
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
1,997 |
|
|
|
820 |
|
|
|
(276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
225 |
|
|
|
(21 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
1,099 |
|
|
|
1,120 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,324 |
|
|
$ |
1,099 |
|
|
$ |
1,120 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
|
|
|
A. Accounting Policies
|
|
|
|
|
|
B. Acquisition |
|
|
|
|
|
C. Segments of Operations |
|
|
|
|
|
D. Fair Value Measurements |
|
|
|
|
|
E. Investments |
|
|
|
|
|
F. Derivatives |
|
|
|
|
|
G. Deferred Policy Acquisition Costs |
|
|
|
|
|
H. Managed Investment Entities |
|
|
|
|
|
I. Goodwill and Other Intangibles |
|
|
|
|
|
J. Long-Term Debt |
|
|
|
|
|
K. Shareholders Equity |
|
|
|
|
|
L. Income Taxes |
|
|
|
|
|
M. Contingencies |
|
|
|
|
|
N. Quarterly Operating Results (Unaudited) |
|
|
|
|
|
O. Insurance |
|
|
|
|
|
P. Additional Information |
|
|
|
|
|
Q. Condensed Consolidating Information |
|
|
Basis of Presentation The consolidated financial statements include the accounts of American
Financial Group, Inc. (AFG) and its subsidiaries. Certain reclassifications have been made
to prior years to conform to the current years presentation. All significant intercompany
balances and transactions have been eliminated. The results of operations of companies since
their formation or acquisition are included in the consolidated financial statements. Events
or transactions occurring subsequent to December 31, 2011, and prior to the filing of this Form
10-K, have been evaluated for potential recognition or disclosure herein.
The preparation of the financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Changes in
circumstances could cause actual results to differ materially from those estimates.
Recent Accounting Standards In October 2010, the FASB issued Accounting Standards Update
(ASU) 2010-26 to address diversity in practice regarding which costs related to issuing or
renewing insurance contracts qualify for deferral. To qualify for deferral, the guidance
specifies that a cost must be directly related to the successful acquisition of an insurance
contract. The guidance is effective on January 1, 2012, with retrospective application
permitted, but not required. AFG will adopt the new standard retrospectively on that date.
The impact of adoption on amounts reported herein is shown in the table below (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Deferred policy acquisition costs |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1,105 |
|
|
$ |
1,244 |
|
As adjusted |
|
|
901 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability (included in
other liabilities) |
|
|
|
|
|
|
|
|
As reported |
|
$ |
203 |
|
|
$ |
116 |
|
As adjusted |
|
|
132 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
As reported |
|
$ |
4,545 |
|
|
$ |
4,470 |
|
As adjusted |
|
|
4,412 |
|
|
|
4,332 |
|
F-6
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net earnings attributable to shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
343 |
|
|
$ |
479 |
|
|
$ |
519 |
|
As adjusted |
|
|
342 |
|
|
|
482 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
3.33 |
|
|
$ |
4.33 |
|
|
$ |
4.45 |
|
As adjusted |
|
|
3.32 |
|
|
|
4.36 |
|
|
|
4.46 |
|
In May 2011, the FASB issued ASU 2011-04 which clarifies the application of existing fair value
measurement and amends certain disclosure requirements. The guidance is to be applied
prospectively for reporting periods beginning after December 15, 2011. Early adoption is not
permitted. The impact of adoption is not expected to be material to AFGs results of
operations or financial position.
In June 2011, the FASB issued ASU 2011-05, which eliminates the option to report other
comprehensive income in the statement of changes in equity. Instead, the guidance requires
that all other comprehensive income (non-owner changes in shareholders equity) be presented
either in a single continuous statement of comprehensive income, which would contain net income
and other comprehensive income sections and replace the statement of earnings, or in a separate
statement of other comprehensive income immediately following the statement of earnings. AFG
intends to present other comprehensive income in a separate statement. The guidance is
effective January 1, 2012, with retrospective application required. The guidance relates
solely to the presentation of other comprehensive income and therefore does not change the
measurement of net income, other comprehensive income or earnings per share. Accordingly, the
adoption of this guidance will have no impact on AFGs results of operations or financial
position.
Fair Value Measurements Accounting standards define fair value as the price that would be
received to sell an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. The standards establish a
hierarchy of valuation techniques based on whether the assumptions that market participants
would use in pricing the asset or liability (inputs) are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect AFGs assumptions about the assumptions market participants would use in pricing
the asset or liability. Except for the acquisition discussed in Note B Acquisition and the
impairment of goodwill discussed in Note I Goodwill and Other Intangibles, AFG did not have
any significant nonrecurring fair value measurements of nonfinancial assets and liabilities in
2011 or 2010.
New accounting guidance adopted by AFG on January 1, 2010, requires additional disclosures
about transfers between levels in the hierarchy of fair value measurements. The guidance also
clarifies existing disclosure requirements related to the level of disaggregation presented and
inputs used in determining fair values. Additional detail relating to the roll-forward of
Level 3 fair values was required in 2011.
Investments Fixed maturity and equity securities classified as available for sale are
reported at fair value with unrealized gains and losses included in accumulated other
comprehensive income (loss) in AFGs Balance Sheet. Fixed maturity and equity securities
classified as trading are reported at fair value with changes in unrealized holding gains or
losses during the period included in investment income. Mortgage and policy loans are carried
primarily at the aggregate unpaid balance.
F-7
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Premiums and discounts on fixed maturity securities are amortized using the interest method;
mortgage-backed securities (MBS) are amortized over a period
based on estimated future principal payments, including prepayments. Prepayment assumptions
are reviewed periodically and adjusted to reflect actual prepayments and changes in
expectations.
Gains or losses on securities are determined on the specific identification basis. When a
decline in the value of a specific investment is considered to be other-than-temporary at the
balance sheet date, a provision for impairment is charged to earnings (included in realized
gains (losses)) and the cost basis of that investment is reduced.
In 2009, AFG adopted new accounting guidance relating to the recognition and presentation of
other-than-temporary impairments. Under the guidance, if management can assert that it does
not intend to sell an impaired fixed maturity security and it is not more likely than not that
it will have to sell the security before recovery of its amortized cost basis, then the
other-than-temporary impairment is separated into two components: 1) the amount related to
credit losses (recorded in earnings) and 2) the amount related to all other factors (recorded
in other comprehensive income (loss)). The credit-related portion of an other-than-temporary
impairment is measured by comparing a securitys amortized cost to the present value of its
current expected cash flows discounted at its effective yield prior to the impairment charge.
Both components are shown in the Statement of Earnings. If management intends to sell an
impaired security, or it is more likely than not that it will be required to sell the security
before recovery, an impairment charge to earnings is recorded to reduce the amortized cost of
that security to fair value. AFG adopted this guidance effective January 1, 2009, and recorded
a cumulative effect adjustment of $17 million to reclassify the non-credit component of
previously recognized impairments from retained earnings to accumulated other comprehensive
income (loss). Additional disclosures required by this guidance are contained in Note E
Investments.
Derivatives Derivatives included in AFGs Balance Sheet are recorded at fair value and consist
primarily of (i) components of certain fixed maturity securities (primarily interest-only MBS)
and (ii) the equity-based component of certain annuity products (included in annuity benefits
accumulated) and related call options (included in other investments) designed to be consistent
with the characteristics of the liabilities and used to mitigate the risk embedded in those
annuity products. Changes in the fair value of derivatives are included in earnings.
Goodwill Goodwill represents the excess of cost of subsidiaries over AFGs equity in their
underlying net assets. Goodwill is not amortized, but is subject to an impairment test at
least annually. On October 1, 2011, AFG adopted ASU 2011-08, Intangibles Goodwill and
Other, which simplifies the annual goodwill impairment test by only requiring an entity to
complete the test on a reporting unit if the entity determines that it is more likely than not
that the reporting units fair value is less than its carrying amount. The adoption of this
guidance did not impact AFGs results of operations or financial position.
Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the
claim liability associated with the reinsured policies. AFGs property and casualty insurance
subsidiaries report as assets (a) the estimated reinsurance recoverable on paid and unpaid
losses, including an estimate for losses incurred but not reported, and (b) amounts paid to
reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers
includes ceded premiums due to reinsurers as well as ceded premiums retained by AFGs property
and casualty insurance subsidiaries under contracts to fund ceded losses as they become due.
AFGs insurance subsidiaries also assume reinsurance from other companies. Earnings on
reinsurance assumed is recognized based on information received from ceding companies.
F-8
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Certain annuity and supplemental insurance subsidiaries cede life insurance policies to a third
party on a funds withheld basis whereby the subsidiaries retain the assets (securities)
associated with the reinsurance contracts. Interest is credited to the reinsurer based on the
actual investment performance of the retained assets. These reinsurance contracts are
considered to contain embedded derivatives (that must be adjusted to fair value) because the
yield on the payables is based on specific blocks of the ceding companies assets, rather than
the overall creditworthiness of the ceding company. AFG determined that changes in the fair
value of the underlying portfolios of fixed maturity securities is an appropriate measure of
the value of the embedded derivative. The securities related to these transactions are
classified as trading. The adjustment to fair value on the embedded derivatives offsets the
investment income recorded on the adjustment to fair value of the related trading portfolios.
Deferred Policy Acquisition Costs (DPAC) Policy acquisition costs (principally commissions,
premium taxes and other marketing and underwriting expenses) related to the production of new
business are deferred. DPAC also includes capitalized costs associated with sales inducements
offered to fixed annuity policyholders such as enhanced interest rates and premium and
persistency bonuses. As discussed above under Recent Accounting Standards, AFGs current
accounting for DPAC will change effective in 2012 and amounts included herein will be adjusted
retrospectively.
For the property and casualty companies, DPAC is limited based upon recoverability without any
consideration for anticipated investment income and is charged against income ratably over the
terms of the related policies. A premium deficiency is recognized if the sum of expected
claims costs, claims adjustment expenses, unamortized acquisition costs and policy maintenance
costs exceed the related unearned premiums. A premium deficiency is first recognized by
charging any unamortized acquisition costs to expense to the extent required to eliminate the
deficiency. If the premium deficiency is greater than unamortized acquisition costs, a
liability is accrued for the excess deficiency and reported with unpaid losses and loss
adjustment expenses.
DPAC related to annuities is deferred to the extent deemed recoverable and amortized, with
interest, in relation to the present value of actual and expected gross profits on the
policies. Expected gross profits consist principally of estimated future investment margin
(estimated future net investment income less interest credited on policyholder funds) and
surrender, mortality, and other life and variable annuity policy charges, less death and
annuitization benefits in excess of account balances and estimated future policy administration
expenses. To the extent that realized gains and losses result in adjustments to the
amortization of DPAC related to annuities, such adjustments are reflected as components of
realized gains (losses).
DPAC related to traditional life and health insurance is amortized over the expected premium
paying period of the related policies, in proportion to the ratio of annual premium revenues to
total anticipated premium revenues.
DPAC related to annuities is also adjusted, net of tax, for the change in amortization that
would have been recorded if the unrealized gains (losses) from securities had actually been
realized. This adjustment is included in unrealized gains (losses) on marketable securities, a
component of accumulated other comprehensive income in AFGs Balance Sheet.
DPAC includes the present value of future profits on business in force of annuity and
supplemental insurance companies acquired (PVFP). PVFP represents the portion of the costs
to acquire companies that is allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date of acquisition. PVFP is amortized with interest
in relation to expected gross profits of the acquired policies for annuities and universal life
products and in relation to the premium paying period for traditional life and health insurance
products.
F-9
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Managed Investment Entities A company is considered the primary beneficiary of, and therefore
must consolidate, a variable interest entity (VIE) based primarily on its ability to direct
the activities of the VIE that most significantly impact that entitys economic performance and
the obligation to absorb losses of, or receive benefits from, the entity that could potentially
be significant to the VIE.
AFG manages, and has investments in, collateralized loan obligations (CLOs) that are VIEs
(See Note H Managed Investment Entities.) Both the management fees (payment of which are
subordinate to other obligations of the CLOs) and the investments in the CLOs are considered
variable interests. AFG has determined that it is the primary beneficiary of the CLOs because
(i) its role as asset manager gives it the power to direct the activities that most
significantly impact the economic performance of the CLOs and (ii) it has exposure to CLO
losses (through its investments in the CLO debt tranches) and the right to receive benefits
(through its subordinated management fees and returns on its investments), both of which could
potentially be significant to the CLOs.
Because AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities,
the assets and liabilities of the CLOs are shown separately in AFGs Balance Sheet (at fair
value). Prior to adoption of guidance requiring the consolidation of VIEs beginning in 2010,
the CLOs were not consolidated. Upon adoption of the guidance, the $261 million excess of fair
value of the CLOs assets over the fair value of the liabilities was recorded in AFGs Balance
Sheet as appropriated retained earnings managed investment entities, representing the
cumulative effect of adopting the new guidance that ultimately will inure to the benefit of the
CLO debt holders.
AFG has elected the fair value option for reporting on the CLO assets and liabilities to
improve the transparency of financial reporting related to the CLOs. The net gain or loss from
accounting for the CLO assets and liabilities at fair value subsequent to January 1, 2010, is
separately presented in AFGs Statement of Earnings. CLO earnings attributable to AFGs
shareholders represent the change in fair value of AFGs investments in the CLOs and management
fees earned. All other CLO earnings (losses) are not attributable to AFGs shareholders and
will ultimately inure to the benefit of the other CLO debt holders. As a result, such CLO
earnings (losses) are included in net earnings (loss) attributable to noncontrolling interests
in AFGs Statement of Earnings and in appropriated retained earnings managed investment
entities in the Balance Sheet. As the CLOs approach maturity (2016 to 2022), it is expected
that losses attributable to noncontrolling interests will reduce appropriated retained earnings
towards zero as the fair values of the assets and liabilities converge and the CLO assets are
used to pay the CLO debt.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and
for expenses of investigation and adjustment of unpaid claims are based upon (a) the
accumulation of case estimates for losses reported prior to the close of the accounting period
on direct business written; (b) estimates received from ceding reinsurers and insurance pools
and associations; (c) estimates of unreported losses (including possible development on known
claims) based on past experience; (d) estimates based on experience of expenses for
investigating and adjusting claims; and (e) the current state of the law and coverage
litigation. Establishing reserves for asbestos, environmental and other mass tort claims
involves considerably more judgment than other types of claims due to, among other things,
inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related
liabilities, novel theories of coverage, and judicial interpretations that often expand
theories of recovery and broaden the scope of coverage.
F-10
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency
and other factors. Changes in estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the period in which determined. Despite
the variability inherent in such estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are adequate.
Annuity Benefits Accumulated Annuity receipts and benefit payments are recorded as increases
or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in
this liability for interest credited are charged to expense and decreases for surrender charges
are credited to other income.
For certain products, annuity benefits accumulated also includes reserves for accrued
persistency and premium bonuses and excess benefits expected to be paid on future deaths and
annuitizations (EDAR). The liability for EDAR is accrued for and modified using assumptions
consistent with those used in determining DPAC and DPAC amortization, except that amounts are
determined in relation to the present value of total expected assessments. Total expected
assessments consist principally of estimated future investment margin, surrender, mortality,
and other life and variable annuity policy charges, and unearned revenues once they are
recognized as income.
Life, Accident and Health Reserves Liabilities for future policy benefits under
traditional life, accident and health policies are computed using the net level premium method.
Computations are based on the original projections of investment yields, mortality, morbidity
and surrenders and include provisions for unfavorable deviations. Claim reserves and
liabilities established for accident and health claims are modified as necessary to reflect
actual experience and developing trends.
Variable Annuity Assets and Liabilities Separate accounts related to variable annuities
represent the fair value of deposits invested in underlying investment funds on which AFG earns
a fee. Investment funds are selected and may be changed only by the policyholder, who retains
all investment risk.
AFGs variable annuity contracts contain a guaranteed minimum death benefit (GMDB) to be paid
if the policyholder dies before the annuity payout period commences. In periods of declining
equity markets, the GMDB may exceed the value of the policyholders account. A GMDB liability
is established for future excess death benefits using assumptions together with a range of
reasonably possible scenarios for investment fund performance that are consistent with DPAC
capitalization and amortization assumptions.
Premium Recognition Property and casualty premiums are earned generally over the terms of the
policies on a pro rata basis. Unearned premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in force. On reinsurance assumed from
other insurance companies or written through various underwriting organizations, unearned
premiums are based on information received from such companies and organizations. For
traditional life, accident and health products, premiums are recognized as revenue when legally
collectible from policyholders. For interest-sensitive life and universal life products,
premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is
recognized as amounts are assessed against the policyholder account for mortality coverage and
contract expenses.
Noncontrolling Interests For Balance Sheet purposes, noncontrolling interests represents the
interests of shareholders other than AFG in consolidated entities. In the Statement of
Earnings, net earnings and losses attributable to noncontrolling interests represents such
shareholders interest in the earnings and losses of those entities.
F-11
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Income Taxes Deferred income taxes are calculated using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on differences between
financial reporting and tax bases and are measured using enacted tax rates. A valuation
allowance is established to reduce total deferred tax assets to an amount that will more likely
than not be realized.
AFG records a liability for the inherent uncertainty in quantifying its income tax provisions.
Related interest and penalties are recognized as a component of tax expense.
Stock-Based Compensation All share-based grants are recognized as compensation expense on a
straight-line basis over their vesting periods based on their calculated fair value at the date
of grant. AFG uses the Black-Scholes pricing model to measure the fair value of employee stock
options. See Note K - Shareholders Equity for further information.
Benefit Plans AFG provides retirement benefits to qualified employees of participating
companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG
makes all contributions to the retirement fund portion of the plan and matches a percentage of
employee contributions to the savings fund. Company contributions are expensed in the year for
which they are declared. AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG also provides postemployment benefits to former
or inactive employees (primarily those on disability) who were not deemed retired under other
company plans. The projected future cost of providing these benefits is expensed over the
period employees earn such benefits.
Earnings Per Share Basic earnings per share is calculated using the weighted average number of
shares of common stock outstanding during the period. The calculation of diluted earnings per
share includes the following adjustments to weighted average common shares related to
stock-based compensation plans: 2011 1.6 million, 2010 1.3 million and 2009 1.1 million.
AFGs weighted average diluted shares outstanding excludes the following anti-dilutive
potential common shares related to stock compensation plans: 2011 2.3 million, 2010 3.5
million and 2009 5.7 million. Adjustments to net earnings attributable to shareholders in
the calculation of diluted earnings per share were nominal in the 2011, 2010 and 2009 periods.
Statement of Cash Flows For cash flow purposes, investing activities are defined as making
and collecting loans and acquiring and disposing of debt or equity instruments and property and
equipment. Financing activities include obtaining resources from owners and providing them
with a return on their investments, borrowing money and repaying amounts borrowed. Annuity
receipts, benefits and withdrawals are also reflected as financing activities. All other
activities are considered operating. Short-term investments having original maturities of
three months or less when purchased are considered to be cash equivalents for purposes of the
financial statements.
F-12
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Vanliner Group, Inc. (Vanliner) In July 2010, National Interstate (NATL), a 52%-owned
subsidiary of AFG, completed the acquisition of Vanliner, a market leader in providing
insurance for the moving and storage industry for $114 million (including post-closing
adjustments). The initial purchase price (funded primarily with cash on hand) was based on
Vanliners estimated tangible book value at the date of closing and is subject to certain
adjustments, including a four and one-half year balance sheet guarantee whereby both favorable
and unfavorable developments related to the closing balance sheet inure to the seller,
UniGroup, Inc. In accordance with accounting guidance, all assets acquired and liabilities
assumed were recognized at their fair values as of
the acquisition date. The purchase price allocation based on these fair values resulted in a
gain on purchase of $7 million (included in realized gains on subsidiaries). Vanliners
premiums associated with policies in force as of December 31, 2011 totaled approximately $93
million. Pro forma results of operations for AFG assuming the acquisition of Vanliner had
taken place at the beginning of 2010 would not differ significantly from actual reported
results.
C. |
|
Segments of Operations |
AFG manages its business as three segments: (i) property and casualty insurance, (ii) annuity
and supplemental insurance and (iii) other, which includes holding company assets and costs,
and the assets and operations of the managed investment entities.
AFG reports its property and casualty insurance business in the following Specialty
sub-segments: (i) Property and transportation, which includes physical damage and liability
coverage for buses, trucks and recreational vehicles, inland and ocean marine,
agricultural-related products and other property coverages, (ii) Specialty casualty, which
includes primarily excess and surplus, general liability, executive liability, umbrella and
excess liability, customized programs for small to mid-sized businesses and California workers
compensation, and (iii) Specialty financial, which includes risk management insurance programs
for lending and leasing institutions (including collateral and mortgage protection insurance),
surety and fidelity products and trade credit insurance. AFGs annuity and supplemental
insurance business markets traditional fixed and indexed annuities and a variety of
supplemental insurance products such as Medicare supplement.
AFGs reportable segments and their components were determined based primarily upon similar
economic characteristics, products and services.
Sales of property and casualty insurance outside of the United States represented 5% of AFGs
revenues in 2011, and 4% in both 2010 and 2009.
F-13
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following tables (in millions) show AFGs assets, revenues and operating earnings before
income taxes by significant business segment and sub-segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance (a) |
|
$ |
11,882 |
|
|
$ |
11,609 |
|
|
$ |
11,863 |
|
Annuity and supplemental insurance |
|
|
20,451 |
|
|
|
17,766 |
|
|
|
15,476 |
|
Other |
|
|
3,709 |
|
|
|
3,079 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
36,042 |
|
|
$ |
32,454 |
|
|
$ |
27,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation |
|
$ |
1,412 |
|
|
$ |
1,167 |
|
|
$ |
909 |
|
Specialty casualty |
|
|
872 |
|
|
|
873 |
|
|
|
917 |
|
Specialty financial |
|
|
408 |
|
|
|
446 |
|
|
|
517 |
|
Other |
|
|
67 |
|
|
|
64 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
|
2,759 |
|
|
|
2,550 |
|
|
|
2,412 |
|
Investment income |
|
|
296 |
|
|
|
341 |
|
|
|
414 |
|
Realized gains (losses) |
|
|
97 |
|
|
|
88 |
|
|
|
123 |
|
Other income |
|
|
65 |
|
|
|
64 |
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty insurance |
|
|
3,217 |
|
|
|
3,043 |
|
|
|
3,055 |
|
Annuity and supplemental insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
944 |
|
|
|
856 |
|
|
|
784 |
|
Life, accident and health premiums |
|
|
430 |
|
|
|
451 |
|
|
|
444 |
|
Realized gains (losses) |
|
|
(23 |
) |
|
|
|
|
|
|
(86 |
) |
Other income |
|
|
104 |
|
|
|
110 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
Total annuity and supplemental insurance |
|
|
1,455 |
|
|
|
1,417 |
|
|
|
1,256 |
|
Other |
|
|
78 |
|
|
|
37 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,750 |
|
|
$ |
4,497 |
|
|
$ |
4,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation |
|
$ |
113 |
|
|
$ |
140 |
|
|
$ |
236 |
|
Specialty casualty |
|
|
39 |
|
|
|
47 |
|
|
|
63 |
|
Specialty financial |
|
|
61 |
|
|
|
112 |
|
|
|
134 |
|
Other |
|
|
18 |
|
|
|
9 |
|
|
|
(9 |
) |
Other lines (b) |
|
|
(51 |
) |
|
|
(12 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Total underwriting |
|
|
180 |
|
|
|
296 |
|
|
|
417 |
|
Investment and other income, net |
|
|
263 |
|
|
|
299 |
|
|
|
338 |
|
Realized gains (losses) |
|
|
97 |
|
|
|
88 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty insurance |
|
|
540 |
|
|
|
683 |
|
|
|
878 |
|
Annuity and supplemental insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
224 |
|
|
|
202 |
|
|
|
162 |
|
Realized gains (losses) |
|
|
(23 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
Total annuity and supplemental insurance |
|
|
201 |
|
|
|
202 |
|
|
|
76 |
|
Other (c) |
|
|
(181 |
) |
|
|
(196 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating earnings before income taxes |
|
$ |
560 |
|
|
$ |
689 |
|
|
$ |
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Not allocable to sub-segments. |
|
(b) |
|
Includes a second quarter 2011 special charge of $50 million to increase asbestos
and environmental reserves. |
|
(c) |
|
Includes holding company expenses, a second quarter 2011 special charge of $9 million
to increase asbestos and environmental reserves and $24 million and $64 million in
losses of managed investment entities attributable to noncontrolling interests for the
years ended December 31, 2011 and 2010, respectively. |
F-14
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
D. |
|
Fair Value Measurements |
Accounting standards for measuring fair value are based on inputs used in estimating fair
value. The three levels of the hierarchy are as follows:
Level 1 Quoted prices for identical assets or liabilities in active markets (markets in which
transactions occur with sufficient frequency and volume to provide pricing information on an
ongoing basis). AFGs Level 1 financial instruments consist primarily of publicly traded
equity securities and highly liquid government bonds for which quoted market prices in active
markets are available and short-term investments of managed investment entities.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical
or similar assets or liabilities in inactive markets (markets in which there are few
transactions, the prices are not current, price quotations vary substantially over time or
among market makers, or in which little information is released publicly); and valuations based
on other significant inputs that are observable in active markets. AFGs Level 2 financial
instruments include separate account assets, corporate and municipal fixed maturity securities,
mortgage-backed securities (MBS) and investments of managed investment entities priced using
observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated
broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes
can be corroborated by comparison to similar securities priced using observable inputs, they
are classified as Level 2.
Level 3 Valuations derived from market valuation techniques generally consistent with those
used to estimate the fair values of Level 2 financial instruments in which one or more
significant inputs are unobservable or when the market for a security exhibits significantly
less liquidity relative to markets supporting Level 2 fair value measurements. The
unobservable inputs may include managements own assumptions about the assumptions market
participants would use based on the best information available in the circumstances. AFGs
Level 3 is comprised of financial instruments, including liabilities of managed investment
entities, whose fair value is estimated based on non-binding broker quotes or internally
developed using significant inputs not based on, or corroborated by, observable market
information.
AFGs management is responsible for the valuation process and uses data from outside sources
(including nationally recognized pricing services and broker/dealers) in establishing fair
value. Valuation techniques utilized by pricing services and prices obtained from external
sources are reviewed by AFGs internal investment professionals who are familiar with the
securities being priced and the markets in which they trade to ensure the fair value
determination is representative of an exit price. To validate the appropriateness of the
prices obtained, these investment managers consider widely published indices (as benchmarks),
recent trades, changes in interest rates, general economic conditions and the credit quality of
the specific issuers. In addition, the Company communicates directly with the pricing service
regarding the methods and assumptions used in pricing, including verifying, on a test basis,
the inputs used by the service to value specific securities.
F-15
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Assets and liabilities measured at fair value at December 31 are summarized below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies |
|
$ |
248 |
|
|
$ |
134 |
|
|
$ |
|
|
|
$ |
382 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
3,794 |
|
|
|
83 |
|
|
|
3,877 |
|
Foreign government |
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
254 |
|
Residential MBS |
|
|
|
|
|
|
3,487 |
|
|
|
361 |
|
|
|
3,848 |
|
Commercial MBS |
|
|
|
|
|
|
2,821 |
|
|
|
19 |
|
|
|
2,840 |
|
All other corporate |
|
|
9 |
|
|
|
10,078 |
|
|
|
519 |
|
|
|
10,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS fixed maturities |
|
|
257 |
|
|
|
20,568 |
|
|
|
982 |
|
|
|
21,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading fixed maturities |
|
|
|
|
|
|
439 |
|
|
|
1 |
|
|
|
440 |
|
Equity securities |
|
|
888 |
|
|
|
29 |
|
|
|
11 |
|
|
|
928 |
|
Assets of managed investment entities (MIE) |
|
|
290 |
|
|
|
2,724 |
|
|
|
44 |
|
|
|
3,058 |
|
Variable annuity assets (separate accounts) (a) |
|
|
|
|
|
|
548 |
|
|
|
|
|
|
|
548 |
|
Other investments |
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value |
|
$ |
1,435 |
|
|
$ |
24,379 |
|
|
$ |
1,038 |
|
|
$ |
26,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of managed investment entities |
|
$ |
194 |
|
|
$ |
|
|
|
$ |
2,593 |
|
|
$ |
2,787 |
|
Derivatives in annuity benefits accumulated |
|
|
|
|
|
|
|
|
|
|
395 |
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value |
|
$ |
194 |
|
|
$ |
|
|
|
$ |
2,988 |
|
|
$ |
3,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies |
|
$ |
251 |
|
|
$ |
216 |
|
|
$ |
|
|
|
$ |
467 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
2,919 |
|
|
|
20 |
|
|
|
2,939 |
|
Foreign government |
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
278 |
|
Residential MBS |
|
|
|
|
|
|
3,563 |
|
|
|
312 |
|
|
|
3,875 |
|
Commercial MBS |
|
|
|
|
|
|
2,117 |
|
|
|
6 |
|
|
|
2,123 |
|
All other corporate |
|
|
9 |
|
|
|
9,201 |
|
|
|
436 |
|
|
|
9,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS fixed maturities |
|
|
260 |
|
|
|
18,294 |
|
|
|
774 |
|
|
|
19,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading fixed maturities |
|
|
|
|
|
|
390 |
|
|
|
3 |
|
|
|
393 |
|
Equity securities |
|
|
461 |
|
|
|
208 |
|
|
|
21 |
|
|
|
690 |
|
Assets of managed investment entities |
|
|
96 |
|
|
|
2,393 |
|
|
|
48 |
|
|
|
2,537 |
|
Variable annuity assets (separate accounts) (a) |
|
|
|
|
|
|
616 |
|
|
|
|
|
|
|
616 |
|
Other investments |
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value |
|
$ |
817 |
|
|
$ |
21,999 |
|
|
$ |
846 |
|
|
$ |
23,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of managed investment entities |
|
$ |
65 |
|
|
$ |
|
|
|
$ |
2,258 |
|
|
$ |
2,323 |
|
Derivatives in annuity benefits accumulated |
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value |
|
$ |
65 |
|
|
$ |
|
|
|
$ |
2,448 |
|
|
$ |
2,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Variable annuity liabilities equal the fair value of variable annuity assets. |
During 2011 and 2010, there were no significant transfers between Level 1 and Level 2.
Approximately 4% of the total assets measured at fair value on December 31, 2011, were Level 3
assets. Approximately 95% of these assets were priced using non-binding broker quotes. The
fair values of the liabilities of managed investment entities were determined using non-binding
broker quotes, which were reviewed by AFGs investment professionals.
F-16
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Changes in balances of Level 3 financial assets and liabilities during 2011, 2010 and 2009 are
presented below (in millions). The transfers into and out of Level 3 were due to changes in
the availability of market observable inputs. All transfers are reflected in the table at fair
value as of the end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized/unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
comp. |
|
|
Purchases |
|
|
|
|
|
|
Transfer |
|
|
Transfer |
|
|
Balance at |
|
|
|
December 31, |
|
|
Net |
|
|
income |
|
|
and |
|
|
Sales and |
|
|
into |
|
|
out of |
|
|
December 31, |
|
|
|
2010 |
|
|
income |
|
|
(loss) |
|
|
issuances |
|
|
settlements |
|
|
Level 3 |
|
|
Level 3 |
|
|
2011 |
|
AFS fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
20 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
58 |
|
|
|
(4 |
) |
|
$ |
17 |
|
|
$ |
(12 |
) |
|
$ |
83 |
|
Residential MBS |
|
|
312 |
|
|
|
3 |
|
|
|
(9 |
) |
|
|
42 |
|
|
|
(38 |
) |
|
|
127 |
|
|
|
(76 |
) |
|
|
361 |
|
Commercial MBS |
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
13 |
|
|
|
(10 |
) |
|
|
19 |
|
All other corporate |
|
|
436 |
|
|
|
2 |
|
|
|
15 |
|
|
|
236 |
|
|
|
(72 |
) |
|
|
90 |
|
|
|
(188 |
) |
|
|
519 |
|
Trading fixed maturities |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
1 |
|
Equity securities |
|
|
21 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(13 |
) |
|
|
11 |
|
Assets of MIE |
|
|
48 |
|
|
|
(8 |
) |
|
|
|
|
|
|
32 |
|
|
|
(18 |
) |
|
|
9 |
|
|
|
(19 |
) |
|
|
44 |
|
Liabilities of MIE (*) |
|
|
(2,258 |
) |
|
|
|
|
|
|
|
|
|
|
(401 |
) |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
(2,593 |
) |
Embedded derivatives |
|
|
(190 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
(395 |
) |
|
|
|
(*) |
|
Total realized/unrealized loss included in net income includes losses of $3 million related to liabilities outstanding as of December 31,
2011. See Note H Managed Investment Entities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized/unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidate |
|
|
|
|
|
|
Other |
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Managed |
|
|
|
|
|
|
comp. |
|
|
sales, |
|
|
Transfer |
|
|
Transfer |
|
|
Balance at |
|
|
|
December 31, |
|
|
Inv. |
|
|
Net |
|
|
income |
|
|
issuances and |
|
|
into |
|
|
out of |
|
|
December 31, |
|
|
|
2009 |
|
|
Entities |
|
|
income |
|
|
(loss) |
|
|
settlements |
|
|
Level 3 |
|
|
Level 3 |
|
|
2010 |
|
AFS fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
(4 |
) |
|
$ |
17 |
|
|
$ |
(17 |
) |
|
$ |
20 |
|
Residential MBS |
|
|
435 |
|
|
|
|
|
|
|
7 |
|
|
|
26 |
|
|
|
17 |
|
|
|
27 |
|
|
|
(200 |
) |
|
|
312 |
|
Commercial MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
All other corporate |
|
|
311 |
|
|
|
(6 |
) |
|
|
(10 |
) |
|
|
10 |
|
|
|
100 |
|
|
|
118 |
|
|
|
(87 |
) |
|
|
436 |
|
Trading fixed maturities |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
2 |
|
|
|
(4 |
) |
|
|
3 |
|
Equity securities |
|
|