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AFG American Financial

Filed: 25 Feb 20, 5:27pm
0001042046 us-gaap:ShortdurationInsuranceContractsAccidentYear2015Member afg:PropertyAndCasualtyInsuranceMember 2019-12-31
_____________________________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-13653

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AMERICAN FINANCIAL GROUP, INC.
Incorporated under the Laws of Ohio                                                                                             IRS Employer I.D. No. 31-1544320
301 East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
 Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
 Common Stock AFG New York Stock Exchange
 6% Subordinated Debentures due November 15, 2055 AFGH New York Stock Exchange
 5.875% Subordinated Debentures due March 30, 2059 AFGB New York Stock Exchange
 5.125% Subordinated Debentures due December 15, 2059 AFGC New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 
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  No 
Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes  No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer                          Accelerated filer                          Non-accelerated filer  
Smaller reporting company                          Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $8.31 billion.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 90,339,433 shares (excluding 14.9 million shares owned by subsidiaries) as of February 1, 2020.
________________________
Documents Incorporated by Reference:
Proxy Statement for 2020 Annual Meeting of Stockholders (portions of which are incorporated by reference into Part III hereof).
_____________________________________________________________________________________________________



AMERICAN FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
 
  
  Page
FORWARD-LOOKING STATEMENTS
    
Part I   
Item 1Business
Item 1ARisk Factors
Item 1BUnresolved Staff Commentsnone
Item 2Properties
Item 3Legal Proceedings
Item 4Mine Safety Disclosuresnone
    
Part II   
Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6Selected Financial Data
Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7AQuantitative and Qualitative Disclosure About Market Risk
Item 8Financial Statements and Supplementary Data
Item 9Changes in and Disagreements With Accountants on Accounting and Financial Disclosurenone
Item 9AControls and Procedures
Item 9BOther Informationnone
    
Part III   
Item 10Directors, Executive Officers and Corporate Governance
Item 11Executive Compensation
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13Certain Relationships and Related Transactions, and Director Independence
Item 14Principal Accounting Fees and Services
    
Part IV  
Item 15Exhibits, Financial Statement Schedules




FORWARD-LOOKING STATEMENTS

The disclosures in this Form 10-K contain certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as “anticipates”, “believes”, “expects”, “projects”, “estimates”, “intends”, “plans”, “seeks”, “could”, “may”, “should”, “will” or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings, 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 the following and those discussed in Item 1A — Risk Factors.
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;
changes in the legal environment affecting AFG or its customers;
tax law and accounting changes, including the impact of recent changes in U.S. corporate tax law;
levels of natural catastrophes and severe weather, terrorist activities (including any nuclear, biological, chemical or radiological events), incidents of war or losses resulting from civil unrest and other major losses;
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; and
the impact of the conditions in the international financial markets and the global economy relating to AFG’s international operations.
The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.

1


PART I
Item 1. Business
Introduction
American Financial Group, Inc. (“AFG” or the “Company”) is an insurance holding company. 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. The members of the Great American Insurance Group have been in business for over 145 years. Management believes that over 55% of the 2019 gross written premiums in AFG’s Specialty property and casualty group are produced by “top 10” ranked businesses and that AFG was also a “top ten” provider of fixed annuities in 2019, including the second largest seller of fixed-indexed annuities (“FIAs”) through financial institutions. AFG’s in-house team of investment professionals oversees the Company’s $55.25 billion investment portfolio.

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AFG’s address is 301 East Fourth Street, Cincinnati, Ohio 45202; its phone number is (513) 579-2121. SEC filings, news releases, AFG’s Code of Ethics applicable to directors, officers and employees and other information may be accessed free of charge through AFG’s Internet site at: www.AFGinc.com. (Information on AFG’s Internet site is not part of this Form 10-K.) See Note C — “Segments of Operations” to the financial statements for information on AFG’s assets, revenues and earnings before income taxes by segment.

2


Building Long-Term Value for AFG Shareholders
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AFG allows each of its businesses the autonomy to make decisions related to underwriting, claims and policy servicing. This entrepreneurial business model promotes agility, innovative product design, unique applications of pricing segmentation, as well as developing distribution strategies and building relationships in the markets served. Management believes that AFG’s ability to grow book value per share at a double-digit annual rate over time is evidence that the Company’s culture, business model and employee incentive plans create a compelling structure to build long-term value for AFG’s shareholders.

As highlighted in the illustration below, over the past 20 or so years, AFG has sharpened its focus on the businesses that management knows best. This has been accomplished through organic growth, carefully selected acquisitions, start-ups, and dispositions of underperforming or peripheral businesses. In August 2019, AFG announced the newly formed Accident & Health division. This business will build upon Great American’s existing array of Accident & Health Insurance coverages, focusing on customized coverages for organizations and educational institutions. In December 2019, AFG initiated plans to exit the Lloyd’s of London property and casualty market in 2020. AFG’s Lloyd’s operation, Neon (and its predecessor, Marketform), failed to achieve AFG’s profitability objectives since the purchase of Marketform in 2008. The exit from this business will allow AFG to reallocate capital to other insurance businesses and opportunities that have the potential to earn targeted returns on investment.

3



Timeline of Selected Start-ups, Acquisitions and Dispositions
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4


Property and Casualty Insurance Segment

General
AFG’s property and casualty insurance operations provide a wide range of commercial coverages through 34 insurance businesses (at December 31, 2019) that make up the Great American Insurance Group. AFG’s property and casualty insurance operations ultimately report to a single senior executive and operate under a business model that allows local decision-making for underwriting, claims and policy servicing in each of the niche operations. Each business is managed by experienced professionals in particular lines or customer groups and operates autonomously but with certain central controls and accountability. The decentralized approach allows each unit the autonomy necessary to respond to local and specialty market conditions while capitalizing on the efficiencies of centralized investment and administrative support functions. AFG’s property and casualty insurance operations had approximately 6,800 employees as of December 31, 2019. These operations are conducted through the subsidiaries listed in the following table, which includes independent financial strength ratings and 2019 gross written premiums (in millions) for each major subsidiary. These ratings are generally based on concerns for policyholders and agents and are not directed toward the protection of investors. AFG believes that maintaining a rating in the “A” category by A.M. Best is important to compete successfully in most lines of business.
 Ratings 
Gross
Written
 AM Best S&P Premiums
Insurance Group     
Great American Insurance  A+   A+ $4,857
National Interstate  A+ not rated 816
Summit (Bridgefield Casualty and Bridgefield Employers)A   A+ 602
Republic IndemnityA   A+ 202
Neon Lloyd’s SyndicateA   A+ 567
Mid-Continent Casualty  A+   A+ 142
Other    113
     $7,299

The primary objectives of AFG’s property and casualty insurance operations are to achieve solid underwriting profitability and provide excellent service to its policyholders and agents. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses, loss adjustment expenses (“LAE”), underwriting expenses and policyholder dividends to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect investment income, other income, other expenses or federal income taxes.

While many costs included in underwriting are readily determined (commissions, administrative expenses and many of the losses on claims reported), the process of determining overall underwriting results is highly dependent upon the use of estimates in the case of losses incurred or expected but not yet reported or developed. Actuarial procedures and projections are used to obtain “point estimates” of ultimate losses. While the process is imprecise and develops amounts which are subject to change over time, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

Financial information is reported in accordance with U.S. generally accepted accounting principles (“GAAP”) for shareholder and other investor-related purposes and reported on a statutory basis for U.S. insurance regulatory purposes. Unless indicated otherwise, the financial information presented in this Form 10-K for AFG’s property and casualty insurance operations is presented based on GAAP. Statutory information is only prepared for AFG’s U.S.-based subsidiaries, which represented approximately 90% of AFG’s direct written premiums in 2019, and is provided for industry comparisons or where comparable GAAP information is not readily available.

Major differences for statutory accounting include charging policy acquisition costs to expense as incurred rather than spreading the costs over the periods covered by the policies; reporting investment grade bonds and redeemable preferred stocks at amortized cost rather than fair value; netting of reinsurance recoverables and prepaid reinsurance premiums against the corresponding liabilities rather than reporting such items separately; and charging to surplus certain GAAP assets, such as furniture and fixtures and agents’ balances over 90 days old.


5


AFG’s statutory combined ratio averaged 92.4% for the period 2010 to 2019 as compared to 100.6% for the property and casualty commercial lines industry over the same period. AFG believes that its specialty niche focus, product line diversification and underwriting discipline have contributed to the Company’s ability to consistently outperform the industry’s underwriting results. Management’s philosophy is to refrain from writing business that is not expected to produce an underwriting profit even if it is necessary to limit premium growth to do so.
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(*)The sources of the commercial lines industry ratios are © 2019 Conning, Inc.’s Property–Casualty Forecast & Analysis (Fourth Quarter 2019 Edition, used with permission) for 2019 and © 2019 A.M. Best Company’s Review & Preview Reports for the preceding years.


6


Property and Casualty Results
Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company’s performance. See Note C — “Segments of Operations” to the financial statements for the reconciliation of AFG’s earnings before income taxes by significant business segment to the statement of earnings.

The following table shows the performance of AFG’s property and casualty insurance operations (dollars in millions):
  2019 2018 2017
Gross written premiums $7,299
 $6,840
 $6,502
Ceded reinsurance (1,957) (1,817) (1,751)
Net written premiums $5,342
 $5,023
 $4,751
       
Net earned premiums $5,185
 $4,865
 $4,579
Loss and LAE 3,207
 2,985
 2,884
Special asbestos and environmental (“A&E”) charges 18
 18
 89
Neon exited lines charge 76
 
 (18)
Underwriting expenses 1,672
 1,560
 1,382
Underwriting gain $212
 $302
 $242
       
GAAP ratios:      
Loss and LAE ratio 63.0% 61.7% 64.5%
Underwriting expense ratio 32.8% 32.1% 30.2%
Combined ratio 95.8% 93.8% 94.7%
       
Statutory ratios:      
Loss and LAE ratio 61.3% 60.2% 63.0%
Underwriting expense ratio 31.6% 31.6% 30.1%
Combined ratio 92.9% 91.8% 93.1%
       
Industry statutory combined ratio (a)      
All lines 96.8% 101.5% 104.0%
Commercial lines 97.6% 102.0% 102.1%
(a)The sources of the industry ratios are © 2019 Conning, Inc.’s Property–Casualty Forecast & Analysis (Fourth Quarter 2019 Edition, used with permission) for 2019 and © 2019 A.M. Best Company’s Review & Preview Report (February 2019 Edition) for 2018 and 2017.

As with other property and casualty insurers, AFG’s operating results can be adversely affected by unpredictable catastrophe losses. Certain natural disasters (hurricanes, severe storms, earthquakes, tornadoes, floods, etc.) and other incidents of major loss (explosions, civil disorder, terrorist events, fires, etc.) are classified as catastrophes by industry associations. Losses from these incidents are usually tracked separately from other business of insurers because of their sizable effects on overall operations. Total net losses to AFG’s insurance operations from current accident year catastrophes were $60 million in 2019, $103 million in 2018 and $140 million in 2017 and are included in the table above.

AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and through the purchase of reinsurance. AFG’s net exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 500 years (a “500-year event”) is expected to be approximately 6% of AFG’s Shareholders’ Equity.


7


Property and Casualty Insurance Products
AFG is focused on growth opportunities in what it believes to be more profitable specialty businesses where AFG personnel are experts in particular lines of business or customer groups. The following are examples of AFG’s specialty businesses grouped by sub-segment:
Property and Transportation 
Agricultural-relatedFederally reinsured multi-peril crop (allied lines) insurance covering most perils as well as crop-hail, equine mortality and other coverages for full-time operating farms/ranches and agribusiness operations on a nationwide basis.
  
Commercial AutomobileCoverage for vehicles (such as buses and trucks) in a broad range of businesses including the moving and storage and transportation industries, as well as alternative risk transfer programs, and a specialized physical damage product for the trucking industry.
  
Property, Inland Marine and Ocean MarineCoverage primarily for commercial properties, builders’ risk, contractors’ equipment, property, motor truck cargo, marine cargo, boat dealers, marina operators/dealers and excursion vessels.
  
Specialty Casualty 
Excess and SurplusLiability, umbrella and excess coverage for unique, volatile or hard to place risks, using rates and forms that generally do not have to be approved by state insurance regulators.
  
Executive and Professional LiabilityCoverage for directors and officers of businesses and non-profit organizations, errors and omissions, cyber, and mergers and acquisitions.
  
General LiabilityCoverage for contractor-related businesses, energy development and production risks, and environmental liability risks.
  
Targeted ProgramsCoverage (primarily liability and property) for social service agencies, leisure, entertainment and non-profit organizations, customized solutions for other targeted markets and alternative risk programs using agency captives.
  
Umbrella and Excess LiabilityCoverage in excess of primary layers.
  
Workers’ CompensationCoverage for prescribed benefits payable to employees who are injured on the job.
  
Specialty Financial 
Fidelity and SuretyFidelity and crime coverage for government, mercantile and financial institutions and surety coverage for various types of contractors and public and private corporations.
  
Lease and Loan ServicesCoverage for insurance risk management programs for lending and leasing institutions, including equipment leasing and collateral and lender-placed mortgage property insurance.

Management believes specialization is the key element to the underwriting success of these business units. These specialty businesses are opportunistic and premium volume will vary based on prevailing market conditions. AFG continually evaluates expansion in existing markets and opportunities in new specialty markets that meet its profitability objectives. Likewise, AFG will withdraw from markets that do not meet its profit objectives or business strategy.


8


2019 SPECIALTY PROPERTY AND CASUALTY BY SUB-SEGMENT
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(*)Excludes underwriting profits and losses recorded outside of AFG’s Specialty property and casualty group.

Premium Distribution
The following table shows the net written premiums by sub-segment for AFG’s property and casualty insurance operations for 2019, 2018 and 2017 (in millions):
 2019 2018 2017
Property and transportation$1,876
 $1,754
 $1,765
Specialty casualty2,701
 2,509
 2,280
Specialty financial617
 602
 596
Other specialty (*)148
 158
 110
 $5,342
 $5,023
 $4,751
(*)Premiums assumed by AFG’s internal reinsurance program from the operations that make up AFG’s Specialty property and casualty insurance sub-segments.

9


The geographic distribution of statutory direct written premiums by AFG’s U.S.-based insurers for 2019, 2018 and 2017 is shown below. Just under 10% of AFG’s direct written premiums in 2019 were derived from non U.S.-based insurers.
In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon generated approximately 85% of the non U.S.-based direct written premiums in 2019.
  2019 2018 2017   2019 2018 2017
California 13.4% 13.5% 13.2% Pennsylvania 2.6% 2.5% 2.4%
Florida 10.1% 10.0% 10.0% New Jersey 2.5% 2.6% 2.6%
Texas 6.9% 6.8% 6.2% Iowa 2.2% 2.3% 2.4%
New York 6.7% 6.8% 6.6% Kansas 2.2% 2.3% 2.2%
Illinois 5.5% 5.3% 5.6% North Carolina 2.0% 2.1% 2.1%
Georgia 3.3% 3.3% 3.2% Indiana 2.0% 1.9% 1.9%
Missouri 2.6% 2.5% 2.8% Other 38.0% 38.1% 38.8%
          100.0% 100.0% 100.0%

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Reinsurance
Consistent with standard practice of most insurance companies, AFG reinsures a portion of its property and casualty business with other insurance companies and assumes a relatively small amount of business from other insurers. AFG uses reinsurance for two primary purposes: (i) to provide higher limits of coverage than it would otherwise be willing to provide (i.e. large line capacity) and (ii) to protect its business by reducing the impact of catastrophes. The availability and cost of reinsurance are subject to prevailing market conditions, which may affect the volume and profitability of business that is written. AFG is subject to credit risk with respect to its reinsurers, as the ceding of risk to reinsurers does not relieve AFG of its liability to its insureds until claims are fully settled.

Reinsurance is provided on either a facultative or treaty basis. Facultative reinsurance is generally provided on a risk-by-risk basis. Individual risks are ceded and assumed based on an offer and acceptance of risk by each party to the transaction. AFG purchases facultative reinsurance, both pro rata and excess of loss, depending on the risk and available reinsurance markets. Treaty reinsurance provides for risks meeting prescribed criteria to be automatically ceded and assumed according to contract provisions.

Catastrophe Reinsurance AFG has taken steps to limit its exposure to wind and earthquake losses through individual risk selection, including minimizing coastal and known fault-line exposures, and purchasing catastrophe reinsurance. Catastrophe reinsurance is purchased separately for AFG’s U.S. property and casualty insurance group and for Neon,

10


AFG’s Lloyd’s insurance business. In addition, AFG purchases catastrophe reinsurance for its workers’ compensation businesses. Although the cost of catastrophe reinsurance varies depending on exposure and the level of worldwide loss activity, AFG continues to obtain reinsurance coverage in adequate amounts at acceptable rates.

In early 2019, Neon launched its second insurance-linked securities transaction through NCM Re (UK PCC) Ltd. (“NCM Re”), which provided $77 million in collateralized quota share reinsurance that assumed 17.1% of the Neon Lloyd’s syndicate’s property treaty reinsurance and direct and facultative portfolios. Losses are recovered from NCM Re before Neon’s catastrophe excess of loss reinsurance coverage applies. In addition to NCM Re, in 2019 Neon placed a quota share treaty, which covered 12.8% of Neon’s gross property losses. Also in 2019, Neon placed a 25.5% quota share reinsurance treaty, which covered its property insurance and a further 7.1% quota share treaty, which covered its property insurance placed under binding authorities.

In January 2020, AFG’s property and casualty insurance subsidiaries renewed substantially all of their catastrophe reinsurance coverages. For AFG’s U.S.-based operations, the Company continued to place $85 million of coverage in excess of a $15 million per event primary retention in the traditional reinsurance markets. In addition, AFG’s U.S.-based operations have a $34 million layer of coverage in excess of $100 million in catastrophe losses that will be up for renewal in June 2020. Neon placed $130 million of coverage in excess of a $15 million per event primary retention and $30 million of coverage in excess of $15 million per event on assumed business. In addition to Neon’s catastrophe excess of loss reinsurance coverage, Neon has placed a quota share treaty which covers 20% of Neon’s gross property losses with a $310 million event limit (maximum $62 million recoverable) and a further 25% quota share treaty covering its property insurance with a $185 million event limit (maximum $46 million recoverable), which supplements its catastrophe excess of loss reinsurance. Recoveries from Neon’s property insurance quota share treaties apply before calculating losses recoverable from the catastrophe excess of loss reinsurance.

In June 2017, AFG’s property and casualty insurance subsidiaries entered into a reinsurance agreement to obtain supplemental catastrophe protection through a catastrophe bond structure with Riverfront Re Ltd. (“Riverfront”). The reinsurance agreement provides supplemental reinsurance coverage up to 95% of $200 million (fully collateralized) for catastrophe losses in excess of $134 million of traditional catastrophe reinsurance (per occurrence and annual aggregate) occurring until December 31, 2020. In connection with the reinsurance agreement, Riverfront issued notes to unrelated investors for the full amount of coverage provided under the reinsurance agreement. Through December 31, 2019, AFG’s incurred catastrophe losses have not reached the level of attachment for the catastrophe bond structure. Riverfront is a variable interest entity in which AFG does not have a variable interest because the variability in Riverfront’s results will be absorbed entirely by the investors in Riverfront. Accordingly, Riverfront is not consolidated in AFG’s financial statements and the reinsurance agreement is accounted for as ceded reinsurance. AFG’s cost for this coverage is approximately $11 million per year.

The commercial marketplace requires large policy limits ($25 million or more) in several of AFG’s lines of business, including certain property, environmental, aviation, executive and professional liability, umbrella and excess liability, and fidelity and surety coverages. Since these limits exceed management’s desired exposure to an individual risk, AFG generally enters into reinsurance agreements to reduce its net exposure under such policies to an acceptable level. Reinsurance continues to be available for this large line capacity exposure with satisfactory pricing and terms.

In addition to the catastrophe and large line capacity reinsurance programs discussed above, AFG purchases reinsurance on a product-by-product basis. AFG regularly reviews the financial strength of its current and potential reinsurers. These reviews include consideration of credit ratings, available capital, claims paying history and expertise. This process periodically results in the transfer of risks to more financially secure reinsurers. Substantially all reinsurance is ceded to companies with investment grade S&P ratings or is secured by “funds withheld” or other collateral. Under “funds withheld” arrangements, AFG retains ceded premiums to fund ceded losses as they become due from the reinsurer. Recoverables from the following companies were individually between 5% and 11% of AFG’s total property and casualty reinsurance recoverable (including prepaid reinsurance premiums and net of payables to reinsurers) at December 31, 2019: Hannover Rueck SE, Munich Reinsurance America, Inc. and Swiss Reinsurance America Corporation. In addition, AFG has a reinsurance recoverable from Ohio Casualty Insurance Company of $137 million related to that company’s purchase of AFG’s commercial lines business in 1998. No other reinsurers exceeded 5% of AFG’s property and casualty reinsurance recoverable.


11


The following table presents (by type of coverage) the amount of each loss above the specified retention covered by treaty reinsurance programs in AFG’s U.S.-based property and casualty insurance operations (in millions) as of January 1, 2020:
    Reinsurance Coverage AFG
  Primary Coverage AFG Participation (a) Maximum
  Retention Amount % $ Loss (b)
U.S.-based operations:          
California Workers’ Compensation $2
 $148
 1% $1
 $3
Summit Workers’ Compensation 3
 37
 % 
 3
Other Workers’ Compensation 2
 48
 % 
 2
Commercial Umbrella 2
 48
 10% 5
 7
Property — General 5
 45
 % 
 5
Property — Catastrophe (c) 15
 119
 % 
 15
Neon Lloyd’s Syndicate          
Property — Catastrophe (direct) (c) 15
 130
 % 
 15
Property — Catastrophe (assumed) (c) 15
 30
 % 
 15
 
(a)Includes the participation of AFG’s internal reinsurance program.
(b)Maximum loss per event for claims up to reinsurance coverage limit.
(c)Additional catastrophe coverage is provided by the Riverfront Re Ltd. catastrophe bond described above.

In addition to the coverage shown above, AFG reinsures a portion of its crop insurance business through the Federal Crop Insurance Corporation (“FCIC”). The FCIC offers both proportional (or “quota share”) and non-proportional coverages. The proportional coverage provides that a fixed percentage of risk is assumed by the FCIC. The non-proportional coverage allows AFG to select desired retention of risk on a state-by-state, county, crop or plan basis. AFG typically reinsures 15% to 25% of gross written premiums with the FCIC. AFG also purchases quota share reinsurance in the private market. This quota share provides for a ceding commission to AFG and a profit-sharing provision. During both 2019 and 2018, AFG reinsured 50% of premiums not reinsured by the FCIC in the private market and purchased stop loss protection coverage for the remaining portion of the business. In 2020, AFG expects to reinsure 50% of the premiums not reinsured by the FCIC in the private market.

The balance sheet caption “recoverables from reinsurers” included approximately $109 million on paid losses and LAE and $3.02 billion on unpaid losses and LAE at December 31, 2019. These amounts are net of allowances of approximately $18 million for doubtful collection of reinsurance recoverables. The collectibility of a reinsurance balance is based upon the financial condition of a reinsurer as well as individual claim considerations.

Reinsurance premiums ceded and assumed are presented in the following table (in millions):
  2019 2018 2017
Reinsurance ceded $1,957
 $1,817
 $1,751
Reinsurance ceded, excluding crop 1,371
 1,202
 1,076
Reinsurance assumed — including involuntary pools and associations 255
 214
 192

Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated liability for unpaid losses and LAE of AFG’s insurance subsidiaries. This liability represents estimates of the ultimate net cost of all unpaid losses and LAE and is determined by using case-basis evaluations, actuarial projections and management’s judgment. These estimates are subject to the effects of changes in claim amounts and frequency and are periodically reviewed and adjusted as additional information becomes known. In accordance with industry practices, such adjustments are reflected in current year operations. Generally, reserves for reinsurance assumed and involuntary pools and associations are reflected in AFG’s results at the amounts reported by those entities. See Note P — “Insurance — Property and Casualty Insurance Reserves” to the financial statements for information on the development of AFG’s liability for unpaid losses and loss adjustment expenses by accident year as well as a progression of the liability on a GAAP basis over the past three years.


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A reconciliation of the liability for losses and LAE reported in the annual statements filed with the state insurance departments in accordance with statutory accounting principles (“SAP”) to the liability reported in the accompanying consolidated financial statements in accordance with GAAP at December 31, 2019 follows (in millions):
Liability reported on a SAP basis, net of $131 million of retroactive reinsurance$6,539
Reinsurance recoverables, net of allowance3,024
Other, including reserves of foreign insurers669
Liability reported on a GAAP basis$10,232

Asbestos and Environmental-related (“A&E”) Insurance Reserves   AFG’s property and casualty group, like many others in the industry, has A&E claims arising in most cases from general liability policies written more than thirty years ago. The establishment of reserves for such A&E claims presents unique and difficult challenges and is subject to uncertainties significantly greater than those presented by other types of claims. For a discussion of these uncertainties, see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” and Note N — “Contingencies” to the financial statements.

The following table (in millions) is a progression of the property and casualty group’s A&E reserves.
  2019 2018 2017
Reserves at beginning of year $395
 $403
 $337
Incurred losses and LAE 18
 18
 89
Paid losses and LAE (30) (26) (23)
Reserves at end of year, net of reinsurance recoverable 383
 395
 403
Reinsurance recoverable, net of allowance 146
 129
 125
Gross reserves at end of year $529
 $524
 $528

In addition to its ongoing internal monitoring of asbestos and environmental exposures, AFG has periodically conducted comprehensive external studies of its asbestos and environmental reserves relating to the run-off operations of its property and casualty insurance segment and exposures related to its former railroad and manufacturing operations with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years. AFG has historically conducted an external study every two years. The most recent external study was in the third quarter of 2017, and AFG is currently evaluating the frequency of future external studies.
An in-depth internal review of AFG’s A&E reserves was completed in the third quarter of 2019 by AFG’s internal A&E claims specialists in consultation with specialty outside counsel and an outside consultant. As a result of the review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.

The increase in property and casualty environmental reserves in 2019 (as well as in 2018 and 2017) was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites. AFG has updated its view of legal defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. As in past years, there were no new or emerging broad industry trends that were identified in this review.

As a result of the in-depth internal review of AFG’s A&E reserves completed in the third quarter of 2018, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance).

As a result of the comprehensive external study completed in the third quarter of 2017, AFG’s property and casualty insurance segment recorded an $89 million pretax special charge to increase its asbestos reserves by $53 million (net of reinsurance) and its environmental reserves by $36 million (net of reinsurance).


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Marketing
The property and casualty insurance group directs its sales efforts primarily through independent insurance agents and brokers, although small portions are written through employee agents. Independent agents and brokers generally receive a commission on the sale of each policy. Some agents and brokers are eligible for a bonus commission based on the overall profitability of policies placed with AFG by the broker or agent in a particular year. The property and casualty insurance group writes insurance through several thousand agents and brokers.

Competition
AFG’s property and casualty insurance businesses compete with other individual insurers, state funds and insurance groups of varying sizes, some of which are mutual insurance companies possessing competitive advantages in that all their profits inure to their policyholders. See Item 1A Risk Factors. AFG also competes with self-insurance plans, captive programs and risk retention groups. Due to the specialty nature of these coverages, competition is based primarily on service to policyholders and agents, specific characteristics of products offered and reputation for claims handling. Financial strength ratings, price, commissions and profit-sharing terms are also important factors. Management believes that sophisticated data analysis for refinement of risk profiles, extensive specialized knowledge and loss prevention service have helped AFG compete successfully.

Annuity Segment

General
AFG’s annuity business is focused on the sale of fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets through independent producers and through direct relationships with certain financial institutions. The Company has a long history in the annuities industry, long-term agent relationships and a reputation for simple, consumer-friendly products. Disciplined product management and operations have enabled AFG to maintain a consistent crediting rate strategy and low-cost structure. AFG’s annuity products are designed to be simple and easy to understand. Lower upfront commissions and bonuses as compared to many competitors allows the Company to pay higher annual crediting rates. In the current low interest rate environment, management is focused on earning the appropriate returns on AFG’s products rather than growing premiums. The annuity operations had approximately 600 employees at December 31, 2019.

Annuity Segment Overview
annuityleadin01.jpg
(*)Market rankings through September 30, 2019, as reported by LIMRA for deferred annuities.

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As highlighted in the table below, AFG’s annuity business has achieved double digit compounded annual growth rates (“CAGR”) and more than tripled core earnings, premiums and assets over the last ten years. At the same time, management has successfully reduced costs per policy and significantly improved return on equity for the annuity segment.

Growth in Annuity Earnings, Premiums and Assets
annuitygrowth.jpg

AFG’s annuity operations are conducted primarily through the subsidiaries listed in the following table, which includes 2019 statutory annuity premiums (in millions), annuity policies in force and independent ratings.
    Annuity    
  Annuity Policies Ratings
Company Premiums In Force AM Best S&P
Great American Life Insurance Company $4,799
 436,000
 A A+
Annuity Investors Life Insurance Company 161
 107,000
 A A+

AFG believes that the ratings assigned by independent insurance rating agencies are an important competitive factor because agents, potential policyholders and financial institutions often use a company’s rating as an initial screening device in considering annuity products. AFG believes that a rating in the “A” category by at least one rating agency is necessary to successfully compete in its primary annuity markets.

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Due to the deposit-type nature of annuities, annuity premiums received and benefit payments are recorded as increases or decreases in the annuity benefits accumulated liability rather than as revenue and expense under GAAP. Statutory premiums of AFG’s annuity operations for the last three years were as follows (in millions):
  Statutory Premiums
  2019 2018 2017
Financial institutions single premium annuities — indexed $1,537
 $1,776
 $1,711
Financial institutions single premium annuities — fixed 1,229
 492
 622
Retail single premium annuities — indexed 943
 1,418
 990
Retail single premium annuities — fixed 120
 87
 70
Broker dealer single premium annuities — indexed 657
 1,271
 733
Broker dealer single premium annuities — fixed 32
 14
 7
Pension risk transfer 257
 132
 6
Education market — fixed and indexed annuities 164
 192
 174
Total fixed annuity premiums 4,939
 5,382
 4,313
Variable annuities 21
 25
 28
Total annuity premiums $4,960
 $5,407
 $4,341

chart-statannuitypremiums.jpg

Annuities are long-term retirement saving instruments that benefit from income accruing on a tax-deferred basis. The issuer of the annuity collects premiums, credits interest or earnings on the policy and pays out a benefit upon death, surrender or annuitization. Single premium annuities are generally issued in exchange for a one-time, lump-sum premium payment. Certain annuities, primarily in the education market, have premium payments that are flexible in both amount and timing as determined by the policyholder and are generally made through payroll deductions.

Annuity contracts are generally classified as either fixed rate (including indexed) or variable. With a traditional fixed rate annuity, AFG seeks to maintain a desired spread between the yield on its investment portfolio and the rate it credits to policyholders. AFG accomplishes this by: (i) offering crediting rates that it has the option to change after any initial guarantee period (subject to minimum interest rate and other contractual guarantees); (ii) designing annuity products that encourage persistency; and (iii) maintaining an appropriate matching of the duration of assets and liabilities.

An indexed annuity provides policyholders with the opportunity to receive a crediting rate tied, in part, to the performance of an existing stock market or other financial index (generally the S&P 500) or other external rate, price, or unit value (an “index”). A fixed-indexed annuity protects against the related downside risk through a guarantee of principal (excluding

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surrender charges, market value adjustments, and certain benefit charges). In 2018, AFG began offering variable-indexed annuities, which are similar to fixed-indexed annuities except that the product offers greater upside participation in the selected index as compared to a fixed-indexed annuity and replaces the guarantee of principal in a fixed-indexed annuity with a guaranteed maximum loss. AFG purchases and sells call and put options designed to substantially offset the effect of the index participation in the liabilities associated with indexed annuities.

As an accommodation in its education market, AFG offers a limited amount of variable annuities. With a variable annuity, the earnings credited to the policy vary based on the investment results of the underlying investment options chosen by the policyholder, generally without any guarantee of principal except in the case of death of the insured. Premiums directed to the underlying investment options maintained in separate accounts are invested in funds managed by various independent investment managers. AFG earns a fee on amounts deposited into separate accounts. Subject to contractual provisions, policyholders may also choose to direct all or a portion of their premiums to various fixed-rate options, in which case AFG earns a spread on amounts deposited.

The profitability of a fixed annuity business is largely dependent on the ability of a company to earn income on the assets supporting the business in excess of the amounts credited to policyholder accounts plus expenses incurred (earning a “spread”). Performance measures such as net spread earned are often presented by annuity businesses to help users of their financial statements better understand the company’s performance. The following table shows the earnings before income taxes, as well as the net spread earned on fixed annuities, for the annuity segment both before and after the impact of unlocking, changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):
  Year ended December 31,
  2019 2018 2017
Annuity earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $409
 $409
 $388
Unlocking (1) (31) (3)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs (a):      
Change in fair value of derivatives related to FIAs (294) (51) (70)
Accretion of guaranteed minimum FIA benefits (408) (347) (289)
Other annuity benefits (14) (83) (58)
Less cost of equity options 586
 506
 395
Related impact on the amortization of deferred policy acquisition costs (b) 84
 (42) 17
Annuity segment earnings before income taxes $362
 $361
 $380
       
Net spread earned on fixed annuities — before impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs 1.08% 1.20% 1.25%
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs (0.12%) (0.04%) (0.01%)
Unlocking % (0.09%) (0.01%)
Net spread earned on fixed annuities 0.96% 1.07% 1.23%
(a)FIAs provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative with a fair value of $3.73 billion at December 31, 2019) and the related call and put options (net fair value of $923 million at December 31, 2019) are considered derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.
(b)An estimate of the related acceleration/deceleration of the amortization of deferred policy acquisition costs and deferred sales inducements.


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Marketing
AFG sells its single premium annuities, excluding financial institution production (discussed below), primarily through a retail network of approximately 60 national marketing organizations (“NMOs”) and managing general agents (“MGAs”) who, in turn, direct approximately 1,000 actively producing agents.

AFG also sells single premium annuities in financial institutions through direct relationships with certain financial institutions and through independent agents and brokers. The table below highlights the percentage of AFG’s total annuity premiums generated through its top five financial institution relationships (ranked based on 2019 statutory premiums):
  2019 2018 2017
Wells Fargo & Company 12.0% 7.4% 8.1%
The PNC Financial Services Group, Inc. 8.8% 6.6% 9.1%
Regions Financial Corporation 6.7% 4.8% 6.5%
BB&T Corporation 5.1% 3.7% 5.5%
LPL Financial 4.4% 4.8% 5.5%
In the education market, schools may allow employees to save for retirement through contributions made on a before-tax basis. Federal income taxes are not payable on pretax contributions or earnings until amounts are withdrawn. AFG sells its education market annuities through regional and national agencies.

AFG is licensed to sell its fixed annuity products in all states except New York; it is licensed to sell its variable annuity products in all states except New York and Vermont. At December 31, 2019, AFG had approximately 544,000 annuity policies in force. The states that accounted for 5% or more of AFG’s statutory annuity premiums in 2019 and the comparable preceding years are shown below:
  2019 2018 2017
California 9.9% 10.2% 10.0%
Florida 8.3% 8.1% 7.3%
North Carolina 6.0% 4.5% 4.8%
Ohio 5.9% 5.2% 5.4%
Pennsylvania 5.2% 5.5% 6.1%
Competition
AFG’s annuity businesses operate in highly competitive markets. They compete with other insurers and financial institutions based on many factors, including: (i) ratings; (ii) financial strength; (iii) reputation; (iv) service to policyholders and agents; (v) product design (including interest rates credited, bonus features and index participation); and (vi) commissions. Since most policies are marketed and distributed through independent agents, the insurance companies must also compete for agents.

No single insurer dominates the markets in which AFG’s annuity businesses compete. See Item 1A — Risk Factors. AFG’s competitors include (i) individual insurers and insurance groups, (ii) mutual funds and (iii) other financial institutions. In a broader sense, AFG’s annuity businesses compete for retirement savings with a variety of financial institutions offering a full range of financial services. In the financial institution annuity market, AFG’s annuities compete directly against competitors’ annuities, certificates of deposit and other investment alternatives at the point of sale. In addition, over the last few years, several offshore and/or hedge fund companies have made significant acquisitions of annuity businesses, resulting in annuity groups that are larger in size than AFG’s annuity business.

Sales of annuities, including renewal premiums, are affected by many factors, including: (i) competitive annuity products and rates; (ii) the general level and volatility of interest rates, including the slope of the yield curve; (iii) the favorable tax treatment of annuities; (iv) commissions paid to agents; (v) services offered; (vi) ratings from independent insurance rating agencies; (vii) other alternative investments; (viii) performance and volatility of the equity markets; (ix) media coverage of annuities; (x) regulatory developments regarding suitability and the sales process; and (xi) general economic conditions.

Other Operations

AFG ceased new sales of long-term care insurance in January 2010 and sold substantially all of its run-off long-term care business in December 2015. The legal entities sold in 2015, United Teacher Associates Insurance Company and Continental General Insurance Company, contained substantially all of AFG’s long-term care insurance reserves (96% as measured by net statutory reserves as of November 30, 2015), as well as smaller blocks of annuity and life insurance

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business. Renewal premiums on the remaining small block of long-term care policies (which are guaranteed renewable) covering approximately 1,500 lives will be accepted unless those policies lapse. At December 31, 2019, AFG’s long-term care insurance reserves were $46 million, net of reinsurance recoverables and excluding the impact of unrealized gains on securities.

Although AFG no longer actively markets new life insurance products, it continues to service and receive renewal premiums on its in-force block of approximately 88,000 policies and $9.53 billion gross ($3.30 billion net of reinsurance) of life insurance in force at December 31, 2019. Renewal premiums, net of reinsurance, were $22 million in 2019, $21 million in 2018 and $17 million in 2017. At December 31, 2019, AFG’s life insurance reserves were $282 million, net of reinsurance recoverables.

Through subsidiaries, AFG is engaged in a variety of other operations, including commercial real estate operations in Cincinnati (office buildings), Whitefield, New Hampshire (Mountain View Grand Resort), Chesapeake Bay (Skipjack Cove Yachting Resort and Bay Bridge Marina), Charleston (Charleston Harbor Resort and Marina) and Palm Beach (Sailfish Marina and Resort). These operations employed approximately 300 full-time employees at December 31, 2019.

Investment Portfolio

General
AFG’s in-house team of investment professionals have followed a consistent strategy over many years and changing economic conditions. Management believes that AFG’s investment expertise has been the driver of consistently strong investment results and effective portfolio risk management over many years. The allocation of AFG’s $55.25 billion investment portfolio at December 31, 2019 is shown below.

Investment Portfolio
investmentportfolio.jpg

For additional information on AFG’s investments, see Note E — “Investments” to the financial statements and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Investments.” AFG’s earned yield (net investment income divided by average invested assets) on fixed maturities was 4.4% for 2019, 2018 and 2017.

The table below compares total returns, which include changes in fair value, on AFG’s fixed maturities and common stocks and equivalents to comparable public indices. While there are no directly comparable indices to AFG’s portfolio, the two shown below are widely used benchmarks in the financial services industry.
  2019 2018 2017
Total return on AFG’s fixed maturities 8.7% 1.3% 5.9%
Barclays Capital U.S. Universal Bond Index 9.3% (0.3%) 4.1%
       
Total return on AFG’s common stocks and equivalents 26.0% (12.0%) 15.8%
Standard & Poor’s 500 Index 31.5% (4.4%) 21.8%

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AFG’s bond portfolio is invested primarily in taxable bonds. The following table shows AFG’s available for sale fixed maturity investments by Standard & Poor’s Corporation or comparable rating as of December 31, 2019 (dollars in millions).
  Amortized Fair Value
  Cost Amount %
S&P or comparable rating      
AAA, AA, A $27,832
 $28,856
 62%
BBB 12,746
 13,452
 29%
Total investment grade 40,578
 42,308
 91%
BB 711
 721
 2%
B 185
 182
 %
CCC, CC, C 508
 591
 1%
D 159
 186
 %
Total non-investment grade 1,563
 1,680
 3%
Not rated 2,383
 2,517
 6%
Total $44,524
 $46,505
 100%

The National Association of Insurance Commissioners (“NAIC”) has retained third-party investment management firms to assist in the determination of appropriate NAIC designations for mortgage-backed securities (“MBS”) based not only on the probability of loss (which is the primary basis of ratings by the major ratings firms), but also on the severity of loss and statutory carrying value. Approximately 9% of AFG’s fixed maturity investments are MBS. At December 31, 2019, 98% (based on statutory carrying value of $44.48 billion) of AFG’s fixed maturity investments held by its insurance companies had an NAIC designation of 1 or 2 (the highest of the six designations).

Regulation

AFG’s insurance company subsidiaries are subject to regulation in the jurisdictions where they do business. In general, the insurance laws of the various states establish regulatory agencies with broad administrative powers governing, among other things, premium rates, solvency standards, licensing of insurers, agents and brokers, trade practices, forms of policies, maintenance of specified reserves and capital for the protection of policyholders, deposits of securities for the benefit of policyholders, investment activities and relationships between insurance subsidiaries and their parents and affiliates. Material transactions between insurance subsidiaries and their parents and affiliates generally must receive prior approval of the applicable insurance regulatory authorities and be disclosed. In addition, while differing from state to state, these regulations typically restrict the maximum amount of dividends that may be paid by an insurer to its shareholders in any twelve-month period without advance regulatory approval. Such limitations are generally based on net earnings or statutory surplus. Under applicable restrictions, the maximum amount of dividends available to AFG in 2020 from its insurance subsidiaries without seeking regulatory approval is approximately $852 million.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), among other things, established a Federal Insurance Office (“FIO”) within the U.S. Treasury. Under this law, regulations will need to be created for the FIO to carry out its mandate to focus on systemic risk oversight. Since its formation, the FIO has worked with the NAIC and other stakeholders to explore a hybrid approach to regulation of the insurance industry; however, the state-based system of regulation has largely been retained. AFG cannot predict the future role of the FIO and its role in regulation of the insurance industry and how that might ultimately affect AFG’s operations.

Neon, AFG’s UK-based Lloyd’s insurer, is subject to regulation by Lloyd’s, including the establishment of capital requirements and approval of business plans, and the Prudential Regulation Authority.

Most states have created insurance guaranty associations that assess solvent insurers to pay claims of insurance companies that become insolvent. Annual guaranty assessments for AFG’s insurance companies have not been material.


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Item 1A. Risk Factors

In addition to the other information set forth in this report, particularly information under “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the following factors could materially affect AFG’s business, financial condition, cash flows or future results. Any one of these factors could cause AFG’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing AFG. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect AFG’s business, financial condition and/or operating results.

Adverse developments in the financial markets and deterioration in global economic conditions could have a material adverse effect on AFG’s results of operations and financial condition.
Worldwide financial markets have, from time to time, experienced significant and unpredictable disruption. A prolonged economic downturn would result in heightened credit risk, reduced valuation of certain investments and decreased economic activity.

Changes in financial markets including fluctuations in interest rates, credit conditions, equity prices and many other factors that are unpredictable and beyond AFG’s control, like the impact of Brexit or the imposition of tariffs by the U.S. and by other countries in response, can adversely affect the value of investments and the realization of investment income.

A significant majority of AFG’s investment portfolio consists of fixed maturity investments, and changes in global economic conditions, including interest rates, could have a material adverse effect on AFG’s results of operations and financial condition.
As of December 31, 2019, approximately 84% of AFG’s investment portfolio holdings consisted of fixed maturity investments that are sensitive to changes in interest rates. A decline in interest rates may reduce the returns earned on new and floating-rate fixed maturity investments, thereby reducing AFG’s net investment income, while an increase in interest rates may reduce the value of AFG’s existing fixed maturity investments, which primarily have fixed interest rates. The value of AFG’s fixed maturity investments is also subject to credit risk as certain investments may default or become impaired due to deterioration in the financial condition of issuers of those investments. If a decline in the fair value of a specific investment (below its amortized cost) is considered to be other-than-temporary, a provision for impairment would be charged to earnings.

Interest rates have remained at historical lows for an extended period. In addition, central banks in some countries have pursued largely unprecedented negative interest rate policies in recent years, the consequences of which are uncertain. The continuation of the current low interest rate environment or a deflationary environment with negative interest rates could affect business behavior in ways that are adverse to AFG and could constrict AFG’s net investment income.

As of December 31, 2019, mortgage-backed securities constituted approximately 9% of AFG’s fixed maturity portfolio. In addition to the risks applicable to the entire fixed maturity investment portfolio, changes in interest rates can expose AFG to prepayment risks on mortgage-backed securities. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are paid down more quickly, requiring AFG to reinvest the proceeds at the then current market rates, which may be lower than on the securities repaid.

Changes in interest rates could adversely affect AFG’s results of operations.
The profitability of AFG’s annuity segment is largely dependent on the spread between what it earns on its investments and the crediting rate it pays on its annuity contracts plus expenses incurred.

Both rising and declining interest rates can negatively affect AFG’s annuity results. Most of AFG’s annuity products have guaranteed minimum crediting rates. Although AFG could reduce the average crediting rate on a substantial portion of its traditional fixed and indexed annuities during periods of low or falling interest rates, AFG may not be able to fully offset the decline in investment earnings with lower crediting rates.

During periods of rising interest rates, AFG may experience competitive pressure to increase crediting rates to avoid a decline in sales or increased surrenders, thus resulting in lower spreads. In addition, an increase in surrenders could require the sale of investments at a time when the prices of those assets are lower due to the increase in market rates, which may result in realized investment losses.


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Intense competition could adversely affect AFG’s results of operations.
The property and casualty insurance segment operates in a highly competitive industry that is affected by many factors that can cause significant fluctuations in its results of operations. The lines of business in this segment compete with other individual insurers, state funds and insurance groups of varying sizes, some of which are mutual insurance companies possessing competitive advantages in that all their profits inure to their policyholders. In addition, certain foreign insurers may be taxed at lower rates, which may result in a competitive advantage over AFG. The property and casualty insurance segment also competes with self-insurance plans, captive programs and risk retention groups. Competition is based on many factors, including service to policyholders and agents, product design, reputation for claims handling, price, commissions, ratings and financial strength. Peer companies and competitors in some or all of AFG’s specialty lines include the following companies and/or their subsidiaries: Alleghany Corp., American International Group Inc., American National Insurance Company, AmTrust Financial Services, Inc., Arch Capital Group Ltd., Assurant, Inc., Chubb Ltd., Cincinnati Financial Corp., CNA Financial Corp., Fairfax Financial Holdings Ltd. (Zenith National), The Hartford Financial Services Group, Inc., Lancer Insurance Company, Liberty Mutual, Markel Corp., Munich Re Group (American Modern Insurance), Protective Insurance Company, RLI Corp., The Travelers Companies, Inc., Tokio Marine Holdings, Inc. (HCC Insurance, Philadelphia Consolidated), W.R. Berkley Corp., AXA (XL Group Ltd.) and Zurich Insurance Group Ltd.

AFG’s annuity segment competes with individual insurers and insurance groups, mutual funds and other financial institutions. In addition, in recent years, offshore and/or hedge fund companies have made significant acquisitions of annuity businesses. Competition is based on numerous factors including reputation, product design, interest crediting rates, performance, scope of distribution, price and perceived financial strength and credit ratings. Peer companies and competitors for AFG’s annuity segment include the following companies and/or their subsidiaries: Allianz Life Insurance Company of North America, American Equity Investment Life Holding Company (Eagle Life Insurance Company), American International Group Inc., Athene Holding Ltd, Global Atlantic Financial Group Ltd. (Forethought Life Insurance Company), Lincoln National Corp., MetLife, Inc., Nationwide Mutual Insurance Company, Pacific Life Insurance Company and Sumitomo Life Insurance Company (Symetra Financial Corp.).

Some of AFG’s competitors have more capital and greater resources than AFG and may offer a broader range of products and lower prices than AFG offers. If competition limits AFG’s ability to write new or renewal business at adequate rates, its results of operations will be adversely affected.

A significant percentage of AFG’s sales of annuity products through financial institutions is concentrated in a small number of institutions.
Annuity premiums generated through financial institutions represented 56% of AFG’s annuity premiums in 2019. In 2019, two large financial institutions accounted for 37% of AFG’s total sales through financial institutions and 21% of AFG’s overall annuity sales. In the financial institutions annuity market, AFG competes directly against competitors’ annuities, certificates of deposit and other investment alternatives at the point of sale. Loss of a substantial portion of this business coupled with a failure to replace these financial institutions if they significantly reduce sales of AFG annuities could reduce AFG’s future growth.

AFG’s revenues could be adversely affected if it is not able to attract and retain independent agents.
AFG’s reliance on the independent agency market makes it vulnerable to a reduction in the amount of business written by agents. Many of AFG’s competitors also rely significantly on the independent agency market. Some of AFG’s competitors offer a wider variety of products, lower prices for insurance coverage or higher commissions. A reduction in the number of independent agencies marketing AFG’s products, the failure of agencies to successfully market AFG’s products, changes in the strategy or operations of agencies (including agency consolidation) or the choice of agencies to reduce their writings of AFG products could adversely affect AFG’s revenues and profitability.

The inability to obtain reinsurance or to collect on ceded reinsurance could adversely affect AFG’s results of operations.
AFG purchases reinsurance to limit the amount of risk it retains. Market conditions determine the availability and cost of the reinsurance protection AFG purchases, which affects the level of AFG’s business and profitability, as well as the level and types of risk AFG retains. If AFG is unable to obtain sufficient reinsurance at a cost AFG deems acceptable, AFG may opt to reduce the volume of its underwriting. AFG is also subject to credit risk with respect to its reinsurers, as AFG will remain liable to its insureds regardless of whether a reinsurer is able to meet its obligations under agreements covering the reinsurance ceded. The collectability of recoverables from reinsurers is subject to uncertainty arising from a number of factors, including a reinsurers’ financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract and changes in market conditions. As of December 31, 2019, AFG has $3.42 billion of recoverables from reinsurers on its balance sheet.


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AFG is subject to comprehensive regulation, and its ability to earn profits may be restricted by these regulations.
AFG is subject to comprehensive regulation by government agencies in the states and countries where its insurance company subsidiaries are domiciled and where these subsidiaries issue policies and handle claims. In addition, the Lloyd’s marketplace sets rules under which its members operate, including Neon (AFG’s Lloyd’s syndicate, which has been placed into run-off by AFG). Most insurance regulations are designed to protect the interests of AFG’s policyholders and third-party claimants as opposed to its investors.

The Dodd-Frank Act, enacted in June 2010, mandates changes to the regulation of the financial services industry. Legislative or regulatory requirements imposed by or promulgated in connection with the Dodd-Frank Act may impact AFG in many ways, including, but not limited to: placing AFG at a competitive disadvantage relative to its competition or other financial services entities; changing the competitive landscape of the financial services sector or the insurance industry; making it more expensive for AFG to conduct its business; and otherwise having a material adverse effect on the overall business climate as well as AFG’s financial condition and results of operations.

Changes in domestic or foreign tax laws or interpretations of such laws could increase AFG’s corporate taxes and reduce earnings. For example, on December 22, 2017, the U.S. enacted The Tax Cuts and Jobs Act of 2017 (“TCJA”), which significantly reformed the U.S. tax code. Amendments or clarifications of the TCJA from additional regulatory and administrative guidance, may occur. Any changes in federal income tax laws, including changes to the TCJA, could adversely affect the federal income taxation of AFG’s ongoing operations and have a material adverse impact on its financial condition and results of operations.

As a participant in the federal crop insurance program, AFG could also be impacted by regulatory and legislative changes affecting that program. For example, the reinsurance levels that the federal government provides to authorized carriers could be reduced by future legislation. AFG will continue to monitor new and changing federal regulations and the potential impact, if any, on its insurance company subsidiaries.

On June 5, 2019, the U.S. Securities and Exchange Commission adopted a package of regulatory proposals to enhance standards of conduct owed by broker-dealers to their clients known as Regulation Best Interest. The new rule heightens the standards that registered representatives need to meet when making a recommendation by requiring them to act in the best interest of the retail customer at the time of the recommendation. Regulation Best Interest requires a registered representative to (i) disclose to the customer the material facts relating to scope and terms of the relationship, (ii) exercise reasonable diligence, care, skill and prudence in recommending a product that is in the customer’s best interest, and (iii) eliminate or, at a minimum, disclose, material conflicts of interests.

Existing insurance-related laws and regulations may become more restrictive in the future or new restrictive laws may be enacted; it is not possible to predict the potential effects of these laws and regulations. The costs of compliance or the failure to comply with existing or future regulations could impose significant burdens on AFG.

A downgrade or potential downgrade in AFG’s financial strength and/or credit ratings by one or more rating agencies could adversely affect its business, financial condition, results of operations and/or cash flows.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies and may have an effect on an insurance company’s sales. A downgrade out of the “A” category in AFG’s insurers’ claims-paying and financial strength ratings could significantly reduce AFG’s business volumes in certain lines of business, adversely impact AFG’s ability to access the capital markets and increase AFG’s borrowing costs.

In addition to the financial strength ratings of AFG’s principal insurance company subsidiaries, various rating agencies also publish credit ratings for AFG. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner, are part of AFG’s overall financial profile and affect AFG’s ability to access certain types of capital. A downgrade in AFG’s credit ratings could have a material adverse effect on AFG’s financial condition and results of operations and cash flows in a number of ways, including adversely limiting access to capital markets, potentially increasing the cost of debt or increasing borrowing costs under AFG’s current revolving credit facility.

The continued threat of terrorism and ongoing military and other actions, as well as civil unrest, may adversely affect AFG’s results of operations.
The occurrence of one or more terrorist attacks could cause significant losses from insurance claims that could adversely affect AFG’s profitability. Private sector catastrophe reinsurance is limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. Reinsurance coverage from the federal government under the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) is also limited. Although

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TRIPRA provides benefits for certified acts of terrorism that exceed a certain threshold of industry losses ($180 million in 2019, increasing by $20 million to $200 million by 2020), those benefits are subject to a deductible and other limitations. In 2020, AFG would have to sustain losses from terrorism of nearly $750 million to be eligible for reinsurance under the program. In addition, because the interpretation of this law is untested, there is substantial uncertainty as to how it will be applied to specific circumstances. Finally, the program currently expires at the end of 2020, and the elimination or modification of the program, or a failure to extend the program, could adversely affect AFG’s property and casualty insurance business through increased exposure to a catastrophic level of terrorism losses.

AFG may experience difficulties with technology or data security, which could have an adverse effect on its business or reputation.
AFG uses computer systems and services to store, retrieve, evaluate and utilize company and customer data and information. Systems failures or outages could compromise AFG’s ability to perform business functions in a timely manner, which could harm its ability to conduct business and hurt its relationships with business partners and customers. In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a malicious software attack, a terrorist attack or war, AFG’s systems may be inaccessible to employees, customers or business partners for an extended period of time. Even if AFG’s employees are able to report to work, they may be unable to perform their duties for an extended period of time if the Company’s data or systems are disabled or destroyed.

AFG’s computer systems are subject to cyber-attacks, viruses, malware, hackers and other external hazards, as well as inadvertent errors, equipment and system failures and to unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to AFG’s systems. In addition, over time, the sophistication of these threats continues to increase. AFG’s administrative and technical controls as well as other preventative actions used to reduce the risk of cyber incidents and protect AFG’s information may be insufficient to detect or prevent future unauthorized access, other physical and electronic break-ins, cyber-attacks or other security breaches to AFG’s computer systems or those of third parties with whom AFG does business.

AFG has increasingly outsourced certain technology and business process functions to third parties and may continue to do so in the future. Outsourcing of certain technology and business process functions to third parties may expose AFG to increased risk related to data security or service disruptions. If AFG does not effectively develop, implement and monitor these relationships, third-party providers do not perform as anticipated, technological or other problems are incurred with a transition, or outsourcing relationships relevant to AFG’s business process functions are terminated, AFG may not realize expected productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business.

The increased risks identified above could expose AFG to data loss, disruption of service, monetary and reputational damages, competitive disadvantage and significant increases in compliance costs and costs to improve the security and resiliency of AFG’s computer systems. The compromise of personal, confidential or proprietary information could also subject AFG to legal liability or regulatory action under evolving cyber-security, data protection and privacy laws and regulations enacted by the U.S. federal and state governments, Canada, the European Union (the “EU”) or other jurisdictions or by various regulatory organizations or exchanges. As a result, AFG’s ability to conduct business and its results of operations might be materially and adversely affected.

Any failure to appropriately collect, administer and protect consumer information could adversely affect AFG’s reputation, subject AFG to fines, claims and penalties, and have a material adverse effect on AFG’s business, financial condition and results of operations.
AFG and certain of its third-party vendors collect and store sensitive data in the ordinary course of AFG’s business, including personal identification information of its employees and that of its customers, vendors, investors and other third parties. In connection with AFG’s property and casualty insurance operations, data may include medical information. Laws and regulations in this area are evolving at an international, national and state level and are generally becoming more rigorous, including through the adoption of more stringent subject matter-specific laws, like the California Consumer Privacy Act of 2018, the New York Department of Financial Services’ Cybersecurity Regulation and Ohio’s insurance data security law, which regulate the collection and use of data and security and data breach obligations. If any disruption or security breach results in a loss or damage to AFG’s data, or inappropriate disclosure of AFG’s confidential information or that of others, it could damage AFG’s reputation, affect its relationships with customers and clients, lead to claims against AFG, result in regulatory action and harm AFG’s business. In addition, AFG may be required to incur significant costs to mitigate the damage caused by any security breach or to protect against future damage.


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AFG’s property and casualty reserves may be inadequate, which could have a material adverse effect on AFG’s results of operations.
Liabilities for unpaid losses and loss adjustment expenses (“LAE”) do not represent an exact calculation of liability but instead represent management estimates of what the ultimate settlement and administration of claims will cost, supported by actuarial expertise and projection techniques, at a given accounting date. The process of estimating unpaid losses and LAE reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as: changes in claims handling procedures, adverse changes in loss cost trends (including inflationary pressures on medical costs), economic conditions (including general inflation), legal trends and legislative changes, and varying judgments and viewpoints of the individuals involved in the estimation process, among others. The impact of many of these items on ultimate costs for unpaid losses and LAE is difficult to estimate. Unpaid losses and LAE reserve estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of an occurrence date for a claim and lags in the time between damage, loss or injury and when a claim is actually reported to the insurer. In addition, the historic development of AFG’s liability for unpaid losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on historical information. To the extent that reserves are inadequate and are strengthened, AFG’s profitability would be adversely affected because the amount of any such increase would be treated as a charge to earnings in the period in which the deficiency is recognized.

AFG’s results of operations could be adversely impacted by severe weather conditions, climate change or catastrophes, both natural and man-made.
Catastrophes can be caused by unpredictable natural events such as hurricanes, windstorms, severe storms, tornadoes, floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by man-made events, such as terrorist attacks. While not considered a catastrophe by insurance industry standards, droughts can have a significant adverse impact on AFG’s crop insurance results. In addition, extreme weather events that are linked to rising temperatures, changing global weather patterns and fluctuating rain, snow and sea levels (climate change) could result in increased occurrence and severity of catastrophes. The extent of gross losses from a catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event, potentially mitigated by any reinsurance coverage purchased by AFG’s insurance subsidiaries. In addition, certain catastrophes could result in both property and non-property claims from the same event. A severe catastrophe or a series of catastrophes could result in losses exceeding AFG’s reinsurance protection and may have a material adverse impact on its results of operations or financial condition.

Volatility in crop prices, as a result of weather conditions, climate change or otherwise, could adversely impact AFG’s results of operations.
Weather conditions, including too much moisture (flooding or excessive rain) or not enough moisture (droughts), and the level of crop prices in the commodities market heavily impact AFG’s crop insurance business. These factors are inherently unpredictable and could result in significant volatility in the results of the crop insurance business from one year to the next. AFG’s crop results could also be negatively impacted by pests and plant disease. A large decline in the commodity prices of one or more of the major crops that AFG insures could have a material adverse effect on AFG’s results of operations or financial condition.

AFG’s international operations exposes it to investment, political and economic risks, including foreign currency and credit risk.
AFG’s international operations expose AFG to a number of additional risks. These risks include restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on AFG’s business and reputation. AFG’s business activities outside the United States may also be subject to political and economic risks, including foreign currency and credit risk.

AFG’s business activities outside the United States subject AFG to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act, the UK Bribery Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. Although AFG has policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective and an employee or intermediary fails to comply with applicable laws and regulations, AFG could suffer civil and criminal penalties and AFG’s business and reputation could be adversely affected. Some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of, and potential liability under, the local laws. Failure to comply with local laws in a particular market may result in substantial liability and could have a significant and negative effect not only on AFG’s business in that market but also on AFG’s reputation generally.


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Exposure to asbestos or environmental claims could materially adversely affect AFG’s results of operations and financial condition.
AFG has asbestos and environmental (“A&E”) exposures arising from its insurance operations and former railroad and manufacturing operations. Uncertainties surrounding the final resolution of these A&E liabilities continue, and it is difficult to estimate AFG’s ultimate exposure to such liabilities and related litigation. Establishing A&E liabilities is subject to uncertainties that are significantly greater than those presented by other types of liabilities. Uncertainties include the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays, the risks inherent in complex litigation and difficulty in properly allocating liability for the asbestos or environmental damage. As a result, A&E liabilities are subject to revision as new information becomes available and as claims are made and develop. Claimants continue to assert new and novel theories of recovery, and from time to time, there is proposed state and federal legislation regarding A&E liability, which would also affect AFG’s exposure. If AFG has not established adequate reserves to cover future claims, AFG’s results of operations and financial condition could be materially adversely affected.

Ineffective risk management policies in the indexed annuity business could adversely affect AFG’s results of operations.
AFG’s risk management policies and procedures, which are intended to identify, monitor and manage economic risks in its annuity business, may not be fully effective at mitigating risk exposures in all market conditions or against all types of risk. For instance, AFG uses derivatives to alleviate risks related to floating-rate investments as well as annuity products that credit interest or provide a return based, in part, on the change in a referenced index. AFG’s use of derivatives may not accurately counterbalance the actual risk exposure, and any derivatives held may not be sufficient to completely hedge the associated risks. In addition, counterparties may fail to perform under the derivative financial instruments. AFG may also decide not to hedge, or fail to identify, certain risks to which it is exposed. Ultimately, AFG’s use of derivatives and other risk management strategies may be inadequate to protect against the full extent of the exposure or losses AFG seeks to mitigate.

Variations from the actuarial assumptions used to establish certain assets and liabilities in AFG’s annuity business could adversely affect AFG’s results of operations.
The earnings on AFG’s annuity products depend significantly upon the extent to which actual experience is consistent with the assumptions used in setting reserves and establishing and amortizing deferred policy acquisition costs. These assumptions relate to investment yields (and spreads over fixed annuity crediting rates), benefit utilization rates, equity market performance, the cost of options used in the indexed annuity business, mortality, surrenders, annuitizations and other withdrawals. Developing such assumptions is complex and involves information obtained from company-specific and industry-wide data, as well as general economic information. These assumptions, and therefore AFG’s results of operations, could be negatively impacted by changes in any of the factors listed above.

The modification or elimination of the London Inter-Bank Offered Rate may adversely affect AFG’s results of operations.
The modification or elimination of the London Inter-Bank Offered Rate (“LIBOR”), a long-standing benchmark interest rate for floating-rate financial contracts, may adversely affect the interest rates on and fair value of AFG’s floating rate investments, interest rate swaps, Federal Home Loan Bank advances and any other assets or liabilities whose value is tied to LIBOR. In addition, the majority of the assets and liabilities of the collateralized loan obligations that AFG manages and consolidates are tied to LIBOR. On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it has commitments from panel banks to submit rates to LIBOR through the end of 2021 but will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, it remains unclear if, how and in what form, LIBOR will continue to exist. Proposals for alternative reference rates for dollars and other currencies have been announced or have already begun publication. Markets are slowly developing in response to these new rates but questions around liquidity in these alternative reference rates and how to appropriately adjust these alternative reference rates to eliminate any economic value transfer at the time of transition persist. At this time, AFG cannot predict the overall effect of the modification or elimination of LIBOR or the establishment of alternative benchmark rates.

Changes to existing accounting standards could adversely impact AFG’s reported results of operations.
As a U.S.-based SEC registrant, AFG prepares its financial statements in accordance with GAAP, as promulgated by the Financial Accounting Standards Board, subject to the accounting-related rules and interpretations of the SEC. Changes in accounting standards, particularly those that specifically apply to insurance company operations, may impact AFG’s reported financial results and could cause increased volatility in reported earnings, resulting in other adverse impacts on AFG’s ratings and cost of capital, and decrease the understandability of AFG’s financial results as well as the comparability of AFG’s reported results with other insurers.

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As a holding company, AFG is dependent on the operations of its insurance company subsidiaries to meet its obligations and pay future dividends.
AFG is a holding company and a legal entity separate and distinct from its insurance company subsidiaries. As a holding company without significant operations of its own, AFG’s principal sources of funds are dividends and other distributions from its insurance company subsidiaries. State insurance laws differ from state to state but, absent advance regulatory approval, restrict the maximum amount of dividends that may be paid by an insurer to its shareholders in any twelve-month period. AFG’s rights to participate in any distribution of assets of its insurance company subsidiaries are subject to prior claims of policyholders and creditors (except to the extent that its rights, if any, as a creditor are recognized). Consequently, AFG’s ability to pay its debts, expenses and dividends to its shareholders may be limited.

Statutory capital requirements set by the NAIC and the various state insurance regulatory bodies establish regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) ratios for insurance companies. Statutory surplus and RBC ratios may change in a given year based on a number of factors, including statutory earnings/losses, reserve changes, excess capital held to support growth, equity market and interest rate changes, the value of investment securities, and changes to the RBC formulas. Increases in the amount of capital or reserves that AFG’s larger insurance subsidiaries are required to hold could reduce the amount of future dividends such subsidiaries are able to distribute to the holding company or require capital contributions. Any reduction in the RBC ratios of AFG’s insurance subsidiaries could also adversely affect their financial strength ratings as determined by rating agencies.

Adverse developments in the financial markets may limit AFG’s access to capital.
Financial markets in the U.S. and elsewhere can experience extreme volatility, which exerts downward pressure on stock prices and limits access to the equity and debt markets for certain issuers, including AFG. AFG can borrow up to $500 million under its revolving credit facility, which expires in June 2021. In addition, AFG’s access to funds through this facility is dependent on the ability of its banks to meet their funding commitments. There were no borrowings outstanding under AFG’s bank credit line or any other parent company short-term borrowing arrangements during 2019. If AFG cannot obtain adequate capital or sources of credit on favorable terms, or at all, its business, operating results and financial condition could be adversely affected.

AFG may suffer losses from litigation, which could materially and adversely affect AFG’s financial condition and business operations.
AFG, primarily in its property and casualty insurance operations and historical operations, is involved in litigation. Litigation by nature is unpredictable, and the outcome of any case is uncertain and could result in liabilities that vary from the amounts AFG has currently recorded. Pervasive or significant changes in the judicial environment relating to matters such as trends in the size of jury awards, developments in the law relating to the liability of insurers or tort defendants, and rulings concerning the availability or amount of certain types of damages could cause AFG’s ultimate liabilities to change from current expectations. Changes in federal or state tort litigation laws or other applicable law could have a similar effect. It is not possible to predict changes in the judicial and legislative environment, including in connection with asbestos and environmental claims. AFG’s business, financial condition, results of operations and liquidity could also be adversely affected if judicial or legislative developments cause AFG’s ultimate liabilities to increase from current expectations.

Certain shareholders exercise substantial control over AFG’s affairs, which may impede a change of control transaction.
Carl H. Lindner III and S. Craig Lindner are each Co-Chief Executive Officers and Directors of AFG. Together, Carl H. Lindner III and S. Craig Lindner beneficially own 8.9% of AFG’s outstanding Common Stock as of February 1, 2020. Other members of the Lindner family own, directly or through trusts, a significant number of additional shares of AFG Common Stock. As a result, the Lindner family has the ability to exercise significant influence over AFG’s management and over matters requiring shareholder approval. Such influence could prevent an acquisition of AFG at a price which other shareholders may find attractive.


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The price of AFG Common Stock may fluctuate significantly, which may make it difficult for holders to resell common stock when they want or at a price they find attractive.
The price of AFG’s Common Stock, which is listed on the NYSE, constantly changes. During 2019, AFG’s Common Stock traded at prices ranging between $88.70 and $111.86. AFG’s Common Stock price can fluctuate as a result of a variety of factors, many of which are beyond its control. These factors include but are not limited to:
actual or anticipated variations in quarterly operating results;
actual or anticipated changes in the dividends paid on AFG Common Stock;
rating agency actions;
recommendations by securities analysts;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving AFG or its competitors;
operating and stock price performance of other companies that investors deem comparable to AFG;
news reports relating to trends, concerns and other issues in AFG’s lines of business;
general economic conditions, including volatility in the financial markets; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.

Item 2. Properties

AFG and its insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States and internationally, including the Company’s headquarters in Cincinnati, Ohio. Subsidiaries of AFG own several other buildings in downtown Cincinnati. AFG and its affiliates occupy approximately half of the aggregate 645,000 square feet of commercial and office space in these buildings. A property and casualty insurance subsidiary occupies approximately 90% of the 281,000 square feet of rentable office space on 17.5 acres of land that it owns in Richfield, Ohio. See Item 1 — Business — “Other Operations” for a discussion of AFG’s other commercial real estate operations.

Item 3. Legal Proceedings

AFG and its subsidiaries are involved in litigation from time to time, generally arising in the ordinary course of business. This litigation may include, but is not limited to, general commercial disputes, lawsuits brought by policyholders, employment matters, reinsurance collection matters and actions challenging certain business practices of insurance subsidiaries. Except for the following, management believes that none of the litigation meets the threshold for disclosure under this Item.

AFG’s insurance company subsidiaries and its 100%-owned subsidiary, American Premier Underwriters (including its subsidiaries, “American Premier”), are parties to litigation and receive claims alleging injuries and damages from asbestos, environmental and other substances and workplace hazards and have established loss accruals for such potential liabilities. None of such litigation or claims is individually material to AFG; however, the ultimate loss for these claims may vary materially from amounts currently recorded as the conditions surrounding resolution of these claims continue to change.

American Premier is a party or named as a potentially responsible party in a number of proceedings and claims by regulatory agencies and private parties under various environmental protection laws, including the Comprehensive Environmental Response, Compensation and Liability Act, seeking to impose responsibility on American Premier for hazardous waste or discharge remediation costs at certain railroad sites formerly owned by its predecessor, Penn Central Transportation Company (“PCTC”), and at certain other sites where hazardous waste or discharge allegedly generated by PCTC’s railroad operations and American Premier’s former manufacturing operations is present. It is difficult to estimate American Premier’s liability for remediation costs at these sites for a number of reasons, including the number and financial resources of other potentially responsible parties involved at a given site, the varying availability of evidence by which to allocate responsibility among such parties, the wide range of costs for possible remediation alternatives, changing technology and the period of time over which these matters develop. Nevertheless, American Premier believes that its accruals for potential environmental liabilities are adequate to cover the probable amount of such liabilities, based on American Premier’s estimates of remediation costs and related expenses and its estimates of the portions of such costs that will be borne by other parties. Such estimates are based on information currently available to American Premier and are subject to future change as additional information becomes available.


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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

AFG Common Stock is listed and traded on the New York Stock Exchange under the symbol AFG. There were approximately 5,200 shareholders of record of AFG Common Stock at February 1, 2020.

Issuer Purchases of Equity Securities
AFG did not repurchase any shares of its Common Stock in the public markets in 2019. As of December 31, 2019, there were 5,000,000 remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February 2016 and February 2019.

AFG acquired 47,069 shares of its Common Stock (at an average of $99.07 per share) in the first nine months of 2019, 2,947 shares (at an average of $106.38 per share) in October 2019 and 46 shares (at $109.70 per share) in December 2019 in connection with its stock incentive plans.


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Stock Performance Graph   
The following graph compares performance of AFG Common Stock during the five year period from December 31, 2014 through December 31, 2019 with the performance of (i) the S&P 500 Composite Stock Index (“S&P 500 Index”), (ii) the S&P 500 Property & Casualty Insurance Index and (iii) the S&P 500 Life & Health Index. The graph assumes that an initial investment of $100 was made on December 31, 2014 and all dividends were reinvested. The stock price performance presented below is not intended to be indicative of future price performance.
chart-5yrstockperformance.jpg

  As of December 31,
  2014 2015 2016 2017 2018 2019
AFG $100
 $122
 $154
 $199
 $173
 $220
S&P 500 Index 100
 101
 113
 138
 132
 174
S&P 500 P&C Index (b) 100
 110
 127
 155
 148
 186
S&P 500 Life & Health Index (c) 100
 94
 117
 136
 108
 133
(a)Cumulative total shareholder return measures the performance of a company’s stock (or an index) over time and is calculated as the change in the stock price plus cumulative dividends (assuming dividends are reinvested) over a specific period of time divided by the stock price at the beginning of the time period.
(b)The S&P 500 Property & Casualty Insurance Index included the following companies at December 31, 2019 (weighted by market capitalization): The Allstate Corporation, Chubb Limited, Cincinnati Financial Corporation, Loews Corporation, The Progressive Corporation, The Travelers Companies, Inc. and W.R. Berkley Corporation.
(c)The S&P 500 Life & Health Insurance Index included the following companies at December 31, 2019 (weighted by market capitalization): Aflac Incorporated, Globe Life Inc., Lincoln National Corporation, MetLife Inc., Principal Financial Group, Inc., Prudential Financial, Inc. and Unum Group.



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Item 6. Selected Financial Data

The following table sets forth certain data for the periods indicated (dollars in millions, except per share data).
  2019 2018 2017 2016 2015
Earnings Statement Data:
          
Revenues:          
Property and casualty insurance $5,668
 $5,313
 $4,969
 $4,729
 $4,621
Annuity 1,900
 1,745
 1,561
 1,459
 1,322
Other 382
 358
 330
 289
 382
Realized gains (losses) on securities and subsidiaries 287
 (266) 5
 21
 (180)
Total revenues $8,237
 $7,150
 $6,865
 $6,498
 $6,145
           
Earnings before income taxes:          
Property and casualty insurance $649
 $709
 $591
 $577
 $576
Annuity 362
 361
 380
 368
 331
Other (190) (165) (252) (179) (162)
Realized gains (losses) on securities and subsidiaries 287
 (266) 5
 21
 (180)
Earnings before income taxes $1,108
 $639
 $724
 $787
 $565
           
Net earnings, including noncontrolling interests $869
 $517
 $477
 $668
 $370
Less: Net earnings (loss) attributable to noncontrolling interests (28) (13) 2
 19
 18
Net earnings attributable to shareholders $897
 $530
 $475
 $649
 $352
           
Earnings attributable to shareholders per Common Share:          
Basic — GAAP $9.98
 $5.95
 $5.40
 $7.47
 $4.02
Diluted — GAAP 9.85
 5.85
 5.28
 7.33
 3.94
Core net operating earnings per share (diluted) (a) 8.62
 8.40
 6.55
 6.03
 5.44
           
Cash dividends paid per share of Common Stock (b) $4.95
 $4.45
 $4.7875
 $2.1525
 $2.03
Ratio of earnings to fixed charges including annuity benefits (c) 1.85
 1.54
 1.72
 1.85
 1.66
           
Balance Sheet Data:
          
Cash and investments $55,252
 $48,498
 $46,048
 $41,433
 $37,736
Total assets 70,130
 63,456
 60,658
 55,072
 49,837
Property and casualty insurance reserves:          
Unpaid losses and loss adjustment expenses 10,232
 9,741
 9,678
 8,563
 8,127
Unearned premiums 2,830
 2,595
 2,410
 2,171
 2,060
Annuity benefits accumulated 40,406
 36,616
 33,316
 29,907
 26,622
Life, accident and health reserves 612
 635
 658
 691
 705
Long-term debt 1,473
 1,302
 1,301
 1,283
 998
           
Shareholders’ equity $6,269
 $4,970
 $5,330
 $4,916
 $4,592
Less: Net unrealized gains related to fixed maturities (d) 879
 72
 606
 299
 279
Adjusted shareholders’ equity (e) $5,390
 $4,898
 $4,724
 $4,617
 $4,313
           
Book value per share $69.43
 $55.66
 $60.38
 $56.55
 $52.50
Adjusted book value per share (e) 59.70
 54.86
 53.51
 53.11
 49.32
 
(a)
AFG’s net earnings per share (diluted), determined in accordance with GAAP, includes certain items that may not be indicative of its ongoing core operations. AFG believes that its core net operating earnings per share provides management, financial analysts, rating agencies and investors with an understanding of the results from the ongoing operations of the Company by excluding the impact of net realized gains and losses and other items that are not necessarily indicative of operating trends. AFG’s management uses core net operating earnings to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business. Core net operating earnings is also used by AFG’s management as a basis for strategic planning and forecasting. Core net operating earnings per share (diluted) is a non-GAAP financial measure. See Item 7 — Management’s Discussion and Analysis — “Results of Operations — General” for additional details, including a reconciliation of core net operating earnings per share (diluted) to net earnings available to shareholders (diluted) computed in accordance with GAAP.

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(b)AFG increased its quarterly dividend in October of each of the last five years as follows: increased to $0.45 per share in 2019, $0.40 per share in 2018, $0.35 per share in 2017, $0.3125 per share in 2016 and $0.28 per share in 2015. In addition, AFG paid special cash dividends of $3.30 per share in 2019, $3.00 per share in 2018, $3.50 per share in 2017 and $1.00 per share in 2016 and 2015.
(c)Fixed charges are computed on a “total enterprise” basis. For purposes of calculating the ratios, “earnings” have been computed by adding to pretax earnings the fixed charges and the noncontrolling interests in earnings of subsidiaries having fixed charges and the undistributed equity in earnings or losses of investees. Fixed charges include interest (including annuity benefits as indicated), amortization of debt premium/discount and expense, preferred dividend and distribution requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor. The ratio of core earnings to fixed charges excluding annuity benefits and the ratio of earnings to fixed charges excluding and including annuity benefits are shown in the table below:
 2019 2018 2017 2016 2015
Ratio of core earnings to fixed charges excluding annuity benefits12.78
 11.31
 8.97
 9.15
 8.59
Impact of non-core items1.83
 (3.45) (1.30) (0.53) (2.01)
Ratio of earnings to fixed charges excluding annuity benefits14.61
 7.86
 7.67
 8.62
 6.58
Impact of including interest on annuities as a fixed charge(12.76) (6.32) (5.95) (6.77) (4.92)
Ratio of earnings to fixed charges including annuity benefits1.85
 1.54
 1.72
 1.85
 1.66
Although the ratio of earnings to fixed charges excluding annuity benefits is not required or encouraged to be disclosed under Securities and Exchange Commission rules, some investors and lenders may not consider interest credited to annuity policyholders’ accounts a borrowing cost for an insurance company, and accordingly, believe this ratio is meaningful.
(d)Net unrealized gains related to fixed maturities, which includes net unrealized gains (losses) on cash flow hedges, is part of accumulated other comprehensive income and is shown net of related adjustments to deferred policy acquisition costs and certain liabilities in the annuity, long-term care and life businesses.
(e)Adjusted shareholders’ equity and adjusted book value per share exclude net unrealized gains related to fixed maturity securities. Management believes that investors find a measurement of shareholders’ equity excluding net unrealized gains related to fixed maturity securities to be meaningful as the unrealized gains related to fixed maturities fluctuates with changes in interest rates in a way that is primarily only meaningful to AFG if it sells those investments.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFG’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page F-1.

OVERVIEW

Financial Condition
AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Therefore, certain analyses are most meaningfully presented on a parent only basis while others are best done on a total enterprise basis. In addition, because most of its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.

At December 31, 2019, AFG (parent) held approximately $243 million in cash and securities and had $500 million available under a bank line of credit, which expires in June 2021.

Results of Operations
Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in the sale of traditional fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets.

AFG reported fourth quarter 2019 net earnings attributable to shareholders of $211 million ($2.31 per share, diluted) compared to a net loss attributable to shareholders of $29 million ($0.33 per share, diluted) in the fourth quarter of 2018, reflecting:
net realized gains on securities in the fourth quarter of 2019 compared to net realized losses on securities in the fourth quarter of 2018. Both the 2019 and 2018 periods reflect the change in the fair value of equity securities that are required to be carried at fair value through net earnings under accounting guidance adopted on January 1, 2018,
higher earnings in the annuity segment,
higher net investment income in the property and casualty insurance segment,
lower underwriting profit in the property and casualty insurance segment,
higher interest charges on borrowed money, and
higher holding company expenses.

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Full year 2019 net earnings attributable to AFG’s shareholders were $897 million ($9.85 per share, diluted) compared to $530 million ($5.85 per share, diluted) in 2018, reflecting:
net realized gains on securities in 2019 compared to net realized losses on securities in 2018,
higher net investment income in the property and casualty insurance segment,
lower underwriting profit in the property and casualty insurance segment,
higher interest charges on borrowed money, and
higher holding company expenses.

CRITICAL ACCOUNTING POLICIES

Significant accounting policies are summarized in Note A “Accounting Policies” to the financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and, thus, impact amounts reported in the future. The areas where management believes the degree of judgment required to determine amounts recorded in the financial statements is most significant are as follows:
the establishment of insurance reserves, especially asbestos and environmental-related reserves,
the recoverability of reinsurance,
the amortization of annuity deferred policy acquisition costs,
the measurement of the derivatives embedded in indexed annuity liabilities,
the establishment of asbestos and environmental reserves of former railroad and manufacturing operations, and
the valuation of investments, including the determination of other-than-temporary impairments.

See “Liquidity and Capital Resources — Uncertainties” for a discussion of insurance reserves, recoverables from reinsurers, indexed annuity embedded derivatives and contingencies related to American Premier’s former operations and “Liquidity and Capital Resources — Investments” for a discussion of impairments on investments. Deferred policy acquisition costs (“DPAC”) and certain liabilities related to annuities are amortized in relation to the present value of expected gross profits on the policies. Assumptions considered in determining expected gross profits involve significant judgment and include management’s estimates of interest rates and investment spreads, surrenders, annuitizations, renewal premiums and mortality. Should actual experience require management to change its assumptions (commonly referred to as “unlocking”), a charge or credit would be recorded to adjust DPAC or annuity liabilities to the levels they would have been if the new assumptions had been used from the inception date of each policy.

LIQUIDITY AND CAPITAL RESOURCES

Ratios   
AFG’s debt to total capital ratio on a consolidated basis is shown below (dollars in millions). Management intends to maintain the ratio of debt to capital at or below 25% and intends to maintain the capital of its significant insurance subsidiaries at or above levels currently indicated by rating agencies as appropriate for the current ratings.
  
 December 31,
2019 2018
Principal amount of long-term debt $1,493
 $1,318
Total capital 6,883
 6,218
Ratio of debt to total capital:    
Including subordinated debt 21.7% 21.2%
Excluding subordinated debt 14.8% 16.4%
 
The ratio of debt to total capital is a non-GAAP measure that management believes is useful for investors, analysts and ratings agencies to evaluate AFG’s financial strength and liquidity and to provide insight into how AFG finances its operations. In addition, maintaining a ratio of debt, excluding subordinated debt and debt secured by real estate (if any), to total capital of 35% or lower is a financial covenant in AFG’s bank credit facility. The ratio is calculated by dividing the principal amount of AFG’s long-term debt by its total capital, which includes long-term debt, noncontrolling interests and shareholders’ equity (excluding unrealized gains (losses) related to fixed maturity investments).


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AFG’s ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.85 for the year ended December 31, 2019. Excluding annuity benefits, this ratio was 14.61. The ratio excluding annuity benefits is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.

The NAIC’s model law for risk-based capital (“RBC”) applies to both life and property and casualty companies. RBC formulas determine the amount of capital that an insurance company needs so that it has an acceptable expectation of not becoming financially impaired. At December 31, 2019, the capital ratios of all AFG insurance companies exceeded the RBC requirements.

Condensed Consolidated Cash Flows   
AFG’s principal sources of cash include insurance premiums, income from its investment portfolio and proceeds from the maturities, redemptions and sales of investments. Insurance premiums in excess of acquisition expenses and operating costs are invested until they are needed to meet policyholder obligations or made available to the parent company through dividends to cover debt obligations and corporate expenses, and to provide returns to shareholders through share repurchases and dividends. Cash flows from operating, investing and financing activities as detailed in AFG’s Consolidated Statement of Cash Flows are shown below (in millions):
 Year ended December 31,
 2019 2018 2017
Net cash provided by operating activities$2,456
 $2,083
 $1,804
Net cash used in investing activities(3,065) (5,350) (3,292)
Net cash provided by financing activities1,408
 2,444
 1,719
Net change in cash and cash equivalents$799
 $(823) $231

Net Cash Provided by Operating Activities   AFG’s property and casualty insurance operations typically produce positive net operating cash flows as premiums collected and investment income exceed policy acquisition costs, claims payments and operating expenses. AFG’s net cash provided by operating activities is impacted by the level and timing of property and casualty premiums, claim and expense payments and recoveries from reinsurers. AFG’s annuity operations typically produce positive net operating cash flows as investment income exceeds acquisition costs and operating expenses. Interest credited on annuity policyholder funds is a non-cash increase in AFG’s annuity benefits accumulated liability and annuity premiums, benefits and withdrawals are considered financing activities due to the deposit-type nature of annuities. Cash flows provided by operating activities also include the activity of AFG’s managed investment entities (collateralized loan obligations) other than those activities included in investing or financing activities. The changes in the assets and liabilities of the managed investment entities included in operating activities increased cash flows from operating activities by $23 million in 2019, $148 million in 2018 and $60 million in 2017, accounting for a $125 million decrease in cash flows from operating activities in 2019 compared to 2018 and an $88 million increase in cash flows from operating activities in 2018 compared to 2017. As discussed in Note A — “Accounting Policies — Managed Investment Entities” to the financial statements, AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities and such assets and liabilities are shown separately in AFG’s Balance Sheet. Excluding the impact of the managed investment entities, net cash provided by operating activities was $2.43 billion, $1.94 billion and $1.74 billion in 2019, 2018 and 2017, respectively.

Net Cash Used in Investing Activities   AFG’s investing activities consist primarily of the investment of funds provided by its property and casualty and annuity businesses. Net cash used in investing activities was $3.07 billion in 2019 compared to $5.35 billion in 2018, a decrease of $2.28 billion. As discussed below (under net cash provided by financing activities), AFG’s annuity segment had net cash flows from annuity policyholders of $1.66 billion in 2019 and $2.76 billion in 2018. In addition, AFG’s cash on hand increased by $799 million during 2019 as AFG held more cash due to fewer investment opportunities in 2019 compared to 2018 when AFG invested a large portion of its cash on hand at the beginning of the year. In addition to the investment of funds provided by the insurance operations, investing activities also include the purchase and disposal of managed investment entity investments, which are presented separately in AFG’s Balance Sheet. Net investment activity in the managed investment entities was a $11 million source of cash in 2019 compared to a $169 million use of cash in 2018, accounting for a $180 million decrease in net cash used in investing activities in 2019 compared to 2018. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements.


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Net cash used in investing activities was $5.35 billion in 2018 compared to $3.29 billion in 2017, an increase of $2.06 billion. As discussed below (under net cash provided by financing activities), AFG’s annuity group had net cash flows from annuity policyholders of $2.76 billion in 2018 and $1.99 billion in 2017. In addition, AFG’s cash on hand decreased by $823 million during 2018 as AFG invested a large portion of its cash on hand at December 31, 2017. Net investment activity in the managed investment entities was a $169 million use of cash in 2018 compared to a $205 million use of cash in 2017, accounting for a $36 million decrease in net cash used in investing activities in 2018 compared to 2017.

Net Cash Provided by Financing Activities   AFG’s financing activities consist primarily of transactions with annuity policyholders, issuances and retirements of long-term debt, issuances and repurchases of common stock, and dividend payments. Net cash provided by financing activities was $1.41 billion in 2019 compared to $2.44 billion in 2018, a decrease of $1.03 billion. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $1.66 billion in 2019 compared to $2.76 billion in 2018, resulting in a $1.10 billion decrease in net cash provided by financing activities in 2019 compared to 2018. In 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in 2059 and $200 million of 5.125% Subordinated Debentures due in 2059, the net proceeds of which contributed $315 million to net cash provided by financing activities in 2019. The December redemption of AFG’s 6-1/4% Subordinated Debentures was a $150 million use of cash in 2019. During 2018, AFG had no additional long-term borrowings or repayments. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of $3.30 per share and $3.00 per share in 2019 and 2018, respectively, which resulted in total cash dividends of $444 million in 2019 compared to $394 million in 2018. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG’s Balance Sheet. Retirements of managed investment entity liabilities exceeded issuances by $11 million in 2019 compared to issuances of managed investment entity liabilities exceeding retirements by $48 million in 2018, accounting for a $59 million decrease in net cash provided by financing activities in 2019 compared to 2018. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements.

Net cash provided by financing activities was $2.44 billion in 2018 compared to $1.72 billion in 2017, an increase of $725 million. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $2.76 billion in 2018 compared to $1.99 billion in 2017, resulting in a $773 million increase in net cash provided by financing activities in 2018 compared to 2017. During 2018, AFG had no additional long-term borrowings or repayments compared to $712 million of additional long-term borrowings and $745 million of debt repayments in 2017. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of $3.00 per share and $3.50 per share in 2018 and 2017, respectively, which resulted in total cash dividends of $394 million in 2018 compared to $417 million in 2017. Issuances of managed investment entity liabilities exceeded retirements by $48 million in 2018 compared to $146 million in 2017, accounting for a $98 million decrease in net cash provided by financing activities in 2018 compared to 2017.

Parent and Subsidiary Liquidity

Parent Holding Company Liquidity   Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and marketable securities or to generate cash through borrowings, sales of other assets, or similar transactions.

AFG can borrow up to $500 million under its revolving credit facility which expires in June 2021. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during 2019.

In 2019, AFG paid special cash dividends of $3.30 per share of AFG Common Stock ($1.50 per share in May and $1.80 per share in November) totaling approximately $297 million.

In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in March 2059. The net proceeds of the
offering were used for general corporate purposes.

On December 2, 2019, AFG issued $200 million of 5.125% Subordinated Debentures due in December 2059. A portion of the net proceeds of the offering were used to redeem AFG’s $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in September 2054, at par value on December 23, 2019, with the remainder used for general corporate purposes.

In 2018, AFG paid special cash dividends of $3.00 per share of AFG Common Stock ($1.50 per share in May and November) totaling approximately $267 million and repurchased 65,589 shares of its Common Stock for $6 million.

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In June 2017, AFG issued $350 million of 4.50% Senior Notes due in June 2047. Net proceeds from the offering were used to redeem AFG’s $230 million outstanding principal amount of 6-3/8% Senior Notes due in June 2042, at par value in June 2017 and AFG’s $125 million outstanding principal amount of 5-3/4% Senior Notes due in August 2042 at par value in August 2017.

In November 2017, AFG issued an additional $240 million of 4.50% Senior Notes due in 2047 and $125 million of 3.50% Senior Notes due in 2026. The net proceeds of the offering were used to redeem AFG’s $350 million outstanding principal amount of 9-7/8% Senior Notes due in June 2019 for $388 million (including a make-whole premium of $38 million) in December 2017.

In 2017, AFG paid special cash dividends of $3.50 per share of AFG Common Stock ($1.50 per share in May and $2.00 per share in November) totaling approximately $308 million.

All debentures and notes issued by AFG are rated investment grade by two nationally recognized rating agencies. Under a currently effective shelf registration statement, AFG can offer additional equity or debt securities. The shelf registration provides AFG with flexibility to access the capital markets from time to time as market and other conditions permit.

Under a tax allocation agreement with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary’s contribution to amounts due under AFG’s consolidated tax return.

Subsidiary Liquidity   Great American Life Insurance Company (“GALIC”), a wholly-owned annuity subsidiary, is a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). The FHLB makes advances and provides other banking services to member institutions, which provides the annuity operations with an additional source of liquidity. At December 31, 2019, GALIC had $1.1 billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.13% to 0.21% over LIBOR (average rate of 1.95% at December 31, 2019). While these advances must be repaid between 2020 and 2021 ($310 million in 2020 and $786 million in 2021), GALIC has the option to prepay all or a portion of the advances. GALIC has invested the proceeds from the advances in fixed maturity securities with similar expected lives as the advances for the purpose of earning a spread over the interest payments due to the FHLB. At December 31, 2019, GALIC estimated that it had additional borrowing capacity of approximately $800 million from the FHLB.

In the fourth quarter of 2018, GALIC, AFG’s primary annuity subsidiary, entered into a reinsurance treaty with Hannover Life Reassurance Company of America that transfers the risk of certain surrender activity in GALIC’s fixed-indexed annuity business. This treaty meets the statutory risk transfer rules and resulted in a $510 million increase in statutory surplus (through an after-tax reserve credit). The treaty reduces statutory capital and surplus volatility related to GALIC’s fixed-indexed annuity policies from stock market fluctuations, which could impact GALIC’s risk-based capital and the amount of dividends available in future periods. Under GAAP, this transaction does not meet the GAAP insurance risk transfer criteria and did not have a material impact on AFG’s financial statements.

The liquidity requirements of AFG’s insurance subsidiaries relate primarily to the liabilities associated with their products as well as operating costs and expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from premiums and investment income have generally provided more than sufficient funds to meet these requirements. 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 AFG’s property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves.


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In the annuity business, where profitability is largely dependent on earning a spread between invested assets and annuity liabilities, the duration of investments is generally maintained close to that of liabilities. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG’s annuity products. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to contractually guaranteed minimum interest rates (“GMIRs”). At December 31, 2019, AFG could reduce the average crediting rate on approximately $30 billion of traditional fixed, fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits by approximately 119 basis points (on a weighted average basis). Annuity policies are subject to GMIRs at policy issuance. The table below shows the breakdown of annuity reserves by GMIR. The current interest crediting rates on substantially all of AFG’s annuities with a GMIR of 3% or higher are at their minimum.
     % of Reserves 
     at December 31, 
 GMIR   2019 2018 2017 
 1 — 1.99%   81% 79% 76% 
 2 — 2.99%   3% 4% 5% 
 3 — 3.99%   7% 8% 10% 
 4.00% and above   9% 9% 9% 
           
 Annuity benefits accumulated (in millions) $40,406 $36,616 $33,316 

For statutory accounting purposes, equity securities of non-affiliates and equity call and put options used in the fixed-indexed and variable-indexed annuity business are generally carried at fair value. At December 31, 2019, AFG’s insurance companies owned publicly traded equity securities with a fair value of $1.87 billion and equity index call and put options with a net fair value of $923 million. Decreases in market prices could adversely affect the insurance group’s capital, potentially impacting the amount of dividends available or necessitating a capital contribution. Conversely, increases in market prices could have a favorable impact on the group’s dividend-paying capability.

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries’ investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.

Condensed Parent Only Cash Flows   
AFG’s parent holding company only condensed cash flows from operating, investing and financing activities are shown below (in millions):
 Year ended December 31,
 2019 2018 2017
Net cash provided by operating activities$306
 $215
 $578
Net cash provided by (used in) investing activities(56) 10
 (63)
Net cash used in financing activities(242) (366) (413)
Net change in cash and cash equivalents$8
 $(141) $102

Parent Net Cash Provided by Operating Activities   Parent holding company cash flows from operating activities consist primarily of dividends and tax payments received from AFG’s insurance subsidiaries, reduced by tax payments to the IRS and holding company interest and other expenses. Parent holding company net cash provided by operating activities was $306 million in 2019 compared to $215 million in 2018 and $578 million in 2017. The $91 million increase in net cash provided by operating activities in 2019 as compared to 2018 was due primarily to higher dividends received from subsidiaries in 2019 as compared to 2018. The $363 million decrease in net cash provided by operating activities in 2018 as compared to 2017 was due to lower dividends received from subsidiaries.

Parent Net Cash Provided by (Used in) Investing Activities   Parent holding company investing activities consist of capital contributions to and returns of capital from subsidiaries and, to a much lesser extent, parent company investment activity. Parent holding company net cash used in investing activities was $56 million in 2019 compared to net cash provided by investing activities of $10 million in 2018 and net cash used in investing activities of $63 million in 2017. The fluctuations in net cash provided by (used in) investing activities are due primarily to higher capital contributions to subsidiaries in 2019 and 2017 as compared to 2018.


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Parent Net Cash Used in Financing Activities   Parent company financing activities consist primarily of the issuance and retirement of long-term debt, dividends to shareholders, and, to a lesser extent, proceeds from employee stock option exercises and repurchases of AFG Common Stock. Significant long-term debt and common stock transactions are discussed above under “Parent Holding Company Liquidity.” Parent holding company net cash used in financing activities was $242 million in 2019 compared to $366 million in 2018 and $413 million in 2017. The $124 million decrease in net cash used in financing activities in 2019 as compared to 2018 reflects the net issuances of long-term debt in 2019, partially offset by increased dividends (due primarily to special dividends of $3.30 per share in 2019 compared to $3.00 per share in 2018). The $47 million decrease in net cash used in financing activities in 2018 as compared to 2017 reflects lower net redemptions of long-term debt in 2018 and decreased dividends (due primarily to special dividends of $3.00 per share in 2018 compared to $3.50 per share in 2017).

Contractual Obligations   
The following table shows an estimate (based on historical patterns and expected trends) of payments to be made for insurance reserve liabilities, as well as scheduled payments for major contractual obligations (in millions).
  Total 
Within
One Year
 2-3 Years 4-5 Years 
More than
5 Years
Annuities (a) $45,451
 $3,546
 $8,819
 $11,035
 $22,051
Life, accident and health liabilities (a) 1,283
 101
 207
 163
 812
Property and casualty unpaid losses and loss adjustment expenses (b) 10,232
 2,834
 2,753
 1,156
 3,489
Long-term debt, including interest 3,349
 68
 136
 136
 3,009
Operating leases (c) 202
 47
 73
 47
 35
Total $60,517
 $6,596
 $11,988
 $12,537
 $29,396

(a)Amounts presented in the table represent estimated cash payments under such contracts, based on significant assumptions related to mortality, morbidity, lapse, renewal, retirement and annuitization. These assumptions also include interest and index crediting consistent with assumptions used to amortize DPAC and assess loss recognition. All estimated cash payments are undiscounted for the time value of money. As a result, total outflows for all years exceed the corresponding liabilities of $40.41 billion for annuity benefits accumulated and $612 million for life, accident and health reserves included in AFG’s Balance Sheet as of December 31, 2019. Based on the same assumptions, AFG projects reinsurance recoveries related to life, accident and health reserves totaling $597 million as follows: Within 1 year — $60 million; 2-3 years — $100 million; 4-5 years — $76 million; and thereafter — $361 million. Actual payments and their timing could differ significantly from these estimates.
(b)Dollar amounts and time periods are estimates based on historical net payment patterns applied to the gross reserves and do not represent actual contractual obligations. Based on the same assumptions, AFG projects reinsurance recoveries related to these reserves totaling $3.02 billion as follows: Within 1 year — $838 million; 2-3 years — $813 million; 4-5 years — $342 million; and thereafter — $1.03 billion. Actual payments and their timing could differ significantly from these estimates.
(c)Amounts presented in the table represent lease component payments, including short-term lease payments, and exclude non-lease component payments of building leases (primarily common area maintenance and property tax payments). Estimated non-lease component payments totaling $92 million are as follows: Within 1 year — $17 million; 2-3 years — $30 million; 4-5 years — $24 million; and thereafter — $21 million.

AFG has no material contractual purchase obligations or other long-term liabilities at December 31, 2019.

Off-Balance Sheet Arrangements  
See Note Q — “Additional Information — Financial Instruments — Unfunded Commitments” to the financial statements.

Investments   
AFG attempts to optimize investment income while building the value of its portfolio, placing emphasis upon total long-term performance.

AFG’s investment portfolio at December 31, 2019, contained $46.51 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in a separate component of shareholders’ equity on an after-tax basis and $113 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes $1.64 billion in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and $294 million in equity securities carried at fair value with holding gains and losses included in net investment income.


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As detailed in Note E — “Investments — Net Unrealized Gain on Marketable Securities” to the financial statements, unrealized gains and losses on AFG’s fixed maturity securities are included in shareholders’ equity after adjustments for related changes in DPAC and certain liabilities related to annuity, long-term care and life businesses and deferred income taxes. DPAC and certain other balance sheet amounts applicable to annuity, long-term care and life businesses are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding increases or decreases (net of tax) included in accumulated other comprehensive income in AFG’s Balance Sheet.

Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2019, the average life of AFG’s fixed maturities was about 5-1/2 years.
 
Fair values for AFG’s portfolio are determined by AFG’s internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on published closing prices. For AFG’s fixed maturity portfolio, approximately 90% was priced using pricing services at December 31, 2019 and the balance was priced primarily by using non-binding broker quotes. When prices obtained for the same security vary, AFG’s internal investment professionals select the price they believe is most indicative of an exit price.

The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage backed securities (“MBS”) are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers’ prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.
 
Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, AFG communicates directly with pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the services to value specific securities.
 
In general, the fair value of AFG’s fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG’s fixed maturity portfolio and accumulated other comprehensive income that an immediate increase of 100 basis points in the interest rate yield curve would have at December 31, 2019 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.

Fair value of fixed maturity portfolio$46,618
Percentage impact on fair value of 100 bps increase in interest rates(4.0%)
Pretax impact on fair value of fixed maturity portfolio$(1,865)
Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts850
Estimated pretax impact on accumulated other comprehensive income(1,015)
Deferred income tax213
Estimated after-tax impact on accumulated other comprehensive income$(802)
 
Approximately 91% of the fixed maturities held by AFG at December 31, 2019, were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high-quality investment portfolio should generate a stable and predictable investment return.
 
MBS are subject to significant prepayment risk because, 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.


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Summarized information for AFG’s MBS (including those classified as trading) at December 31, 2019, is shown in the table below (dollars in millions). 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 average life of the residential and commercial MBS is approximately 4-1/2 years and 3 years, respectively.
  
Amortized
Cost
 Fair Value 
Fair Value as
% of Cost
 
Unrealized
Gain (Loss)
 
% Rated
Investment
Grade
Collateral type          
Residential:          
Agency-backed $549
 $552
 101% $3
 100%
Non-agency prime 1,157
 1,264
 109% 107
 53%
Alt-A 897
 1,015
 113% 118
 37%
Subprime 298
 330
 111% 32
 25%
Commercial 896
 927
 103% 31
 96%
  $3,797
 $4,088
 108% $291
 63%

The National Association of Insurance Commissioners (“NAIC”) assigns creditworthiness designations on a scale of 1 to 6 with 1 being the highest quality and 6 being the lowest quality. The NAIC retains third-party investment management firms to assist in the determination of appropriate NAIC designations for MBS based not only on the probability of loss (which is the primary basis of ratings by the major ratings firms), but also on the severity of loss and statutory carrying value. At December 31, 2019, 97% (based on statutory carrying value of $3.74 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately 15% of AFG’s fixed maturity portfolio at December 31, 2019. AFG’s municipal bond portfolio is high quality, with 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. At December 31, 2019, approximately 79% of the municipal bond portfolio was held in revenue bonds, with the remaining 21% held in general obligation bonds.

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at December 31, 2019, is shown in the following table (dollars in millions). Approximately $1.09 billion of available for sale fixed maturity securities had no unrealized gains or losses at December 31, 2019.
 
Securities
With
Unrealized
Gains
 
Securities
With
Unrealized
Losses
Available for Sale Fixed Maturities   
Fair value of securities$38,726
 $6,685
Amortized cost of securities$36,657
 $6,773
Gross unrealized gain (loss)$2,069
 $(88)
Fair value as % of amortized cost106% 99%
Number of security positions4,680
 649
Number individually exceeding $2 million gain or loss165
 7
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):   
States and municipalities$363
 $(4)
Mortgage-backed securities296
 (5)
Banks, savings and credit institutions287
 (2)
Other asset-backed securities156
 (20)
Insurance138
 (1)
Collateralized loans obligations10
 (37)
Percentage rated investment grade92% 93%


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The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at December 31, 2019, based on their fair values. Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. 
  
Securities
With
Unrealized
Gains
 
Securities
With
Unrealized
Losses
Maturity    
One year or less 4% 2%
After one year through five years 27% 7%
After five years through ten years 36% 9%
After ten years 8% 8%
  75% 26%
Collateralized loan obligations and other asset-backed securities (average life of approximately 4 years) 16% 65%
Mortgage-backed securities (average life of approximately 4-1/2 years) 9% 9%
  100% 100%

The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount:
  
Aggregate
Fair
Value
 
Aggregate
Unrealized
Gain (Loss)
 
Fair
Value as
% of Cost
Fixed Maturities at December 31, 2019      
Securities with unrealized gains:      
Exceeding $500,000 (1,278 securities) $20,444
 $1,557
 108%
$500,000 or less (3,402 securities) 18,282
 512
 103%
  $38,726
 $2,069
 106%
Securities with unrealized losses:      
Exceeding $500,000 (34 securities) $793
 $(41) 95%
$500,000 or less (615 securities) 5,892
 (47) 99%
  $6,685
 $(88) 99%
 
The following table (dollars in millions) summarizes the unrealized losses for all securities with unrealized losses by issuer quality and the length of time those securities have been in an unrealized loss position:
  
Aggregate
Fair
Value
 
Aggregate
Unrealized
Loss
 
Fair
Value as
% of Cost
Securities with Unrealized Losses at December 31, 2019      
Investment grade fixed maturities with losses for:      
Less than one year (295 securities) $4,086
 $(32) 99%
One year or longer (222 securities) 2,116
 (33) 98%
  $6,202
 $(65) 99%
Non-investment grade fixed maturities with losses for:      
Less than one year (98 securities) $375
 $(12) 97%
One year or longer (34 securities) 108
 (11) 91%
  $483
 $(23) 95%
 
When a decline in the value of a specific investment is considered to be other-than-temporary, a provision for impairment is charged to earnings (accounted for as a realized loss) and the cost basis of that investment is reduced by the amount of the charge. The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

a)whether the unrealized loss is credit-driven or a result of changes in market interest rates,
b)the extent to which fair value is less than cost basis,
c)cash flow projections received from independent sources,
d)historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases,

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e)near-term prospects for improvement in the issuer and/or its industry,
f)third-party research and communications with industry specialists,
g)financial models and forecasts,
h)the continuity of interest payments, maintenance of investment grade ratings and hybrid nature of certain investments,
i)discussions with issuer management, and
j)ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.

Based on its analysis of the factors listed above, management believes AFG will recover its cost basis in the fixed maturity securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at December 31, 2019. Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers’ creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG’s ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other-than-temporary impairment could be material to results of operations in future periods. Significant declines in the fair value of AFG’s investment portfolio could have a significant adverse effect on AFG’s liquidity. For information on AFG’s realized gains (losses) on securities, including charges for other-than-temporary impairment, see “Results of Operations — Consolidated Realized Gains (Losses) on Securities.”

Uncertainties   
As more fully explained in the following paragraphs, management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations.

Property and Casualty Insurance Reserves   Estimating the liability for unpaid losses and loss adjustment expenses (“LAE”) is inherently judgmental and is influenced by factors that are subject to significant variation. Determining the liability is a complex process incorporating input from many areas of the Company including actuarial, underwriting, pricing, claims and operations management.

The estimates of liabilities for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon: (i) the accumulation of case estimates for losses reported prior to the close of the accounting periods on direct business written (“case reserves”); (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of claims incurred but not reported or “IBNR” (including possible development on known claims); (iv) estimates (based on experience) of expense for investigating and adjusting claims; and (v) the current state of law and coverage litigation.

The process used to determine the total reserve for liabilities involves estimating the ultimate incurred losses and LAE, adjusted for amounts already paid on the claims. The IBNR reserve is derived by first estimating the ultimate unpaid reserve liability and subtracting case reserves for loss and LAE. See Note P — “Insurance — Property and Casualty Insurance Reserves” to the financial statements for a discussion of the factors considered and actuarial methods used in determining management’s best estimate of the ultimate liability for unpaid losses and LAE.


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The following table shows (in millions) the breakdown of AFG’s property and casualty insurance reserves between case reserves, IBNR reserves and LAE reserves (estimated amounts required to adjust, record and settle claims, other than the claim payments themselves) at December 31, 2019 and gross written premiums for the year ended December 31, 2019.
  Gross Loss Reserves  
  Case IBNR LAE 
Total
Reserves
 Gross Written Premiums
Statutory Line of Business          
Other liability — occurrence $817
 $1,973
 $477
 $3,267
 $1,098
Workers’ compensation 995
 1,360
 350
 2,705
 1,270
Other liability — claims made 204
 354
 260
 818
 588
Commercial auto/truck liability/medical 261
 343
 118
 722
 449
Special property (fire, allied lines, inland marine, earthquake) 366
 98
 25
 489
 1,439
Products liability — occurrence 87
 170
 145
 402
 138
Commercial multi-peril 136
 113
 66
 315
 300
Other lines 200
 409
 93
 702
 1,190
Total Statutory 3,066
 4,820
 1,534
 9,420
 6,472
Adjustments for GAAP:          
Foreign operations 293
 475
 36
 804
 811
Deferred gains on retroactive reinsurance 
 27
 
 27
 
Loss reserve discounting (8) 
 
 (8) 
Other (11) 
 
 (11) 16
Total Adjustments for GAAP 274
 502
 36
 812
 827
Total GAAP Reserves and Premiums $3,340
 $5,322
 $1,570
 $10,232
 $7,299

While current factors and reasonably likely changes in variable factors are considered in estimating the liability for unpaid losses and LAE, there is no method or system that can eliminate the risk of actual ultimate results differing from such estimates.

Following is a discussion of certain critical variables affecting the estimation of loss reserves of the more significant long-tail lines of business (asbestos and environmental liabilities are separately discussed below). Many other variables may also impact ultimate claim costs.

An important assumption underlying reserve estimates is that the cost trends implicitly built into development patterns will continue into the future. However, future results could vary due to an unexpected change in the underlying cost trends. This unexpected change could arise from a variety of sources including a general increase in economic inflation, inflation from social programs, new medical technologies, or other factors such as those listed below in connection with AFG’s largest lines of business. It is not possible to isolate and measure the potential impact of just one of these variables, and future cost trends could be partially impacted by several such variables. However, it is reasonable to address the sensitivity of the reserves to potential impact from changes in these variables by measuring the effect of a possible overall 1% change in future cost trends that may be caused by one or more variables. Utilizing the effect of a 1% change in overall cost trends enables changes greater than 1% to be estimated by extrapolation. Each additional 1% change in the cost trend would increase the effect on net earnings by an amount slightly (about 5%) greater than the effect of the previous 1%. For example, if a 1% change in cost trends in a line of business would change net earnings by $20 million, a 2% change would change net earnings by approximately $41 million.

The estimated cumulative impact that a 1% change in cost trends in AFG’s more significant lines of property and casualty business (exceeding 5% of total reserves) would have on net earnings is shown below (in millions).
Line of business
Effect of 1%
Change in
Cost Trends
Other liability — occurrence$45
Workers’ compensation72
Other liability — claims made15
Commercial auto/truck liability/medical10

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The judgments and uncertainties surrounding management’s reserve estimation process and the potential for reasonably possible variability in management’s most recent reserve estimates may also be viewed by looking at how recent historical estimates of reserves have developed. The following table shows (dollars in millions) what the impact on AFG’s net earnings would be on the more significant lines of business if the December 31, 2019, reserves (net of reinsurance) developed at the same rate as the average development of the most recent five years.
  
5-yr. Average
Development (a)(b)
 Net Reserves (b) December 31, 2019 
Effect on Net
Earnings (b)
Other liability — occurrence 4.5% $1,428
 $(64)
Workers’ compensation (3.7%) 2,283
 84
Other liability — claims made (2.1%) 605
 13
Commercial auto/truck liability/medical 0.3% 508
 (2)
(a)Adverse (favorable), net of tax effect.
(b)Excludes asbestos and environmental liabilities.

The following discussion describes key assumptions and important variables that affect the estimate of the reserve for loss and LAE of the more significant lines of business and explains what caused them to change from assumptions used in the preceding period.

Other Liability — Occurrence

This long-tail line of business consists of coverages protecting the insured against legal liability resulting from negligence, carelessness, or a failure to act causing property damage or personal injury to others. Some of the important variables affecting estimation of loss reserves for other liability — occurrence include:
Litigious climate
Unpredictability of judicial decisions regarding coverage issues
Magnitude of jury awards
Outside counsel costs
Timing of claims reporting

AFG recorded adverse prior year reserve development of $143 million in 2019 related to its other liability — occurrence coverage due primarily to continued claim severity increases in excess and umbrella liability coverages. AFG recorded adverse prior year reserve development of $48 million in 2018 due to claim severity increases in excess and umbrella liability coverages as well as late emergence of excess workers’ compensation and Texas non-subscribers workers’ injury claims. AFG recorded adverse prior year reserve development of $37 million in 2017 due to increased severity of New York contractor claims, as well as increased claim severity across other excess and umbrella liability coverages and general liability coverages.

While management applies the actuarial methods mentioned above, more judgment is involved in arriving at the final reserve to be held. For recent accident years, more weight is given to the Bornhuetter-Ferguson method.

Workers’ Compensation

This long-tail line of business provides coverage to employees who may be injured in the course of employment. Some of the important variables affecting estimation of loss reserves for workers’ compensation include:
Legislative actions and regulatory and legal interpretations
Future medical cost inflation
Economic conditions
Frequency of reopening claims previously closed
Advances in medical equipment and processes
Pace and intensity of employee rehabilitation
Changes in the use of pharmaceutical drugs
Changes in longevity trends for permanently injured workers

Approximately 27% and 23% of AFG’s workers’ compensation reserves at December 31, 2019 relate to policies written in Florida and California, respectively. The Castellanos v. Next Door Company decision in Florida and the implementation of Senate Bill 863 in California are two examples of recent changes that impacted the workers’ compensation operating environment and added difficulty and uncertainty to the estimation of related liabilities.


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AFG recorded favorable prior year reserve development of $180 million in 2019 related to its workers’ compensation coverage due to lower than anticipated frequency of lost-time claims and medical severity. AFG recorded favorable prior year reserve development of $127 million in 2018 due to lower than anticipated claim severity in the southeastern United States and improving claim closure rates in California. AFG recorded favorable prior year reserve development of $79 million in 2017 due to lower than anticipated claim severity and improving claim closure rates, particularly in the southeastern United States and California.

Other Liability — Claims Made

This long-tail line of business consists mostly of directors’ and officers’ liability (“D&O”). Some of the important variables affecting estimation of loss reserves for other liability — claims made include:
Litigious climate
Economic conditions
Variability of stock prices
Magnitude of jury awards
The general state of the economy and the variability of the stock price of the insured can affect the frequency and severity of shareholder class action suits and other situations that trigger coverage under D&O policies. For example, from 2008 to 2010, economic conditions led to higher frequency of claims, particularly in the D&O policies for small account and not-for-profit organizations. Since then, claim frequency has decreased from its peak in 2010 and has stabilized to near pre-2008 levels.

AFG recorded favorable prior year reserve development of $4 million in 2019, $9 million in 2018 and $5 million in 2017 on its D&O business as claim severity was less than expected across several prior accident years.

Commercial Auto/Truck Liability/Medical

This line of business is a mix of coverage protecting the insured against legal liability for property damage or personal injury to others arising from the operation of commercial motor vehicles. The property damage liability exposure is usually short-tail with relatively quick reporting and settlement of claims. The bodily injury and medical payments exposures are longer-tailed; although the claim reporting is relatively quick, the final settlement can take longer to achieve. Some of the important variables affecting estimation of loss reserves for commercial auto/truck liability/medical are similar to other liability — occurrence and include:
Magnitude of jury awards
Unpredictability of judicial decisions regarding coverage issues
Litigious climate and trends
Change in frequency of severe accidents
Health care costs and utilization of medical services by injured parties

AFG recorded favorable prior year reserve development of $15 million in 2019 for this line of business due primarily to lower than expected claim frequency and severity. AFG recorded favorable prior year reserve development of $26 million in 2018 due primarily to lower than expected claim severity. AFG recorded adverse prior year reserve development of $2 million in 2017 for this line of business.

Reserves of Foreign Operations

Approximately $512 million of the $804 million in gross reserves of foreign operations relate to the operations of Neon Underwriting Limited, AFG’s wholly-owned United Kingdom-based Lloyd’s insurer. In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon’s reserves will decline as the business is run-off. Historically, Neon wrote cargo, cyber, financial lines, marine and energy liability, marine hull and war, general casualty, personal accident and health, political and trade risk, professional indemnity, property insurance and reinsurance, and terrorism and political violence insurance. Significant variables in estimating Neon’s loss reserves include:
Litigious environment
Magnitude of court awards
Trends in claim costs, including medical cost inflation
Global economic conditions
Reporting lag from ceding property insurers


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Neon recorded adverse prior year reserve development of $13 million in 2019, due primarily to lower than expected recoveries and higher than expected claim severity of assumed property catastrophe losses and reserve strengthening in its general casualty, ocean marine and non-catastrophe property lines of business.

Neon recorded favorable prior year reserve development of $26 million in 2018, due primarily to lower than expected emergence in assumed 2017 property catastrophe losses.

In the fourth quarter of 2017, Neon entered into a reinsurance to close agreement for 2015 and prior years of account, which transfers the responsibility for all of the liabilities that attach to the transferred year of account (gross reserves of $385 million at December 31, 2017) as well as any income due to the closing year of account in return for a premium. The reinsurance to close agreement eliminates any remaining reserve volatility from years of account 2015 and prior, including all medical malpractice exposure. As a result of the reinsurance to close transaction, Neon recorded favorable reserve development of approximately $42 million, including $24 million related to its ongoing lines of business and $18 million that relates to exited lines of business. In addition to the prior year reserve development related to the reinsurance to close transaction, Neon recorded favorable prior year reserve development of $29 million in 2017 related to the retained loss reserves across all of Neon’s ongoing lines of business, particularly property lines.

Recoverables from Reinsurers and Availability of Reinsurance   AFG is subject to credit risk with respect to its reinsurers, as reinsurance contracts do not relieve AFG of its liability to policyholders. To mitigate this risk, substantially all reinsurance is ceded to companies rated “A” or better by S&P or is secured by “funds withheld” or other collateral.

The availability and cost of reinsurance are subject to prevailing market conditions, which are beyond AFG’s control and which may affect AFG’s level of business and profitability. Although the cost of certain reinsurance programs may increase, management believes that AFG will be able to maintain adequate reinsurance coverage at acceptable rates without a material adverse effect on AFG’s results of operations. AFG’s gross and net combined ratios are shown in the table below.

See Item 1 — Business — “Property and Casualty Insurance Segment — Reinsurance” for more information on AFG’s reinsurance programs. For additional information on the effect of reinsurance on AFG’s historical results of operations see Note P — “Insurance — Reinsurance” to the financial statements.

The following table illustrates the effect that purchasing property and casualty reinsurance has had on AFG’s combined ratio over the last three years. 
  2019 2018 2017
Before reinsurance (gross) 95.6% 94.1 % 98.9%
Effect of reinsurance 0.2% (0.3%) (4.2%)
Actual (net of reinsurance) 95.8% 93.8 % 94.7%

Outside of its property and casualty operations, AFG also has reinsurance recoverables totaling $282 million, including $228 million related to the run-off life business. These recoverables include $195 million directly or indirectly from Hannover Life Reassurance Company of America (rated AA- by S&P).

Asbestos and Environmental-related (“A&E”) Insurance Reserves   Asbestos and environmental reserves of the property and casualty group consisted of the following (in millions): 
  December 31,
  2019 2018
Asbestos $221
 $234
Environmental 162
 161
A&E reserves, net of reinsurance recoverable 383
 395
Reinsurance recoverable, net of allowance 146
 129
Gross A&E reserves $529
 $524

Asbestos reserves include claims asserting alleged injuries and damages from exposure to asbestos. Environmental reserves include claims relating to polluted sites.

Asbestos claims against manufacturers, distributors or installers of asbestos products were presented under the products liability section of their policies, which typically had aggregate limits that capped an insurer’s liability. In addition, asbestos claims are being presented as “non-products” claims, such as those by installers of asbestos products and by property

47


owners or operators who allegedly had asbestos on their property, under the premises or operations section of their policies. Unlike products exposures, these non-products exposures typically had no aggregate limits, creating greater exposure for insurers. Further, in an effort to seek additional insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits.

Approximately 41% of AFG’s net asbestos reserves relate to policies written directly by AFG subsidiaries. Claims from these policies generally are product-oriented claims with only a limited amount of non-products exposures and are dominated by small to mid-sized commercial entities that are mostly regional policyholders with few national target defendants. The remainder is assumed reinsurance business that includes exposures from 1954 to 1983. The asbestos and environmental assumed claims are ceded by various insurance companies under reinsurance treaties. A majority of the individual assumed claims have exposures of less than $100,000 to AFG. Asbestos losses assumed include some of the industry known manufacturers, distributors and installers. Pollution losses include industry known insured names and sites.

Establishing reserves for A&E claims relating to policies and participations in reinsurance treaties and former operations is subject to uncertainties that are significantly greater than those presented by other types of claims. For this group of claims, traditional actuarial techniques that rely on historical loss development trends cannot be used and a range of reasonably possible losses cannot be estimated. Case reserves and expense reserves are established by the claims department as specific policies are identified. In addition to the case reserves established for known claims, management establishes additional reserves for claims not yet known or reported and for possible development on known claims. These additional reserves are management’s best estimate based on periodic comprehensive studies and internal reviews adjusted for payments and identifiable changes, supplemented by management’s review of industry information about such claims, with due consideration to individual claim situations.

Management believes that estimating the ultimate liability for asbestos claims presents a unique and difficult challenge to the insurance industry due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. Environmental claims likewise present challenges in prediction, due to uncertainty regarding the interpretation of insurance policies, complexities regarding multi-party involvements at sites, evolving cleanup standards and protracted time periods required to assess the level of cleanup required at contaminated sites.

The following factors could impact AFG’s A&E reserves and payments:
There is interest at the state level to attempt to legislatively address asbestos liabilities and the manner in which asbestos claims are resolved. These developments are fluid and could result in piecemeal state-by-state solutions.
The manner by which bankruptcy courts are addressing asbestos liabilities is in flux.
AFG’s insureds may make claims alleging significant non-products exposures.

While management believes that AFG’s reserves for A&E claims are a reasonable estimate of ultimate liability for such claims, actual results may vary materially from the amounts currently recorded due to the difficulty in predicting the number of future claims, the impact of bankruptcy filings and unresolved issues such as whether coverage exists, whether policies are subject to aggregate limits on coverage, how claims are to be allocated among triggered policies and implicated years and whether claimants who exhibit no signs of illness will be successful in pursuing their claims. A 1% variation in loss cost trends, caused by any of the factors previously described, would change net earnings by approximately $32 million.


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AFG tracks its A&E claims by policyholder. The following table shows, by type of claim, the number of policyholders that did not receive any payments in the calendar year separate from policyholders that did receive a payment. Policyholder counts represent policies written by AFG subsidiaries and do not include assumed reinsurance. 
  2019 2018 2017
Number of policyholders with no indemnity payments:      
Asbestos 98
 94
 81
Environmental 113
 112
 101
  211
 206
 182
Number of policyholders with indemnity payments:      
Asbestos 46
 49
 74
Environmental 17
 32
 31
  63
 81
 105
Total 274
 287
 287

Amounts paid (net of reinsurance recoveries) for asbestos and environmental claims, including LAE, were as follows (in millions):
  2019 2018 2017
Asbestos $17
 $9
 $11
Environmental 13
 17
 12
Total $30
 $26
 $23

The survival ratio is a measure often used by industry analysts to compare A&E reserves’ strength among companies. This ratio is typically calculated by dividing reserves for A&E exposures by the three-year average of paid losses, and therefore measures the number of years that it would take to pay off current reserves based on recent average payments. Because this ratio can be significantly impacted by a number of factors such as loss payout variability, caution should be exercised in attempting to determine reserve adequacy based simply on the survival ratio. At December 31, 2019, the property and casualty insurance segment’s three-year survival ratios compare favorably with industry survival ratios published by A.M. Best (as of December 31, 2018, and adjusted for several large portfolio transfers) as detailed in the following table:
 Property and Casualty Insurance Reserves
 Three-Year Survival Ratio (Times Paid Losses)
 Asbestos Environmental Total A&E
AFG (12/31/2019)17.9
 11.8
 14.6
Industry (12/31/2018)7.0
 8.3
 7.3

During the third quarter of 2019, AFG completed and in-depth internal review of its A&E exposures relating to the run-off operations of its property and casualty insurance segment and its exposures related to former railroad and manufacturing operations and sites. In addition to its ongoing internal monitoring of A&E exposures, AFG has periodically conducted comprehensive external studies of its A&E reserves with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years. AFG has historically conducted an external study every two years. The most recent external study was in the third quarter of 2017 and AFG is currently evaluating the frequency of future external studies.

As a result of the 2019 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.

The increase in property and casualty environmental reserves was primarily associated with updated estimates of site
investigation and remedial costs with respect to existing sites and newly identified sites. AFG has updated its view of legal
defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. As in past years, there were no new or emerging broad industry trends that were identified in this review.

An in-depth internal review of AFG’s A&E reserves was also completed in the third quarter of 2018. As a result of the 2018 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase

49


its asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance). The increase in property and casualty asbestos reserves relates to increased estimates for indemnity and defense costs. The increase in property and casualty environmental reserves was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites.

As a result of the comprehensive external study completed in the third quarter of 2017, AFG’s property and casualty insurance segment recorded an $89 million pretax special charge to increase its asbestos reserves by $53 million (net of reinsurance) and its environmental reserves by $36 million (net of reinsurance). The increase in property and casualty asbestos reserves reflects increasing life expectancies in the U.S., which have allowed more time for the impacts of asbestos exposure to emerge. AFG’s comprehensive external study incorporates, among other factors, the increase in projected industry ultimate losses attributable to asbestos exposures, as well as revised estimates for future claims emergence. The increase in property and casualty environmental reserves was attributed primarily to increased legal defense costs and a number of claims and sites where the estimated investigation and remediation costs have increased.

Contingencies related to Subsidiaries’ Former Operations   The A&E studies and reviews discussed above encompassed reserves for various environmental and occupational injury and disease claims and other contingencies arising out of the railroad operations disposed of by American Premier’s predecessor and certain manufacturing operations disposed of by American Premier and its subsidiaries and by Great American Financial Resources, Inc. Charges resulting from the A&E study and reviews were $11 million in 2019, $9 million in 2018 and $24 million in 2017. For a discussion of the charges recorded for those operations, see “Results of Operations — Holding Company, Other and Unallocated.” Liabilities for claims and contingencies arising from these former railroad and manufacturing operations totaled $91 million at December 31, 2019. For a discussion of the uncertainties in determining the ultimate liability, see Note N — “Contingencies” to the financial statements.

Indexed Annuity Embedded Derivatives   As of December 31, 2019, annuity benefits accumulated in AFG’s Balance Sheet includes $3.73 billion for the fair value of the derivatives embedded in its fixed-indexed and variable-indexed annuities. As discussed in Note F — “Derivatives” to the financial statements, AFG’s fixed-indexed and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. Under GAAP, this index participation is considered an embedded derivative that is required to be carried at fair value in the financial statements. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. The fair value of the embedded derivatives represents an estimate of the present value of projected policyholder benefits from the equity participation in excess of the projected minimum guaranteed contract values. As discussed in Note D — “Fair Value Measurements” to the financial statements, the fair value of the embedded derivatives is impacted by fluctuations in interest rates, the stock market (including the cost of options), policyholder behavior and other factors. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

Run-off Long-term Care Insurance   In December 2015, AFG completed the sale of United Teacher Associates Insurance Company and Continental General Insurance Company, the legal entities containing substantially all of its run-off long-term care insurance business, to HC2 Holdings, Inc. (“HC2”) for approximately $13 million in net proceeds. AFG may also receive up to $13 million of additional proceeds from HC2 in 2020 contingent upon the release of certain statutory-basis liabilities of the legal entities sold by AFG. In connection with obtaining regulatory approval for the transaction, AFG agreed to provide up to an aggregate of $35 million of capital support for the insurance companies, on an as-needed basis to maintain specified surplus levels, subject to immediate reimbursement by HC2 through a five-year capital maintenance agreement expiring in 2020. With the completion of this sale, AFG divested substantially all of its long-term care business (96% as measured by net statutory reserves as of November 30, 2015) and retained only a small block of long-term care insurance (1,500 policies) with approximately $48 million of reserves at December 31, 2019. AFG will continue to accept renewal premiums on its remaining outstanding policies, which are guaranteed renewable.

MANAGED INVESTMENT ENTITIES

Accounting standards require AFG to consolidate its investments in collateralized loan obligation (“CLO”) entities that it manages and owns an interest in (in the form of debt). See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements. The effect of consolidating these entities is shown in the tables below (in millions). The “Before CLO Consolidation” columns include AFG’s investment and earnings in the CLOs on an unconsolidated basis.

50


CONDENSED CONSOLIDATING BALANCE SHEET

 
Before CLO
Consolidation
 
Managed
Investment
Entities
 
Consol.
Entries
   
Consolidated
As Reported
December 31, 2019         
Assets:         
Cash and investments$55,416
 $
 $(164) (a) $55,252
Assets of managed investment entities
 4,736
 
   4,736
Other assets10,143
 
 (1) (a) 10,142
Total assets$65,559
 $4,736
 $(165)   $70,130
Liabilities:         
Unpaid losses and loss adjustment expenses and unearned premiums$13,062
 $
 $
   $13,062
Annuity, life, accident and health benefits and reserves41,018
 
 
   41,018
Liabilities of managed investment entities
 4,736
 (165) (a) 4,571
Long-term debt and other liabilities5,210
 
 
   5,210
Total liabilities59,290
 4,736
 (165)   63,861
          
Redeemable noncontrolling interests
 
 
   
          
Shareholders’ equity:         
Common Stock and Capital surplus1,397
 
 
   1,397
Retained earnings4,009
 
 
   4,009
Accumulated other comprehensive income, net of tax863
 
 
   863
Total shareholders’ equity6,269
 
 
   6,269
Noncontrolling interests
 
 
   
Total equity6,269
 
 
   6,269
Total liabilities and equity$65,559
 $4,736
 $(165)   $70,130
          
December 31, 2018         
Assets:         
Cash and investments$48,685
 $
 $(187) (a) $48,498
Assets of managed investment entities
 4,700
 
   4,700
Other assets10,259
 
 (1) (a) 10,258
Total assets$58,944
 $4,700
 $(188)   $63,456
Liabilities:         
Unpaid losses and loss adjustment expenses and unearned premiums$12,336
 $
 $
   $12,336
Annuity, life, accident and health benefits and reserves37,251
 
 
   37,251
Liabilities of managed investment entities
 4,700
 (188) (a) 4,512
Long-term debt and other liabilities4,385
 
 
   4,385
Total liabilities53,972
 4,700
 (188)   58,484
          
Redeemable noncontrolling interests
 
 
   
          
Shareholders’ equity:         
Common Stock and Capital surplus1,334
 
 
   1,334
Retained earnings3,588
 
 
   3,588
Accumulated other comprehensive income, net of tax48
 
 
   48
Total shareholders’ equity4,970
 
 
   4,970
Noncontrolling interests2
 
 
   2
Total equity4,972
 
 
   4,972
Total liabilities and equity$58,944
 $4,700
 $(188)   $63,456

(a)Elimination of the fair value of AFG’s investment in CLOs and related accrued interest.



51


CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

 Before CLO
Consolidation (a)
 Managed
Investment
Entities
 Consol.
Entries
   Consolidated
As Reported
Three months ended December 31, 2019         
Revenues:         
Insurance net earned premiums$1,375
 $
 $
   $1,375
Net investment income586
 
 7
 (b) 593
Realized gains (losses) on securities65
 
 
   65
Income (loss) of managed investment entities:         
Investment income
 63
 
   63
Gain (loss) on change in fair value of assets/liabilities
 (1) (13) (b) (14)
Other income52
 
 (4) (c) 48
Total revenues2,078
 62
 (10)   2,130
Costs and Expenses:         
Insurance benefits and expenses1,695
 
 
   1,695
Expenses of managed investment entities
 62
 (10) (b)(c)  52
Interest charges on borrowed money and other expenses124
 
 
   124
Total costs and expenses1,819
 62
 (10)   1,871
Earnings before income taxes259
 
 
   259
Provision for income taxes68
 
 
   68
Net earnings, including noncontrolling interests191
 
 
   191
Less: Net earnings (losses) attributable to noncontrolling interests(20) 
 
   (20)
Net earnings attributable to shareholders$211
 $
 $
   $211
          
Three months ended December 31, 2018         
Revenues:         
Insurance net earned premiums$1,276
 $
 $
   $1,276
Net investment income538
 
 4
 (b) 542
Realized gains (losses) on securities(238) 
 
   (238)
Income (loss) of managed investment entities:         
Investment income
 68
 
   68
Gain (loss) on change in fair value of assets/liabilities
 (1) (10) (b) (11)
Other income57
 
 (4) (c) 53
Total revenues1,633
 67
 (10)   1,690
Costs and Expenses:         
Insurance benefits and expenses1,575
 
 
   1,575
Expenses of managed investment entities
 67
 (10) (b)(c)  57
Interest charges on borrowed money and other expenses97
 
 
   97
Total costs and expenses1,672
 67
 (10)   1,729
Earnings (loss) before income taxes(39) 
 
   (39)
Provision (credit) for income taxes(4) 
 
   (4)
Net earnings (loss), including noncontrolling interests(35) 
 
   (35)
Less: Net earnings (losses) attributable to noncontrolling interests(6) 
 
   (6)
Net earnings (loss) attributable to shareholders$(29) $
 $
   $(29)

(a)Includes losses of $7 million and $4 million in the fourth quarter of 2019 and 2018, respectively, representing the change in fair value of AFG’s CLO investments plus $4 million in both the fourth quarter of 2019 and 2018 in CLO management fees earned.
(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $6 million in both the fourth quarter of 2019 and 2018 in distributions recorded as interest expense by the CLOs.
(c)Elimination of management fees earned by AFG.



52


CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED

 
Before CLO
Consolidation (a)
 
Managed
Investment
Entities
 
Consol.
Entries
   
Consolidated
As Reported
Year ended December 31, 2019         
Revenues:         
Insurance net earned premiums$5,207
 $
 $
   $5,207
Net investment income2,307
 
 (4) (b) 2,303
Realized gains (losses) on securities287
 ���
 
   287
Income (loss) of managed investment entities:         
Investment income
 269
 
   269
Gain (loss) on change in fair value of assets/liabilities
 (8) (22) (b) (30)
Other income216
 
 (15) (c) 201
Total revenues8,017
 261
 (41)   8,237
Costs and Expenses:         
Insurance benefits and expenses6,436
 
 
   6,436
Expenses of managed investment entities
 261
 (41) (b)(c)  220
Interest charges on borrowed money and other expenses473
 
 
   473
Total costs and expenses6,909
 261
 (41)   7,129
Earnings before income taxes1,108
 


  
1,108
Provision for income taxes239
 
 
   239
Net earnings, including noncontrolling interests869
 
 
   869
Less: Net earnings (losses) attributable to noncontrolling interests(28) 
 
   (28)
Net earnings attributable to shareholders$897
 $
 $
   $897
          
Year ended December 31, 2018         
Revenues:         
Insurance net earned premiums$4,889
 $
 $
   $4,889
Net investment income2,101
 
 (7) (b) 2,094
Realized gains (losses) on securities(266) 
 
   (266)
Income (loss) of managed investment entities:         
Investment income
 255
 
   255
Gain (loss) on change in fair value of assets/liabilities
 (7) (14) (b) (21)
Other income215
 
 (16) (c) 199
Total revenues6,939
 248
 (37)   7,150
Costs and Expenses:         
Insurance benefits and expenses5,885
 
 
   5,885
Expenses of managed investment entities
 248
 (37) (b)(c)  211
Interest charges on borrowed money and other expenses415
 
 
   415
Total costs and expenses6,300
 248
 (37)   6,511
Earnings before income taxes639
 
 
   639
Provision for income taxes122
 
 
   122
Net earnings, including noncontrolling interests517
 
 
   517
Less: Net earnings (losses) attributable to noncontrolling interests(13) 
 
   (13)
Net earnings attributable to shareholders$530
 $
 $
   $530

(a)Includes income of $4 million and $7 million in 2019 and 2018, respectively, representing the change in fair value of AFG’s CLO investments plus $15 million and $16 million in 2019 and 2018, respectively, in CLO management fees earned.
(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $26 million and $21 million in 2019 and 2018, respectively, in distributions recorded as interest expense by the CLOs.
(c)Elimination of management fees earned by AFG.




53


CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED

 Before CLO
Consolidation (a)
 Managed
Investment
Entities
 Consol.
Entries
   Consolidated
As Reported
Year ended December 31, 2017         
Revenues:         
Insurance net earned premiums$4,601
 $
 $
   $4,601
Net investment income1,854
 
 (23) (b) 1,831
Realized gains (losses) on securities5
 
 
   5
Income (loss) of managed investment entities:         
Investment income
 210
 
   210
Gain (loss) on change in fair value of assets/liabilities
 22
 (10) (b) 12
Other income224
 
 (18) (c) 206
Total revenues6,684
 232
 (51)   6,865
Costs and Expenses:         
Insurance benefits and expenses5,453
 
 
   5,453
Expenses of managed investment entities
 231
 (50) (b)(c)  181
Interest charges on borrowed money and other expenses507
 
 
   507
Total costs and expenses5,960
 231
 (50)   6,141
Earnings before income taxes724
 1
 (1)   724
Provision for income taxes247
 
 
   247
Net earnings, including noncontrolling interests477
 1
 (1)   477
Less: Net earnings (losses) attributable to noncontrolling interests2
 
 
   2
Net earnings attributable to shareholders$475
 $1
 $(1)   $475

(a)Includes income of $23 million representing the change in fair value of AFG’s CLO investments plus $18 million in CLO management fees earned.
(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $32 million in distributions recorded as interest expense by the CLOs.
(c)Elimination of management fees earned by AFG.


54


RESULTS OF OPERATIONS

General   
AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. For example, core net operating earnings excludes realized gains (losses) on securities because such gains and losses are influenced significantly by financial markets, interest rates and the timing of sales. Similarly, significant gains and losses from the sale of real estate are excluded from core earnings as they are influenced by the timing of sales and realized gains (losses) and significant tax benefits (charges) related to subsidiaries are excluded because such gains and losses are largely the result of the changing business strategy and market opportunities. In addition, special charges related to coverage that AFG no longer writes, such as the Neon exited lines and for asbestos and environmental exposures are excluded from core earnings.

Beginning prospectively with the second quarter of 2019, AFG’s core net operating earnings for its annuity segment excludes unlocking, the impact of changes in the fair value of derivatives related to fixed-indexed annuities (“FIAs”), and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs (“annuity non-core earnings (losses)”). Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of FIA liabilities that management believes can be inconsistent with the long-term economics of this growing portion of AFG’s annuity business. Management believes that separating these impacts as “non-core” will provide investors with a better view of the fundamental performance of the business, and a more comparable measure of the annuity segment’s business compared to the results identified as “core” by its peers. Core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, so results for periods following the change are not directly comparable to prior periods. The impact of the items now considered annuity non-core earnings on prior periods is highlighted in the discussion following the reconciliation of net earnings attributable to shareholders to core net operating earnings.


55


The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes core net operating earnings is a useful tool for investors and analysts in analyzing ongoing operating trends and for management to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business.
 Three months ended December 31, Year ended December 31,
2019 2018 2019 2018 2017
Components of net earnings (loss) attributable to shareholders:         
Core operating earnings before income taxes$251
 $199
 $967
 $932
 $865
Pretax non-core items:         
Realized gains (losses) on securities65
 (238) 287
 (266) 5
Annuity non-core earnings (losses) (*)24
 
 (36) 
 
Special A&E charges
 
 (29) (27) (113)
Neon exited lines charge(76) 
 (76) 
 18
Loss on retirement of debt(5) 
 (5) 
 (51)
Earnings (loss) before income taxes259
 (39) 1,108
 639
 724
Provision (credit) for income taxes:         
Core operating earnings50
 46
 193
 184
 275
Non-core items:         
Realized gains (losses) on securities14
 (50) 60
 (56) 2
Annuity non-core earnings (losses) (*)5
 
 (7) 
 
Special A&E charges
 
 (6) (6) (39)
Loss on retirement of debt(1) 
 (1) 
 (18)
Tax benefit related to Neon restructuring
 
 
 
 (56)
Tax expense related to change in U.S. corporate tax rate
 
 
 
 83
Total provision (credit) for income taxes68
 (4) 239
 122
 247
Net earnings (loss), including noncontrolling interests191
 (35) 869
 517
 477
Less net earnings (losses) attributable to noncontrolling interests:         
Core operating earnings(2) (6) (10) (13) 2
Neon exited lines charge(18) 
 (18) 
 
Total net earnings (losses) attributable to noncontrolling interests(20) (6) (28) (13) 2
Net earnings (loss) attributable to shareholders$211
 $(29) $897
 $530
 $475
          
Net earnings (loss):         
Core net operating earnings$203
 $159
 $784
 $761
 $588
Realized gains (losses) on securities51
 (188) 227
 (210) 3
Annuity non-core earnings (losses) (*)19
 
 (29) 
 
Special A&E charges
 
 (23) (21) (74)
Neon exited lines charge(58) 
 (58) 
 18
Loss on retirement of debt(4) 
 (4) 
 (33)
Tax benefit related to Neon restructuring
 
 
 
 56
Tax expense related to change in U.S. corporate tax rate
 
 
 
 (83)
Net earnings (loss) attributable to shareholders$211
 $(29) $897
 $530
 $475
          
Diluted per share amounts:         
Core net operating earnings$2.22
 $1.75
 $8.62
 $8.40
 $6.55
Realized gains (losses) on securities0.56
 (2.08) 2.47
 (2.31) 0.03
Annuity non-core earnings (losses) (*)0.21
 
 (0.31) 
 
Special A&E charges
 
 (0.25) (0.24) (0.82)
Neon exited lines charge(0.64) 
 (0.64) 
 0.19
Loss on retirement of debt(0.04) 
 (0.04) 
 (0.37)
Tax benefit related to Neon restructuring
 
 
 
 0.62
Tax expense related to change in U.S. corporate tax rate
 
 
 
 (0.92)
Net earnings (loss) attributable to shareholders$2.31
 $(0.33) $9.85
 $5.85
 $5.28

(*)As discussed above, beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).

AFG reported net earnings attributable to shareholders of $211 million in the fourth quarter of 2019 compared to a net loss attributable to shareholders of $29 million in the fourth quarter of 2018. Results for the fourth quarter of 2019 were positively impacted by $8 million in net non-core items. Comparatively, the net loss in the 2018 fourth quarter includes $188 million in non-core net realized losses on securities. In addition, net earnings attributable to shareholders includes after-tax earnings of $19 million in the fourth quarter of 2019 and after-tax losses of $52 million in the fourth quarter of

56


2018 from unlocking (in the 2018 quarter), the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) beginning prospectively with the second quarter of 2019. Excluding the $52 million after-tax negative impact of these items on results for the fourth quarter of 2018, core net operating earnings decreased $8 million in the fourth quarter of 2019 compared to the same period in 2018 reflecting lower earnings in the property and casualty insurance segment and higher holding company expenses, partially offset by higher earnings in the annuity segment. Realized gains (losses) on securities in the fourth quarters of 2019 and 2018 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Net earnings attributable to shareholders increased $367 million for the full-year of 2019 compared to the same period in 2018 due primarily to after-tax net realized gains on securities of $227 million in 2019 compared to after-tax net realized losses of $210 million in 2018. In addition, net earnings attributable to shareholders includes an after-tax loss of $38 million for the full-year of 2019 (after tax losses of $9 million in the first quarter, $27 million in the second quarter and $21 million in the third quarter, and an after tax gain of $19 million in the fourth quarter) and an after-tax loss of $38 million for the full-year of 2018 from unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) beginning prospectively with the second quarter of 2019. Excluding the $9 million after-tax negative impact of these items on results for the first quarter of 2019 and the $38 million after-tax negative impact of these items on results for the full-year of 2018, core net operating earnings decreased $6 million in 2019 compared to 2018 reflecting higher holding company expenses, partially offset by higher earnings in the property and casualty insurance segment. Realized gains (losses) on securities in 2019 and 2018 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Net earnings attributable to shareholders increased $55 million for the full-year of 2018 compared to the same period in 2017 due primarily to higher core net operating earnings, lower special A&E charges recorded in 2018 compared to 2017, losses on the retirement of debt in 2017 and the 2017 tax expense related to the change in the U.S. corporate tax rate, partially offset by net realized losses on securities in 2018 compared to net realized gains on securities in 2017, the 2017 favorable development in the Neon exited lines in connection with a reinsurance to close transaction and the 2017 tax benefit from restructuring at Neon. Core net operating earnings increased $173 million in 2018 compared to 2017 reflecting higher net investment income in the property and casualty insurance segment, lower interest charges on borrowed money, lower holding company expenses and a lower corporate income tax rate, partially offset by lower earnings in the annuity segment and income from the sale of real estate in 2017. Realized losses on securities in 2018 includes the decline in fair value of equity securities that are required to be carried at fair value through net earnings under accounting guidance adopted on January 1, 2018. Included in the $210 million of non-core net realized losses on securities in 2018 were $214 million in net losses on equity securities that AFG continued to own at December 31, 2018.


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RESULTS OF OPERATIONS — QUARTERS ENDED DECEMBER 31, 2019 AND 2018

Segmented Statement of Earnings   
AFG reports its business as three segments: (i) Property and casualty insurance (“P&C”), (ii) Annuity and (iii) Other, which includes run-off long-term care and life, holding company costs and income and expenses related to the managed investment entities (“MIEs”).

AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months ended December 31, 2019 and 2018 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):
     Other      
 P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Three months ended December 31, 2019             
Revenues:             
Property and casualty insurance net earned premiums$1,370
 $
 $
 $
 $1,370
 $
 $1,370
Life, accident and health net earned premiums
 
 
 5
 5
 
 5
Net investment income120
 458
 7
 8
 593
 
 593
Realized gains (losses) on securities
 
 
 
 
 65
 65
Income (loss) of MIEs:             
Investment income
 
 63
 
 63
 
 63
Gain (loss) on change in fair value of assets/liabilities
 
 (14) 
 (14) 
 (14)
Other income1
 26
 (4) 25
 48
 
 48
Total revenues1,491
 484
 52
 38
 2,065
 65
 2,130
              
Costs and Expenses:             
Property and casualty insurance:             
Losses and loss adjustment expenses866
 
 
 
 866
 46
 912
Commissions and other underwriting expenses416
 
 
 4
 420
 30
 450
Annuity benefits
 281
 
 
 281
 (30) 251
Life, accident and health benefits
 
 
 10
 10
 
 10
Annuity and supplemental insurance acquisition expenses
 65
 
 1
 66
 6
 72
Interest charges on borrowed money
 
 
 18
 18
 
 18
Expenses of MIEs
 
 52
 
 52
 
 52
Other expenses12
 34
 
 55
 101
 5
 106
Total costs and expenses1,294
 380
 52
 88
 1,814
 57
 1,871
Earnings before income taxes197
 104
 
 (50) 251
 8
 259
Provision for income taxes39
 21
 
 (10) 50
 18
 68
Net earnings, including noncontrolling interests158
 83
 
 (40) 201
 (10) 191
Less: Net earnings (losses) attributable to noncontrolling interests(2) 
 
 
 (2) (18) (20)
Core Net Operating Earnings160
 83
 
 (40) 203
    
Non-core earnings attributable to shareholders (a):             
Realized gains (losses) on securities, net of tax
 
 
 51
 51
 (51) 
Annuity non-core earnings (losses), net of tax (b)
 19
 
 
 19
 (19) 
Neon exited lines charge(58) 
 
 
 (58) 58
 
Loss on retirement of debt, net of tax
 
 
 (4) (4) 4
 
Net Earnings Attributable to Shareholders$102
 $102
 $
 $7
 $211
 $
 $211

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  Other      
 P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Three months ended December 31, 2018             
Revenues:             
Property and casualty insurance net earned premiums$1,270
 $
 $
 $
 $1,270
 $
 $1,270
Life, accident and health net earned premiums
 
 
 6
 6
 
 6
Net investment income115
 419
 4
 4
 542
 
 542
Realized gains (losses) on securities
 
 
 
 
 (238) (238)
Income (loss) of MIEs:             
Investment income
 
 68
 
 68
 
 68
Gain (loss) on change in fair value of assets/liabilities
 
 (11) 
 (11) 
 (11)
Other income2
 27
 (4) 28
 53
 
 53
Total revenues1,387
 446
 57
 38
 1,928
 (238) 1,690
              
Costs and Expenses:             
Property and casualty insurance:             
Losses and loss adjustment expenses797
 
 
 
 797
 
 797
Commissions and other underwriting expenses372
 
 
 6
 378
 
 378
Annuity benefits
 334
 
 
 334
 
 334
Life, accident and health benefits
 
 
 8
 8
 
 8
Annuity and supplemental insurance acquisition expenses
 56
 
 2
 58
 
 58
Interest charges on borrowed money
 
 
 16
 16
 
 16
Expenses of MIEs
 
 57
 
 57
 
 57
Other expenses10
 36
 
 35
 81
 
 81
Total costs and expenses1,179
 426
 57
 67
 1,729
 
 1,729
Earnings (loss) before income taxes208
 20
 
 (29) 199
 (238) (39)
Provision (credit) for income taxes49
 5
 
 (8) 46
 (50) (4)
Net earnings (loss), including noncontrolling interests159
 15
 
 (21) 153
 (188) (35)
Less: Net earnings (losses) attributable to noncontrolling interests(6) 
 
 
 (6) 
 (6)
Core Net Operating Earnings165
 15
 
 (21) 159
    
Non-core earnings attributable to shareholders (a):             
Realized gains (losses) on securities, net of tax
 
 
 (188) (188) 188
 
Net Earnings (Loss) Attributable to Shareholders$165
 $15
 $
 $(209) $(29) $
 $(29)

(a)
See the reconciliation of core earnings to GAAP net earnings under “Results of Operations — General” for details on the tax and noncontrolling interest impacts of these reconciling items.
(b)
As discussed under “Results of Operations — General,” beginning with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).

Property and Casualty Insurance Segment — Results of Operations
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 company’s performance. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses and LAE, and commissions and other underwriting expenses to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect net investment income, other income, other expenses or federal income taxes.

AFG’s property and casualty insurance operations contributed $121 million in GAAP pretax earnings in the fourth quarter of 2019 compared to $208 million in the fourth quarter of 2018, a decrease of $87 million (42%). Property and casualty core pretax earnings were $197 million in the fourth quarter of 2019 compared to $208 million in the fourth quarter of 2018, a decrease of $11 million (5%). The decrease in GAAP and core pretax earnings reflects lower underwriting profit, partially offset by higher net investment income in the fourth quarter of 2019 compared to the fourth quarter of 2018.

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GAAP pretax earnings also includes a pretax non-core charge of $76 million in the fourth quarter of 2019 related to costs associated with plans to exit the Lloyd’s of London insurance market in 2020. See “Neon exited lines charge” below.

The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the three months ended December 31, 2019 and 2018 (dollars in millions):
 Three months ended December 31,  
 2019 2018 % Change
Gross written premiums$1,749
 $1,613
 8%
Reinsurance premiums ceded(436) (405) 8%
Net written premiums1,313
 1,208
 9%
Change in unearned premiums57
 62
 (8%)
Net earned premiums1,370
 1,270
 8%
Loss and loss adjustment expenses (a)866
 797
 9%
Commissions and other underwriting expenses (b)416
 372
 12%
Core underwriting gain88
 101
 (13%)
      
Net investment income120
 115
 4%
Other income and expenses, net(11) (8) 38%
Core earnings before income taxes197
 208
 (5%)
Pretax non-core Neon exited lines charge(76) 
 %
GAAP earnings before income taxes$121
 $208
 (42%)
      
      
 Three months ended December 31,  
Combined Ratios:2019 2018 Change
Specialty lines     
Loss and LAE ratio (a)63.2% 62.7% 0.5%
Underwriting expense ratio (b)30.3% 29.3% 1.0%
Combined ratio93.5% 92.0% 1.5%
      
Aggregate — including exited lines     
Loss and LAE ratio66.6% 62.7% 3.9%
Underwriting expense ratio32.5% 29.3% 3.2%
Combined ratio99.1% 92.0% 7.1%

(a)Excludes a pretax non-core charge of $46 million (3.3 points on the combined ratio) in the fourth quarter of 2019 associated with plans to exit the Lloyd’s of London insurance market in 2020.
(b)Excludes a pretax non-core charge of $30 million (2.2 points on the combined ratio) in the fourth quarter of 2019 associated with plans to exit the Lloyd’s of London insurance market in 2020.

Starting in 1986, AFG’s statutory combined ratio has been better than the U.S. industry average for 32 of the 34 years. Management believes that AFG’s insurance operations have performed better than the industry as a result of its specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives.

AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial.

To understand the overall profitability of particular lines, the timing of claims payments and the related impact of investment income must be considered. Certain “short-tail” lines of business (primarily property coverages) generally have quick loss payouts, which reduce the time funds are held, thereby limiting investment income earned thereon. In contrast, “long-tail” lines of business (primarily liability coverages and workers’ compensation) generally have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.


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Gross Written Premiums
Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $1.75 billion for the fourth quarter of 2019 compared to $1.61 billion for the fourth quarter of 2018, an increase of $136 million (8%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):
 Three months ended December 31,  
 2019 2018  
 GWP % GWP % % Change
Property and transportation$628
 36% $651
 40% (4%)
Specialty casualty929
 53% 778
 48% 19%
Specialty financial192
 11% 184
 12% 4%
 $1,749
 100% $1,613
 100% 8%

Reinsurance Premiums Ceded
Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 25% of gross written premiums for both the fourth quarter of 2019 and the fourth quarter of 2018. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):
 Three months ended December 31,  
 2019 2018 Change in
 Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation$(179) 29% $(203) 31% (2%)
Specialty casualty(260) 28% (197) 25% 3%
Specialty financial(36) 19% (42) 23% (4%)
Other specialty39
   37
    
 $(436) 25% $(405) 25% %

Net Written Premiums
Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $1.31 billion for the fourth quarter of 2019 compared to $1.21 billion for the fourth quarter of 2018, an increase of $105 million (9%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):
 Three months ended December 31,  
 2019 2018  
 NWP % NWP % % Change
Property and transportation$449
 34% $448
 37% %
Specialty casualty669
 51% 581
 48% 15%
Specialty financial156
 12% 142
 12% 10%
Other specialty39
 3% 37
 3% 5%
 $1,313
 100% $1,208
 100% 9%

Net Earned Premiums
Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $1.37 billion for the fourth quarter of 2019 compared to $1.27 billion for the fourth quarter of 2018, an increase of $100 million (8%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):
 Three months ended December 31,  
 2019 2018  
 NEP % NEP % % Change
Property and transportation$505
 37% $479
 38% 5%
Specialty casualty676
 49% 613
 48% 10%
Specialty financial152
 11% 141
 11% 8%
Other specialty37
 3% 37
 3% %
 $1,370
 100% $1,270
 100% 8%

The $136 million (8%) increase in gross written premiums in the fourth quarter of 2019 compared to the fourth quarter of 2018 reflects growth in the Specialty casualty and Specialty financial sub-segments, partially offset by lower premiums in

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the Property and transportation sub-segment. Overall average renewal rates increased approximately 5% in the fourth quarter of 2019. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately 7%.

Property and transportation Gross written premiums decreased $23 million (4%) in the fourth quarter of 2019 compared to the fourth quarter of 2018. Higher premiums in the property and inland marine and ocean marine businesses were more than offset by lower premiums in the transportation businesses (due primarily to the timing of the renewal of a large commercial auto account) and lower year-over-year premiums related to winter wheat and rainfall index products in the crop operations. Average renewal rates increased nearly 5% for this group in the fourth quarter of 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points for the fourth quarter of 2019 compared to the fourth quarter of 2018, reflecting lower cessions in the crop insurance business.

Specialty casualty Gross written premiums increased $151 million (19%) in the fourth quarter of 2019 compared to the fourth quarter of 2018. Growth in the surplus lines and excess liability businesses, primarily the result of new business opportunities, rate increases and higher retentions on renewal business, were primary drivers of the higher premiums. Higher premiums reported by Neon, premium growth in the executive liability business and the addition of ABA Insurance Services also contributed to the increase in premiums. Average renewal rates for this group increased approximately 6% in the fourth quarter of 2019. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 11%. Reinsurance premiums ceded as a percentage of gross written premiums increased 3 percentage points for the fourth quarter of 2019 compared to the fourth quarter of 2018, reflecting growth in the surplus lines, excess liability and mergers and acquisitions businesses, which have a higher ceding percentage than the overall Specialty casualty sub-segment.

Specialty financial Gross written premiums increased $8 million (4%) in the fourth quarter of 2019 compared to the fourth quarter of 2018, due to modest growth across all businesses in the group. Average renewal rates for this group increased approximately 2% in the fourth quarter of 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 4 percentage points for the fourth quarter of 2019 compared to the fourth quarter of 2018 reflecting lower cessions in the financial institutions business due to reduced gross written premiums in certain lines of business that are 100% reinsured.

Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased $2 million (5%) in the fourth quarter of 2019 compared to the fourth quarter of 2018, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

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Combined Ratio
Performance measures such as the combined ratio are often used by property and casualty insurers to help users of their financial statements better understand the company’s performance. The combined ratio is the sum of the loss and loss adjustment expenses (“LAE”) and underwriting expense ratios. These ratios are calculated by dividing each of the respective expenses by net earned premiums. The table below (dollars in millions) details the components of the combined ratio for AFG’s property and casualty insurance segment:
 Three months ended December 31,   Three months ended December 31,
 2019 2018 Change 2019 2018
Property and transportation         
Loss and LAE ratio77.8% 68.2% 9.6%    
Underwriting expense ratio22.6% 18.3% 4.3%    
Combined ratio100.4% 86.5% 13.9%    
Underwriting profit (loss)      $(2) $64
          
Specialty casualty         
Loss and LAE ratio59.4% 63.5% (4.1%)    
Underwriting expense ratio30.3% 33.0% (2.7%)    
Combined ratio89.7% 96.5% (6.8%)    
Underwriting profit      $69
 $22
          
Specialty financial         
Loss and LAE ratio26.1% 36.4% (10.3%)    
Underwriting expense ratio53.5% 49.1% 4.4%    
Combined ratio79.6% 85.5% (5.9%)    
Underwriting profit      $32
 $20
          
Total Specialty         
Loss and LAE ratio63.2% 62.7% 0.5%    
Underwriting expense ratio30.3% 29.3% 1.0%    
Combined ratio93.5% 92.0% 1.5%    
Underwriting profit      $89
 $102
          
Aggregate — including exited lines         
Loss and LAE ratio66.6% 62.7% 3.9%    
Underwriting expense ratio32.5% 29.3% 3.2%    
Combined ratio99.1% 92.0% 7.1%    
Underwriting profit      $12
 $101

The Specialty property and casualty insurance operations generated an underwriting profit of $89 million for the fourth quarter of 2019 compared to $102 million in the fourth quarter of 2018, a decrease of $13 million (13%). Lower underwriting results in the Property and transportation sub-segment were partially offset by higher underwriting profits in the Specialty casualty and Specialty financial sub-segments. Overall catastrophe losses were $15 million, including $1 million of net reinstatement premiums, (1.0 points on the combined ratio) in the fourth quarter of 2019 compared to $38 million, including a $1 million favorable adjustment to net reinstatement premiums, (3.0 points) in the fourth quarter of 2018.

Property and transportation This group reported an underwriting loss of $2 million for the fourth quarter of 2019 compared to an underwriting profit of $64 million in the fourth quarter of 2018, a change of $66 million (103%). Record levels of prevented planting claims in the crop operations were the driver of the lower underwriting results in the fourth quarter of 2019 compared to the fourth quarter of 2018. Catastrophe losses for this group were $7 million in the fourth quarter of 2019. By comparison, catastrophe losses had a favorable impact of $1 million in the 2018 fourth quarter, with catastrophe losses reported from the previous quarter developing favorably in the fourth quarter of 2018.


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Specialty casualty Underwriting profit for this group was $69 million for the fourth quarter of 2019 compared to $22 million for the fourth quarter of 2018, an increase of $47 million (214%). This increase is largely due to a reduction in the underwriting loss at Neon (excluding the Neon exited lines charge), due primarily to lower year-over-year catastrophe losses. See “Neon exited lines charge” below for information about AFG’s plans to exit the Lloyd’s of London insurance market in 2020. Higher underwriting profit in the workers’ compensation businesses, due primarily to higher favorable prior year reserve development, also contributed to the increase in underwriting profit between periods. Catastrophe losses were $5 million (0.8 points on the combined ratio) for the fourth quarter of 2019 compared to $28 million (4.7 points) for the fourth quarter of 2018. Catastrophe losses in both periods were primarily in the Neon operations.

Specialty financial Underwriting profit for this group was $32 million for the fourth quarter of 2019 compared to $20 million in the fourth quarter of 2018, an increase of $12 million (60%). Higher underwriting profits in the financial institutions, surety and trade credit businesses contributed to these results. Catastrophe losses were $2 million (1.1 points on the combined ratio) in the fourth quarter of 2019 compared to $10 million (7.1 points) in the fourth quarter of 2018.

Other specialty This group reported an underwriting loss of $10 million for the fourth quarter of 2019 compared to $4 million in the fourth quarter of 2018, an increase of $6 million (150%), reflecting higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the fourth quarter of 2019 compared to the fourth quarter of 2018.

Neon exited lines charge In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off and recording a non-core charge of $76 million for reserve strengthening and expenses related to exit costs incurred with the run-off of this business. Neon and its predecessor, Marketform, have failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. The non-core charge includes $46 million to increase loss reserves (including $7 million of net adverse prior year reserve development) and $30 million of underwriting expenses representing contractual employee severance benefits and other incurred exit costs. AFG will incur additional employee-related, rent and other expenses as the business is run-off.

In the fourth quarter of 2017, Neon entered into a reinsurance to close agreement for its 2015 and prior years of account, which transfers the responsibility for all of the liabilities that attach to the transferred year of account as well as any income due to the closing year of account in return for a premium. As a result of the reinsurance to close agreement, Neon recorded favorable reserve development of $42 million, of which $24 million related to its ongoing lines of business (included in Specialty casualty) and $18 million related to exited lines of business (included in Neon exited lines charge).

Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), the $76 million charge related to the Neon exited lines recorded in 2019 in connection with AFG’s plans to exit the Lloyd’s of London insurance market in 2020 and the $18 million of favorable development related to the Neon exited lines recorded in connection with the December 2017 reinsurance to close transaction were treated as non-core.

Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment for the fourth quarter of 2019 includes the Neon exited lines charge mentioned above.


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Losses and Loss Adjustment Expenses
AFG’s overall loss and LAE ratio was 66.6% for the fourth quarter of 2019 compared to 62.7% for fourth quarter of 2018, an increase of 3.9 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):
 Three months ended December 31,  
 Amount Ratio Change in
 2019 2018 2019 2018 Ratio
Property and transportation         
Current year, excluding catastrophe losses$403
 $335
 79.9% 69.9% 10.0%
Prior accident years development(18) (7) (3.5%) (1.5%) (2.0%)
Current year catastrophe losses7
 (1) 1.4% (0.2%) 1.6%
Property and transportation losses and LAE and ratio$392
 $327
 77.8% 68.2% 9.6%
          
Specialty casualty         
Current year, excluding catastrophe losses$422
 $413
 62.4% 67.3% (4.9%)
Prior accident years development(25) (52) (3.8%) (8.5%) 4.7%
Current year catastrophe losses5
 28
 0.8% 4.7% (3.9%)
Specialty casualty losses and LAE and ratio$402
 $389
 59.4% 63.5% (4.1%)
          
Specialty financial         
Current year, excluding catastrophe losses$52
 $48
 34.2% 34.5% (0.3%)
Prior accident years development(14) (7) (9.2%) (5.2%) (4.0%)
Current year catastrophe losses2
 10
 1.1% 7.1% (6.0%)
Specialty financial losses and LAE and ratio$40
 $51
 26.1% 36.4% (10.3%)
          
Total Specialty         
Current year, excluding catastrophe losses$904
 $818
 66.0% 64.4% 1.6%
Prior accident years development(53) (61) (3.8%) (4.7%) 0.9%
Current year catastrophe losses14
 39
 1.0% 3.0% (2.0%)
Total Specialty losses and LAE and ratio$865
 $796
 63.2% 62.7% 0.5%
          
Aggregate — including exited lines         
Current year, excluding catastrophe losses$943
 $819
 66.0% 64.4% 1.6%
Prior accident years development(45) (61) (0.4%) (4.7%) 4.3%
Current year catastrophe losses14
 39
 1.0% 3.0% (2.0%)
Aggregate losses and LAE and ratio$912
 $797
 66.6% 62.7% 3.9%

Current accident year losses and LAE, excluding catastrophe losses
The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was 66.0% for the fourth quarter of 2019 compared to 64.4% for the fourth quarter of 2018, an increase of 1.6 percentage points.

Property and transportation   The 10.0 percentage points increase in the loss and LAE ratio for the current year, excluding catastrophe losses reflects an increase in the loss and LAE ratio of the crop operations due to a high level of prevented planting claims resulting from excess rain in 2019.

Specialty casualty   The 4.9 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio at Neon (excluding the impact of the Neon exited lines charge), partially offset by an increase in the loss and LAE ratio of the workers’ compensation businesses.

Specialty financial   The 0.3 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio of the financial institutions business, partially offset by an increase in the loss and LAE ratio of the fidelity business.


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Net prior year reserve development
AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $53 million in the fourth quarter of 2019 compared to $61 million in the fourth quarter of 2018, a decrease of $8 million (13%).

Property and transportation   Net favorable reserve development of $18 million in the fourth quarter of 2019 reflects lower than expected claim frequency at National Interstate and lower than anticipated claim severity in the property and inland marine business. Net favorable reserve development of $7 million in the fourth quarter of 2018 reflects lower than expected claim frequency and severity at National Interstate and lower than expected losses in the crop business.

Specialty casualty   Net favorable reserve development of $25 million in the fourth quarter of 2019 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses, higher than expected claim frequency in product liability contractor claims, and higher than anticipated claim severity in the public sector business. Net favorable reserve development of $52 million in the fourth quarter of 2018 reflects lower than anticipated claim severity in the workers’ compensation businesses and lower than expected emergence in assumed 2017 property catastrophe losses at Neon.

Specialty financial   Net favorable reserve development of $14 million in the fourth quarter of 2019 reflects lower than expected claim frequency and severity in the surety business and lower than anticipated claim severity in the foreign credit business. Net favorable reserve development of $7 million in the fourth quarter of 2018 reflects lower than expected claim frequency and severity in the surety business and lower than anticipated claim frequency in run-off businesses.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $4 million in the fourth quarter of 2019 and $5 million in the fourth quarter of 2018, reflecting adverse development associated with AFGs internal reinsurance program, partially offset by the amortization of deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001.

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment for the fourth quarter of 2019 includes $7 million of net adverse reserve development related to Neon exited lines discussed above under “Neon exited lines charge.”

Catastrophe losses
AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available at December 31, 2019, AFG’s exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 100, 250 or 500 years as a percentage of AFG’s Shareholders’ Equity is shown below:
   Approximate impact of modeled loss 
 Industry Model on AFG’s Shareholders’ Equity 
 100-year event 1% 
 250-year event 2% 
 500-year event 6% 
As of January 1, 2020, AFG maintains comprehensive catastrophe reinsurance coverage, including a $15 million per occurrence net retention for its U.S.-based property and casualty insurance operations for losses up to $134 million. Neon’s excess of loss catastrophe reinsurance limits the maximum retained loss per event to $15 million for losses up to $145 million on direct business and $15 million for losses up to $45 million on assumed business. AFG’s property and casualty insurance operations further maintain supplemental fully collateralized reinsurance coverage up to 95% of $200 million for catastrophe losses in excess of $134 million of traditional catastrophe reinsurance through a catastrophe bond.

Catastrophe losses of $14 million in the fourth quarter of 2019 resulted primarily from Typhoons Faxai and Hagibis, storms and tornadoes in the south-central United States and the Kincade fire in California. Catastrophe losses of $39 million in the fourth quarter of 2018 resulted primarily from Hurricane Michael and wildfires in California.


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Commissions and Other Underwriting Expenses
AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $446 million in the fourth quarter of 2019 compared to $372 million for the fourth quarter of 2018, an increase of $74 million (20%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 32.5% for the fourth quarter of 2019 compared to 29.3% for the fourth quarter of 2018, an increase of 3.2 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):
 Three months ended December 31,  
 2019 2018 Change in
 U/W Exp % of NEP U/W Exp % of NEP % of NEP
Property and transportation$115
 22.6% $88
 18.3% 4.3%
Specialty casualty205
 30.3% 202
 33.0% (2.7%)
Specialty financial80
 53.5% 70
 49.1% 4.4%
Other specialty16
 39.0% 12
 35.8% 3.2%
Total Specialty416
 30.3% 372
 29.3% 1.0%
Neon exited lines charge30
   
    
Total Aggregate$446
 32.5% $372
 29.3% 3.2%

Property and transportation   Commissions and other underwriting expenses as a percentage of net earned premiums increased 4.3 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018 reflecting lower profitability-based ceding commissions received from reinsurers in the crop business and growth in businesses that have higher underwriting expense ratios than many of the businesses in the Property and transportation sub-segment.

Specialty casualty   Commissions and other underwriting expenses as a percentage of net earned premiums decreased 2.7 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018 reflecting the impact of higher premiums on the ratio, particularly in the excess and surplus lines businesses.

Specialty financial   Commissions and other underwriting expenses as a percentage of net earned premiums increased 4.4 percentage points in the fourth quarter of 2019 compared to the fourth quarter of 2018 reflecting higher profitability-based commissions paid to agents in the financial institutions business, higher underwriting expenses in the European businesses, due to costs incurred in preparation for Brexit, and a change in the mix of business.

Aggregate   Aggregate commissions and other underwriting expenses for AFG’s property and casualty insurance segment includes $30 million of underwriting expenses related to the Neon exited lines charge in the fourth quarter of 2019 representing contractual employee severance benefits and other incurred exit costs. See “Neon exited lines charge” above for information about AFG’s plans to exit the Lloyd’s of London insurance market in 2020.

Property and Casualty Net Investment Income
Net investment income in AFG’s property and casualty insurance operations was $120 million in the fourth quarter of 2019 compared to $115 million in the fourth quarter of 2018, an increase of $5 million (4%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions):
 Three months ended December 31,   %
 2019 2018 Change Change
Net investment income$120
 $115
 $5
 4%
        
Average invested assets (at amortized cost)$11,744
 $10,651
 $1,093
 10%
        
Yield (net investment income as a % of average invested assets)4.09% 4.32% (0.23%)  
        
Tax equivalent yield (*)4.22% 4.49% (0.27%)  
(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield.

The increase in net investment income in the property and casualty insurance segment for the fourth quarter of 2019 as compared to the fourth quarter of 2018 reflects growth in the property and casualty insurance segment, partially offset by lower income from partnerships and similar investments. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.09% for the fourth quarter of

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2019 compared to 4.32% for the fourth quarter of 2018, a decrease of 0.23 percentage points, reflecting a lower yield on partnerships and similar investments. AFG’s property and casualty insurance operations recorded $18 million in earnings from partnerships and similar investments and AFG-managed CLOs in the fourth quarter of 2019 compared to $22 million in the fourth quarter of 2018, a decrease of $4 million (18%). The annualized yield earned on these investments was 9.1% in the fourth quarter of 2019 compared to 13.8% in the prior year period.

Property and Casualty Other Income and Expenses, Net
Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $11 million for the fourth quarter of 2019 compared to $8 million for the fourth quarter of 2018, an increase of $3 million (38%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):
 Three months ended December 31,
 2019 2018
    
Other income$1
 $2
Other expenses   
Amortization of intangibles2
 2
Other10
 8
Total other expenses12
 10
Other income and expenses, net$(11) $(8)




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Annuity Segment — Results of Operations
AFG’s annuity operations contributed $128 million in GAAP pretax earnings in the fourth quarter of 2019 compared to $20 million in the fourth quarter of 2018, an increase of $108 million (540%). This increase in AFG’s GAAP annuity segment results for the fourth quarter of 2019 as compared to the fourth quarter of 2018 is due primarily to the favorable impact of the significant increase in stock market performance on annuities with guaranteed withdrawal benefits and on the fair value of derivatives related to FIAs in the fourth quarter of 2019 compared to the unfavorable impact of the significant decline in the stock market on these annuities in the fourth quarter of 2018. The increase in pretax earnings also reflects growth in the annuity business. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and has historically conducted detailed reviews (“unlocking”) of its assumptions in the fourth quarter of each year. Beginning with the third quarter of 2019, AFG moved its annual unlocking to the third quarter and expects to continue to conduct the annual review in the third quarter of each year (consistent with many of its peers). The unlocking of the actuarial assumptions resulted in a net charge to earnings of $4 million in the fourth quarter of 2018. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter.

The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the three months ended December 31, 2019 and 2018 (dollars in millions):
 Three months ended December 31,  
 2019 2018 % Change
Revenues:     
Net investment income$458
 $419
 9%
Other income:     
Guaranteed withdrawal benefit fees17
 17
 %
Policy charges and other miscellaneous income (a)9
 10
 (10%)
Total revenues484
 446
 9%
      
Costs and Expenses:     
Annuity benefits (a)(b)281
 334
 (16%)
Acquisition expenses (a)65
 56
 16%
Other expenses34
 36
 (6%)
Total costs and expenses380
 426
 (11%)
Core earnings before income taxes104
 20
 420%
Pretax non-core earnings (losses) (a)24
 
 %
GAAP earnings before income taxes$128
 $20
 540%
(a)
As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the fourth quarter of 2019, annuity benefits exclude the $30 million favorable impact of these items and acquisition expenses exclude the related $6 million unfavorable impact on the amortization of deferred policy acquisition costs.
(b)Details of the components of annuity benefits are provided below.


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Annuity core earnings before income taxes were $104 million in the fourth quarter of 2019 compared to $20 million in the fourth quarter of 2018, an increase of $84 million (420%). As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the fourth quarter of 2019, the annuity segment’s core earnings before income taxes excludes $24 million in pretax earnings related to these items. Since annuity core earnings for the first quarter of 2019 and prior periods were not adjusted, the annuity segment’s core earnings before income taxes for the fourth quarter of 2018 includes the $66 million negative impact from these items in that period. Excluding the $66 million negative impact of these items on results for the fourth quarter of 2018, annuity core earnings before income taxes were $18 million (21%) higher in the fourth quarter of 2019 compared to the fourth quarter of 2018, reflecting growth in the annuity business. The table below highlights the impact of unlocking, changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):
 Three months ended December 31,  
 2019 2018 % Change
Earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs$104
 $86
 21%
Unlocking
 (4) (100%)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs:    
Change in fair value of derivatives related to FIAs(15) (80) (81%)
Accretion of guaranteed minimum FIA benefits(103) (94) 10%
Other annuity benefits(2) (35) (94%)
Less cost of equity options150
 141
 6%
Related impact on the amortization of deferred policy acquisition costs(6) 6
 (200%)
Earnings before income taxes$128
 $20
 540%
Annuity benefits consisted of the following (dollars in millions):
  Three months ended December 31,  
  2019 2018 Total %
  Core Non-core Total Core Non-core Total Change
Interest credited — fixed $102
 $
 $102
 $92
 $
 $92
 11%
Accretion of guaranteed minimum FIA benefits 
 103
 103
 94
 
 94
 10%
Interest credited — fixed component of variable annuities 1
 
 1
 1
 
 1
 %
Cost of equity options 150
 (150) 
 
 
 
 %
Other annuity benefits:     

     

  
Amortization of sales inducements 3
 
 3
 5
 
 5
 (40%)
Change in guaranteed withdrawal benefit reserve:     

     

  
Impact of change in the stock market and interest rates 
 (8) (8) 27
 
 27
 (130%)
Accretion of benefits and other 24
 
 24
 19
 
 19
 26%
Change in expected death and annuitization reserves and other 1
 
 1
 3
 
 3
 (67%)
Change in other benefit reserves — impact of changes in interest rates and the stock market 
 10
 10
 8
 
 8
 25%
Unlocking 
 
 
 5
 
 5
 (100%)
Derivatives related to fixed-indexed annuities:     

     

  
Embedded derivative mark-to-market 
 276
 276
 (490) 
 (490) (156%)
Equity option mark-to-market 
 (261) (261) 570
 
 570
 (146%)
Impact of derivatives related to FIAs 
 15
 15
 80
 
 80
 (81%)
               
Total annuity benefits $281
 $(30) $251
 $334
 $
 $334
 (25%)


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Because fluctuations in interest rates and the stock market, among other factors, can cause volatility in annuity benefits expense related to FIAs that can be inconsistent with the long-term economics of the FIA business, management believes that including the actual cost of the equity options purchased in the FIA business and excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs provides investors with a better view of the true cost of funds in the business and a more comparable measure to the cost of funds reported by its peers. The cost of the equity options included in AFG’s cost of funds is the net purchase price of the option contracts amortized on a straight-line basis over the life of the contracts, which is generally one year. The following table reconciles AFG’s non-GAAP cost of funds measure to total annuity benefits expense (in millions):
 Three months ended December 31,
 2019 2018
Interest credited — fixed$102
 $92
Include cost of equity options150
 141
Cost of funds252
 233
    
Interest credited — fixed component of variable annuities1
 1
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs28
 27
 281
 261
Unlocking, changes in fair value of derivatives related to FIAs, and other impacts of the stock market and interest rates over or under option costs:   
Unlocking
 5
Impact of derivatives related to FIAs15
 80
Accretion of guaranteed minimum FIA benefits103
 94
Other annuity benefits — impact of the stock market and interest rates on FIAs2
 35
Less cost of equity options (included in cost of funds)(150) (141)
Total annuity benefits expense$251
 $334

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in the fourth quarter of 2018.

Net Spread on Fixed Annuities (excludes variable annuity earnings)
The profitability of a fixed annuity business is largely dependent on the ability of a company to earn income on the assets supporting the business in excess of the amounts credited to policyholder accounts plus expenses incurred (earning a “spread”). Performance measures such as net interest spread and net spread earned are often presented by annuity businesses to help users of their financial statements better understand the company’s performance.


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The table below (dollars in millions) details the components of these spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):
 Three months ended December 31, %
 2019 2018 Change
Average fixed annuity investments (at amortized cost)$39,316
 $35,993
 9%
Average fixed annuity benefits accumulated39,615
 36,103
 10%
      
As % of fixed annuity benefits accumulated (except as noted):     
Net investment income (as % of fixed annuity investments)4.63% 4.64%  
Cost of funds(2.54%) (2.58%)  
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*)(0.11%) (0.12%)  
Net interest spread1.98% 1.94%  
      
Policy charges and other miscellaneous income (*)0.07% 0.08%  
Acquisition expenses (*)(0.65%) (0.66%)  
Other expenses(0.33%) (0.38%)  
Net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on FIAs1.07% 0.98%  
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs0.24% (0.69%)  
Unlocking% (0.04%)  
Net spread earned on fixed annuities1.31% 0.25%  
(*)Excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on annuity benefits and the related impact on the amortization of deferred policy acquisition costs.

Annuity Net Investment Income
Net investment income for the fourth quarter of 2019 was $458 million compared to $419 million for the fourth quarter of 2018, an increase of $39 million (9%). This increase reflects the growth in AFG’s annuity business and higher earnings on investments accounted for under the equity method. The overall yield earned on investments in AFG’s fixed annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by 0.01 percentage points to 4.63% from 4.64% in the fourth quarter of 2019 compared to the fourth quarter of 2018. The impact of the reinvestment of proceeds from maturity and redemption of higher yielding investments at the lower yields available in the financial markets was substantially offset by very strong investment income in the 2019 quarter, including higher yields on investments accounted for under the equity method. For the period from October 1, 2018 through December 31, 2019, $6.4 billion in annuity segment investments with an average yield of approximately 5.0% were redeemed or sold with the proceeds reinvested at an approximately 0.8% lower yield.


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Annuity Cost of Funds
Cost of funds for the fourth quarter of 2019 was $252 million compared to $233 million for the fourth quarter of 2018, an increase of $19 million (8%), reflecting growth in the annuity business. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.04 percentage points to 2.54% in the fourth quarter of 2019 from 2.58% in the fourth quarter of 2018 reflecting lower renewal option costs.

The following table provides details of AFG’s interest credited and other cost of funds (in millions):
 Three months ended December 31,
 2019 2018
Cost of equity options (FIAs)$150
 $141
Interest credited:   
Traditional fixed annuities62
 58
Fixed component of fixed-indexed annuities25
 21
Immediate annuities6
 6
Pension risk transfer products3
 1
Federal Home Loan Bank advances6
 6
Total cost of funds$252
 $233

Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees
Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of unlocking and the stock market and interest rates, for the fourth quarter of 2019 were $11 million compared to $10 million for the fourth quarter of 2018, an increase of $1 million (10%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.01 percentage points to 0.11% from 0.12% in the fourth quarter of 2019 compared to the fourth quarter of 2018. In addition to interest credited to policyholders’ accounts and the change in fair value of derivatives related to fixed-indexed annuities, annuity benefits expense also includes the following expenses (in millions, net of guaranteed withdrawal benefit fees):
 Three months ended December 31,
 2019 2018
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:   
Amortization of sales inducements$3
 $5
Change in guaranteed withdrawal benefit reserve24
 19
Change in other benefit reserves1
 3
Other annuity benefits28
 27
Offset guaranteed withdrawal benefit fees(17) (17)
Other annuity benefits excluding the impact of the stock market and interest rates, net11
 10
Other annuity benefits — impact of the stock market and interest rates2
 35
Other annuity benefits, net$13
 $45

As discussed under “Annuity Benefits Accumulated” in Note A — “Accounting Policies” to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits decreases when the benefit of stock market participation increases. As shown in the table above, changes in the stock market and interest rates increased AFG’s guaranteed withdrawal benefit reserve by $2 million in the fourth quarter of 2019 compared to $35 million in the fourth quarter of 2018. This $33 million (94%) decrease was the primary cause of the $32 million overall decrease in other annuity benefits, net of guaranteed withdrawal benefit fees in the fourth quarter of 2019 compared to the fourth quarter of 2018.

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in the fourth quarter of 2018.

Annuity Net Interest Spread
AFG’s net interest spread increased 0.04 percentage points to 1.98% from 1.94% in the fourth quarter of 2019 compared to the same period in 2018 due primarily to lower renewal option costs. Features included in current annuity product offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.

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Annuity Policy Charges and Other Miscellaneous Income
Annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and income from sales of real estate were $9 million in the fourth quarter of 2019 compared to $10 million the fourth quarter of 2018, a decrease of $1 million (10%). Annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated decreased 0.01 percentage points to 0.07% in the fourth quarter of 2019 from 0.08% in the fourth quarter of 2018.

See “Annuity Unlocking” below for a discussion of the impact that the periodic review of actuarial assumptions had on annuity policy charges and other miscellaneous income in the fourth quarter of 2018.

Annuity Acquisition Expenses
In addition to the impact of unlocking, the following table illustrates the acceleration/deceleration of the amortization of deferred policy acquisition costs (“DPAC”) resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):
 Three months ended December 31,
 2019 2018
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates$65
 $64
Unlocking
 (1)
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates6
 (7)
Annuity acquisition expenses$71
 $56

Annuity acquisitions expenses before unlocking and the acceleration/deceleration of the amortization resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs were $65 million for the fourth quarter of 2019 compared to $64 million for the fourth quarter of 2018, an increase of $1 million (2%), reflecting growth in the annuity business.

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity and supplemental insurance acquisition expenses in the fourth quarter of 2018. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to future write-offs of DPAC or the present value of future profits on business in force of companies acquired (“PVFP”).

The positive impact of strong market performance during the fourth quarter of 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting acceleration of the amortization of DPAC. The unfavorable impact of the significant decline in stock market performance during the fourth quarter of 2018 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC.

The table below illustrates the impact of unlocking and the estimated impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:
 Three months ended December 31,
 2019 2018
Before unlocking, the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates0.65% 0.66%
Unlocking% (0.01%)
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates0.06% (0.07%)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated0.71% 0.58%

Annuity Other Expenses  
Annuity other expenses were $34 million for the fourth quarter of 2019 compared to $36 million for the fourth quarter of 2018, a decrease of $2 million (6%). Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses decreased 0.05 percentage points to 0.33% from 0.38% for the fourth quarter of 2019 as compared to the fourth quarter of 2018 due primarily to growth in the annuity business.

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Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities and Other Impacts of Changes in the Stock Market and Interest Rates on FIAs
AFG’s fixed-indexed (including variable-indexed) annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. For a list of other factors impacting the fair value of the embedded derivative component of AFG’s annuity benefits accumulated, see Note D — “Fair Value Measurements” to the financial statements. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

As discussed above under “Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees” and “Annuity Acquisition Expenses,” the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates. These impacts may be temporary in nature and not necessarily indicative of the long-term performance of the FIA business. The table below highlights the impact of changes in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates (excluding the impact of the 2018 unlocking charge) over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):
 Three months ended December 31,  
 2019 2018 % Change
Change in the fair value of derivatives related to FIAs$(15) $(80) (81%)
Accretion of guaranteed minimum FIA benefits(103) (94) 10%
Other annuity benefits(2) (35) (94%)
Less cost of equity options150
 141
 6%
Related impact on the amortization of DPAC(6) 6
 (200%)
Impact on annuity segment earnings before income taxes$24
 $(62) (139%)

During the fourth quarter of 2019, the positive impact of strong stock market performance increased earnings before income taxes for the annuity segment by $24 million. During the fourth quarter of 2018, the negative impact of the significant decline in the stock market reduced the annuity segment’s earnings before income taxes by $62 million. As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense reduction of 0.24% in the fourth quarter of 2019 compared to a net expense of 0.69% in the fourth quarter of 2018.

The following table provides analysis of the primary factors impacting the change in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates (excluding the impact of the 2018 unlocking charge) on the accounting for FIAs over or under the cost of the equity index options discussed above. Each factor is presented net of the estimated related impact on the amortization of DPAC (dollars in millions).
 Three months ended December 31,  
 2019 2018 % Change
Changes in the stock market, including volatility$24
 $(57) (142%)
Changes in interest rates higher (lower) than expected(4) (4) %
Other4
 (1) (500%)
Impact on annuity segment earnings before income taxes$24
 $(62) (139%)

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on the change in the fair value of the embedded derivative and other annuity liabilities in the fourth quarter of 2018.


75


Annuity Net Spread Earned on Fixed Annuities
AFG’s net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates over or under option costs increased 0.09 percentage points to 1.07% from 0.98% in the fourth quarter of 2019 compared to the same period in 2018 due primarily to the 0.04 percentage points increase in AFG’s net interest spread discussed above and the impact of growth in the business over stable fixed expenses. AFG’s overall net spread earned on fixed annuities increased 1.06 percentage points to 1.31% in the fourth quarter of 2019 from 0.25% in the fourth quarter of 2018 due to the increase in AFG’s net interest spread, the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed above and the impact of the 2018 unlocking discussed below under “Annuity Unlocking.”

Annuity Benefits Accumulated
Annuity premiums received 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 and other benefits are charged to expense and decreases for surrender and other policy charges are credited to other income.

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the three months ended December 31, 2019 and 2018 (in millions):
 Three months ended December 31,
 2019 2018
Beginning fixed annuity reserves$39,212
 $35,774
Fixed annuity premiums (receipts)1,134
 1,476
Federal Home Loan Bank advances
 225
Surrenders, benefits and other withdrawals(829) (796)
Interest and other annuity benefit expenses:   
Cost of funds252
 233
Embedded derivative mark-to-market276
 (490)
Change in other benefit reserves(27) 5
Unlocking
 4
Ending fixed annuity reserves$40,018
 $36,431
    
Reconciliation to annuity benefits accumulated per balance sheet:   
Ending fixed annuity reserves (from above)$40,018
 $36,431
Impact of unrealized investment gains225
 10
Fixed component of variable annuities163
 175
Annuity benefits accumulated per balance sheet$40,406
 $36,616

Annuity benefits accumulated includes a liability of $625 million at December 31, 2019 and $472 million at December 31, 2018 for guaranteed withdrawal benefits on annuities with features that allow the policyholder to take fixed periodic lifetime benefit payments that could exceed account value. As discussed above under “Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees” and “Annuity Acquisition Expenses,” the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates.


76


Statutory Annuity Premiums
AFG’s annuity operations generated statutory premiums of $1.14 billion in the fourth quarter of 2019 compared to $1.48 billion in the fourth quarter of 2018, a decrease of $343 million (23%). The following table summarizes AFG’s annuity sales (dollars in millions):
 Three months ended December 31,  
2019 2018 % Change
Financial institutions single premium annuities — indexed$359
 $455
 (21%)
Financial institutions single premium annuities — fixed270
 142
 90%
Retail single premium annuities — indexed170
 392
 (57%)
Retail single premium annuities — fixed25
 27
 (7%)
Broker dealer single premium annuities — indexed107
 335
 (68%)
Broker dealer single premium annuities — fixed9
 4
 125%
Pension risk transfer158
 75
 111%
Education market — fixed and indexed annuities36
 46
 (22%)
Total fixed annuity premiums1,134
 1,476
 (23%)
Variable annuities5
 6
 (17%)
Total annuity premiums$1,139
 $1,482
 (23%)

Management attributes the 23% decrease in annuity premiums in the fourth quarter of 2019 compared to the fourth quarter of 2018 to the lower market interest rate environment. In response to the continued drop in market interest rates during 2019, AFG lowered crediting rates on several products, which has slowed annuity sales compared to 2018 levels.

Annuity Unlocking
AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions annually. Beginning with the third quarter of 2019, AFG moved its unlocking from the fourth quarter to the third quarter and expects to continue to conduct the annual review in the third quarter each year (consistent with many of its peers). If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter.

The unlocking of the major actuarial assumptions underlying AFG’s annuity operations in the fourth quarter of 2018 resulted in a net charge related to its annuity business of $4 million, which impacted AFG’s financial statements as follows (in millions):
  Three months ended December 31,
  2019 (*) 2018
Policy charges and other miscellaneous income:    
Unearned revenue $
 $
Total revenues 
 
Annuity benefits:    
Fixed-indexed annuity embedded derivative 
 
Guaranteed withdrawal benefit reserve 
 (1)
Other reserves 
 5
Sales inducements asset 
 1
Total annuity benefits 
 5
Annuity and supplemental insurance acquisition expenses:    
Deferred policy acquisition costs 
 (1)
Total costs and expenses 
 4
Net charge $
 $(4)
(*)The detailed review of the major actuarial assumptions was conducted in the third quarter of 2019.

The net charge from unlocking annuity assumptions in the fourth quarter of 2018 reflects the favorable impact of an increase in projected net interest spreads on in-force business (due primarily to higher actual yields than previously anticipated), more than offset by a slight increase in projected expenses and the unfavorable impact of changes in projected policyholder annuitization and lapse behavior. Reinvestment rate assumptions are based primarily on 7-year and 10-year corporate bond yields.


77


Annuity Earnings before Income Taxes Reconciliation
The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the three months ended December 31, 2019 and 2018 (in millions):
 Three months ended December 31,
 2019 2018
Earnings on fixed annuity benefits accumulated$129
 $22
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)(3) (1)
Variable annuity earnings (loss)2
 (1)
Earnings before income taxes$128
 $20
(*)Net investment income (as a % of investments) of 4.63% and 4.64% for the three months ended December 31, 2019 and 2018, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.

Holding Company, Other and Unallocated — Results of Operations
AFG’s net GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $55 million for the fourth quarter of 2019 compared to $29 million for the fourth quarter of 2018, an increase of $26 million (90%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $50 million for the fourth quarter of 2019 compared to $29 million for the fourth quarter of 2018, an increase of $21 million (72%).

The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance and annuity segments for the three months ended December 31, 2019 and 2018 (dollars in millions):
 Three months ended December 31,  
 2019 2018 % Change
Revenues:     
Life, accident and health net earned premiums$5
 $6
 (17%)
Net investment income8
 4
 100%
Other income — P&C fees17
 19
 (11%)
Other income8
 9
 (11%)
Total revenues38
 38
 %
      
Costs and Expenses:     
Property and casualty insurance — commissions and other underwriting expenses4
 6
 (33%)
Life, accident and health benefits10
 8
 25%
Life, accident and health acquisition expenses1
 2
 (50%)
Other expense — expenses associated with P&C fees13
 13
 %
Other expenses (*)42
 22
 91%
Costs and expenses, excluding interest charges on borrowed money70
 51
 37%
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money(32) (13) 146%
Interest charges on borrowed money18
 16
 13%
Core loss before income taxes, excluding realized gains and losses(50) (29) 72%
Pretax non-core loss on retirement of debt(5) 
 %
GAAP loss before income taxes, excluding realized gains and losses$(55) $(29) 90%

(*)Excludes a pretax non-core loss on retirement of debt of $5 million in the fourth quarter of 2019.


78


Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses
AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $5 million and related benefits and acquisition expenses of $11 million in the fourth quarter of 2019 compared to net earned premiums of $6 million and related benefits and acquisition expenses of $10 million in the fourth quarter of 2018. The $2 million (25%) increase in life, accident and health benefits reflects higher claims in the run-off life insurance business.

Holding Company and Other — Net Investment Income
AFG recorded net investment income on investments held outside of its property and casualty insurance and annuity segments of $8 million in the fourth quarter of 2019 compared to $4 million in the fourth quarter of 2018, an increase of $4 million (100%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities increased in value by $1 million in the fourth quarter of 2019 compared to a decrease of $5 million in the fourth quarter of 2018.

Holding Company and Other — P&C Fees and Related Expenses
Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the fourth quarter of 2019, AFG collected $17 million in fees for these services compared to $19 million in the fourth quarter of 2018. Management views this fee income, net of the $13 million in both the fourth quarter of 2019 and the fourth quarter of 2018, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.

Holding Company and Other — Other Income
Other income in the table above includes $4 million in both the fourth quarter of 2019 and 2018, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded $4 million in other income outside of its property and casualty insurance and annuity segments in the fourth quarter of 2019 compared to $5 million in the fourth quarter of 2018.

Holding Company and Other — Other Expenses
Excluding the non-core loss on retirement of debt discussed below, AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded other expenses of $42 million in the fourth quarter of 2019 compared to $22 million in the fourth quarter of 2018, an increase of $20 million (91%). This increase is due primarily to the impact of higher holding company expenses related to employee benefit plans that are tied to stock market performance in the fourth quarter of 2019 compared to the fourth quarter of 2018.


79


Holding Company and Other — Interest Charges on Borrowed Money
AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded interest expense of $18 million in the fourth quarter of 2019 compared to $16 million in the fourth quarter of 2018, an increase of $2 million (13%). The following table details the principal amount of AFG’s long-term debt balances as of December 31, 2019 compared to December 31, 2018 (dollars in millions):
 December 31,
2019
 December 31,
2018
Direct obligations of AFG:   
4.50% Senior Notes due June 2047$590
 $590
3.50% Senior Notes due August 2026425
 425
5.125% Subordinated Debentures due December 2059200
 
6% Subordinated Debentures due November 2055150
 150
5.875% Subordinated Debentures due March 2059125
 
6-1/4% Subordinated Debentures due September 2054
 150
Other3
 3
Total principal amount of Holding Company Debt$1,493
 $1,318
    
Weighted Average Interest Rate4.6% 4.6%

The increase in interest expense for the fourth quarter of 2019 as compared to the fourth quarter of 2018 reflects the following financing transactions completed by AFG between October 1, 2018 and December 31, 2019:
Issued $125 million of 5.875% Subordinated Debentures in March 2019
Issued $200 million of 5.125% Subordinated Debentures in December 2019
Redeemed $150 million of 6-1/4% Subordinated Debentures in December 2019

Holding Company and Other — Loss on Retirement of Debt
In December 2019, AFG redeemed its $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due 2054 and wrote off unamortized debt issuance costs of $5 million.

Consolidated Realized Gains (Losses) on Securities  
AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net gains of $65 million in the fourth quarter of 2019 compared to net losses of $238 million in the fourth quarter of 2018, a change of $303 million (127%). Realized gains (losses) on securities consisted of the following (in millions):
 Three months ended December 31,
2019 2018
Realized gains (losses) before impairments:   
Disposals$8
 $(2)
Change in the fair value of equity securities (*)67
 (223)
Change in the fair value of derivatives(5) 3
Adjustments to annuity deferred policy acquisition costs and related items1
 
 71
 (222)
Impairment charges:   
Securities(9) (23)
Adjustments to annuity deferred policy acquisition costs and related items3
 7
 (6) (16)
Realized gains (losses) on securities$65
 $(238)
(*)The 2019 quarter includes a $55 million net gain on securities that were still held at December 31, 2019, and the 2018 quarter includes a $228 million net loss on securities that were still held at December 31, 2018.

The $67 million net realized gain from the change in the fair value of equity securities in the fourth quarter of 2019 includes gains of $17 million on investments in banks and financing companies, $16 million on investments in technology companies and $14 million on investments in media companies. The $223 million net realized loss from the change in the fair value of equity securities in the fourth quarter of 2018 includes losses of $65 million on banks and financing companies, $23 million on asset management companies, $22 million on energy exploration and production companies and $21 million on technology companies.


80


AFG’s impairment charges for the fourth quarter of 2019 consist of $7 million on corporate bonds and $2 million on third-party collateralized loan obligations compared to $17 million on corporate bonds and $6 million on residential MBS in the fourth quarter of 2018.

Consolidated Income Taxes   
AFG’s consolidated provision (credit) for income taxes was an expense of $68 million for the fourth quarter of 2019 compared to a credit of $4 million in the fourth quarter of 2018. The following is a reconciliation of income taxes at the statutory rate to the provision (credit) for income taxes as shown in the segmented statement of earnings (dollars in millions):
 Three months ended December 31,
 2019 2018
 Amount % of EBT Amount % of EBT
Earnings (loss) before income taxes (“EBT”)$259
   $(39)  
        
Income taxes at statutory rate$55
 21% $(8) 21%
Effect of:       
Tax exempt interest(3) (1%) (3) 8%
Stock-based compensation(2) (1%) (1) 3%
Dividend received deduction(1) % (1) 3%
Employee stock ownership plan dividend paid deduction(1) % (1) 3%
Adjustment to prior year taxes
 % 1
 (3%)
Change in valuation allowance10
 4% 8
 (21%)
Foreign operations4
 2% (5) 13%
Nondeductible expenses2
 1% 2
 (5%)
Other4
 % 4
 (12%)
Provision (credit) for income taxes$68
 26% $(4) 10%

Consolidated Noncontrolling Interests   
AFG’s consolidated net earnings (losses) attributable to noncontrolling interests was a net loss of $20 million for the fourth quarter of 2019 compared to $6 million for the fourth quarter of 2018, an increase of $14 million (233%). The losses in both periods are related to losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer. Net losses attributable to noncontrolling interests in the fourth quarter of 2019 includes $18 million related to the $76 million non-core charge for costs associated with AFG’s plans to exit the Lloyd’s of London insurance market in 2020. See “Neon exited lines charge” under “Property and Casualty Insurance Segment — Results of Operations” for the quarters ended December 31, 2019 and 2018.

81


RESULTS OF OPERATIONS — YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
Segmented Statement of Earnings   
AFG reports its business as three segments: (i) Property and casualty insurance (“P&C”), (ii) Annuity and (iii) Other, which includes run-off long-term care and life, holding company costs and income and expenses related to the managed investment entities (“MIEs”).
Effective January 1, 2018, the results of AFG’s run-off long-term care and life businesses are included in the “Other” segment instead of as a separate reportable segment based on the immaterial size of the remaining operations. Prior periods amounts were reclassified for consistent presentation.

AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the years ended December 31, 2019, 2018 and 2017 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):
     Other      
 P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Year ended December 31, 2019             
Revenues:             
Property and casualty insurance net earned premiums$5,185
 $
 $
 $
 $5,185
 $
 $5,185
Life, accident and health net earned premiums
 
 
 22
 22
 
 22
Net investment income472
 1,792
 (4) 43
 2,303
 
 2,303
Realized gains (losses) on securities
 
 
 
 
 287
 287
Income (loss) of MIEs:             
Investment income
 
 269
 
 269
 
 269
Gain (loss) on change in fair value of assets/liabilities
 
 (30) 
 (30) 
 (30)
Other income11
 107
 (15) 97
 200
 1
 201
Total revenues5,668
 1,899
 220
 162
 7,949
 288
 8,237
              
Costs and Expenses:             
Property and casualty insurance:             
Losses and loss adjustment expenses3,207
 
 
 
 3,207
 64
 3,271
Commissions and other underwriting expenses1,672
 
 
 23
 1,695
 30
 1,725
Annuity benefits
 1,140
 
 
 1,140
 11
 1,151
Life, accident and health benefits
 
 
 36
 36
 
 36
Annuity and supplemental insurance acquisition expenses
 222
 
 5
 227
 26
 253
Interest charges on borrowed money
 
 
 68
 68
 
 68
Expenses of MIEs
 
 220
 
 220
 
 220
Other expenses46
 139
 
 204
 389
 16
 405
Total costs and expenses4,925
 1,501
 220
 336
 6,982
 147
 7,129
Earnings before income taxes743
 398
 
 (174) 967
 141
 1,108
Provision for income taxes150
 80
 
 (37) 193
 46
 239
Net earnings, including noncontrolling interests593
 318
 
 (137) 774
 95
 869
Less: Net earnings (losses) attributable to noncontrolling interests(10) 
 
 
 (10) (18) (28)
Core Net Operating Earnings603
 318
 
 (137) 784
    
Non-core earnings attributable to shareholders (a):             
Realized gains (losses) on securities, net of tax
 
 
 227
 227
 (227) 
Annuity non-core earnings (losses), net of tax (b)
 (29) 
 
 (29) 29
 
Neon exited lines charge(58) 
 
 
 (58) 58
 
Special A&E charges, net of tax(14) 
 
 (9) (23) 23
 
Loss on retirement of debt, net of tax
 
 
 (4) (4) 4
 
Net Earnings Attributable to Shareholders$531
 $289
 $
 $77
 $897
 $
 $897

82


  Other      
 P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Year ended December 31, 2018             
Revenues:             
Property and casualty insurance net earned premiums$4,865
 $
 $
 $
 $4,865
 $
 $4,865
Life, accident and health net earned premiums
 
 
 24
 24
 
 24
Net investment income438
 1,638
 (7) 25
 2,094
 
 2,094
Realized gains (losses) on securities
 
 
 
 
 (266) (266)
Income (loss) of MIEs:             
Investment income
 
 255
 
 255
 
 255
Gain (loss) on change in fair value of assets/liabilities
 
 (21) 
 (21) 
 (21)
Other income10
 107
 (16) 98
 199
 
 199
Total revenues5,313
 1,745
 211
 147
 7,416
 (266) 7,150
              
Costs and Expenses:             
Property and casualty insurance:             
Losses and loss adjustment expenses2,985
 
 
 
 2,985
 18
 3,003
Commissions and other underwriting expenses1,560
 
 
 23
 1,583
 
 1,583
Annuity benefits
 998
 
 
 998
 
 998
Life, accident and health benefits
 
 
 40
 40
 
 40
Annuity and supplemental insurance acquisition expenses
 255
 
 6
 261
 
 261
Interest charges on borrowed money
 
 
 62
 62
 
 62
Expenses of MIEs
 
 211
 
 211
 
 211
Other expenses41
 131
 
 172
 344
 9
 353
Total costs and expenses4,586
 1,384
 211
 303
 6,484
 27
 6,511
Earnings before income taxes727
 361
 
 (156) 932
 (293) 639
Provision for income taxes149
 70
 
 (35) 184
 (62) 122
Net earnings, including noncontrolling interests578
 291
 
 (121) 748
 (231) 517
Less: Net earnings (losses) attributable to noncontrolling interests(13) 
 
 
 (13) 
 (13)
Core Net Operating Earnings591
 291
 
 (121) 761
    
Non-core earnings attributable to shareholders (a):             
Realized gains (losses) on securities, net of tax
 
 
 (210) (210) 210
 
Special A&E charges, net of tax(14) 
 
 (7) (21) 21
 
Net Earnings Attributable to Shareholders$577
 $291
 $
 $(338) $530
 $
 $530


83


   Other      
 P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Year ended December 31, 2017             
Revenues:             
Property and casualty insurance net earned premiums$4,579
 $
 $
 $
 $4,579
 $
 $4,579
Life, accident and health net earned premiums
 
 
 22
 22
 
 22
Net investment income362
 1,458
 (23) 34
 1,831
 
 1,831
Realized gains (losses) on securities
 
 
 
 
 5
 5
Income (loss) of MIEs:             
Investment income
 
 210
 
 210
 
 210
Gain (loss) on change in fair value of assets/liabilities
 
 12
 
 12
 
 12
Other income28
 103
 (18) 93
 206
 
 206
Total revenues4,969
 1,561
 181
 149
 6,860
 5
 6,865
              
Costs and Expenses:             
Property and casualty insurance:             
Losses and loss adjustment expenses2,884
 
 
 
 2,884
 71
 2,955
Commissions and other underwriting expenses1,382
 
 
 25
 1,407
 
 1,407
Annuity benefits
 892
 
 
 892
 
 892
Life, accident and health benefits
 
 
 26
 26
 
 26
Annuity and supplemental insurance acquisition expenses
 168
 
 5
 173
 
 173
Interest charges on borrowed money
 
 
 85
 85
 
 85
Expenses of MIEs
 
 181
 
 181
 
 181
Other expenses41
 121
 
 185
 347
 75
 422
Total costs and expenses4,307
 1,181
 181
 326
 5,995
 146
 6,141
Earnings before income taxes662
 380
 
 (177) 865
 (141) 724
Provision for income taxes219
 128
 
 (72) 275
 (28) 247
Net earnings, including noncontrolling interests443
 252
 
 (105) 590
 (113) 477
Less: Net earnings (losses) attributable to noncontrolling interests2
 
 
 
 2
 
 2
Core Net Operating Earnings441
 252
 
 (105) 588
    
Non-core earnings attributable to shareholders (a):             
Realized gains (losses) on securities, net of tax
 
 
 3
 3
 (3) 
Special A&E charges, net of tax(58) 
 
 (16) (74) 74
 
Neon exited lines charge18
 
 
 
 18
 (18) 
Loss on retirement of debt, net of tax
 
 
 (33) (33) 33
 
Tax benefit related to Neon restructuring56
 
 
 
 56
 (56) 
Tax expense related to change in U.S. corporate tax rate(88) 25
 
 (20) (83) 83
 
Net Earnings Attributable to Shareholders$369
 $277
 $
 $(171) $475
 $
 $475

(a)
See the reconciliation of core earnings to GAAP net earnings under “Results of Operations — General” for details on the tax and noncontrolling interest impacts of these reconciling items.
(b)
As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019,
unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses).

Property and Casualty Insurance Segment — Results of Operations   
AFG’s property and casualty insurance operations contributed $649 million in GAAP pretax earnings in 2019 compared to $709 million in 2018, a decrease of $60 million (8%). Property and casualty core pretax earnings were $743 million in 2019 compared to $727 million in 2018, an increase of $16 million (2%). The decrease in GAAP pretax earnings reflects a pretax non-core charge of $76 million in 2019 related to costs associated with plans to exit the Lloyd’s of London insurance market in 2020, partially offset by higher core pretax earnings. The increase in core pretax earnings reflects

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higher net investment income in 2019 compared to 2018 due primarily to growth in the business, partially offset by lower underwriting profit.

AFG’s property and casualty insurance operations contributed $709 million in GAAP pretax earnings in 2018 compared to $591 million in 2017, an increase of $118 million (20%). Property and casualty core pretax earnings were $727 million in 2018 compared to $662 million in 2017, an increase of $65 million (10%). The increase in GAAP and core pretax earnings reflects higher underwriting profit in 2018 compared to 2017 due primarily to higher favorable prior year reserve development and lower catastrophe losses, higher net investment income, due primarily to higher earnings from limited partnerships and similar investments and growth in the business, partially offset by the impact of income from the sale of real estate in 2017. The increase in GAAP pretax earnings also reflects lower special A&E charges in 2018 compared to 2017, partially offset by the impact of favorable reserve development of $18 million in the fourth quarter of 2017 in the Neon exited lines in connection with a reinsurance to close transaction.

The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the years ended December 31, 2019, 2018 and 2017 (dollars in millions):
 Year ended December 31, % Change
 2019 2018 2017 2019 - 2018 2018 - 2017
Gross written premiums$7,299
 $6,840
 $6,502
 7% 5%
Reinsurance premiums ceded(1,957) (1,817) (1,751) 8% 4%
Net written premiums5,342
 5,023
 4,751
 6% 6%
Change in unearned premiums(157) (158) (172) (1%) (8%)
Net earned premiums5,185
 4,865
 4,579
 7% 6%
Loss and loss adjustment expenses (a)3,207
 2,985
 2,884
 7% 4%
Commissions and other underwriting expenses (b)1,672
 1,560
 1,382
 7% 13%
Core underwriting gain306
 320
 313
 (4%) 2%
          
Net investment income472
 438
 362
 8% 21%
Other income and expenses, net(35) (31) (13) 13% 138%
Core earnings before income taxes743
 727
 662
 2% 10%
Pretax non-core special A&E charges(18) (18) (89) % (80%)
Pretax non-core Neon exited lines charge(76) 
 18
 % (100%)
GAAP earnings before income taxes$649
 $709
 $591
 (8%) 20%
          
 Year ended December 31, Change
Combined Ratios:2019 2018 2017 2019 - 2018 2018 - 2017
Specialty lines         
Loss and LAE ratio (a)61.5% 61.3% 62.9% 0.2% (1.6%)
Underwriting expense ratio (b)32.2% 32.1% 30.2% 0.1% 1.9%
Combined ratio93.7% 93.4% 93.1% 0.3% 0.3%
          
Aggregate — including exited lines         
Loss and LAE ratio63.0% 61.7% 64.5% 1.3% (2.8%)
Underwriting expense ratio32.8% 32.1% 30.2% 0.7% 1.9%
Combined ratio95.8% 93.8% 94.7% 2.0% (0.9%)

(a)Excludes pretax non-core special A&E charges of $18 million in both 2019 and 2018 (0.3 and 0.4 points on the combined ratio, respectively) and $89 million (1.9 points) in 2017, a pretax non-core charge of $46 million (0.9 points) in 2019 associated with plans to exit the Lloyd’s of London insurance market in 2020 and income of $18 million (0.4 points) in 2017 representing favorable development related to the Neon exited lines in connection with a reinsurance to close transaction.
(b)Excludes a pretax non-core charge of $30 million (0.6 points on the combined ratio) in 2019 associated with plans to exit the Lloyd’s of London insurance market in 2020.

AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial.


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Gross Written Premiums
Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $7.30 billion in 2019 compared to $6.84 billion in 2018, an increase of $459 million (7%). GWP increased $338 million (5%) in 2018 compared to 2017. Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):
 Year ended December 31, % Change
 2019 2018 2017 2019 - 2018 2018 - 2017
 GWP % GWP % GWP %    
Property and transportation$2,759
 38% $2,645
 39% $2,688
 41% 4% (2%)
Specialty casualty3,768
 52% 3,445
 50% 3,087
 48% 9% 12%
Specialty financial772
 10% 750
 11% 727
 11% 3% 3%
 $7,299
 100% $6,840
 100% $6,502
 100% 7% 5%

Reinsurance Premiums Ceded
Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 27% of gross written premiums for each of the years ended December 31, 2019, 2018 and 2017. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):
 Year ended December 31, Change in % of GWP
 2019 2018 2017 2019 - 2018 2018 - 2017
 Ceded % of GWP Ceded % of GWP Ceded % of GWP    
Property and transportation$(883) 32% $(891) 34% $(923) 34% (2%) %
Specialty casualty(1,067) 28% (936) 27% (807) 26% 1% 1%
Specialty financial(155) 20% (148) 20% (131) 18% % 2%
Other specialty148
   158
   110
      
 $(1,957) 27% $(1,817) 27% $(1,751) 27% % %

Net Written Premiums
Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $5.34 billion in 2019 compared to $5.02 billion in 2018, an increase of $319 million (6%). NWP increased $272 million (6%) in 2018 compared to 2017. Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):
 Year ended December 31, % Change
 2019 2018 2017 2019 - 2018 2018 - 2017
 NWP % NWP % NWP %    
Property and transportation$1,876
 35% $1,754
 35% $1,765
 37% 7% (1%)
Specialty casualty2,701
 51% 2,509
 50% 2,280
 48% 8% 10%
Specialty financial617
 12% 602
 12% 596
 13% 2% 1%
Other specialty148
 2% 158
 3% 110
 2% (6%) 44%
 $5,342
 100% $5,023
 100% $4,751
 100% 6% 6%

Net Earned Premiums
Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $5.19 billion in 2019 compared to $4.87 billion in 2018, an increase of $320 million (7%). NEP increased $286 million (6%) in 2018 compared to 2017. Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):
 Year ended December 31, % Change
 2019 2018 2017 2019 - 2018 2018 - 2017
 NEP % NEP % NEP %    
Property and transportation$1,828
 35% $1,729
 36% $1,711
 37% 6% 1%
Specialty casualty2,597
 50% 2,403
 49% 2,186
 48% 8% 10%
Specialty financial610
 12% 598
 12% 576
 13% 2% 4%
Other specialty150
 3% 135
 3% 106
 2% 11% 27%
 $5,185
 100% $4,865
 100% $4,579
 100% 7% 6%

The $459 million (7%) increase in gross written premiums in 2019 compared to 2018 reflects growth in each of the Specialty property and casualty sub-segments. Overall average renewal rates increased approximately 3% in 2019. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately 6%.


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The $338 million (5%) increase in gross written premiums in 2018 compared to 2017 reflects growth in the Specialty casualty and Specialty financial sub-segments. Overall average renewal rates increased approximately 1% in 2018. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately 3%.

Property and transportation Gross written premiums increased $114 million (4%) in 2019 compared to 2018, due primarily to new business opportunities in the transportation businesses and higher year-over-year premiums in the property and inland marine and ocean marine businesses. Average renewal rates increased approximately 4% for this group in 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points in 2019 compared to 2018, reflecting lower cessions in the crop insurance business.

Gross written premiums decreased $43 million (2%) in 2018 compared to 2017. This decrease was largely the result of lower year-over-year premiums in the crop insurance business and underwriting actions on under-performing accounts in the Singapore branch. Average renewal rates increased approximately 3% for this group in 2018. Reinsurance premiums ceded as a percentage of gross written premiums were comparable in 2018 and 2017.

Specialty casualty Gross written premiums increased $323 million (9%) in 2019 compared to 2018 due primarily to the addition of premiums from ABA Insurance Services and growth in the excess and surplus lines, executive liability and targeted markets businesses and higher premiums reported by Neon. This growth was partially offset by lower premiums in the workers’ compensation businesses. Average renewal rates increased approximately 3% for this group in 2019. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 8% in 2019. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point in 2019 compared to 2018, reflecting growth in the surplus lines, excess liability and mergers and acquisitions businesses, which have a higher ceding percentage than many of the businesses in the Specialty casualty sub-segment.

Gross written premiums increased $358 million (12%) in 2018 compared to 2017 due primarily to growth at Neon. Higher gross written premiums in the excess and surplus, targeted markets and executive liability businesses also contributed to the year-over-year growth. Average renewal rates decreased approximately 1% for this group in 2018. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 3% in 2018. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point in 2018 compared to 2017, reflecting higher cessions to AFG’s internal reinsurance program, which is included in Other specialty and higher cessions in the workers’ compensation businesses.

Specialty financial Gross written premiums increased $22 million (3%) in 2019 compared to 2018 due primarily to higher premiums in the fidelity, surety and equipment leasing businesses, partially offset by lower premiums in the financial institutions business. Average renewal rates for this group increased approximately 1% in 2019. Reinsurance premiums ceded as a percentage of gross written premiums were comparable in 2019 and 2018.

Gross written premiums increased $23 million (3%) in 2018 compared to 2017 due primarily to higher premiums in the financial institutions business. Average renewal rates for this group increased approximately 5% in 2018. Reinsurance premiums ceded as a percentage of gross written premiums increased 2 percentage points in 2018 compared to 2017, reflecting higher cessions in the financial institutions and equipment leasing businesses and the impact of reinstatement premiums in 2018 related to a reinsured loss in the fidelity business.

Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed decreased $10 million (6%) in 2019 compared to 2018, reflecting lower premiums retained, primarily from businesses in the Specialty casualty sub-segment.

Reinsurance premiums assumed increased $48 million (44%) in 2018 compared to 2017, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.


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Combined Ratio
The table below (dollars in millions) details the components of the combined ratio for AFG’s property and casualty insurance segment for 2019, 2018 and 2017:
 Year ended December 31, Change Year ended December 31,
 2019 2018 2017 2019 - 2018 2018 - 2017 2019 2018 2017
Property and transportation               
Loss and LAE ratio71.0% 69.0% 68.5% 2.0% 0.5%      
Underwriting expense ratio24.7% 24.1% 22.5% 0.6% 1.6%      
Combined ratio95.7% 93.1% 91.0% 2.6% 2.1%      
Underwriting profit          $79
 $120
 $154
                
Specialty casualty               
Loss and LAE ratio61.1% 61.5% 64.5% (0.4%) (3.0%)      
Underwriting expense ratio32.2% 32.7% 30.7% (0.5%) 2.0%      
Combined ratio93.3% 94.2% 95.2% (0.9%) (1.0%)      
Underwriting profit          $175
 $141
 $104
                
Specialty financial               
Loss and LAE ratio31.5% 37.6% 39.4% (6.1%) (1.8%)      
Underwriting expense ratio53.5% 51.3% 50.0% 2.2% 1.3%      
Combined ratio85.0% 88.9% 89.4% (3.9%) (0.5%)      
Underwriting profit          $92
 $66
 $61
                
Total Specialty               
Loss and LAE ratio61.5% 61.3% 62.9% 0.2% (1.6%)      
Underwriting expense ratio32.2% 32.1% 30.2% 0.1% 1.9%      
Combined ratio93.7% 93.4% 93.1% 0.3% 0.3%      
Underwriting profit          $325
 $322
 $317
                
Aggregate — including exited lines              
Loss and LAE ratio63.0% 61.7% 64.5% 1.3% (2.8%)      
Underwriting expense ratio32.8% 32.1% 30.2% 0.7% 1.9%      
Combined ratio95.8% 93.8% 94.7% 2.0% (0.9%)      
Underwriting profit          $212
 $302
 $242

The Specialty property and casualty insurance operations generated an underwriting profit of $325 million in 2019 compared to $322 million in 2018, an increase of $3 million (1%). The higher underwriting profit in 2019 reflects higher underwriting profits in the Specialty casualty and Specialty financial sub-segments, partially offset by lower underwriting profit in the Property and transportation sub-segment. Overall catastrophe losses were $60 million (1.2 points on the combined ratio) for 2019 compared to $103 million (2.1 points) for 2018. In connection with catastrophe losses incurred in 2019 and 2018, AFG paid $1 million and $2 million in net reinstatement premiums, respectively, resulting in total pretax losses from catastrophes of $61 million in 2019 and $105 million in 2018.

The Specialty property and casualty insurance operations generated an underwriting profit of $322 million in 2018 compared to $317 million in 2017, an increase of $5 million (2%). Higher underwriting profits in the Specialty casualty and Specialty financial sub-segments were partially offset by lower underwriting profit in the Property and transportation sub-segment. Overall catastrophe losses were $103 million (2.1 points on the combined ratio) for 2018 compared to $140 million (3.0 points) for 2017. In connection with catastrophe losses incurred in 2018, AFG paid $2 million in net reinstatement premiums, resulting in a total pretax loss from catastrophes of $105 million. In connection with catastrophe losses incurred in 2017, AFG reduced profit-based commissions payable to agents by $8 million in the Specialty financial sub-segment and paid $10 million in net reinstatement premiums, resulting in a total pretax loss from catastrophes of $142 million in 2017.

Property and transportation Underwriting profit for this group was $79 million in 2019 compared to $120 million in 2018, a decrease of $41 million (34%). Record levels of prevented planting claims in the crop operations were the driver of the lower underwriting profit in 2019 compared to 2018, partially offset by higher underwriting profits in the transportation businesses. Catastrophe losses were $32 million (1.8 points on the combined ratio) in 2019 compared to catastrophe losses of $26 million (1.5 points) in 2018.


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Underwriting profit for this group was $120 million in 2018 compared to $154 million in 2017, a decrease of $34 million (22%). Lower underwriting profits in the agricultural, property and inland marine and aviation businesses and the Singapore branch were partially offset by higher underwriting profit at National Interstate and improved results in the ocean marine operations. Catastrophe losses were $26 million (1.5 points on the combined ratio) in 2018 compared to catastrophe losses of $36 million (2.1 points) and related net reinstatement premiums of $2 million in 2017.

Specialty casualty Underwriting profit for this group was $175 million in 2019 compared to $141 million in 2018, an increase of $34 million (24%). Higher underwriting profits in the targeted markets and workers’ compensation businesses and a reduction in the underwriting loss at Neon (excluding the Neon exited lines charge), due primarily to lower year-over-year catastrophe losses, were partially offset by lower underwriting profits in the excess and surplus lines, executive liability and general liability businesses. See “Neon exited lines charge” under “Property and Casualty Insurance Segment — Results of Operations” for the quarters ended December 31, 2019 and 2018 for information about AFG’s plans to exit the Lloyd’s of London insurance market in 2020. Catastrophe losses were $17 million (0.7 points on the combined ratio) and related net reinstatement premiums were $1 million in 2019 compared to catastrophe losses of $45 million (1.9 points) and related net reinstatement premiums of $1 million in 2018.

Underwriting profit for this group was $141 million in 2018 compared to $104 million in 2017, an increase of $37 million (36%). These results reflect higher underwriting profits in the executive liability and targeted markets businesses and lower adverse prior year reserve development in run-off businesses. Catastrophe losses were $45 million (1.9 points on the combined ratio) and related net reinstatement premiums were $1 million in 2018 compared to catastrophe losses of $71 million (3.3 points) and related net reinstatement premiums of $6 million in 2017.

Specialty financial Underwriting profit for this group was $92 million in 2019 compared to $66 million in 2018, an increase of $26 million (39%) due primarily to higher underwriting profitability in the financial institutions and surety businesses. Catastrophe losses were $10 million (1.6 points on the combined ratio) in 2019 compared to catastrophe losses of $28 million (4.7 points) and related net reinstatement premiums of $1 million in 2018.

Underwriting profit for this group was $66 million in 2018 compared to $61 million in 2017, an increase of $5 million (8%) due primarily to favorable prior year reserve development in run-off businesses. Catastrophe losses were $28 million (4.7 points on the combined ratio) in 2018 compared to $30 million (5.2 points) in 2017. In connection with catastrophe losses incurred in 2018, the Specialty financial sub-segment paid $1 million in reinstatement premiums compared to a reduction of profit-based commissions payable to agents of $8 million (1.1 points on the combined ratio) and reinstatement premiums of $2 million in 2017.

Other specialty This group reported an underwriting loss of $21 million in 2019 compared to $5 million in 2018, an increase of $16 million (320%). This increase reflects higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in 2019 compared to 2018.

This group reported an underwriting loss of $5 million in 2018 compared to $2 million in 2017, an increase of $3 million (150%). The lower underwriting results are due primarily to losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in 2018, partially offset by the impact of a $14 million charge recorded in 2017 to adjust the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998.

Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment include the asbestos and environmental reserve charges, the Neon exited lines charge and favorable development in the Neon exited lines. See “Neon exited lines charge” under “Property and Casualty Insurance Segment — Results of Operations” for the quarters ended December 31, 2019 and 2018. AFG also recorded adverse prior year reserve development of $19 million in 2019 related to business outside of the Specialty group that AFG no longer writes.

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Losses and Loss Adjustment Expenses
AFG’s overall loss and LAE ratio was 63.0%, 61.7% and 64.5% in 2019, 2018 and 2017, respectively. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):
 Year ended December 31,    
 Amount Ratio Change in Ratio
 2019 2018 2017 2019 2018 2017 2019 - 2018 2018 - 2017
Property and transportation               
Current year, excluding catastrophe losses$1,332
 $1,216
 $1,176
 72.8% 70.3% 68.7% 2.5% 1.6%
Prior accident years development(67) (50) (40) (3.6%) (2.8%) (2.3%) (0.8%) (0.5%)
Current year catastrophe losses32
 26
 36
 1.8% 1.5% 2.1% 0.3% (0.6%)
Property and transportation losses and LAE and ratio$1,297
 $1,192
 $1,172
 71.0% 69.0% 68.5% 2.0% 0.5%
                
Specialty casualty               
Current year, excluding catastrophe losses$1,657
 $1,570
 $1,425
 63.8% 65.4% 65.2% (1.6%) 0.2%
Prior accident years development(88) (139) (86) (3.4%) (5.8%) (4.0%) 2.4% (1.8%)
Current year catastrophe losses17
 45
 71
 0.7% 1.9% 3.3% (1.2%) (1.4%)
Specialty casualty losses and LAE and ratio$1,586
 $1,476
 $1,410
 61.1% 61.5% 64.5% (0.4%) (3.0%)
                
Specialty financial               
Current year, excluding catastrophe losses$220
 $223
 $218
 36.2% 37.3% 37.8% (1.1%) (0.5%)
Prior accident years development(38) (26) (21) (6.3%) (4.4%) (3.6%) (1.9%) (0.8%)
Current year catastrophe losses10
 28
 30
 1.6% 4.7% 5.2% (3.1%) (0.5%)
Specialty financial losses and LAE and ratio$192
 $225
 $227
 31.5% 37.6% 39.4% (6.1%) (1.8%)
                
Total Specialty               
Current year, excluding catastrophe losses$3,315
 $3,092
 $2,879
 64.0% 63.6% 62.9% 0.4% 0.7%
Prior accident years development(187) (212) (139) (3.7%) (4.4%) (3.0%) 0.7% (1.4%)
Current year catastrophe losses60
 103
 140
 1.2% 2.1% 3.0% (0.9%) (0.9%)
Total Specialty losses and LAE and ratio$3,188
 $2,983
 $2,880
 61.5% 61.3% 62.9% 0.2% (1.6%)
                
Aggregate — including exited lines               
Current year, excluding catastrophe losses$3,354
 $3,092
 $2,879
 64.0% 63.6% 62.9% 0.4% 0.7%
Prior accident years development(143) (192) (64) (2.2%) (4.0%) (1.4%) 1.8% (2.6%)
Current year catastrophe losses60
 103
 140
 1.2% 2.1% 3.0% (0.9%) (0.9%)
Aggregate losses and LAE and ratio$3,271
 $3,003
 $2,955
 63.0% 61.7% 64.5% 1.3% (2.8%)

Current accident year losses and LAE, excluding catastrophe losses
The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was 64.0% in 2019, 63.6% in 2018 and 62.9% in 2017.

Property and transportation   The 2.5 percentage points increase in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects an increase in the loss and LAE ratio of the crop operations due to a high level of prevented planting claims resulting from excess rain in 2019.

The 1.6 percentage points increase in the loss and LAE ratio for the current year, excluding catastrophe losses in 2018 compared to 2017 reflects an increase in the loss and LAE ratio of the aviation business and the Singapore branch.

Specialty casualty   The 1.6 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects a decrease in the loss and LAE ratio at Neon (excluding the impact of the Neon exited lines charge).

The loss and LAE ratio for the current year, excluding catastrophe losses is comparable in 2018 and 2017.


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Specialty financial   The 1.1 percentage points decrease in the loss and LAE ratio for the current year, excluding catastrophe losses in 2019 compared to 2018 reflects a decrease in the loss and LAE ratio of the financial institutions business.

The loss and LAE ratio for the current year, excluding catastrophe losses is comparable in 2018 and 2017.