American Financial Group, Inc. (NYSE:AFG) announced today that
it has entered into a reinsurance agreement with Commonwealth
Annuity and Life Insurance Company (“Commonwealth”), a subsidiary
of Global Atlantic Financial Group Limited (“Global Atlantic”).
Through its subsidiaries, Global Atlantic offers a broad range of
retirement, life and reinsurance products, and is rated “A” by A.M.
Best.
Under the terms of the agreement, AFG’s Annuity subsidiary,
Great American Life Insurance Company (“GALIC”), ceded
approximately $5.7 billion (statutory basis) of inforce traditional
fixed and indexed annuities, representing approximately 15% of its
inforce business, and transferred related investment assets to
Commonwealth.
The agreement has an effective date of October 1, 2020 and will
be reported in AFG’s fourth quarter financial statements.
Information on the assets and reserves ceded is as follows:
GAAP book value
(amortized cost) of assets transferred:
Bonds
$5.1 billion
Cash
$0.6
billion
Total
$5.7
billion
Book yield on bonds transferred
3.13%
Average NAIC rating of bonds
transferred
1.4
GAAP carrying value
of ceded reserves:
Indexed annuities
$5.3 billion
Traditional fixed annuities
$0.7
billion
Total
$6.0
billion
Because the assets transferred under the agreement have a lower
average yield than AFG’s overall annuity portfolio yield, and the
policies ceded have an overall cost of funds that is higher than
that of AFG’s retained business, AFG expects to earn an increase in
the net interest spread on its retained $34 billion of annuity
reserves.
In addition, as a result of the assets and reserves transferred
in this transaction, this agreement is expected to free up between
$300 million and $325 million of GALIC’s statutory capital in the
fourth quarter of 2020. The transaction is expected to create $375
million to $400 million of additional excess capital for AFG.
AFG will recognize the following after-tax non-core items in the
periods indicated (in millions):
After-tax
Non-Core
Recognition period
under GAAP
Realized gains(1)
$275 - $300
Upon execution of transaction in Q4
2020
Deferred loss(2)
($70) - ($80)
Over lifetime of ceded reserves(3)
Negative ceding commission
($35) - ($40)
Over lifetime of ceded reserves(3)
Unamortized DAC
($30) - ($35)
Over lifetime of ceded reserves(3)
_________________ (1) Difference between market value and
amortized cost of investments transferred, net of DAC (2)
Difference between market value of investments transferred and
carrying value of reserves transferred (3) Expected to be 7 - 10
years
In addition, over the next 12 months, AFG will receive
approximately $50 million from Commonwealth in exchange for the
value at expiration of the options associated with the fixed
indexed annuity policies ceded. Any gains or losses on these will
be determined based on the market values of the options upon their
expiration and will be recorded as a non-core item each month. At
September 30, 2020, the market value of these options was
approximately $130 million.
S. Craig Lindner, AFG’s Co-Chief Executive Officer, commented,
“This transaction presents an exceptional opportunity for AFG to
further strengthen its already significant amount of excess
capital, and is expected to result in higher core operating
earnings and core operating returns in both the Annuity segment and
AFG. The agreement will have no impact on AFG’s relationship with,
and commitments to, our annuity policyholders and distribution
partners, and AFG will continue serving the annuity market as a
leading provider of fixed and indexed annuity products. Global
Atlantic has demonstrated strong capabilities partnering with us in
the past, and they delivered a custom solution to meet our
financial objectives.”
Mr. Lindner continued, “AFG’s excess capital prior to this
reinsurance transaction was approximately $1 billion at September
30, 2020, including parent cash of nearly $600 million. The
majority of the additional excess capital freed up at GALIC will be
paid as a dividend to AFG by GALIC; the remaining amount will be
retained by GALIC to further increase its excess capital levels. As
illustrated in the table below, taking into account the additional
excess capital created by the reinsurance agreement and adjusting
for the November redemption of our 6% Subordinated Debentures,
AFG’s excess capital on a proforma basis at September 30, 2020
would have been approximately $1.2 billion. We will continue to
evaluate opportunities for deploying AFG’s excess capital,
including the potential for healthy, profitable organic growth, and
opportunities to expand our Specialty Property & Casualty niche
businesses through acquisitions and start-ups that meet our target
return thresholds, share repurchases and special dividends.”
(dollars in millions)
Parent
Cash
Excess
Capital
September 30, 2020 Actual
$577
$1,043
Pro Forma
Impacts:
Block Reinsurance Agreement and GALIC
dividend*
$200
$375
Debt Redemption
(150)
(192)
September 30, 2020 Pro Forma
$627
$1,226
* Dividend to be paid by GALIC to AFG
parent on November 2, 2020.
About American Financial Group,
Inc.
American Financial Group is an insurance holding company, based
in Cincinnati, Ohio with assets of approximately $70 billion as of
June 30, 2020. Through the operations of Great American Insurance
Group, AFG is engaged primarily in property and casualty insurance,
focusing on specialized commercial products for businesses, and in
the sale of traditional fixed and indexed annuities in the retail,
financial institutions, broker-dealer, and registered investment
advisor markets. Great American Insurance Group’s roots go back to
1872 with the founding of its flagship company, Great American
Insurance Company.
Forward Looking
Statements
This press release contains certain statements that may be
deemed to be "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements in this press
release not dealing with historical results are forward-looking and
are based on estimates, assumptions and projections. Examples of
such forward-looking statements include statements relating to: the
Company's expectations concerning market and other conditions and
their effect on future premiums, revenues, earnings, investment
activities and the amount and timing of share repurchases;
recoverability of asset values; expected losses and the adequacy of
reserves for asbestos, environmental pollution and mass tort
claims; rate changes; and improved loss experience.
Actual results and/or financial condition could differ
materially from those contained in or implied by such
forward-looking statements for a variety of reasons including, but
not limited to: changes in financial, political and economic
conditions, including changes in interest and inflation rates,
currency fluctuations and extended economic recessions or
expansions in the U.S. and/or abroad; performance of securities
markets, including the cost of equity index options; new
legislation or declines in credit quality or credit ratings that
could have a material impact on the valuation of securities in
AFG’s investment portfolio; the availability of capital; changes in
insurance law or regulation, including changes in statutory
accounting rules and changes in regulation of the Lloyd’s market,
including modifications to capital requirements; changes in costs
associated with the exit from the Lloyd’s market and the run-off of
AFG’s Lloyd’s-based insurer, Neon; the effects of the COVID-19
outbreak, including the effects on the international and national
economy and credit markets, legislative or regulatory developments
affecting the insurance industry, quarantines or other travel or
health-related restrictions; changes in the legal environment
affecting AFG or its customers; tax law and accounting changes;
levels of natural catastrophes and severe weather, terrorist
activities (including any nuclear, biological, chemical or
radiological events), incidents of war or losses resulting from
pandemics, civil unrest and other major losses; disruption caused
by cyber-attacks or other technology breaches or failures by AFG or
its business partners and service providers, which could negatively
impact AFG’s business and/or expose AFG to litigation; development
of insurance loss reserves and establishment of other reserves,
particularly with respect to amounts associated with asbestos and
environmental claims; availability of reinsurance and ability of
reinsurers to pay their obligations; trends in persistency and
mortality; competitive pressures; the ability to obtain adequate
rates and policy terms; changes in AFG’s credit ratings or the
financial strength ratings assigned by major ratings agencies to
AFG’s operating subsidiaries; the impact of the conditions in the
international financial markets and the global economy relating to
AFG’s international operations; and other factors identified in
AFG’s filings with the Securities and Exchange Commission.
The forward-looking statements herein are made only as of the
date of this press release. The Company assumes no obligation to
publicly update any forward-looking statements.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201026005810/en/
Diane P. Weidner, IRC Vice President – Investor & Media
Relations (513) 369-5713
Websites: www.AFGinc.com
www.GreatAmericanInsuranceGroup.com
American Financial (NYSE:AFG)
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