American Financial (US:AFG)2022-02-25 20:47markdown [Part I](index=4&type=section&id=Part%20I) [Item 1. Business](index=4&type=section&id=Item%201.%20Business) AFG is an insurance holding company primarily engaged in specialized commercial property and casualty insurance, having divested its Annuity business and acquired an AI company - AFG is an insurance holding company focused on specialized commercial property and casualty (P&C) insurance products[10](index=10&type=chunk) - On May 28, 2021, AFG completed the sale of its Annuity business to MassMutual for **$3.57 billion** in cash, sharpening its focus on the P&C segment[11](index=11&type=chunk)[734](index=734&type=chunk) - In December 2021, AFG acquired Verikai, Inc., a machine learning and AI company, for approximately **$120 million** in cash to enter the medical stop loss insurance business[15](index=15&type=chunk)[738](index=738&type=chunk) [Property and Casualty Insurance Segment](index=7&type=section&id=Property%20and%20Casualty%20Insurance%20Segment) The P&C segment, operating through Great American Insurance Group, achieved strong underwriting profitability in 2021 with a GAAP combined ratio of 86.5% and $7.95 billion in gross written premiums P&C Insurance Segment Key Performance Indicators (2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | **Gross Written Premiums (in millions)** | $7,946 | $7,087 | $7,299 | | **Net Written Premiums (in millions)** | $5,573 | $5,013 | $5,342 | | **Net Earned Premiums (in millions)** | $5,404 | $5,099 | $5,185 | | **Underwriting Gain (in millions)** | $733 | $224 | $212 | | **GAAP Combined Ratio** | 86.5% | 95.5% | 95.8% | | **Statutory Combined Ratio** | 85.5% | 91.9% | 92.9% | - The P&C operations recorded net losses from catastrophes of **$86 million** in 2021, compared to **$128 million** in 2020 and **$60 million** in 2019, with COVID-19 related losses at **$16 million** in 2021 and **$115 million** in 2020[31](index=31&type=chunk)[754](index=754&type=chunk) Net Written Premiums by Sub-Segment (in millions) | Sub-Segment | 2021 | 2020 (ex-Neon) | 2019 | | :--- | :--- | :--- | :--- | | Property and transportation | $2,157 | $1,887 | $1,876 | | Specialty casualty | $2,540 | $2,304 | $2,701 | | Specialty financial | $658 | $604 | $617 | | Other specialty | $218 | $197 | $148 | | **Total** | **$5,573** | **$4,992** | **$5,342** | Asbestos & Environmental (A&E) Gross Reserves Progression (in millions) | Year | Beginning Balance | Incurred Losses | Paid Losses | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | 2021 | $572 | $0 | ($14) | $555 | | 2020 | $529 | $47 | ($8) | $572 | | 2019 | $395 | $18 | ($30) | $529 | [Investment Portfolio](index=16&type=section&id=Investment%20Portfolio) AFG's $15.75 billion investment portfolio, primarily fixed maturities, is high-quality and outperformed its benchmark in 2021 - The total investment portfolio was valued at **$15.75 billion** at December 31, 2021[76](index=76&type=chunk)[799](index=799&type=chunk) Fixed Maturity Portfolio Credit Quality (December 31, 2021) | S&P Rating | Fair Value (in millions) | % of Total | | :--- | :--- | :--- | | AAA, AA, A | $7,736 | 75% | | BBB | $1,370 | 13% | | **Total Investment Grade** | **$9,106** | **88%** | | Non-Investment Grade | $363 | 3% | | Not Rated | $888 | 9% | | **Total** | **$10,357** | **100%** | Total Return on Fixed Maturities vs. Index | Year | AFG's Fixed Maturities | Barclays Capital U.S. Universal Bond Index | | :--- | :--- | :--- | | 2021 | 1.9% | (1.1%) | | 2020 | 4.0% | 7.6% | | 2019 | 6.1% | 9.3% | [Regulation](index=18&type=section&id=Regulation) AFG's insurance operations are subject to extensive U.S. and international regulations, including solvency, cybersecurity, and dividend restrictions - The maximum amount of dividends available to AFG from its insurance subsidiaries in 2022 without prior regulatory approval is approximately **$843 million**[84](index=84&type=chunk)[807](index=807&type=chunk) - The company is subject to various U.S. and international regulations, including state-level insurance laws, NAIC Risk-Based Capital (RBC) requirements, cybersecurity regulations (NYDFS, NAIC model law), and federal laws like Dodd-Frank[79](index=79&type=chunk)[803](index=803&type=chunk)[805](index=805&type=chunk) [Item 1A. Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) AFG faces significant risks including catastrophe losses, reserve adequacy, investment market volatility, cybersecurity threats, and regulatory compliance - Key risks include unpredictable catastrophe losses, which could exceed reinsurance protection, and the increasing frequency and severity of weather-related events due to climate change[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) - The company's P&C reserves may be inadequate due to the high degree of judgment involved in estimating ultimate claim costs, especially for asbestos and environmental (A&E) exposures[114](index=114&type=chunk)[117](index=117&type=chunk) - The investment portfolio is subject to market risk, particularly from changes in interest rates affecting the value of its large fixed maturity holdings, and credit risk from potential defaults[119](index=119&type=chunk)[120](index=120&type=chunk) - AFG faces risks from technology failures and cyberattacks, which could lead to data loss, service disruption, and legal liability under evolving data protection laws[129](index=129&type=chunk)[130](index=130&type=chunk)[132](index=132&type=chunk) - A downgrade in financial strength or credit ratings could reduce business volume, increase borrowing costs, and limit access to capital markets[135](index=135&type=chunk)[136](index=136&type=chunk) [Item 2. Properties](index=27&type=section&id=Item%202.%20Properties) AFG primarily leases its office facilities across the U.S. and internationally, while also owning several key properties in Ohio - The company leases most of its office space, including its Cincinnati headquarters, but also owns several buildings in Cincinnati and a large office property in Richfield, Ohio[153](index=153&type=chunk)[876](index=876&type=chunk) [Item 3. Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) AFG faces routine litigation, with significant legal matters related to asbestos and environmental claims from insurance and historical operations - The company faces litigation and claims related to asbestos and environmental (A&E) liabilities from its insurance operations and former railroad and manufacturing operations of its subsidiary, American Premier[155](index=155&type=chunk)[878](index=878&type=chunk) - American Premier is a party to proceedings under environmental laws for remediation costs at former railroad and manufacturing sites, but believes its accruals for these liabilities are adequate[156](index=156&type=chunk)[158](index=158&type=chunk)[879](index=879&type=chunk) [Part II](index=29&type=section&id=Part%20II) [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=29&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) AFG's common stock trades on the NYSE, with the company repurchasing $319 million in shares in 2021 and outperforming its P&C peer index over five years 2021 Share Repurchases | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | Q1 | 1,757,702 | $108.98 | | Q2 | 916,520 | $124.40 | | Q3 | 94,960 | $128.56 | | Q4 | 8,502 | $126.14 | | **Total** | **2,777,684** | **$114.79** | - Over the five years ending December 31, 2021, AFG's stock performance, with dividends reinvested, matched the S&P 500 Index and significantly outperformed the S&P 500 P&C Insurance Index[165](index=165&type=chunk)[166](index=166&type=chunk)[889](index=889&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) AFG reported strong 2021 financial performance with $1.08 billion in net earnings from continuing operations, enhanced capital from the Annuity business sale, and a 29.0% debt-to-total capital ratio Full Year Earnings from Continuing Operations (Attributable to Shareholders) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Earnings | $1.08 billion | $325 million | | Diluted EPS | $12.62 | $3.63 | - The sale of the Annuity business for **$3.57 billion** provided significant capital, which was partially returned to shareholders through **$2.21 billion** in special dividends and **$319 million** in share repurchases during 2021[172](index=172&type=chunk)[192](index=192&type=chunk) Debt to Total Capital Ratio | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Including subordinated debt | 29.0% | 26.6% | | Excluding subordinated debt | 19.2% | 17.6% | - Critical accounting policies requiring significant management judgment include the establishment of insurance reserves (especially A&E), recoverability of reinsurance, and valuation of investments[177](index=177&type=chunk)[900](index=900&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) AFG maintains strong liquidity and capital, bolstered by $3.57 billion from the annuity sale, with a 29.0% debt-to-total capital ratio and $1.71 billion in operating cash flow Condensed Consolidated Cash Flows (in millions) | Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $1,714 | $2,183 | $2,456 | | Net cash used in investing activities | ($436) | ($1,564) | ($3,065) | | Net cash from (used in) financing activities | ($1,957) | ($123) | $1,408 | - The parent holding company's liquidity was significantly enhanced by the **$3.57 billion** in proceeds from the sale of the annuity business[192](index=192&type=chunk)[915](index=915&type=chunk) - AFG has access to a **$500 million** revolving credit facility expiring in December 2025, with no borrowings outstanding during 2021[196](index=196&type=chunk)[919](index=919&type=chunk) [Uncertainties](index=40&type=section&id=Uncertainties) AFG's primary uncertainties involve the adequacy of P&C insurance reserves, especially for long-tail asbestos and environmental claims, with gross A&E reserves at $555 million - Estimating the liability for unpaid losses and loss adjustment expenses (LAE) is a critical and inherently judgmental process, especially for long-tail lines of business[222](index=222&type=chunk)[945](index=945&type=chunk) - A **1%** adverse change in cost trends for the 'Other liability — occurrence' and 'Workers' compensation' lines would impact net earnings by an estimated **$55 million** and **$66 million**, respectively[230](index=230&type=chunk)[953](index=953&type=chunk) - Gross A&E reserves were **$555 million** at the end of 2021, and the company's A&E survival ratio (**23.6 years**) is significantly higher than the industry average (**8.2 years**), suggesting a more conservative reserving position[244](index=244&type=chunk)[253](index=253&type=chunk)[976](index=976&type=chunk) - A comprehensive external study in 2020 led to a **$47 million** pretax charge to increase P&C A&E reserves, while an internal review in 2021 resulted in no net change[254](index=254&type=chunk)[977](index=977&type=chunk) [Results of Operations](index=51&type=section&id=Results%20of%20Operations) AFG's 2021 results showed significant improvement, with core net operating earnings of $993 million and an 81% increase in P&C underwriting gain Core Net Operating Earnings Reconciliation (Full Year, in millions) | Description | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | **Core Net Operating Earnings** | **$993** | **$481** | **$482** | | Realized gains (losses) on securities | $87 | ($59) | $122 | | Special A&E charges | $0 | ($54) | ($23) | | Neon exited lines | $3 | ($39) | ($58) | | Loss on retirement of debt | $0 | ($4) | ($4) | | Other | ($2) | $0 | $0 | | Net earnings from continuing operations | $1,081 | $325 | $519 | | Discontinued annuity operations | $914 | $407 | $378 | | **Net Earnings Attributable to Shareholders** | **$1,995** | **$732** | **$897** | - The company exited the Lloyd's of London market by selling Neon in December 2020, and the run-off operations of Neon are excluded from core earnings[269](index=269&type=chunk)[992](index=992&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) AFG's primary market risk is interest rate sensitivity in its fixed maturity portfolio, with a 100 bps rate increase estimated to decrease fair value by $208 million Interest Rate Sensitivity of Fixed Maturity Portfolio | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Fair Value of Portfolio (in millions) | $10,385 | $9,108 | | % Impact of 100 bps Rate Increase | (2.0%) | (3.0%) | | Pretax Impact of 100 bps Rate Increase (in millions) | ($208) | ($273) | [Item 8. Financial Statements and Supplementary Data](index=89&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item presents AFG's audited consolidated financial statements for 2021, including balance sheets, income statements, and cash flow statements - This item includes the audited consolidated financial statements and supplementary data for the fiscal year ended December 31, 2021[448](index=448&type=chunk)[1171](index=1171&type=chunk) [Item 9A. Controls and Procedures](index=89&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded AFG's disclosure controls and internal control over financial reporting were effective, with an unqualified auditor opinion - Management concluded that both disclosure controls and procedures, and internal control over financial reporting, were effective as of December 31, 2021[449](index=449&type=chunk)[451](index=451&type=chunk)[1172](index=1172&type=chunk) - The independent auditor, Ernst & Young LLP, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[453](index=453&type=chunk)[1176](index=1176&type=chunk) [Part III](index=138&type=section&id=Part%20III) [Items 10-14](index=138&type=section&id=Items%2010-14) Information for Items 10 through 14, covering governance, compensation, and related party transactions, is incorporated by reference from AFG's 2022 Proxy Statement - Information for Part III (Items 10-14) is incorporated by reference from the company's 2022 Proxy Statement[700](index=700&type=chunk) [Part IV](index=138&type=section&id=Part%20IV) [Item 15. Exhibits, Financial Statement Schedules](index=138&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This item lists all documents filed with the Form 10-K, including financial statements, schedules, and a comprehensive index of exhibits - This part includes the financial statements, financial statement schedules, and an index of all exhibits filed with the 10-K report[701](index=701&type=chunk)