UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2010
Commission File No. 1-13653
AMERICAN FINANCIAL GROUP, INC.
Incorporated under the Laws of Ohio
IRS Employer I.D. No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company:
|
|
|
|
|
|
|
Large Accelerated Filer
þ
|
|
Accelerated Filer
o
|
|
Non-Accelerated Filer
o
|
|
Smaller Reporting Company
o
|
Indicate by check mark whether the Registrant is a shell company. Yes
o
No
þ
As of November 1, 2010, there were 107,755,778 shares of the Registrants Common Stock outstanding, excluding
14.9 million shares owned by subsidiaries.
AMERICAN FINANCIAL GROUP, INC.
TABLE OF CONTENTS
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM I FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars In Millions)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,140
|
|
|
$
|
1,120
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturities, available for sale at fair value
(amortized cost $18,237 and $16,730)
|
|
|
19,454
|
|
|
|
16,823
|
|
Fixed maturities, trading at fair value
|
|
|
385
|
|
|
|
372
|
|
Equity securities, at fair value
(cost $409 and $228)
|
|
|
581
|
|
|
|
411
|
|
Mortgage loans
|
|
|
492
|
|
|
|
376
|
|
Policy loans
|
|
|
267
|
|
|
|
276
|
|
Real estate and other investments
|
|
|
404
|
|
|
|
413
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
22,723
|
|
|
|
19,791
|
|
|
|
|
|
|
|
|
|
|
Recoverables from reinsurers
|
|
|
2,949
|
|
|
|
3,279
|
|
Prepaid reinsurance premiums
|
|
|
536
|
|
|
|
381
|
|
Agents balances and premiums receivable
|
|
|
773
|
|
|
|
554
|
|
Deferred policy acquisition costs
|
|
|
1,154
|
|
|
|
1,570
|
|
Assets of managed investment entities
|
|
|
2,491
|
|
|
|
|
|
Other receivables
|
|
|
655
|
|
|
|
774
|
|
Variable annuity assets (separate accounts)
|
|
|
573
|
|
|
|
549
|
|
Other assets
|
|
|
599
|
|
|
|
577
|
|
Goodwill
|
|
|
186
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
32,639
|
|
|
$
|
27,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
6,434
|
|
|
$
|
6,412
|
|
Unearned premiums
|
|
|
1,743
|
|
|
|
1,568
|
|
Annuity benefits accumulated
|
|
|
12,476
|
|
|
|
11,335
|
|
Life, accident and health reserves
|
|
|
1,643
|
|
|
|
1,603
|
|
Payable to reinsurers
|
|
|
446
|
|
|
|
462
|
|
Liabilities of managed investment entities
|
|
|
2,271
|
|
|
|
|
|
Long-term debt
|
|
|
954
|
|
|
|
828
|
|
Variable annuity liabilities (separate accounts)
|
|
|
573
|
|
|
|
549
|
|
Other liabilities
|
|
|
1,370
|
|
|
|
1,007
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,910
|
|
|
|
23,764
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common Stock, no par value
|
|
|
|
|
|
|
|
|
- 200,000,000 shares authorized
|
|
|
|
|
|
|
|
|
- 107,739,128 and 113,386,343 shares outstanding
|
|
|
108
|
|
|
|
113
|
|
Capital surplus
|
|
|
1,190
|
|
|
|
1,231
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
Appropriated managed investment entities
|
|
|
208
|
|
|
|
|
|
Unappropriated
|
|
|
2,464
|
|
|
|
2,274
|
|
Accumulated other comprehensive income, net of tax
|
|
|
607
|
|
|
|
163
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
4,577
|
|
|
|
3,781
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
152
|
|
|
|
138
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
4,729
|
|
|
|
3,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
32,639
|
|
|
$
|
27,683
|
|
|
|
|
|
|
|
|
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(In Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
736
|
|
|
$
|
622
|
|
|
$
|
1,887
|
|
|
$
|
1,809
|
|
Life, accident and health premiums
|
|
|
112
|
|
|
|
112
|
|
|
|
340
|
|
|
|
331
|
|
Investment income
|
|
|
296
|
|
|
|
301
|
|
|
|
885
|
|
|
|
900
|
|
Realized gains (losses) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities (*)
|
|
|
57
|
|
|
|
9
|
|
|
|
72
|
|
|
|
(17
|
)
|
Subsidiaries
|
|
|
(22
|
)
|
|
|
(5
|
)
|
|
|
(22
|
)
|
|
|
(5
|
)
|
Income (loss) of managed investment entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
23
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
Loss on change in fair value of
assets/liabilities
|
|
|
(4
|
)
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
Other income
|
|
|
57
|
|
|
|
54
|
|
|
|
155
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,255
|
|
|
|
1,093
|
|
|
|
3,341
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
446
|
|
|
|
296
|
|
|
|
1,052
|
|
|
|
846
|
|
Commissions and other underwriting expenses
|
|
|
222
|
|
|
|
218
|
|
|
|
633
|
|
|
|
643
|
|
Annuity benefits
|
|
|
114
|
|
|
|
112
|
|
|
|
340
|
|
|
|
323
|
|
Life, accident and health benefits
|
|
|
90
|
|
|
|
86
|
|
|
|
279
|
|
|
|
268
|
|
Annuity and supplemental insurance acquisition
expenses
|
|
|
47
|
|
|
|
38
|
|
|
|
150
|
|
|
|
136
|
|
Interest charges on borrowed money
|
|
|
21
|
|
|
|
19
|
|
|
|
57
|
|
|
|
48
|
|
Expenses of managed investment entities
|
|
|
15
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Other operating and general expenses
|
|
|
92
|
|
|
|
121
|
|
|
|
279
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,047
|
|
|
|
890
|
|
|
|
2,828
|
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
208
|
|
|
|
203
|
|
|
|
513
|
|
|
|
577
|
|
Provision for income taxes
|
|
|
82
|
|
|
|
72
|
|
|
|
199
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling interests
|
|
|
126
|
|
|
|
131
|
|
|
|
314
|
|
|
|
373
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
(6
|
)
|
|
|
4
|
|
|
|
(32
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
132
|
|
|
$
|
127
|
|
|
$
|
346
|
|
|
$
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Attributable to Shareholders per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.22
|
|
|
$
|
1.10
|
|
|
$
|
3.14
|
|
|
$
|
3.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.21
|
|
|
$
|
1.09
|
|
|
$
|
3.11
|
|
|
$
|
3.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
108.2
|
|
|
|
116.1
|
|
|
|
110.1
|
|
|
|
115.8
|
|
Diluted
|
|
|
109.5
|
|
|
|
117.2
|
|
|
|
111.4
|
|
|
|
116.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per Common Share
|
|
$
|
.1375
|
|
|
$
|
.13
|
|
|
$
|
.4125
|
|
|
$
|
.39
|
|
(*) Consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains before impairments
|
|
$
|
68
|
|
|
$
|
35
|
|
|
$
|
120
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on securities with impairment
|
|
|
(8
|
)
|
|
|
(47
|
)
|
|
|
(42
|
)
|
|
|
(301
|
)
|
Non-credit portion recognized in other
comprehensive income (loss)
|
|
|
(3
|
)
|
|
|
21
|
|
|
|
(6
|
)
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges recognized in earnings
|
|
|
(11
|
)
|
|
|
(26
|
)
|
|
|
(48
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized gains (losses) on securities
|
|
$
|
57
|
|
|
$
|
9
|
|
|
$
|
72
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
(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, 2009
|
|
|
113,386,343
|
|
|
$
|
1,344
|
|
|
$
|
|
|
|
$
|
2,274
|
|
|
$
|
163
|
|
|
$
|
3,781
|
|
|
$
|
138
|
|
|
$
|
3,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
245
|
|
|
|
|
|
|
|
245
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
346
|
|
|
|
(32
|
)
|
|
|
314
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
440
|
|
|
|
6
|
|
|
|
446
|
|
Change in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
2
|
|
|
|
9
|
|
Change in unrealized pension and other
postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
794
|
|
|
|
(24
|
)
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of losses of managed
investment entities
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
(46
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,312,149
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
Other benefit plans
|
|
|
388,094
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Dividend reinvestment plan
|
|
|
12,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
Shares acquired and retired
|
|
|
(7,360,110
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
(201
|
)
|
Other
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
107,739,128
|
|
|
$
|
1,298
|
|
|
$
|
208
|
|
|
$
|
2,464
|
|
|
$
|
607
|
|
|
$
|
4,577
|
|
|
$
|
152
|
|
|
$
|
4,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
|
|
|
|
358
|
|
|
|
15
|
|
|
|
373
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
|
|
827
|
|
|
|
7
|
|
|
|
834
|
|
Change in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
1
|
|
|
|
15
|
|
Change in unrealized pension and other
postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200
|
|
|
|
23
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
903,133
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Other benefit plans
|
|
|
190,629
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Dividend reinvestment plan
|
|
|
16,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Shares exchanged in option exercises
|
|
|
(175,530
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Other
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
116,533,990
|
|
|
$
|
1,378
|
|
|
$
|
|
|
|
$
|
2,170
|
|
|
$
|
122
|
|
|
$
|
3,670
|
|
|
$
|
132
|
|
|
$
|
3,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling interests
|
|
$
|
314
|
|
|
$
|
373
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
141
|
|
|
|
155
|
|
Annuity benefits
|
|
|
340
|
|
|
|
323
|
|
Realized (gains) losses on investing activities
|
|
|
(57
|
)
|
|
|
26
|
|
Net purchases of trading securities
|
|
|
(2
|
)
|
|
|
(25
|
)
|
Deferred annuity and life policy acquisition costs
|
|
|
(157
|
)
|
|
|
(128
|
)
|
Change in:
|
|
|
|
|
|
|
|
|
Reinsurance and other receivables
|
|
|
256
|
|
|
|
188
|
|
Other assets
|
|
|
13
|
|
|
|
85
|
|
Insurance claims and reserves
|
|
|
(195
|
)
|
|
|
(335
|
)
|
Payable to reinsurers
|
|
|
(24
|
)
|
|
|
142
|
|
Other liabilities
|
|
|
101
|
|
|
|
(44
|
)
|
Other operating activities, net
|
|
|
51
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
781
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(3,737
|
)
|
|
|
(3,245
|
)
|
Equity securities
|
|
|
(183
|
)
|
|
|
(20
|
)
|
Mortgage loans
|
|
|
(143
|
)
|
|
|
(9
|
)
|
Real estate, property and equipment
|
|
|
(62
|
)
|
|
|
(49
|
)
|
Subsidiaries
|
|
|
(128
|
)
|
|
|
(5
|
)
|
Proceeds from:
|
|
|
|
|
|
|
|
|
Maturities and redemptions of fixed maturities
|
|
|
1,474
|
|
|
|
1,388
|
|
Repayments of mortgage loans
|
|
|
35
|
|
|
|
6
|
|
Sales of fixed maturities
|
|
|
1,215
|
|
|
|
1,504
|
|
Sales of equity securities
|
|
|
10
|
|
|
|
41
|
|
Sales of real estate, property and equipment
|
|
|
3
|
|
|
|
1
|
|
Change in securities lending collateral
|
|
|
|
|
|
|
48
|
|
Managed investment entities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(617
|
)
|
|
|
|
|
Proceeds from sales and redemptions of investments
|
|
|
658
|
|
|
|
|
|
Cash and cash equivalents of businesses acquired
|
|
|
95
|
|
|
|
|
|
Other investing activities, net
|
|
|
6
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,374
|
)
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Annuity receipts
|
|
|
1,661
|
|
|
|
1,092
|
|
Annuity surrenders, benefits and withdrawals
|
|
|
(914
|
)
|
|
|
(986
|
)
|
Additional long-term borrowings
|
|
|
158
|
|
|
|
526
|
|
Reductions of long-term debt
|
|
|
(36
|
)
|
|
|
(682
|
)
|
Managed investment entities retirement of liabilities
|
|
|
(42
|
)
|
|
|
|
|
Change in securities lending obligation
|
|
|
|
|
|
|
(95
|
)
|
Issuances of Common Stock
|
|
|
27
|
|
|
|
13
|
|
Repurchases of Common Stock
|
|
|
(201
|
)
|
|
|
|
|
Cash dividends paid on Common Stock
|
|
|
(46
|
)
|
|
|
(45
|
)
|
Other financing activities, net
|
|
|
6
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
613
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
20
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,120
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,140
|
|
|
$
|
1,435
|
|
|
|
|
|
|
|
|
5
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies
B. Acquisition of Subsidiary
C. Segments of Operations
D. Fair Value Measurements
E. Investments
F. Derivatives
G. Deferred Policy Acquisition Costs
H. Managed Investment Entities
I. Goodwill and Intangible Assets
J. Long Term Debt
K. Shareholders Equity
L. Income Taxes
M. Contingencies
N. Condensed Consolidating Information
Basis of Presentation
The accompanying consolidated financial statements for American
Financial Group, Inc. (AFG) and subsidiaries are unaudited; however, management believes that
all adjustments (consisting only of normal recurring accruals unless otherwise disclosed
herein) necessary for fair presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the year. The financial
statements have been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes necessary to be in conformity with U.S. generally
accepted accounting principles.
Certain reclassifications have been made to prior periods 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 September
30, 2010, and prior to the filing date of this Form 10-Q, have been evaluated for potential
recognition or disclosure herein.
The preparation of the financial statements 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.
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 impairment of goodwill discussed in Note I, AFG did not
have any significant nonrecurring fair value measurements of nonfinancial assets and
liabilities in the first nine months of 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 will be required beginning 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 a separate component of
shareholders equity. 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.
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
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 an entity
may separate other-than-temporary impairments 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 required to be 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 required 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.
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.
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
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.
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 and universal life insurance products 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 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 on marketable securities, a
component of Accumulated Other Comprehensive Income, net of tax in the Shareholders Equity
section of the Balance Sheet.
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.
8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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.
Managed Investment Entities
In 2009, the Financial Accounting Standards Board issued a new
standard changing how a company determines if it is the primary beneficiary of, and therefore
must consolidate, a variable interest entity (VIE). This determination is based primarily on
a companys ability to direct the activities of the entity that most significantly impact the
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 minor investments in, six collateralized loan obligations (CLOs) that
are VIEs. As further described in Note H, these entities issued securities in various tranches
and invested the proceeds primarily in secured bank loans, which serve as collateral for the
debt securities issued by each particular CLO. 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. Based on the new accounting guidance, 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 subordinated 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.
Accordingly, AFG began consolidating these entities on January 1, 2010.
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 Consolidated Balance
Sheet. As permitted under the new standard, the assets and liabilities of the CLOs have been
recorded at fair value upon adoption of the new standard on January 1, 2010. At that date, the
excess of fair value of the assets ($2.382 billion) over the fair value of the liabilities
($2.137 billion) of $245 million was included in AFGs Balance Sheet as appropriated retained
earnings managed investment entities, representing the cumulative effect of adopting the new
standard that ultimately will inure to the benefit of the CLO debt holders.
At December 31, 2009, AFGs investments in the CLOs were included in fixed maturity securities
and had a cost of approximately $700,000 and a fair value of $6.4 million. Beginning January
1, 2010, these investments are eliminated in consolidation.
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. As further detailed in
Note H
-
Managed Investment Entities
, 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.
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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.
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. Reserves 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.
10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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.
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. Deferred tax
assets are recognized if it is more likely than not that a benefit will 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 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 on stock options.
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: third quarter 2010 and 2009 1.3 million and 1.1 million;
first nine months of 2010 and 2009 1.3 million and 1.1 million, respectively.
11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
AFGs weighted average diluted shares outstanding excludes the following anti-dilutive
potential common shares related to stock compensation plans: third quarter 2010 and 2009 3.1
million and 4.6 million; first nine months of 2010 and 2009 4.0 million and 6.0 million,
respectively. Adjustments to net earnings attributable to shareholders in the calculation of
diluted earnings per share were nominal in the 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.
B.
|
|
Acquisition of Subsidiary
In July 2010, National Interstate (NATL), a 52.5%-owned
subsidiary of AFG, completed the acquisition of Vanliner Group, Inc., a subsidiary of
UniGroup, Inc. for $128 million in cash, which was based on Vanliners estimated tangible book
value at the date of closing and is subject to certain adjustments. The purchase price is
subject to a four and one-half-year balance sheet guarantee whereby both favorable and
unfavorable balance sheet developments inure to UniGroup. The preliminary allocation of the
purchase price based on the estimated fair value of the assets and liabilities is subject to
change upon finalizing valuations. NATL funded the acquisition primarily with cash on hand.
Vanliner wrote approximately $104 million of gross premiums in 2009 in the moving and storage
industry.
|
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 costs 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 and 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, indexed and variable annuities and a
variety of supplemental insurance products. AFGs reportable segments and their components
were determined based primarily upon similar economic characteristics, products and services.
12
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following tables (in millions) show AFGs revenues and operating earnings before income
taxes by significant business segment and sub-segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
$
|
407
|
|
|
$
|
239
|
|
|
$
|
832
|
|
|
$
|
676
|
|
Specialty casualty
|
|
|
224
|
|
|
|
237
|
|
|
|
661
|
|
|
|
692
|
|
Specialty financial
|
|
|
92
|
|
|
|
127
|
|
|
|
347
|
|
|
|
388
|
|
Other
|
|
|
13
|
|
|
|
19
|
|
|
|
47
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
736
|
|
|
|
622
|
|
|
|
1,887
|
|
|
|
1,809
|
|
Investment income
|
|
|
80
|
|
|
|
102
|
|
|
|
257
|
|
|
|
313
|
|
Realized gains
|
|
|
46
|
|
|
|
17
|
|
|
|
69
|
|
|
|
41
|
|
Other
|
|
|
13
|
|
|
|
26
|
|
|
|
49
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875
|
|
|
|
767
|
|
|
|
2,262
|
|
|
|
2,250
|
|
Annuity and supplemental insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
215
|
|
|
|
195
|
|
|
|
625
|
|
|
|
585
|
|
Life, accident and health premiums
|
|
|
112
|
|
|
|
112
|
|
|
|
340
|
|
|
|
331
|
|
Realized losses
|
|
|
(11
|
)
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(63
|
)
|
Other
|
|
|
23
|
|
|
|
26
|
|
|
|
81
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
320
|
|
|
|
1,027
|
|
|
|
941
|
|
Other
|
|
|
41
|
|
|
|
6
|
|
|
|
52
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,255
|
|
|
$
|
1,093
|
|
|
$
|
3,341
|
|
|
$
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
$
|
41
|
|
|
$
|
47
|
|
|
$
|
81
|
|
|
$
|
121
|
|
Specialty casualty
|
|
|
(13
|
)
|
|
|
27
|
|
|
|
29
|
|
|
|
106
|
|
Specialty financial
|
|
|
36
|
|
|
|
29
|
|
|
|
91
|
|
|
|
96
|
|
Other
|
|
|
4
|
|
|
|
6
|
|
|
|
13
|
|
|
|
3
|
|
Other lines
|
|
|
|
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
108
|
|
|
|
202
|
|
|
|
320
|
|
Investment and other operating income
|
|
|
67
|
|
|
|
80
|
|
|
|
229
|
|
|
|
253
|
|
Realized gains
|
|
|
46
|
|
|
|
17
|
|
|
|
69
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
205
|
|
|
|
500
|
|
|
|
614
|
|
Annuity and supplemental insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
58
|
|
|
|
46
|
|
|
|
148
|
|
|
|
127
|
|
Realized losses
|
|
|
(11
|
)
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
33
|
|
|
|
129
|
|
|
|
64
|
|
Other (*)
|
|
|
(20
|
)
|
|
|
(35
|
)
|
|
|
(116
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208
|
|
|
$
|
203
|
|
|
$
|
513
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
|
The third quarter and first nine months of 2010 include $8 million and $23 million,
respectively, in earnings from managed investment entities attributable to AFG
shareholders and $4 million and $37 million, respectively, in losses of managed
investment entities attributable to noncontrolling interests.
|
13
AMERICAN FINANCIAL GROUP, INC. 10-Q
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. 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),
changes in interest rates, general economic conditions and the credit quality of the specific
issuers.
14
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Assets and liabilities measured at fair value are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies
|
|
$
|
264
|
|
|
$
|
259
|
|
|
$
|
|
|
|
$
|
523
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
2,532
|
|
|
|
21
|
|
|
|
2,553
|
|
Foreign government
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
308
|
|
Residential MBS
|
|
|
|
|
|
|
3,646
|
|
|
|
292
|
|
|
|
3,938
|
|
Commercial MBS
|
|
|
|
|
|
|
2,092
|
|
|
|
5
|
|
|
|
2,097
|
|
All other corporate
|
|
|
10
|
|
|
|
9,573
|
|
|
|
452
|
|
|
|
10,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS fixed maturities
|
|
|
274
|
|
|
|
18,410
|
|
|
|
770
|
|
|
|
19,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading fixed maturities
|
|
|
|
|
|
|
384
|
|
|
|
1
|
|
|
|
385
|
|
Equity securities
|
|
|
402
|
|
|
|
158
|
|
|
|
21
|
|
|
|
581
|
|
Assets of managed investment entities (MIE)
|
|
|
122
|
|
|
|
2,327
|
|
|
|
42
|
|
|
|
2,491
|
|
Variable annuity assets (separate accounts) (a)
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
573
|
|
Other investments
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value
|
|
$
|
798
|
|
|
$
|
21,917
|
|
|
$
|
834
|
|
|
$
|
23,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of managed investment entities
|
|
$
|
72
|
|
|
$
|
|
|
|
$
|
2,199
|
|
|
$
|
2,271
|
|
Derivatives embedded in annuity
benefits accumulated
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value
|
|
$
|
72
|
|
|
$
|
|
|
|
$
|
2,369
|
|
|
$
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
$
|
371
|
|
|
$
|
15,683
|
|
|
$
|
769
|
|
|
$
|
16,823
|
|
Trading
|
|
|
|
|
|
|
371
|
|
|
|
1
|
|
|
|
372
|
|
Equity securities
|
|
|
197
|
|
|
|
189
|
|
|
|
25
|
|
|
|
411
|
|
Variable annuity assets (separate accounts) (a)
|
|
|
|
|
|
|
549
|
|
|
|
|
|
|
|
549
|
|
Other investments
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value
|
|
$
|
568
|
|
|
$
|
16,877
|
|
|
$
|
795
|
|
|
$
|
18,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity
benefits accumulated
|
|
$
|
|
|
|
$
|
|
|
|
$
|
113
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Variable annuity liabilities equal the fair value of annuity assets.
|
During the third quarter of 2010, there were no significant transfers between Level 1 and
Level 2. Approximately 4% of the total assets measured at fair value on September 30, 2010,
were Level 3 assets. Approximately 36% of these assets were MBS whose fair values were
determined primarily using non-binding broker quotes; the balance was primarily private
placement debt securities whose fair values were determined internally using significant
unobservable inputs, including the evaluation of underlying collateral and issuer
creditworthiness, as well as certain Level 2 inputs such as comparable yields and multiples on
similar publicly traded issues. The fair values of the liabilities of managed investment
entities were determined using non-binding broker quotes, which were reviewed by AFGs internal
investment professionals.
15
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Changes in balances of Level 3 financial assets and liabilities during the third quarter and
first nine months of 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
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
comp.
|
|
|
sales,
|
|
|
Transfer
|
|
|
Transfer
|
|
|
Balance at
|
|
|
|
June 30,
|
|
|
Net
|
|
|
income
|
|
|
issuances and
|
|
|
into
|
|
|
out of
|
|
|
September 30,
|
|
|
|
2010
|
|
|
income
|
|
|
(loss)
|
|
|
settlements
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2010
|
|
AFS fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
Residential MBS
|
|
|
326
|
|
|
|
4
|
|
|
|
11
|
|
|
|
5
|
|
|
|
7
|
|
|
|
(61
|
)
|
|
|
292
|
|
Commercial MBS
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
All other corporate
|
|
|
426
|
|
|
|
|
|
|
|
7
|
|
|
|
14
|
|
|
|
27
|
|
|
|
(22
|
)
|
|
|
452
|
|
Trading
fixed maturities
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Equity securities
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
21
|
|
Assets of MIE
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Liabilities of MIE
|
|
|
(2,152
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(2,199
|
)
|
Embedded derivatives
|
|
|
(128
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
included in
|
|
|
Purchases,
|
|
|
Transfer
|
|
|
Balance at
|
|
|
|
June 30,
|
|
|
|
|
|
|
Other comp.
|
|
|
sales, issuances
|
|
|
out of
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Net income
|
|
|
income (loss)
|
|
|
and settlements
|
|
|
Level 3
|
|
|
2009
|
|
AFS fixed maturities
|
|
$
|
712
|
|
|
$
|
5
|
|
|
$
|
68
|
|
|
$
|
185
|
|
|
$
|
(313
|
)
|
|
$
|
657
|
|
Trading
fixed maturities
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
1
|
|
Equity securities
|
|
|
26
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
|
|
(93
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidate
|
|
|
|
|
|
|
Other
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Managed
|
|
|
|
|
|
|
comp.
|
|
|
sales,
|
|
|
Transfer
|
|
|
Transfer
|
|
|
Balance at
|
|
|
|
Dec. 31,
|
|
|
Inv.
|
|
|
Net
|
|
|
income
|
|
|
issuances and
|
|
|
into
|
|
|
out of
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Entities
|
|
|
income
|
|
|
(loss)
|
|
|
settlements
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2010
|
|
AFS fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
17
|
|
|
$
|
(17
|
)
|
|
$
|
21
|
|
Residential MBS
|
|
|
435
|
|
|
|
|
|
|
|
6
|
|
|
|
22
|
|
|
|
11
|
|
|
|
9
|
|
|
|
(191
|
)
|
|
|
292
|
|
Commercial MBS
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
All other corporate
|
|
|
311
|
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
15
|
|
|
|
101
|
|
|
|
96
|
|
|
|
(53
|
)
|
|
|
452
|
|
Trading
fixed maturities
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
1
|
|
Equity securities
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
21
|
|
Assets of MIE
|
|
|
|
|
|
|
90
|
|
|
|
5
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
7
|
|
|
|
(52
|
)
|
|
|
42
|
|
Liabilities of MIE
|
|
|
|
|
|
|
(2,100
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
(2,199
|
)
|
Embedded derivatives
|
|
|
(113
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
included in
|
|
|
Purchases,
|
|
|
Transfer
|
|
|
Balance at
|
|
|
|
Dec. 31,
|
|
|
|
|
|
|
Other comp.
|
|
|
sales, issuances
|
|
|
out of
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Net income
|
|
|
income (loss)
|
|
|
and settlements
|
|
|
Level 3
|
|
|
2009
|
|
AFS fixed maturities
|
|
$
|
706
|
|
|
$
|
12
|
|
|
$
|
71
|
|
|
$
|
144
|
|
|
$
|
(276
|
)
|
|
$
|
657
|
|
Trading
fixed maturities
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Equity securities
|
|
|
44
|
|
|
|
(11
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
24
|
|
Other assets
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
Embedded derivatives
|
|
|
(96
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
(111
|
)
|
16
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Fair Value of Financial Instruments
The following table presents (in millions) the carrying value
and estimated fair value of AFGs financial instruments at September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,140
|
|
|
$
|
1,140
|
|
|
$
|
1,120
|
|
|
$
|
1,120
|
|
Fixed maturities
|
|
|
19,839
|
|
|
|
19,839
|
|
|
|
17,195
|
|
|
|
17,195
|
|
Equity securities
|
|
|
581
|
|
|
|
581
|
|
|
|
411
|
|
|
|
411
|
|
Mortgage loans
|
|
|
492
|
|
|
|
494
|
|
|
|
376
|
|
|
|
373
|
|
Policy loans
|
|
|
267
|
|
|
|
267
|
|
|
|
276
|
|
|
|
276
|
|
Assets of managed investment entities
|
|
|
2,491
|
|
|
|
2,491
|
|
|
|
|
|
|
|
|
|
Variable annuity assets
(separate accounts)
|
|
|
573
|
|
|
|
573
|
|
|
|
549
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
benefits accumulated (*)
|
|
$
|
12,266
|
|
|
$
|
12,131
|
|
|
$
|
11,123
|
|
|
$
|
10,365
|
|
Long-term debt
|
|
|
954
|
|
|
|
1,037
|
|
|
|
828
|
|
|
|
839
|
|
Liabilities
of managed investment entities
|
|
|
2,271
|
|
|
|
2,271
|
|
|
|
|
|
|
|
|
|
Variable annuity liabilities
(separate accounts)
|
|
|
573
|
|
|
|
573
|
|
|
|
549
|
|
|
|
549
|
|
|
|
|
(*)
|
|
Excludes life contingent annuities in the payout phase.
|
The carrying amount of cash and cash equivalents approximates fair value. Fair values for
mortgage loans are estimated by discounting the future contractual cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings. The fair
value of policy loans is estimated to approximate carrying value; policy loans have no defined
maturity dates and are inseparable from insurance contracts. The fair value of annuity
benefits was estimated based on expected cash flows discounted using forward interest rates
adjusted for the Companys credit risk and includes the impact of maintenance expenses and
capital costs. Fair values of long-term debt are based primarily on quoted market prices.
E.
|
|
Investments
Available for sale fixed maturities and equity securities at September
30, 2010, and December 31, 2009, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Gross Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Gross Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agencies
|
|
$
|
502
|
|
|
$
|
523
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
599
|
|
|
$
|
612
|
|
|
$
|
14
|
|
|
$
|
(1
|
)
|
States, municipalities and
political subdivisions
|
|
|
2,443
|
|
|
|
2,553
|
|
|
|
114
|
|
|
|
(4
|
)
|
|
|
1,764
|
|
|
|
1,789
|
|
|
|
40
|
|
|
|
(15
|
)
|
Foreign government
|
|
|
292
|
|
|
|
308
|
|
|
|
16
|
|
|
|
|
|
|
|
261
|
|
|
|
264
|
|
|
|
4
|
|
|
|
(1
|
)
|
Residential MBS
|
|
|
3,873
|
|
|
|
3,938
|
|
|
|
223
|
|
|
|
(158
|
)
|
|
|
4,142
|
|
|
|
3,956
|
|
|
|
126
|
|
|
|
(312
|
)
|
Commercial MBS
|
|
|
1,916
|
|
|
|
2,097
|
|
|
|
185
|
|
|
|
(4
|
)
|
|
|
1,434
|
|
|
|
1,431
|
|
|
|
22
|
|
|
|
(25
|
)
|
All other corporate
|
|
|
9,211
|
|
|
|
10,035
|
|
|
|
849
|
|
|
|
(25
|
)
|
|
|
8,530
|
|
|
|
8,771
|
|
|
|
375
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,237
|
|
|
$
|
19,454
|
|
|
$
|
1,408
|
|
|
$
|
(191
|
)
|
|
$
|
16,730
|
|
|
$
|
16,823
|
|
|
$
|
581
|
|
|
$
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
270
|
|
|
$
|
441
|
|
|
$
|
173
|
|
|
$
|
(2
|
)
|
|
$
|
112
|
|
|
$
|
298
|
|
|
$
|
187
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stocks
|
|
$
|
139
|
|
|
$
|
140
|
|
|
$
|
6
|
|
|
$
|
(5
|
)
|
|
$
|
116
|
|
|
$
|
113
|
|
|
$
|
6
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-credit related portion of other-than-temporary impairment charges are included in
other comprehensive income (loss). Such charges taken for securities still owned at September
30, 2010 and December 31, 2009,
respectively, were: residential MBS $266 million and $284 million; commercial MBS $3
million in both periods; corporate bonds $1 million and $4 million.
17
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following tables show gross unrealized losses (in millions) on fixed maturities and equity
securities by investment category and length of time that individual securities have been in a
continuous unrealized loss position at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Fair Value as
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Fair Value as
|
|
|
|
Loss
|
|
|
Value
|
|
|
% of Cost
|
|
|
Loss
|
|
|
Value
|
|
|
% of Cost
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agencies
|
|
$
|
|
|
|
$
|
53
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
States, municipalities and
political subdivisions
|
|
|
(1
|
)
|
|
|
164
|
|
|
|
99
|
%
|
|
|
(3
|
)
|
|
|
54
|
|
|
|
95
|
%
|
Foreign government
|
|
|
|
|
|
|
5
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Residential MBS
|
|
|
(13
|
)
|
|
|
274
|
|
|
|
96
|
%
|
|
|
(145
|
)
|
|
|
664
|
|
|
|
82
|
%
|
Commercial MBS
|
|
|
|
|
|
|
36
|
|
|
|
99
|
%
|
|
|
(4
|
)
|
|
|
20
|
|
|
|
85
|
%
|
All other corporate
|
|
|
(4
|
)
|
|
|
191
|
|
|
|
98
|
%
|
|
|
(21
|
)
|
|
|
365
|
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18
|
)
|
|
$
|
723
|
|
|
|
98
|
%
|
|
$
|
(173
|
)
|
|
$
|
1,103
|
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
$
|
(2
|
)
|
|
$
|
35
|
|
|
|
95
|
%
|
|
$
|
|
|
|
$
|
2
|
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Preferred Stocks
|
|
$
|
|
|
|
$
|
4
|
|
|
|
99
|
%
|
|
$
|
(5
|
)
|
|
$
|
37
|
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agencies
|
|
$
|
(1
|
)
|
|
$
|
232
|
|
|
|
99
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
States, municipalities and
political subdivisions
|
|
|
(8
|
)
|
|
|
470
|
|
|
|
98
|
%
|
|
|
(7
|
)
|
|
|
69
|
|
|
|
90
|
%
|
Foreign government
|
|
|
(1
|
)
|
|
|
81
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Residential MBS
|
|
|
(37
|
)
|
|
|
458
|
|
|
|
93
|
%
|
|
|
(275
|
)
|
|
|
1,392
|
|
|
|
84
|
%
|
Commercial MBS
|
|
|
(1
|
)
|
|
|
209
|
|
|
|
99
|
%
|
|
|
(24
|
)
|
|
|
395
|
|
|
|
94
|
%
|
All other corporate
|
|
|
(19
|
)
|
|
|
895
|
|
|
|
98
|
%
|
|
|
(115
|
)
|
|
|
1,336
|
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(67
|
)
|
|
$
|
2,345
|
|
|
|
97
|
%
|
|
$
|
(421
|
)
|
|
$
|
3,192
|
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
$
|
(1
|
)
|
|
$
|
3
|
|
|
|
79
|
%
|
|
$
|
|
|
|
$
|
2
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual Preferred Stocks
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
(9
|
)
|
|
$
|
47
|
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 the gross unrealized losses on fixed maturities of $191 million
relate to approximately 630 securities. Investment grade securities (as determined by
nationally recognized rating agencies) represented approximately 37% of the gross unrealized
loss and 64% of the fair value. Residential MBS comprised approximately 83% of the gross
unrealized losses on the available for sale fixed maturity portfolio at September 30, 2010.
Gross Unrealized Losses on MBS
Over 97% of AFGs commercial MBS are AAA-rated. Of the
residential MBS that have been in an unrealized loss position (impaired) for 12 months or
more (286 securities), approximately 37% of the unrealized losses and 50% of the fair value
relate to investment grade rated securities. AFG analyzes its MBS securities for
other-than-temporary impairment each quarter based upon expected future cash flows. Management
estimates expected future cash flows based upon its knowledge of the MBS market, cash flow
projections (which reflect loan to collateral values, subordination, vintage and geographic
concentration) received from independent sources, implied cash flows inherent in security
ratings and analysis of historical payment data. For the first nine months of 2010, AFG
recorded in earnings $42 million in other-than-temporary impairment charges related to its
residential MBS.
18
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Gross Unrealized Losses on All Other Corporates
For the first nine months of 2010, AFG
recorded in earnings $18 million in other-than-temporary impairment charges on all other
corporate securities. Management concluded that no additional impairment charges were
required based on many factors, including AFGs ability
and intent to hold the investments for a period of time sufficient to allow for anticipated
recovery of its amortized cost, the length of time and the extent to which fair value has been
below cost, analysis of historical and projected company-specific financial data, the outlook
for industry sectors, and credit ratings.
The following tables progress the credit portion of other-than-temporary impairments on fixed
maturity securities for which the non-credit portion of an impairment has been recognized in
other comprehensive income (loss) (in millions).
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at June 30
|
|
$
|
121
|
|
|
$
|
67
|
|
Additional credit impairments on:
|
|
|
|
|
|
|
|
|
Previously impaired securities
|
|
|
11
|
|
|
|
4
|
|
Securities without prior impairments
|
|
|
1
|
|
|
|
9
|
|
Reductions disposals
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
133
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
99
|
|
|
$
|
14
|
|
Additional credit impairments on:
|
|
|
|
|
|
|
|
|
Previously impaired securities
|
|
|
34
|
|
|
|
14
|
|
Securities without prior impairments
|
|
|
8
|
|
|
|
59
|
|
Reductions disposals
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
133
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
The table below sets forth the scheduled maturities of available for sale fixed maturities as
of September 30, 2010 (in millions). 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.
MBS had an average life of approximately 4 years at September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair Value
|
|
|
|
Cost
|
|
|
Amount
|
|
|
%
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
516
|
|
|
$
|
526
|
|
|
|
3
|
%
|
After one year through five years
|
|
|
4,998
|
|
|
|
5,323
|
|
|
|
27
|
|
After five years through ten years
|
|
|
5,525
|
|
|
|
6,066
|
|
|
|
31
|
|
After ten years
|
|
|
1,409
|
|
|
|
1,504
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,448
|
|
|
|
13,419
|
|
|
|
69
|
|
MBS
|
|
|
5,789
|
|
|
|
6,035
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,237
|
|
|
$
|
19,454
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
Certain risks are inherent in connection with fixed maturity securities, including loss upon
default, price volatility in reaction to changes in interest rates, and general market factors
and risks associated with reinvestment of proceeds due to prepayments or redemptions in a
period of declining interest rates.
There were no investments in individual issuers (other than U.S. Treasury Notes) that exceeded
10% of Shareholders Equity at September 30, 2010 or December 31, 2009.
19
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Net Unrealized Gain on Marketable Securities
In addition to adjusting equity securities and
fixed maturity securities classified as available for sale to fair value, GAAP requires that
deferred policy acquisition costs related to annuities and certain other balance sheet amounts
be adjusted to the extent that unrealized gains and losses from securities would result in
adjustments to those balances had the unrealized gains or losses actually been realized. The
following table shows the components of the net unrealized gain on securities that is included
in Accumulated Other Comprehensive Income in AFGs Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax and
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable
|
|
|
|
|
|
|
|
|
|
|
to Noncontrolling
|
|
|
|
|
|
|
Pre-tax
|
|
|
Interests
|
|
|
Net
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
1,217
|
|
|
$
|
(432
|
)
|
|
$
|
785
|
|
Equity securities
|
|
|
172
|
|
|
|
(61
|
)
|
|
|
111
|
|
Deferred policy acquisition costs
|
|
|
(460
|
)
|
|
|
161
|
|
|
|
(299
|
)
|
Annuity benefits and other liabilities
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
938
|
|
|
$
|
(335
|
)
|
|
$
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
93
|
|
|
$
|
(33
|
)
|
|
$
|
60
|
|
Equity securities
|
|
|
183
|
|
|
|
(65
|
)
|
|
|
118
|
|
Deferred policy acquisition costs
|
|
|
(18
|
)
|
|
|
6
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
258
|
|
|
$
|
(92
|
)
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to
fixed maturity and equity security investments are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncon-
|
|
|
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
|
|
|
|
Tax
|
|
|
trolling
|
|
|
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Other (*)
|
|
|
Effects
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized before impairments
|
|
$
|
44
|
|
|
$
|
29
|
|
|
$
|
(5
|
)
|
|
$
|
(24
|
)
|
|
$
|
|
|
|
$
|
44
|
|
Realized impairments
|
|
|
(14
|
)
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
(7
|
)
|
Change in Unrealized
|
|
|
498
|
|
|
|
(7
|
)
|
|
|
(177
|
)
|
|
|
(110
|
)
|
|
|
(4
|
)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized before impairments
|
|
$
|
37
|
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
(11
|
)
|
|
$
|
(2
|
)
|
|
$
|
22
|
|
Realized impairments
|
|
|
(28
|
)
|
|
|
(8
|
)
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
(16
|
)
|
Change in Unrealized
|
|
|
1,039
|
|
|
|
98
|
|
|
|
(407
|
)
|
|
|
(256
|
)
|
|
|
(3
|
)
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized before impairments
|
|
$
|
99
|
|
|
$
|
31
|
|
|
$
|
(10
|
)
|
|
$
|
(42
|
)
|
|
$
|
(1
|
)
|
|
$
|
77
|
|
Realized impairments
|
|
|
(64
|
)
|
|
|
(4
|
)
|
|
|
20
|
|
|
|
17
|
|
|
|
|
|
|
|
(31
|
)
|
Change in Unrealized
|
|
|
1,131
|
|
|
|
(11
|
)
|
|
|
(434
|
)
|
|
|
(240
|
)
|
|
|
(6
|
)
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized before impairments
|
|
$
|
168
|
|
|
$
|
(12
|
)
|
|
$
|
(20
|
)
|
|
$
|
(47
|
)
|
|
$
|
(2
|
)
|
|
$
|
87
|
|
Realized impairments
|
|
|
(182
|
)
|
|
|
(27
|
)
|
|
|
56
|
|
|
|
54
|
|
|
|
1
|
|
|
|
(98
|
)
|
Change in Unrealized
|
|
|
1,834
|
|
|
|
161
|
|
|
|
(712
|
)
|
|
|
(449
|
)
|
|
|
(7
|
)
|
|
|
827
|
|
|
|
|
(*)
|
|
Primarily adjustments to deferred policy acquisition costs related to annuities.
|
20
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Realized gains include net gains of $25 million and $51 million in the third quarter and first
nine months of 2010 from the mark-to-market of certain MBS, primarily interest-only securities
with interest rates that float inversely with short-term rates. In the 2009 periods, realized
gains included $32 million in the third quarter and $129 million for the first nine months from
the mark-to-market of these securities. Gross realized gains and losses (excluding impairment
writedowns and mark-to-market of derivatives) on available for sale fixed maturity and equity
security investment transactions included in the Statement of Cash Flows consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
74
|
|
|
$
|
68
|
|
Gross losses
|
|
|
(10
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
29
|
|
|
|
6
|
|
Gross losses
|
|
|
|
|
|
|
(21
|
)
|
F.
|
|
Derivatives
As discussed under
Derivatives
in Note A, AFG uses derivatives in
certain areas of its operations. AFGs derivatives do not qualify for hedge accounting under
GAAP; changes in the fair value of derivatives are included in earnings.
|
The following derivatives are included in AFGs Balance Sheet at fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Derivative
|
|
Balance Sheet Line
|
|
Asset
|
|
|
Liability
|
|
|
Asset
|
|
|
Liability
|
|
MBS with embedded derivatives
|
|
Fixed maturities
|
|
$
|
97
|
|
|
$
|
|
|
|
$
|
226
|
|
|
$
|
|
|
Interest rate swaptions
|
|
Other investments
|
|
|
13
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
Indexed annuities
(embedded derivative)
|
|
Annuity benefits accumulated
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
|
113
|
|
Equity index call options
|
|
Other investments
|
|
|
52
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
Reinsurance contracts
(embedded derivative)
|
|
Other liabilities
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162
|
|
|
$
|
191
|
|
|
$
|
311
|
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The MBS with embedded derivatives consist primarily of interest-only MBS with interest
rates that float inversely with short-term rates. AFG has elected to measure these securities
(in their entirety) at fair value in its financial statements. These investments are part of
AFGs overall investment strategy and represent a small component of AFGs overall investment
portfolio.
AFG has entered into $800 million notional amount of pay-fixed interest rate swaptions (options
to enter into pay-fixed/receive floating interest rate swaps at future dates expiring between
2012 and 2015) to mitigate interest rate risk in its annuity operations. AFG paid $21 million
to purchase these swaptions, which represents its maximum potential economic loss over the life
of the contracts.
AFGs indexed annuities, which represented 26% of annuity benefits accumulated at September 30,
2010, 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.
21
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
As discussed under
Reinsurance
in Note A, certain reinsurance contracts in AFGs annuity and
supplemental insurance business are considered to contain embedded derivatives.
The following table summarizes the gain (loss) included in the Statement of Earnings for
changes in the fair value of these derivatives for the third quarter and first nine months of
2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Derivative
|
|
Statement of Earnings Line
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
MBS with embedded derivatives
|
|
Realized gains
|
|
$
|
25
|
|
|
$
|
32
|
|
|
$
|
51
|
|
|
$
|
129
|
|
Interest rate swaptions
|
|
Realized gains
|
|
|
(2
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
5
|
|
Indexed annuities
(embedded derivative)
|
|
Annuity benefits
|
|
|
(26
|
)
|
|
|
(23
|
)
|
|
|
(25
|
)
|
|
|
(23
|
)
|
Equity index call options
|
|
Annuity benefits
|
|
|
23
|
|
|
|
19
|
|
|
|
11
|
|
|
|
17
|
|
Reinsurance contracts
(embedded derivative)
|
|
Investment income
|
|
|
(6
|
)
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G.
|
|
Deferred Policy Acquisition Costs
Deferred policy acquisition costs consisted of
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Property and casualty insurance
|
|
$
|
321
|
|
|
$
|
338
|
|
Annuity and supplemental insurance:
|
|
|
|
|
|
|
|
|
Policy acquisition costs
|
|
|
911
|
|
|
|
853
|
|
Policyholder sales inducements
|
|
|
214
|
|
|
|
207
|
|
Present value of future profits (PVFP)
|
|
|
168
|
|
|
|
190
|
|
Impact of unrealized gains and losses
on securities
|
|
|
(460
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
Total annuity and supplemental
|
|
|
833
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,154
|
|
|
$
|
1,570
|
|
|
|
|
|
|
|
|
The PVFP amounts in the table above are net of $170 million and $148 million of accumulated
amortization at September 30, 2010 and December 31, 2009, respectively. Amortization of the
PVFP was $6 million in the third quarter and $22 million during the first nine months of 2010
and $7 million in the third quarter and $22 million in the first nine months of 2009,
respectively.
H.
|
|
Managed Investment Entities
AFG is the investment manager and has investments
ranging from 7.5% to 24.4% of the most subordinate debt tranche of six collateralized loan
obligation entities or CLOs, which are considered variable interest entities. Upon
formation between 2004 and 2007, these entities issued securities in various senior and
subordinate classes and invested the proceeds primarily in secured bank loans, which serve as
collateral for the debt securities issued by each particular CLO. None of the collateral was
purchased from AFG. AFGs investments in these entities receive residual income from the CLOs
only after the CLOs pay operating expenses (including management fees to
AFG),
interest on and returns of capital to senior levels of debt securities.
There are no contractual requirements for AFG to provide additional funding for these entities.
AFG has not provided and does not intend to provide any financial support to these entities.
|
22
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In analyzing expected cash flows related to these entities, AFG determined that it will not
receive a majority of the residual returns nor absorb a majority of the entities expected
losses. Accordingly, AFG was not required to consolidate these variable interest entities
prior to 2010. Beginning in 2010, accounting standards for determining the primary beneficiary
of a variable interest entity changed from the above quantitative assessment to a qualitative
assessment as outlined in
Note A
-
Accounting Policies, Managed Investment Entities.
Under
the new guidance, AFG determined that it is the primary beneficiary of the CLOs it manages and
began consolidating the CLOs on January 1, 2010.
AFGs maximum ultimate exposure to economic loss on its CLOs is limited to its investment in
the CLOs, which had an aggregate fair value of $12 million at September 30, 2010.
The revenues and expenses of the CLOs are separately identified in AFGs Statement of Earnings,
after elimination of $5 million and $13 million in management fees and $3 million and $10
million in income attributable to shareholders of AFG for the third quarter and nine months of
2010, respectively, as measured by the change in the fair value of AFGs investments in the
CLOs. AFGs Operating earnings before income taxes for the third quarter and first nine
months of 2010 includes $4 million and $37 million, respectively, in CLO losses attributable to
noncontrolling interests.
The net loss from changes in the fair value of assets and liabilities of managed investment
entities included in the Statement of Earnings for 2010 includes gains of $47 million in the
third quarter and gains of $97 million for the first nine months from changes in the fair value
of CLO assets and losses of $51 million in the third quarter and losses of $141 million for the
first nine months from changes in the fair value of CLO liabilities. The aggregate unpaid
principal balance of the CLOs fixed maturity investments exceeded the fair value of the
investments by $132 million at September 30, 2010. The aggregate unpaid principal balance of
the CLOs debt exceeded its fair value by $390 million at that date. The CLO assets include
$17 million in loans (aggregate unpaid principal balance of $37 million) for which the CLOs are
not accruing interest because the loans are in default.
I.
|
|
Goodwill and Intangible Assets
Changes in the carrying value of goodwill during the
first nine months of 2010, by reporting segment, are presented in the following table (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
|
|
|
Annuity and
|
|
|
|
|
|
|
Casualty
|
|
|
Supplemental
|
|
|
Total
|
|
Balance January 1, 2010
|
|
$
|
152
|
|
|
$
|
56
|
|
|
$
|
208
|
|
Impairment charge
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2010
|
|
$
|
152
|
|
|
$
|
34
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2010, management reached a decision to de-emphasize the sale of
supplemental health insurance products through career agents, including the sale of a marketing
subsidiary. As a result of this decision, AFG performed an interim impairment test of the
goodwill associated with the reporting unit using an income valuation method based on
discounted cash flows. Based on the results of this test, AFG recorded a goodwill impairment
charge of $22 million (included in realized gains (losses) on subsidiaries) to write off all of
the goodwill related to this reporting unit.
23
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Included in other assets in AFGs Balance Sheet is $52 million at September 30, 2010 and $60
million at December 31, 2009, in amortizable intangible assets related to property and casualty
insurance acquisitions, primarily the 2008 acquisitions of Marketform and Strategic Comp.
These amounts are net of accumulated amortization of $32 million and $23 million, respectively.
Amortization of these intangibles was $3 million in the third quarter and $9 million during
the first nine months of 2010 compared to $7 million in the third quarter and $19 million
during the first nine months of 2009. Other assets also include $8 million in non-amortizable
intangible assets related to insurance licenses acquired in the acquisition of Vanliner in
2010.
J.
|
|
Long-Term Debt
The carrying value of long-term debt consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Direct obligations of AFG:
|
|
|
|
|
|
|
|
|
9-7/8% Senior Notes due June 2019
|
|
$
|
350
|
|
|
$
|
350
|
|
7% Senior Notes due September 2050
|
|
|
132
|
|
|
|
|
|
7-1/8% Senior Debentures due February 2034
|
|
|
115
|
|
|
|
115
|
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
468
|
|
|
|
|
|
|
|
|
Subsidiaries
:
|
|
|
|
|
|
|
|
|
Obligations of AAG Holding (guaranteed by AFG):
|
|
|
|
|
|
|
|
|
7-1/2% Senior Debentures due November 2033
|
|
|
112
|
|
|
|
112
|
|
7-1/4% Senior Debentures due January 2034
|
|
|
86
|
|
|
|
86
|
|
Notes payable secured by real estate
due 2010 through 2016
|
|
|
65
|
|
|
|
66
|
|
Secured borrowings ($18 and $19 guaranteed by AFG)
|
|
|
43
|
|
|
|
52
|
|
National Interstate bank credit facility
|
|
|
19
|
|
|
|
15
|
|
American Premier Underwriters 10-7/8% Subordinated
|
|
|
|
|
|
|
|
|
Notes due May 2011
|
|
|
8
|
|
|
|
8
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
334
|
|
|
|
340
|
|
|
|
|
|
|
|
|
Payable to Subsidiary Trusts:
|
|
|
|
|
|
|
|
|
AAG Holding Variable Rate Subordinated Debentures
due May 2033
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
954
|
|
|
$
|
828
|
|
|
|
|
|
|
|
|
Scheduled principal payments on debt for the balance of 2010 and the subsequent five years were
as follows: 2010 $3 million; 2011 $20 million; 2012 $31 million; 2013 $20 million; 2014
$2 million and 2015 $14 million.
As shown below (in millions), the majority of AFGs long-term debt is unsecured obligations of
the holding company and its subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Unsecured obligations
|
|
$
|
846
|
|
|
$
|
710
|
|
Obligations secured by real estate
|
|
|
65
|
|
|
|
66
|
|
Other secured borrowings
|
|
|
43
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
$
|
954
|
|
|
$
|
828
|
|
|
|
|
|
|
|
|
In August 2010, AFG replaced its credit facility with a three-year, $500 million revolving
credit line. Amounts borrowed under this agreement bear interest at rates ranging from 1.75%
to 3.00% (currently 2%) over LIBOR based on AFGs credit rating. No amounts were borrowed
under this facility at September 30, 2010.
24
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In September 2010, AFG issued $132 million of 7% Senior Notes due 2050. In April 2009, AFG
paid $136 million to redeem its outstanding 7-1/8% Senior Debentures at maturity. In June
2009, AFG issued $350 million of 9-7/8% Senior Notes due 2019 and used the proceeds to repay
borrowings under the credit facility.
In 2009, AFG subsidiaries borrowed a total of $59 million at interest rates ranging from 3.8%
to 4.25% over LIBOR (weighted average interest rate of 4.4% at September 30, 2010). The loans
require principal payments over the next four years.
K.
|
|
Shareholders Equity
AFG is authorized to issue 12.5 million shares of Voting
Preferred Stock and 12.5 million shares of Nonvoting Preferred Stock, each without par value.
|
Accumulated Other Comprehensive Income (Loss), Net of Tax
Comprehensive income (loss) is
defined as all changes in Shareholders Equity except those arising from transactions with
shareholders. Comprehensive income (loss) includes net earnings and other comprehensive income
(loss), which consists primarily of changes in net unrealized gains or losses on available for
sale securities and foreign currency translation. The progression of the components of
accumulated other comprehensive income (loss) follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Net Unrealized
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
Noncon-
|
|
|
Other
|
|
|
|
Gains (Losses)
|
|
|
Translation
|
|
|
|
|
|
|
Tax
|
|
|
trolling
|
|
|
Comprehensive
|
|
|
|
on Securities
|
|
|
Adjustment
|
|
|
Other (a)
|
|
|
Effects
|
|
|
Interests
|
|
|
Income (Loss)
|
|
Balance at December 31, 2009
|
|
$
|
258
|
(b)
|
|
$
|
1
|
|
|
$
|
(13
|
)
|
|
$
|
(86
|
)
|
|
$
|
3
|
|
|
$
|
163
|
(b)
|
Unrealized holding gains on securities
arising during the period
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
(7
|
)
|
|
|
486
|
|
Realized gains included in net income
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
1
|
|
|
|
(46
|
)
|
Foreign currency translation gains
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
7
|
|
Other
|
|
|
(6
|
)
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
938
|
(b)
|
|
$
|
10
|
|
|
$
|
(12
|
)
|
|
$
|
(324
|
)
|
|
$
|
(5
|
)
|
|
$
|
607
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
(1,058
|
)
|
|
$
|
(18
|
)
|
|
$
|
(11
|
)
|
|
$
|
374
|
|
|
$
|
10
|
|
|
$
|
(703
|
)
|
Cumulative effect of accounting change
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
(17
|
)
|
Unrealized holding losses on
securities
arising during the period
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
|
|
(8
|
)
|
|
|
816
|
|
Realized losses included in net income
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
11
|
|
Foreign currency translation gains
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
14
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
198
|
|
|
$
|
(3
|
)
|
|
$
|
(10
|
)
|
|
$
|
(65
|
)
|
|
$
|
2
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Net unrealized pension and other postretirement plan benefits.
|
|
(b)
|
|
Includes $35 million at September 30, 2010, and $98 million at December 31, 2009 in net
pretax unrealized losses ($24 million and $63 million net of tax) related to securities for which only the
credit portion of an other-than-temporary impairment has been recorded in earnings.
|
Stock Based Compensation
Under AFGs Stock Incentive Plan, employees of AFG and its
subsidiaries are eligible to receive equity awards in the form of stock options, stock
appreciation rights, restricted stock awards, restricted stock units and stock awards. In the
first nine months of 2010, AFG issued 175,282 shares of restricted Common Stock (fair value of
$24.83 per share) and granted stock options for 1.1 million shares of Common Stock (at an
average exercise price of $24.83) under the Stock Incentive Plan. In addition, AFG issued
141,264 shares of Common Stock (fair value of $24.83 per share) in the first quarter of 2010
under its Annual Co-CEO Equity Bonus Plan.
AFG uses the Black-Scholes option pricing model to calculate the fair value of its option
grants. Expected volatility is based on historical volatility over a period equal to the
expected term. The expected term was estimated based on historical exercise patterns and
post vesting cancellations. The fair value of options granted during 2010 was $8.90 per
share based on the following
assumptions: expected dividend yield 2.2%; expected volatility 39%; expected term 7.5
years; risk-free rate 3.2%.
25
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Total compensation expense related to stock incentive plans of AFG and its subsidiaries was
as follows: third quarter of 2010 and 2009 $5 million and $4 million, respectively; nine
months of 2010 and 2009 $15 million and $14 million, respectively.
L.
|
|
Income Taxes
Operating income before income taxes includes $4 million in the third
quarter of 2010 and $37 million for the first nine months of 2010 in non-deductible losses of
managed investment entities attributable to noncontrolling interests, thereby increasing AFGs
effective tax rate.
|
As discussed in
Note K
-
Income Taxes,
to AFGs 2009 Form 10-K, AFG has several tax years for
which there are ongoing disputes with the Internal Revenue Service (IRS). AFG filed a suit
for refund in the U.S. District Court in Southern Ohio as a result of its dispute with the IRS
regarding the calculation of tax reserves for certain annuity reserves pursuant to Actuarial
Guideline 33. Oral arguments on joint motions for summary judgment were presented in June
2009. On March 15, 2010, the Court issued an Order denying both motions. On June 18, 2010,
the Court issued a final judgment in favor of AFG. The IRS has appealed the decision. AFGs
liabilities for uncertain tax positions will not be adjusted until the case is effectively
settled. Resolution of the case could result in a decrease in the liability for
unrecognized tax benefits by up to $36 million and a decrease in related accrued interest of
$12 million. These amounts do not include tax and interest paid to the IRS in 2005 and 2006,
for which the suit was filed, totaling $17 million.
In the third quarter of 2010, AFG increased its liability for uncertain tax positions by $19
million, exclusive of interest, to reflect uncertainty as to the timing of tax return inclusion
of income related to certain securities. Because the ultimate recognition of income with
respect to these securities is highly certain, the recording of this liability resulted in an
offsetting reduction in AFGs deferred tax liability. Accordingly, the ultimate resolution of
this item will not impact AFGs annual effective tax rate but could accelerate the payment of
taxes.
M.
|
|
Contingencies
There have been no significant changes to the matters discussed and
referred to in
Note M Contingencies
of AFGs 2009 Annual Report on Form 10-K covering
property and casualty insurance reserves for claims related to environmental exposures,
asbestos and other mass tort claims as well as environmental and occupational injury and
disease claims of former subsidiary railroad and manufacturing operations.
|
26
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
N.
|
|
Condensed Consolidating Information
AFG has guaranteed all of the outstanding debt
of Great American Financial Resources, Inc. (GAFRI) and GAFRIs wholly-owned subsidiary, AAG
Holding Company, Inc. In addition, GAFRI guarantees AAG Holdings public debt. The AFG and
GAFRI guarantees are full and unconditional and joint and several. Condensed consolidating
financial statements for AFG are as follows:
|
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$
|
379
|
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
22,312
|
|
|
$
|
(2
|
)
|
|
$
|
22,723
|
|
Recoverables from reinsurers and
prepaid reinsurance premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,485
|
|
|
|
|
|
|
|
3,485
|
|
Agents balances and premiums receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
773
|
|
Deferred policy acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,154
|
|
|
|
|
|
|
|
1,154
|
|
Assets of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,491
|
|
|
|
|
|
|
|
2,491
|
|
Other assets
|
|
|
29
|
|
|
|
6
|
|
|
|
5
|
|
|
|
1,984
|
|
|
|
(11
|
)
|
|
|
2,013
|
|
Investment in subsidiaries and
affiliates
|
|
|
5,007
|
|
|
|
1,952
|
|
|
|
2,050
|
|
|
|
677
|
|
|
|
(9,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,415
|
|
|
$
|
1,992
|
|
|
$
|
2,055
|
|
|
$
|
32,876
|
|
|
$
|
(9,699
|
)
|
|
$
|
32,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses, loss adjustment expenses
and unearned premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,177
|
|
|
$
|
|
|
|
$
|
8,177
|
|
Annuity, life, accident and health
benefits and reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,120
|
|
|
|
(1
|
)
|
|
|
14,119
|
|
Liabilities of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,271
|
|
|
|
|
|
|
|
2,271
|
|
Long-term debt
|
|
|
600
|
|
|
|
1
|
|
|
|
219
|
|
|
|
134
|
|
|
|
|
|
|
|
954
|
|
Other liabilities
|
|
|
238
|
|
|
|
18
|
|
|
|
111
|
|
|
|
2,277
|
|
|
|
(255
|
)
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
19
|
|
|
|
330
|
|
|
|
26,979
|
|
|
|
(256
|
)
|
|
|
27,910
|
|
Total shareholders equity
|
|
|
4,577
|
|
|
|
1,973
|
|
|
|
1,725
|
|
|
|
5,745
|
|
|
|
(9,443
|
)
|
|
|
4,577
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
5,415
|
|
|
$
|
1,992
|
|
|
$
|
2,055
|
|
|
$
|
32,876
|
|
|
$
|
(9,699
|
)
|
|
$
|
32,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$
|
225
|
|
|
$
|
33
|
|
|
$
|
|
|
|
$
|
19,535
|
|
|
$
|
(2
|
)
|
|
$
|
19,791
|
|
Recoverables from reinsurers and
prepaid reinsurance premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,660
|
|
|
|
|
|
|
|
3,660
|
|
Agents balances and premiums receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
554
|
|
Deferred policy acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570
|
|
|
|
|
|
|
|
1,570
|
|
Other assets
|
|
|
14
|
|
|
|
5
|
|
|
|
6
|
|
|
|
2,063
|
|
|
|
20
|
|
|
|
2,108
|
|
Investment in subsidiaries and
affiliates
|
|
|
4,189
|
|
|
|
1,539
|
|
|
|
1,624
|
|
|
|
687
|
|
|
|
(8,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,428
|
|
|
$
|
1,577
|
|
|
$
|
1,630
|
|
|
$
|
28,069
|
|
|
$
|
(8,021
|
)
|
|
$
|
27,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses, loss adjustment expenses
and unearned premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,980
|
|
|
$
|
|
|
|
$
|
7,980
|
|
Annuity, life, accident and health
benefits and reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,939
|
|
|
|
(1
|
)
|
|
|
12,938
|
|
Long-term debt
|
|
|
468
|
|
|
|
1
|
|
|
|
219
|
|
|
|
140
|
|
|
|
|
|
|
|
828
|
|
Other liabilities
|
|
|
179
|
|
|
|
21
|
|
|
|
110
|
|
|
|
1,876
|
|
|
|
(168
|
)
|
|
|
2,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
22
|
|
|
|
329
|
|
|
|
22,935
|
|
|
|
(169
|
)
|
|
|
23,764
|
|
Total shareholders equity
|
|
|
3,781
|
|
|
|
1,555
|
|
|
|
1,301
|
|
|
|
4,996
|
|
|
|
(7,852
|
)
|
|
|
3,781
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
4,428
|
|
|
$
|
1,577
|
|
|
$
|
1,630
|
|
|
$
|
28,069
|
|
|
$
|
(8,021
|
)
|
|
$
|
27,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE THREE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2010
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
736
|
|
|
$
|
|
|
|
$
|
736
|
|
Life, accident and health premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
112
|
|
Realized gains (losses)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
35
|
|
Income of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Investment and other income
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
352
|
|
|
|
(5
|
)
|
|
|
353
|
|
Equity in earnings of subsidiaries
|
|
|
242
|
|
|
|
48
|
|
|
|
76
|
|
|
|
|
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
49
|
|
|
|
76
|
|
|
|
1,256
|
|
|
|
(371
|
)
|
|
|
1,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
919
|
|
|
|
|
|
|
|
919
|
|
Interest charges on borrowed money
|
|
|
15
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
21
|
|
Expenses of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Other expenses
|
|
|
16
|
|
|
|
6
|
|
|
|
2
|
|
|
|
68
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
6
|
|
|
|
8
|
|
|
|
1,008
|
|
|
|
(6
|
)
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
214
|
|
|
|
43
|
|
|
|
68
|
|
|
|
248
|
|
|
|
(365
|
)
|
|
|
208
|
|
Provision (credit) for income taxes
|
|
|
82
|
|
|
|
21
|
|
|
|
22
|
|
|
|
97
|
|
|
|
(140
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
132
|
|
|
|
22
|
|
|
|
46
|
|
|
|
151
|
|
|
|
(225
|
)
|
|
|
126
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
132
|
|
|
$
|
22
|
|
|
$
|
46
|
|
|
$
|
157
|
|
|
$
|
(225
|
)
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE THREE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2009
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
622
|
|
|
$
|
|
|
|
$
|
622
|
|
Life, accident and health premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
112
|
|
Realized gains (losses)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
4
|
|
Investment and other income
|
|
|
4
|
|
|
|
8
|
|
|
|
|
|
|
|
349
|
|
|
|
(6
|
)
|
|
|
355
|
|
Equity in earnings of subsidiaries
|
|
|
226
|
|
|
|
31
|
|
|
|
41
|
|
|
|
|
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
33
|
|
|
|
41
|
|
|
|
1,093
|
|
|
|
(304
|
)
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
|
|
|
|
750
|
|
Interest charges on borrowed money
|
|
|
15
|
|
|
|
|
|
|
|
6
|
|
|
|
4
|
|
|
|
(6
|
)
|
|
|
19
|
|
Other expenses
|
|
|
16
|
|
|
|
4
|
|
|
|
2
|
|
|
|
99
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
4
|
|
|
|
8
|
|
|
|
853
|
|
|
|
(6
|
)
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
199
|
|
|
|
29
|
|
|
|
33
|
|
|
|
240
|
|
|
|
(298
|
)
|
|
|
203
|
|
Provision (credit) for income taxes
|
|
|
72
|
|
|
|
9
|
|
|
|
10
|
|
|
|
80
|
|
|
|
(99
|
)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
127
|
|
|
|
20
|
|
|
|
23
|
|
|
|
160
|
|
|
|
(199
|
)
|
|
|
131
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
127
|
|
|
$
|
20
|
|
|
$
|
23
|
|
|
$
|
156
|
|
|
$
|
(199
|
)
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2010
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,887
|
|
|
$
|
|
|
|
$
|
1,887
|
|
Life, accident and health premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
340
|
|
Realized gains (losses)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
50
|
|
Income of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
Investment and other income
|
|
|
3
|
|
|
|
8
|
|
|
|
|
|
|
|
1,045
|
|
|
|
(16
|
)
|
|
|
1,040
|
|
Equity in earnings of subsidiaries
|
|
|
621
|
|
|
|
129
|
|
|
|
172
|
|
|
|
|
|
|
|
(922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624
|
|
|
|
135
|
|
|
|
172
|
|
|
|
3,348
|
|
|
|
(938
|
)
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,454
|
|
|
|
|
|
|
|
2,454
|
|
Interest charges on borrowed money
|
|
|
42
|
|
|
|
|
|
|
|
19
|
|
|
|
13
|
|
|
|
(17
|
)
|
|
|
57
|
|
Expenses of managed investment entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
Other expenses
|
|
|
37
|
|
|
|
13
|
|
|
|
5
|
|
|
|
224
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
13
|
|
|
|
24
|
|
|
|
2,729
|
|
|
|
(17
|
)
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
545
|
|
|
|
122
|
|
|
|
148
|
|
|
|
619
|
|
|
|
(921
|
)
|
|
|
513
|
|
Provision (credit) for income taxes
|
|
|
199
|
|
|
|
49
|
|
|
|
50
|
|
|
|
236
|
|
|
|
(335
|
)
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
346
|
|
|
|
73
|
|
|
|
98
|
|
|
|
383
|
|
|
|
(586
|
)
|
|
|
314
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
346
|
|
|
$
|
73
|
|
|
$
|
98
|
|
|
$
|
415
|
|
|
$
|
(586
|
)
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2009
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance premiums
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,809
|
|
|
$
|
|
|
|
$
|
1,809
|
|
Life, accident and health premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
331
|
|
Realized gains (losses)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(22
|
)
|
Investment and other income
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
1,084
|
|
|
|
(17
|
)
|
|
|
1,077
|
|
Equity in earnings of subsidiaries
|
|
|
629
|
|
|
|
61
|
|
|
|
94
|
|
|
|
|
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
|
|
62
|
|
|
|
94
|
|
|
|
3,208
|
|
|
|
(801
|
)
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,216
|
|
|
|
|
|
|
|
2,216
|
|
Interest charges on borrowed money
|
|
|
36
|
|
|
|
|
|
|
|
19
|
|
|
|
10
|
|
|
|
(17
|
)
|
|
|
48
|
|
Other expenses
|
|
|
34
|
|
|
|
13
|
|
|
|
4
|
|
|
|
304
|
|
|
|
(1
|
)
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
13
|
|
|
|
23
|
|
|
|
2,530
|
|
|
|
(18
|
)
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
562
|
|
|
|
49
|
|
|
|
71
|
|
|
|
678
|
|
|
|
(783
|
)
|
|
|
577
|
|
Provision (credit) for income taxes
|
|
|
204
|
|
|
|
14
|
|
|
|
21
|
|
|
|
233
|
|
|
|
(268
|
)
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
358
|
|
|
|
35
|
|
|
|
50
|
|
|
|
445
|
|
|
|
(515
|
)
|
|
|
373
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
358
|
|
|
$
|
35
|
|
|
$
|
50
|
|
|
$
|
430
|
|
|
$
|
(515
|
)
|
|
$
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2010
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
$
|
346
|
|
|
$
|
73
|
|
|
$
|
98
|
|
|
$
|
383
|
|
|
$
|
(586
|
)
|
|
$
|
314
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries
|
|
|
(395
|
)
|
|
|
(78
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
587
|
|
|
|
|
|
Dividends from subsidiaries
|
|
|
359
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
Other operating activities, net
|
|
|
(52
|
)
|
|
|
(2
|
)
|
|
|
4
|
|
|
|
518
|
|
|
|
(1
|
)
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
258
|
|
|
|
(7
|
)
|
|
|
4
|
|
|
|
901
|
|
|
|
(375
|
)
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments, property
and equipment
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,119
|
)
|
|
|
|
|
|
|
(4,125
|
)
|
Purchase of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(128
|
)
|
Capital contributions to subsidiaries
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
19
|
|
|
|
|
|
Proceeds from maturities and redemptions
of investments
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
1,503
|
|
|
|
|
|
|
|
1,509
|
|
Proceeds from sales of investments,
property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,228
|
|
|
|
|
|
|
|
1,228
|
|
Managed investment entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(617
|
)
|
|
|
|
|
|
|
(617
|
)
|
Proceeds from sales and redemptions of
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
658
|
|
|
|
|
|
|
|
658
|
|
Other investing activities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(18
|
)
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
(1,374
|
)
|
|
|
19
|
|
|
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity receipts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,661
|
|
|
|
|
|
|
|
1,661
|
|
Annuity surrenders, benefits and
withdrawals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(914
|
)
|
|
|
|
|
|
|
(914
|
)
|
Additional long-term borrowings
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
158
|
|
Reductions of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(36
|
)
|
Managed investment entities retirement
of liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
(42
|
)
|
Issuances of Common Stock
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
27
|
|
Capital contributions from parent
|
|
|
|
|
|
|
12
|
|
|
|
1
|
|
|
|
6
|
|
|
|
(19
|
)
|
|
|
|
|
Repurchases of Common Stock
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
Cash dividends paid
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
375
|
|
|
|
(46
|
)
|
Other financing activities, net
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(94
|
)
|
|
|
12
|
|
|
|
1
|
|
|
|
338
|
|
|
|
356
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
146
|
|
|
|
9
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
20
|
|
Cash and cash equivalents at beginning
of period
|
|
|
197
|
|
|
|
12
|
|
|
|
|
|
|
|
911
|
|
|
|
|
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
343
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
776
|
|
|
$
|
|
|
|
$
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
All Other
|
|
|
Consol.
|
|
|
|
|
SEPTEMBER 30, 2009
|
|
AFG
|
|
|
GAFRI
|
|
|
Holding
|
|
|
Subs
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling
interests
|
|
$
|
358
|
|
|
$
|
35
|
|
|
$
|
50
|
|
|
$
|
445
|
|
|
$
|
(515
|
)
|
|
$
|
373
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries
|
|
|
(407
|
)
|
|
|
(43
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
516
|
|
|
|
|
|
Dividends from subsidiaries
|
|
|
284
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
|
|
|
|
Other operating activities, net
|
|
|
16
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
374
|
|
|
|
(1
|
)
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
251
|
|
|
|
(3
|
)
|
|
|
(19
|
)
|
|
|
819
|
|
|
|
(287
|
)
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments, property
and equipment
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,314
|
)
|
|
|
|
|
|
|
(3,323
|
)
|
Capital contributions to subsidiaries
|
|
|
(129
|
)
|
|
|
(119
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
346
|
|
|
|
|
|
Proceeds from maturities and redemptions
of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394
|
|
|
|
|
|
|
|
1,394
|
|
Proceeds
from sales of investments, property and equipment
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
1,546
|
|
Other investing activities, net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(130
|
)
|
|
|
(117
|
)
|
|
|
(98
|
)
|
|
|
(406
|
)
|
|
|
346
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity receipts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
1,092
|
|
Annuity surrenders, benefits and
withdrawals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986
|
)
|
|
|
|
|
|
|
(986
|
)
|
Additional long-term borrowings
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
526
|
|
Reductions of long-term debt
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(682
|
)
|
Issuances of Common Stock
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
Capital contributions from parent
|
|
|
|
|
|
|
128
|
|
|
|
118
|
|
|
|
100
|
|
|
|
(346
|
)
|
|
|
|
|
Cash dividends paid
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
|
|
287
|
|
|
|
(45
|
)
|
Other financing activities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(242
|
)
|
|
|
128
|
|
|
|
118
|
|
|
|
(130
|
)
|
|
|
(59
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(121
|
)
|
|
|
8
|
|
|
|
1
|
|
|
|
283
|
|
|
|
|
|
|
|
171
|
|
Cash and cash equivalents at beginning
of period
|
|
|
160
|
|
|
|
2
|
|
|
|
|
|
|
|
1,102
|
|
|
|
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
39
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
1,385
|
|
|
$
|
|
|
|
$
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
AMERICAN FINANCIAL GROUP, INC. 10-Q
ITEM 2
Managements Discussion and Analysis
of Financial Condition and Results of Operations
INDEX TO MD&A
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
Income Items
|
|
|
43
|
|
|
|
|
|
|
Expense Items
|
|
|
48
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Some of the forward-looking statements can be identified by the use of words such
as anticipates, believes, expects, projects, estimates, intends, plans, seeks,
could, may, should, will or the negative version of those words or other comparable
terminology. Such forward-looking statements include statements relating to: expectations
concerning market and other conditions and their effect on future premiums, revenues, earnings
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:
|
|
|
changes in financial, political and economic conditions, including changes in
interest rates and extended economic recessions or expansions;
|
|
|
|
|
performance of securities markets;
|
|
|
|
|
AFGs ability to estimate accurately the likelihood, magnitude and timing of any
losses in connection with investments in the non-agency residential mortgage market;
|
|
|
|
|
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, including
mortgage-backed securities;
|
|
|
|
|
the availability of capital;
|
|
|
|
|
regulatory actions (including changes in statutory accounting rules);
|
|
|
|
|
changes in legal environment affecting AFG or its customers;
|
|
|
|
|
tax law and accounting changes;
|
|
|
|
|
levels of natural catastrophes, terrorist activities (including any nuclear,
biological, chemical or radiological events), incidents of war and other major losses;
|
|
|
|
|
development of insurance loss reserves and establishment of other reserves,
particularly with respect to amounts associated with asbestos and environmental claims;
|
|
|
|
|
availability of reinsurance and ability of reinsurers to pay their obligations;
|
|
|
|
|
the unpredictability of possible future litigation if certain settlements of current
litigation do not become effective;
|
|
|
|
|
trends in persistency, mortality and morbidity;
|
|
|
|
|
competitive pressures, including the ability to obtain adequate rates; and
|
|
|
|
|
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.
32
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
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.
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, indexed and variable annuities and a variety of supplemental insurance
products.
Net earnings attributable to AFGs shareholders for the third quarter of 2010 were $132 million
($1.21 per share, diluted) compared to $127 million ($1.09 per share, diluted) in the
comparable 2009 period. Net earnings attributable to AFGs shareholders for the nine months
ended September 30, 2010 were $346 million ($3.11 per share, diluted) compared to $358 million
($3.07 per share, diluted) in the comparable 2009 period. The 2010 results reflect improved
operating results in the annuity and supplemental insurance group and higher realized gains
offset by a decline in underwriting profit in the property and casualty operations.
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.
|
For a discussion of these policies, see
Managements Discussion and Analysis Critical
Accounting Policies
in AFGs 2009 Form 10-K.
33
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
LIQUIDITY AND CAPITAL RESOURCES
Ratios
AFGs debt to total capital ratio on a consolidated basis is shown below
(dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Long-term debt
|
|
$
|
954
|
|
|
$
|
828
|
|
|
$
|
1,030
|
|
Total capital
|
|
|
4,984
|
|
|
|
4,698
|
|
|
|
4,351
|
|
Ratio of debt to total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Including debt secured by real estate
|
|
|
19.1
|
%
|
|
|
17.6
|
%
|
|
|
23.7
|
%
|
Excluding debt secured by real estate
|
|
|
18.1
|
%
|
|
|
16.4
|
%
|
|
|
22.5
|
%
|
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
2.35 for the nine months ended September 30, 2010 and 2.58 for the entire year of 2009.
Excluding annuity benefits, this ratio was 9.12 and 11.06, respectively. 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.
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.
In September 2010, AFG issued $132 million of 7% Senior Notes due 2050. In August 2010, AFG
replaced its credit facility with a three-year, $500 million revolving credit line. No amounts
were borrowed under this facility at September 30, 2010.
During the first nine months of 2010, AFG repurchased 7.4 million shares of its Common Stock
for $201 million.
AFG retired the $136 million of 7-1/8% Senior Debentures at maturity in April 2009, using cash
on hand. In June 2009, AFG issued $350 million of 9-7/8% Senior Notes due 2019.
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.
Subsidiary Liquidity
Great American Life Insurance Company (GALIC), a wholly-owned annuity
and supplemental insurance subsidiary, became a member of the Federal Home Loan Bank of
Cincinnati (FHLB) in the third quarter of 2009.
34
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
The
FHLB makes loans and provides other banking services to member institutions. Members are
required to purchase stock in the FHLB in addition to maintaining collateral deposits that back
any funds borrowed. GALICs $15 million investment in FHLB capital stock at September 30, 2010
is included in other investments at cost. Membership in the FHLB provides the annuity and
supplemental insurance operations with a substantial additional source of liquidity. No funds
have been borrowed from the FHLB.
National Interstate, a 52.5%-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 National Interstates credit rating. There was $19 million
outstanding under this agreement at September 30, 2010.
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 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. With declining rates, AFG receives some protection (from spread
compression) due to the ability to lower crediting rates, subject to guaranteed minimums. In a
rising interest rate environment, significant protection from withdrawals exists in the form of
temporary and permanent surrender charges on AFGs annuity products.
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.
Investments
AFGs investment portfolio at September 30, 2010, contained $19.5 billion
in Fixed maturities classified as available for sale and $581 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, $385 million in fixed maturities were
classified as trading with changes in unrealized holding gains or losses included in investment
income.
35
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
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 one-third of AFGs fixed maturities, prices
for each security are generally obtained from both pricing services and broker quotes. For the
other two-thirds of AFGs fixed maturity portfolio, approximately 93% are priced using pricing
services and the balance is priced internally or by 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.
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.
Data obtained from external sources is reviewed by AFGs internal investment professionals who
ensure the fair value is representative of an exit price and consistent with accounting
standards. 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 September 30, 2010 (dollars in millions). Increases or
decreases from the 100 basis points illustrated would be approximately proportional.
|
|
|
|
|
Fair value of fixed maturity portfolio
|
|
$
|
19,839
|
|
Pretax impact on fair value of 100 bps
increase in interest rates
|
|
$
|
(932
|
)
|
Pretax impact as % of total fixed maturity portfolio
|
|
|
(4.7
|
)%
|
Approximately 91% of the fixed maturities held by AFG at September 30, 2010, 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 noninvestment grade. Management believes that the high quality investment
portfolio should generate a stable and predictable investment return.
AFGs $6.1 billion investment in MBS represented approximately one-third of its fixed
maturities at September 30, 2010. 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.
36
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
Summarized information for AFGs MBS (including those classified as trading) at September 30,
2010, 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
|
|
$
|
474
|
|
|
$
|
497
|
|
|
|
105
|
%
|
|
$
|
23
|
|
|
|
100
|
%
|
Non-agency prime
|
|
|
2,271
|
|
|
|
2,356
|
|
|
|
104
|
|
|
|
85
|
|
|
|
80
|
|
Alt-A
|
|
|
758
|
|
|
|
720
|
|
|
|
95
|
|
|
|
(38
|
)
|
|
|
54
|
|
Subprime
|
|
|
386
|
|
|
|
378
|
|
|
|
98
|
|
|
|
(8
|
)
|
|
|
56
|
|
Other
|
|
|
27
|
|
|
|
30
|
|
|
|
111
|
|
|
|
3
|
|
|
|
53
|
|
Commercial
|
|
|
1,951
|
|
|
|
2,132
|
|
|
|
109
|
|
|
|
181
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,867
|
|
|
$
|
6,113
|
|
|
|
104
|
%
|
|
$
|
246
|
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Beginning with year-end 2009 reporting of MBS by insurance companies, the NAIC
retained a third-party investment management firm to assist in the determination of appropriate
NAIC designations for all non-agency residential 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 September 30, 2010, 98% (based
on statutory carrying value of $5.8 billion) of AFGs MBS securities had an NAIC designation of
1 or 2.
37
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
Summarized information for the unrealized gains and losses recorded in AFGs Balance Sheet at
September 30, 2010, is shown in the following table (dollars in millions). Approximately $433
million of available for sale Fixed maturities and $51 million of Equity securities had no
unrealized gains or losses at September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
With
|
|
|
With
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Gains
|
|
|
Losses
|
|
Available
for Sale Fixed Maturities
|
|
|
|
|
|
|
|
|
Fair value of securities
|
|
$
|
17,195
|
|
|
$
|
1,826
|
|
Amortized cost of securities
|
|
$
|
15,787
|
|
|
$
|
2,017
|
|
Gross unrealized gain (loss)
|
|
$
|
1,408
|
|
|
$
|
(191
|
)
|
Fair value as % of amortized cost
|
|
|
109
|
%
|
|
|
91
|
%
|
Number of security positions
|
|
|
3,433
|
|
|
|
631
|
|
Number individually exceeding
$2 million gain or loss
|
|
|
125
|
|
|
|
3
|
|
Concentration of gains (losses) by type or
industry (exceeding 5% of unrealized):
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
408
|
|
|
$
|
(162
|
)
|
Banks, savings and credit institutions
|
|
|
114
|
|
|
|
(8
|
)
|
States and municipalities
|
|
|
114
|
|
|
|
(4
|
)
|
Gas and electric services
|
|
|
177
|
|
|
|
(2
|
)
|
Percentage rated investment grade
|
|
|
94
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
Equity
Securities
|
|
|
|
|
|
|
|
|
Fair value of securities
|
|
$
|
452
|
|
|
$
|
78
|
|
Cost of securities
|
|
$
|
273
|
|
|
$
|
85
|
|
Gross unrealized gain (loss)
|
|
$
|
179
|
(*)
|
|
$
|
(7
|
)
|
Fair value as % of cost
|
|
|
166
|
%
|
|
|
92
|
%
|
Number of security positions
|
|
|
77
|
|
|
|
29
|
|
Number individually exceeding
$2 million gain or loss
|
|
|
3
|
|
|
|
|
|
|
|
|
(*)
|
|
Includes $126 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 September 30, 2010, 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
|
|
|
|
Gains
|
|
|
Losses
|
|
Maturity
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
2
|
%
|
|
|
1
|
%
|
After one year through five years
|
|
|
29
|
|
|
|
19
|
|
After five years through ten years
|
|
|
34
|
|
|
|
15
|
|
After ten years
|
|
|
7
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
45
|
|
Mortgage-backed securities (average
life of approximately four years)
|
|
|
28
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
38
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
The table below (dollars in millions) summarizes the unrealized gains and losses on fixed
maturity securities by dollar amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Value as
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
% of Cost
|
|
Fixed Maturities at September 30, 2010
|
|
Value
|
|
|
Gain (Loss)
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $500,000 (831 issues)
|
|
$
|
10,103
|
|
|
$
|
1,078
|
|
|
|
112
|
%
|
$500,000 or less (2,602 issues)
|
|
|
7,092
|
|
|
|
330
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,195
|
|
|
$
|
1,408
|
|
|
|
109
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $500,000 (125 issues)
|
|
$
|
449
|
|
|
$
|
(132
|
)
|
|
|
77
|
%
|
$500,000 or less (506 issues)
|
|
|
1,377
|
|
|
|
(59
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,826
|
|
|
$
|
(191
|
)
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Securities with Unrealized
|
|
Fair
|
|
|
Unrealized
|
|
|
% of Cost
|
|
Losses at September 30, 2010
|
|
Value
|
|
|
Loss
|
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed maturities with losses for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (172 issues)
|
|
$
|
599
|
|
|
$
|
(10
|
)
|
|
|
98
|
%
|
One year or longer (192 issues)
|
|
|
560
|
|
|
|
(61
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,159
|
|
|
$
|
(71
|
)
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade fixed maturities with losses for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (56 issues)
|
|
$
|
124
|
|
|
$
|
(8
|
)
|
|
|
94
|
%
|
One year or longer (211 issues)
|
|
|
543
|
|
|
|
(112
|
)
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
667
|
|
|
$
|
(120
|
)
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity securities with losses for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (12 issues)
|
|
$
|
35
|
|
|
$
|
(2
|
)
|
|
|
95
|
%
|
One year or longer (5 issues)
|
|
|
2
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37
|
|
|
$
|
(2
|
)
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred equity securities with losses for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (1 issues)
|
|
$
|
4
|
|
|
$
|
|
|
|
|
99
|
%
|
One year or longer (11 issues)
|
|
|
37
|
|
|
|
(5
|
)
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41
|
|
|
$
|
(5
|
)
|
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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 as detailed in AFGs 2009 Form 10-K under
Managements Discussion and Analysis Investments.
39
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
Based on its analysis, management believes (i) AFG will recover its cost basis in the
securities with unrealized losses and (ii) that AFG has the ability and intent to hold the
securities until they recover in value and, at September 30, 2010, had no intent to sell them.
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.
|
|
|
Uncertainties
Management believes that the areas posing the greatest risk of material
loss are the adequacy of its insurance reserves and contingencies related to potential asbestos
and environmental liabilities arising out of its former railroad and manufacturing operations.
See
Managements Discussion and Analysis Uncertainties
in AFGs 2009 Form 10-K.
|
|
|
Asbestos and Environmental Reserve Review
During the second quarter of 2010, AFG completed the
previously announced in-depth internal review of its asbestos and environmental (A&E)
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. Previous studies
have been completed with the assistance of outside actuarial and engineering firms and
specialty outside counsel every two years with an in-depth internal review during the
intervening years. This years internal review resulted in an increase of $8 million to A&E
reserves. During the course of this review, there were no newly identified emerging trends or
issues that management believes significantly impact the overall adequacy of AFGs A&E
reserves.
|
|
|
At September 30, 2010, the property and casualty groups A&E reserves were $350 million, net of
reinsurance recoverables. At that date, AFGs three year survival ratio for property and
casualty exposures was 9.6 times paid losses for the asbestos reserves and 8.3 times paid
losses for the total A&E reserves. These ratios compare favorably with industry data published
by Conning Research and Consulting, Inc. in May 2010, which indicate that industry survival
ratios were 8.2 for asbestos and 7.7 for total industry A&E reserves at December 31, 2009. The
survival ratio, which is often used by industry analysts to compare A&E reserves strength
across companies, is a measure of the number of years that it would take to pay the amount of
the current reserves based on the average paid losses over the preceding three years.
|
40
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
MANAGED INVESTMENT ENTITIES
|
|
|
Beginning January 1, 2010, new accounting standards require AFG to consolidate its investments
in six 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, which would be comparable to periods prior
to adopting the new standards.
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed
|
|
|
|
|
|
|
|
|
|
Before CLO
|
|
|
Investment
|
|
|
Consol.
|
|
|
Consolidated
|
|
September 30, 2010
|
|
Consolidation
|
|
|
Entities
|
|
|
Entries
|
|
|
As Reported
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and other investments
|
|
$
|
22,735
|
|
|
$
|
|
|
|
$
|
(12
|
)(a)
|
|
$
|
22,723
|
|
Assets of managed investment entities
|
|
|
|
|
|
|
2,491
|
|
|
|
|
|
|
|
2,491
|
|
Other assets
|
|
|
7,425
|
|
|
|
|
|
|
|
|
|
|
|
7,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,160
|
|
|
$
|
2,491
|
|
|
$
|
(12
|
)
|
|
$
|
32,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses, loss adjustment expenses and
unearned premiums
|
|
$
|
8,177
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,177
|
|
Annuity, life, accident and health benefits
and reserves
|
|
|
14,119
|
|
|
|
|
|
|
|
|
|
|
|
14,119
|
|
Liabilities of managed investment entities
|
|
|
|
|
|
|
2,283
|
|
|
|
(12
|
)(a)
|
|
|
2,271
|
|
Long-term debt and other liabilities
|
|
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,639
|
|
|
|
2,283
|
|
|
$
|
(12
|
)
|
|
|
27,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and Capital surplus
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
1,298
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriated managed investment entities
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
208
|
|
Unappropriated
|
|
|
2,464
|
|
|
|
|
|
|
|
|
|
|
|
2,464
|
|
Accumulated other comprehensive income
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
|
|
208
|
|
|
|
|
|
|
|
4,577
|
|
Noncontrolling interests
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,521
|
|
|
|
208
|
|
|
|
|
|
|
|
4,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,160
|
|
|
$
|
2,491
|
|
|
$
|
(12
|
)
|
|
$
|
32,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Elimination of the fair value of AFGs investment in CLOs.
|
41
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed
|
|
|
|
|
|
|
|
|
|
Before CLO
|
|
|
Investment
|
|
|
Consol.
|
|
|
Consol. As
|
|
|
|
Consolidation(a)
|
|
|
Entities
|
|
|
Entries
|
|
|
Reported
|
|
Three
months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
848
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
848
|
|
Investment income
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
296
|
|
Realized gains (losses) on securities
|
|
|
60
|
|
|
|
|
|
|
|
(3
|
)(b)(c)
|
|
|
57
|
|
Realized gains(losses) on subsidiaries
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
Income (loss) of managed investment entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Loss on change in fair value of
assets/liabilities
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
(b)
|
|
|
(4
|
)
|
Other income
|
|
|
62
|
|
|
|
|
|
|
|
(5
|
)(c)
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,244
|
|
|
|
19
|
|
|
|
(8
|
)
|
|
|
1,255
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
|
919
|
|
Expenses of managed investment entities
|
|
|
|
|
|
|
23
|
|
|
|
(8
|
)(c)
|
|
|
15
|
|
Interest on borrowed money and other expenses
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032
|
|
|
|
23
|
|
|
|
(8
|
)
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
212
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
208
|
|
Provision for income taxes
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
130
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
126
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
(2
|
)
|
|
|
|
|
|
|
(4
|
)(d)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
132
|
|
|
$
|
(4
|
)
|
|
$
|
4
|
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
2,227
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,227
|
|
Investment income
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
885
|
|
Realized gains (losses) on securities
|
|
|
82
|
|
|
|
|
|
|
|
(10
|
)(b)(c)
|
|
|
72
|
|
Realized gains(losses) on subsidiaries
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
Income (loss) of managed investment entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
68
|
|
Loss on change in fair value of
assets/liabilities
|
|
|
|
|
|
|
(49
|
)
|
|
|
5
|
(b)
|
|
|
(44
|
)
|
Other income
|
|
|
168
|
|
|
|
|
|
|
|
(13
|
)(c)
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,340
|
|
|
|
19
|
|
|
|
(18
|
)
|
|
|
3,341
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and expenses
|
|
|
2,454
|
|
|
|
|
|
|
|
|
|
|
|
2,454
|
|
Expenses of managed investment entities
|
|
|
|
|
|
|
56
|
|
|
|
(18
|
)(c)
|
|
|
38
|
|
Interest on borrowed money and other expenses
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,790
|
|
|
|
56
|
|
|
|
(18
|
)
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before income taxes
|
|
|
550
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
513
|
|
Provision for income taxes
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, including noncontrolling
interests
|
|
|
351
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
314
|
|
Less: Net earnings (loss) attributable to
noncontrolling interests
|
|
|
5
|
|
|
|
|
|
|
|
(37
|
)(d)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Attributable to Shareholders
|
|
$
|
346
|
|
|
$
|
(37
|
)
|
|
$
|
37
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes $3 million and $10 million for the third quarter and nine months of 2010 in realized
gains representing the change in fair value of AFGs CLO investments plus $5 million and
$13 million for the same 2010 periods in CLO management fees earned.
|
|
(b)
|
|
Elimination of the change in fair value of AFGs investments in the CLOs.
|
|
(c)
|
|
Elimination of management fees earned by AFG and distributions received on AFGs CLO investments.
|
|
(d)
|
|
Allocate losses of CLOs attributable to other debt holders to noncontrolling interests.
|
42
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
General
Results of operations as shown in the accompanying financial statements are
prepared in accordance with U.S. generally accepted accounting principles (GAAP).
|
|
|
AFG reported operating earnings before income taxes of $208 million for the third quarter of
2010 compared to $203 million for the 2009 third quarter. Results for the third quarter of
2010 include (i) a $12 million improvement in the annuity and supplemental insurance operating
results, (ii) $35 million in realized gains, compared to $4 million in the third quarter of
2009, (iii) a $40 million decline in Specialty property and casualty underwriting results,
(iv) a $22 million decline in property and casualty investment income, (v) $16 million in
income from the sale of real estate and termination of leases by a tenant in 2010, (vi) $8
million in income from managed investment entities, (vii) $3 million of amortization of
intangible assets compared to $7 million in the third quarter of 2009 and (viii) $4 million in
losses of managed investment entities attributable to noncontrolling interests.
|
|
|
Nine month pretax operating earnings decreased $64 million in 2010 compared to the comparable
2009 period reflecting (i) a $21 million improvement in the annuity and supplemental insurance
operating results, (ii) $50 million in realized gains, compared to realized losses of
$22 million in the first nine months of 2009, (iii) a $112 million decline in Specialty
property and casualty underwriting results, (iv) a $56 million decline in property and casualty
investment income, (v) $16 million in income from the sale of real estate and lease termination
in the third quarter of 2010, (vi) $23 million in income from managed investment entities,
(vii) $9 million in amortization of intangible assets compared to $19 million in the first nine
months of 2009 and (viii) $37 million in losses of managed investment entities attributable to
noncontrolling interests.
|
|
|
Property and Casualty Insurance Underwriting
AFG reports its Specialty insurance
business in the following sub-segments: (i) Property and transportation, (ii) Specialty
casualty and (iii) Specialty financial. Due to the decreasing size of the California workers
compensation business, this former sub-segment is included in Specialty casualty.
|
|
|
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
for the detail of
AFGs operating profit by significant business segment.
|
|
|
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.
|
43
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
Premiums, combined ratios and prior year development for AFGs property and casualty insurance
operations were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Gross
Written Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
$
|
809
|
|
|
$
|
864
|
|
|
$
|
1,450
|
|
|
$
|
1,541
|
|
Specialty casualty
|
|
|
335
|
|
|
|
368
|
|
|
|
998
|
|
|
|
1,089
|
|
Specialty financial
|
|
|
129
|
|
|
|
137
|
|
|
|
379
|
|
|
|
409
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,273
|
|
|
$
|
1,369
|
|
|
$
|
2,828
|
|
|
$
|
3,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Written Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
$
|
450
|
|
|
$
|
236
|
|
|
$
|
912
|
|
|
$
|
662
|
|
Specialty casualty
|
|
|
227
|
|
|
|
250
|
|
|
|
676
|
|
|
|
731
|
|
Specialty financial
|
|
|
10
|
|
|
|
116
|
|
|
|
212
|
|
|
|
349
|
|
Other
|
|
|
16
|
|
|
|
18
|
|
|
|
44
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
703
|
|
|
$
|
620
|
|
|
$
|
1,844
|
|
|
$
|
1,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
|
89.9
|
%
|
|
|
80.6
|
%
|
|
|
90.3
|
%
|
|
|
82.1
|
%
|
Specialty casualty
|
|
|
105.6
|
|
|
|
88.6
|
|
|
|
95.7
|
|
|
|
84.7
|
|
Specialty financial
|
|
|
60.4
|
|
|
|
77.3
|
|
|
|
73.8
|
|
|
|
75.2
|
|
Total Specialty
|
|
|
90.7
|
|
|
|
82.7
|
|
|
|
88.8
|
|
|
|
81.9
|
|
Aggregate (including discontinued
lines)
|
|
|
90.7
|
%
|
|
|
82.7
|
%
|
|
|
89.4
|
%
|
|
|
82.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and transportation
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
$
|
22
|
|
|
$
|
47
|
|
Specialty casualty
|
|
|
(3
|
)
|
|
|
25
|
|
|
|
47
|
|
|
|
91
|
|
Specialty financial
|
|
|
16
|
|
|
|
37
|
|
|
|
39
|
|
|
|
78
|
|
Other specialty
|
|
|
4
|
|
|
|
8
|
|
|
|
14
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
78
|
|
|
|
122
|
|
|
|
222
|
|
Other (primarily asbestos and
environmental charges)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14
|
|
|
$
|
76
|
|
|
$
|
110
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall decreases in gross written premiums in the third quarter and first nine months of
2010 were the result of soft market conditions and competitive pressures, depressed economic
conditions and lower agricultural commodity prices. The increase in net written premiums for
the third quarter and first nine months of 2010 compared to the 2009 periods is a result of
decreased cessions under the crop reinsurance agreement, partially offset by the decline in
premiums resulting from a reinsurance transaction in the Specialty financial group. Excluding
crop operations and the reinsurance transaction, gross and net written premiums decreased 3%
and 1% in the first nine months of 2010 compared to the same period of 2009. Overall average
renewal rates for the first nine months of 2010 were flat when compared with the same period of
last year.
|
|
|
The Specialty insurance operations generated underwriting profits of $68 million and
$214 million in the third quarter and first nine months of 2010, respectively, compared to
$108 million and $326 million for the same periods of 2009. The reduced profit in the third
quarter of 2010 compared to 2009 is primarily the result of lower favorable reserve
development. Favorable reserve development was $15 million (2 points on the combined ratio) in
the third quarter of 2010 compared to $78 million (12 points) in the 2009 third quarter.
|
44
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
Catastrophe losses were $6 million in the 2010 third quarter compared to $3 million in the 2009
third quarter. The reduced profit in the first nine months of 2010 compared to 2009 reflects a
$34 million increase in catastrophe losses and a $100 million decrease in favorable prior year
reserve development.
|
|
|
Property and transportation
gross written premiums for the third quarter and first nine
months of 2010 declined from the 2009 periods primarily as a result of lower spring
commodity prices that have the effect of lowering AFGs crop premium volume. These declines
were partially offset by additional premiums from the Vanliner acquisition in July 2010. In
2010, AFG returned to historical levels of cessions under its crop reinsurance agreement,
contributing to a substantial increase in this groups net written premiums for the third
quarter and first nine months of 2010 when compared to the 2009 periods. Excluding crop,
this groups net written premiums for the 2010 third quarter increased 27% from the
comparable 2009 period, primarily as a result of additional premiums resulting from the
Vanliner acquisition. This group reported an underwriting profit of $41 million in the 2010
third quarter, $6 million lower than the 2009 third quarter. Approximately three fourths of
this underwriting profit comes from the crop business, which had an underwriting profit
consistent with 2009 third quarter results. Continued competitive market conditions and
lower favorable reserve development contributed to the decline in underwriting profits.
This groups underwriting profit for the first nine months of 2010 decreased $40 million
from the comparable 2009 period due primarily to higher catastrophe losses and lower
favorable reserve development. Catastrophe losses totaled $42 million in the first nine
months of 2010 compared to $8 million for the comparable 2009 period.
|
|
|
Specialty casualty
gross and net written premiums declined for the third quarter and first
nine months of 2010 when compared to the 2009 periods due primarily to a soft pricing
environment and competitive market conditions in the excess and surplus markets and
California workers compensation business, 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. This group reported an underwriting loss of $13 million in the 2010 third
quarter, compared to an underwriting profit of $27 million in the third quarter of 2009.
The decrease in underwriting profit reflects $39 million in adverse reserve development
related to Marketform, primarily its run-off Italian public hospital business. Included in
AFGs liability for unpaid losses and loss adjustment expenses at September 30, 2010, are
reserves of $131 million related to this business. Specialty casualty underwriting profit
in the first nine months of 2010 was $29 million, approximately $77 million lower than the
comparable 2009 period. Lower underwriting profits in Marketform, the general liability
operations (primarily those that serve the homebuilders industry), excess and surplus lines
and the California workers compensation businesses were offset somewhat by improvements in
the targeted markets operations. Other businesses in this group produced strong
underwriting profit margins, but at lower levels than in 2009.
|
|
|
Specialty financial
gross written premiums decreased for the third quarter and first nine
months of 2010 when compared to the 2009 periods, 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 was the
primary cause of the
|
45
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
decrease of $106 million in net written premiums during the quarter.
The Specialty financial group reported underwriting income of $36 million for the third
quarter of 2010, compared to $29 million for the same period a year ago. The 2010 results
reflect income of approximately $8 million in connection with the reinsurance transaction.
Additionally, higher underwriting income in the financial institutions business and
run-off lease and loan operations more than offset lower favorable reserve development.
Specialty financial underwriting profit was $91 million for the nine month period,
compared to $96 million in the same 2009 period.
|
|
|
Annuity and Supplemental Insurance Operations
Operating earnings before income taxes
of the annuity and supplemental insurance segment increased $12 million (26%) and $21 million
(17%) from the comparable 2009 third quarter and nine months, respectively, due primarily to
higher earnings in the fixed annuity and supplemental insurance operations. For the nine month
period, these higher earnings were partially offset by lower earnings in the variable annuity
operations.
|
|
|
Statutory Annuity Premiums
The following table summarizes AFGs annuity sales (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
403(b) Fixed and Indexed Annuities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Year
|
|
$
|
6
|
|
|
$
|
14
|
|
|
$
|
26
|
|
|
$
|
49
|
|
Renewal
|
|
|
35
|
|
|
|
29
|
|
|
|
122
|
|
|
|
104
|
|
Single Sum
|
|
|
35
|
|
|
|
31
|
|
|
|
86
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
76
|
|
|
|
74
|
|
|
|
234
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-403(b) Indexed Annuities
|
|
|
221
|
|
|
|
108
|
|
|
|
504
|
|
|
|
282
|
|
Non-403(b) Fixed Annuities
|
|
|
232
|
|
|
|
87
|
|
|
|
501
|
|
|
|
198
|
|
Bank Fixed Annuities
|
|
|
170
|
|
|
|
137
|
|
|
|
366
|
|
|
|
288
|
|
Variable Annuities
|
|
|
17
|
|
|
|
17
|
|
|
|
56
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annuity Premiums
|
|
$
|
716
|
|
|
$
|
423
|
|
|
$
|
1,661
|
|
|
$
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in annuity premiums for the third quarter and first nine months of 2010 compared
to the same periods in 2009 reflects increased sales of indexed and traditional fixed annuities
in the non-403(b) single premium market and increased sales of traditional fixed annuities
through the bank distribution channel.
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental insurance operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First year
|
|
$
|
14
|
|
|
$
|
23
|
|
|
$
|
52
|
|
|
$
|
63
|
|
Renewal
|
|
|
91
|
|
|
|
82
|
|
|
|
268
|
|
|
|
247
|
|
Life operations (in run-off)
|
|
|
7
|
|
|
|
7
|
|
|
|
20
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112
|
|
|
$
|
112
|
|
|
$
|
340
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental insurance operations
|
|
$
|
81
|
|
|
$
|
77
|
|
|
$
|
250
|
|
|
$
|
236
|
|
Life operations (in run-off)
|
|
|
9
|
|
|
|
9
|
|
|
|
29
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90
|
|
|
$
|
86
|
|
|
$
|
279
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
Investment Income
The $5 million and $15 million decreases in investment income for
the third quarter and first nine months of 2010, respectively, compared to the same periods in
2009 reflects lower yields on fixed maturity investments partially offset by higher average
invested assets. Investment income includes $14 million and $58 million in the third quarter
and first nine months of 2010 and $32 million and $100 million in the third quarter and first
nine months of 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.
|
|
|
Since January 1, 2009, the amortized cost of AFGs portfolio of non-agency residential MBS
decreased $680 million due primarily to paydowns. As these securities paid down, proceeds were
reinvested principally in high quality corporate bonds, highly rated commercial mortgage-backed
securities, municipal bonds and dividend-paying stocks, placing downward pressure on AFGs
investment portfolio yield. Management estimates that 2011 investment income in AFGs property
and casualty segment will be approximately 10% to 15% lower than in 2010. The anticipated
impact of the reduction in AFGs non-agency residential MBS portfolio is much less for the
annuity and supplemental insurance business. In addition, lower reinvestment rates can be
partially offset by the ability to reduce crediting rates. Given the growth expected in 2011
in the annuity and supplemental insurance business, this segments investment income is
expected to exceed that of the current year.
|
|
|
Realized Gains (Losses) on Securities
Net realized gains (losses) on securities
consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Realized gains (losses) before
impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals
|
|
$
|
50
|
|
|
$
|
10
|
|
|
$
|
95
|
|
|
$
|
32
|
|
Change in the fair value
of derivatives
|
|
|
22
|
|
|
|
29
|
|
|
|
34
|
|
|
|
124
|
|
Adjustments to annuity deferred
policy acquisition costs and
related items
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
35
|
|
|
|
120
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
(15
|
)
|
|
|
(36
|
)
|
|
|
(68
|
)
|
|
|
(209
|
)
|
Adjustments to annuity deferred
policy acquisition costs and
related items
|
|
|
4
|
|
|
|
10
|
|
|
|
20
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(26
|
)
|
|
|
(48
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57
|
|
|
$
|
9
|
|
|
$
|
72
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in fair value of derivatives includes net gains of $25 million and $51 million in
the third quarter and first nine months of 2010 and $32 million and $129 million in the third
quarter and first nine months of 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.
|
47
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
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. See
Note I Goodwill and Intangible
Assets.
The $5 million loss in the third quarter of 2009 includes a $3 million impairment
charge to write off the goodwill associated with an annuity and supplemental insurance agency
subsidiary and an estimated pretax loss of $2 million related to the October 2009 sale of a
property and casualty subsidiary that represented less than 1% of AFGs assets and revenues.
|
|
|
Other Income
The $22 million decrease in other income for the first nine months of
2010 compared to the 2009 period reflects a decline in income from AFGs warranty business and
lower fee income in certain other businesses, partially offset by $16 million in income
recorded during the third quarter of 2010 from the sale of real estate and the termination of
leases by a tenant.
|
|
|
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. The $17 million increase in annuity benefits in the
first nine months of 2010 compared to the 2009 period reflects growth in the fixed annuity
business from increased premium production and strong persistency.
|
|
|
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.
|
|
|
Annuity and Supplemental Insurance Acquisition Expenses
Annuity and supplemental
insurance acquisition expenses include amortization of annuity, supplemental insurance and life
business deferred policy acquisition costs (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).
The $9 million and $14 million increases in annuity and supplemental insurance acquisition
expenses for the third quarter and first nine months of 2010, respectively, compared to the
2009 periods reflect primarily growth in the fixed annuity business. For the nine month
period, the impact of this growth was partially offset by the impact of changes in the fair
value of derivatives related to the indexed annuity business.
|
|
|
The vast majority of the annuity and supplemental insurance groups DPAC asset relates to its
fixed annuity, variable 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 write-offs of DPAC or PVFP in the future.
|
|
|
Interest Charges on Borrowed Money
Interest expense increased $9 million (19%) for the
first nine months of 2010 compared to the same periods of 2009 reflecting AFGs issuance of
$350 million of 9-7/8% Senior Notes in June 2009.
|
|
|
Other Operating and General Expenses
The $29 million and $75 million decreases in the
third quarter and first nine months of 2010 compared to the 2009 periods reflect the 2009 sale
of a small subsidiary, lower expenses in AFGs warranty business due to the run-off of certain
products and lower amortization of intangible assets.
|
48
AMERICAN FINANCIAL GROUP, INC. 10-Q
Managements Discussion and Analysis
of Financial Condition and Results of Operations Continued
|
|
RECENT ACCOUNTING STANDARDS
|
|
|
New accounting standards implemented in 2010, are discussed in
Note A Accounting Policies
under the following subheadings.
|
|
|
|
Accounting Standard
|
|
Note A Reference
|
|
Improvements to Financial Reporting by
Enterprises Involved with Variable
Interest Entities
|
|
Managed Investment Entities
|
|
|
|
Fair Value Measurements and Disclosures
|
|
Fair Value Measurements
|
|
|
In October 2010, the FASB issued Accounting Standards Update 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 for periods
ending after December 31, 2011, with retrospective application permitted, but not required.
AFG expects that this guidance will result in fewer acquisition costs being capitalized and is
currently assessing the impact of adoption.
|
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
|
|
As of September 30, 2010, there were no material changes to the information provided in Item 7A
Quantitative and Qualitative Disclosure of Market Risk of AFGs 2009 Form 10-K.
|
ITEM 4
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 the controls and
procedures are effective. There have been no changes in AFGs internal control over financial
reporting during the third fiscal quarter of 2010 that materially affected, or are reasonably
likely to materially affect, AFGs internal control over financial reporting.
|
|
|
In the ordinary course of business, AFG and its subsidiaries routinely enhance their
information systems by either upgrading current systems or implementing new systems. There has
been no change in AFGs business processes and procedures during the third fiscal quarter of
2010 that has materially affected, or is reasonably likely to materially affect, AFGs internal
controls over financial reporting.
|
49
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
AFG repurchased shares of its common stock during the first
nine months of 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2,911,834
|
|
|
$
|
25.76
|
|
|
|
2,911,834
|
|
|
|
5,055,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
2,730,521
|
|
|
$
|
27.82
|
|
|
|
2,730,521
|
|
|
|
2,324,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
|
|
|
319,700
|
|
|
$
|
27.75
|
|
|
|
319,700
|
|
|
|
2,005,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
|
|
|
801,398
|
|
|
$
|
28.93
|
|
|
|
801,398
|
|
|
|
6,203,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
596,657
|
|
|
$
|
30.07
|
|
|
|
596,657
|
|
|
|
5,607,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents the remaining shares that may be repurchased under the Plans
authorized by AFGs Board of Directors in November 2009, February 2010 and August
2010. In August 2010, AFGs Board of Directors authorized the repurchase of five
million additional shares.
|
ITEM 6
Exhibits
|
|
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
|
|
|
|
|
|
12
|
|
|
Computation of ratios of earnings to fixed charges.
|
|
|
|
|
|
|
|
|
31
|
(a)
|
|
Certification of the Co-Chief Executive Officer pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
31
|
(b)
|
|
Certification of the Co-Chief Executive Officer pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
31
|
(c)
|
|
Certification of the Chief Financial Officer pursuant to
section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
32
|
|
|
Certification of the Co-Chief Executive Officers and Chief
Financial Officer pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
101
|
|
|
The following financial information from American Financial
Groups Form 10-Q for the quarter ended September 30, 2010,
formatted in XBRL (Extensible Business Reporting Language):
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
(ii)
|
|
Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
(iii)
|
|
Consolidated Statement of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
(iv)
|
|
Consolidated Statement of Changes in Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
(v)
|
|
Notes to Consolidated Financial Statements, tagged as
blocks of text
|
50
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Signature
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, American Financial Group,
Inc. has duly caused this Report to be signed on its behalf by the undersigned duly authorized.
|
|
|
|
|
|
|
American Financial Group, Inc.
|
|
November 8, 2010
|
BY:
|
/s/ Keith A. Jensen
|
|
|
|
Keith A. Jensen
|
|
|
|
Senior Vice President
(principal financial and
accounting officer)
|
|
51
American Financial (NYSE:AFG)
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American Financial (NYSE:AFG)
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