American Financial Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; includes fourth-quarter results. Filed February 25, 2021. AFG is an insurance holding company focused on specialty commercial property and casualty insurance and fixed and indexed annuities.
Financial results and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenues | $7.91 billion | $8.24 billion |
| Net earnings attributable to shareholders | $732 million; $8.20 diluted EPS | $897 million; $9.85 diluted EPS |
| Core net operating earnings (non-GAAP) | $752 million; $8.44 diluted EPS | $784 million; $8.62 diluted EPS |
| Operating cash flow | $2.18 billion | $2.46 billion |
| Cash and cash equivalents, year-end | $2.81 billion | $2.31 billion |
| Shareholders’ equity, year-end | $6.79 billion | $6.27 billion |
| Long-term debt principal, year-end | $1.99 billion | $1.49 billion |
- Property and casualty (P&C): Net earned premiums were $5.10 billion, down 2%. Underwriting gain was $224 million and the GAAP combined ratio was 95.5%, versus 95.8% in 2019; below 100% indicates underwriting profit. Specialty P&C’s combined ratio was 91.3%.
- Annuities: Segment pretax earnings were $171 million, down from $362 million. Gross statutory annuity premiums fell 18% to $4.09 billion. Net spread earned on fixed annuities was 0.43%, compared with 0.96%.
- Investments: Total investment portfolio was $52.50 billion at year-end; fixed-maturity earned yield was 4.2%, versus 4.4%. Approximately 89% of available-for-sale fixed maturities were investment grade by S&P or comparable rating.
- Liquidity and capital: Parent held approximately $215 million in cash and securities and had $500 million available under its revolving credit facility; no parent borrowings were outstanding on the facility during 2020. All insurance subsidiaries exceeded statutory risk-based capital requirements. Consolidated debt-to-capital was 26.6% including subordinated debt, compared with management’s stated goal of 25% or less; adjusted pro forma for the pending annuity sale, it was 24.5%.
Material changes versus the prior period
- Full-year net earnings fell $165 million, while core net operating earnings declined $32 million. Total revenues decreased about 4%.
- P&C core underwriting gain rose to $406 million from $306 million, but lower investment income and special items weighed on reported results. Gross P&C written premiums declined 3%, while renewal rates increased approximately 11% overall.
- Annuity earnings decreased amid lower investment income, a $46 million pretax assumption-unlocking charge, and reinsurance and market-related effects. Low interest rates also slowed annuity sales.
- Operating cash flow declined $273 million. Financing cash flow shifted to a $123 million use from a $1.41 billion source, reflecting reduced net annuity receipts, share repurchases, dividends and debt activity.
- AFG repurchased 4.53 million shares for $313 million and paid $334 million in common dividends, including a $2.00-per-share special dividend. The prior year included no share repurchases and a $3.30-per-share special dividend.
Outlook, significant items and risks
- On January 27, 2021, AFG agreed to sell its annuity subsidiaries, including certain run-off life and long-term-care operations, to MassMutual for $3.5 billion in cash, subject to closing adjustments. Closing was expected in the second quarter of 2021. AFG estimated an after-tax gain of $620–$690 million; completion and final proceeds were not assured. AFG planned to report the annuity business as discontinued operations beginning in first-quarter 2021.
- In October 2020, the annuity subsidiary ceded about $5.96 billion of in-force annuities to Commonwealth and transferred related investments. The transaction produced substantial realized gains on securities but also a deferred $180 million loss to be recognized over an estimated 7–10 years; reported earnings are affected by reinsurance and market-sensitive annuity accounting.
- AFG recorded $115 million of COVID-19-related P&C losses and $128 million of catastrophe losses in 2020. Management cited uncertainty about further pandemic effects, claims, premium volumes, investment markets and possible legal or regulatory changes affecting coverage.
- A third-party study led to a $47 million pretax P&C charge to strengthen asbestos and environmental reserves. P&C A&E reserves were $572 million gross and $422 million net of reinsurance at year-end; management cautioned that ultimate claims may differ materially from estimates. Former railroad and manufacturing operations had additional recorded liabilities.
- Other key risks include reserve-estimation uncertainty, reinsurer credit and availability, prolonged low or changing interest rates, investment valuation and liquidity, catastrophe and climate-related losses, competition, cyber risk, regulation and capital constraints. Management provided no quantified earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether the MassMutual sale closed, its final adjustment and gain, and the resulting post-sale capital, liquidity and earnings profile.
- Underlying P&C underwriting performance, including reserve development, COVID-19 claims and catastrophe losses; distinguish Specialty results from exited Neon and other non-core items.
- Whether the assumptions and reserves for long-tail claims, particularly asbestos and environmental exposures, remain adequate as claims develop.
- How annuity spreads, investment yields, reinsurance economics and market-sensitive derivative accounting affect results through closing and afterward.
- Investment portfolio credit quality and valuation, reinsurer recoverability and the company’s ability to sustain dividends and capital deployment under changing market conditions.