Acquisitions and Sale of Businesses

Acquisition of Noncontrolling Interest in National Interstate Corporation On November 10, 2016, AFG acquired the 49% of National Interstate Corporation (“NATL”) not previously owned by AFG’s wholly-owned subsidiary, Great American Insurance Company (“GAI”) for $315 million ($32.00 per share) in a merger transaction. In addition, NATL paid a one-time special cash dividend of $0.50 per share to its shareholders immediately prior to the merger closing ($5 million was paid to noncontrolling shareholders). Expenses related to the merger were approximately $10 million and were expensed as incurred.

Because NATL was already a consolidated subsidiary of AFG prior to the merger, the acquisition was accounted for as an equity transaction. As a result, the excess of the consideration paid over the carrying value of the noncontrolling interest acquired was recorded as a $137 million reduction in AFG’s Capital Surplus. In addition, the merger allowed NATL and its subsidiaries to become members of the AFG consolidated tax group, which resulted in a tax benefit of $66 million in the fourth quarter of 2016.

Acquisition of Summit Holding Southeast, Inc. In April 2014, AFG acquired Summit Holding Southeast, Inc. and its related companies (“Summit”), from Liberty Mutual Insurance for $259 million using cash on hand at the parent company. Immediately following the acquisition, AFG made a capital contribution of $140 million, bringing its total capital investment in the Summit business to $399 million. Summit is based in Lakeland, Florida and is a leading provider of specialty workers’ compensation solutions in the southeastern United States. Summit continues to operate under the Summit brand as a member of AFG’s Great American Insurance Group. Summit is included in the Specialty casualty sub-segment and generated $540 million and $529 million in net earned premiums in 2016 and 2015, respectively, and $410 million in net earned premiums during the nine months subsequent to AFG’s acquisition in 2014.

Expenses related to the acquisition were less than $1 million and were expensed as incurred. The purchase price was allocated to the acquired assets and liabilities of Summit based on management’s best estimate of fair value as of the acquisition date. The allocation of the purchase price is shown in the table below (in millions):



	April 1, 2014
Total purchase price			$	259

Tangible assets acquired:
Cash and cash equivalents	$	1,078
Fixed maturities, available for sale	92
Recoverables from reinsurers	116
Agents’ balances and premiums receivable	41
Deferred tax assets, net (*)	67
Other receivables	21
Other assets	11
Total tangible assets acquired			1,426

Liabilities acquired:
Unpaid losses and loss adjustment expenses	1,142
Unearned premiums	3
Payable to reinsurers	3
Other liabilities	66
Total liabilities acquired			1,214

Net tangible assets acquired, at fair value			212
Excess purchase price over net tangible assets acquired			$	47

Allocation of excess purchase price:
Intangible assets acquired (*)			$	47
Deferred tax on intangible assets acquired (*)			(16		)
Goodwill			16
			$	47


(*)	Included in Other assets in AFG’s Balance Sheet.

Acquisition of Renewal Rights In March 2014, AFG completed a renewal rights agreement with Selective Insurance Company of America to acquire Selective’s pooled public entity book of business for $8 million. At the acquisition date, this book of business had approximately $38 million in in-force gross written premiums. The acquired business generated $34 million in gross written premiums and $16 million in net written premiums in 2016.

Sale of Long-term Care Business In December 2015, AFG completed the sale of substantially all of its run-off long-term care insurance business (which was included in the run-off long-term care and life segment) to HC2 Holdings, Inc. (“HC2”) for an initial payment of $7 million in cash and HC2 securities with a fair value of $11 million. AFG may also receive up to $13 million of additional proceeds from HC2 in the future 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. The legal entities involved in the transaction, United Teacher Associates Insurance Company (“UTA”) and Continental General Insurance Company (“CGIC”), 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 business. Following the sale of these subsidiaries, AFG has only a small block of long-term care insurance (1,600 policies) with approximately $37 million in reserves at December 31, 2016. AFG had ceased new sales of long-term care insurance in January 2010, but continued to service and accept renewal premiums on its outstanding policies, which are guaranteed renewable.

In addition to the $18 million in cash and securities received at closing and the $13 million of potential additional proceeds in the future from the release of statutory liabilities, AFG received a total of $97 million in tax benefits in 2016 related to the sale through reduced estimated tax payments and a tax refund resulting from the carryback of the tax-basis capital loss. The receivables for these tax benefits were reflected in AFG’s financial statements at December 31, 2015.

Based on the status of ongoing negotiations at the end of the first quarter of 2015, management determined that the potential sale of the run-off long-term care insurance business met the GAAP “held for sale” criteria as of March 31, 2015. Accordingly, AFG recorded a $162 million pretax loss ($105 million loss after tax) in the first quarter of 2015 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. At the closing date, the loss was adjusted to $166 million ($108 million loss after tax) based on the actual proceeds received and the final carrying value of the net assets disposed. In the second quarter of 2016, AFG received additional proceeds based on the final closing balance sheet and adjusted certain accrued expense estimates associated with the sale, resulting in a $2 million pretax gain. At March 31, 2015 and at the sale date, the carrying value of the assets and liabilities disposed represented approximately 4% of both AFG’s assets and liabilities.

Under accounting guidance effective in January 2015, only disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations. Due to the run-off nature of the business and the immaterial expected impact on AFG’s results of operations, the sale of AFG’s long-term care insurance business has not been reported as a discontinued operation.

The impact of the sale of the run-off long-term care insurance business is shown below (in millions):



	December 24, 2015
Net sale proceeds (*)				$	13

Assets of businesses sold:
Cash and investments	$	1,334
Recoverables from reinsurers	630
Deferred policy acquisition costs	16
Other receivables	16
Other assets	(4		)
Goodwill	2
Total assets				1,994
Liabilities of businesses sold:
Annuity benefits accumulated	261
Life, accident and health reserves	1,525
Other liabilities	7
Total liabilities				1,793
Reclassify net unrealized gain on marketable securities				22
Net assets of businesses sold				179

Loss on subsidiaries, pretax				(166		)
Tax benefit				58
Loss on subsidiaries, net of tax				$	(108	)


(*)	Includes the fair value of the potential additional consideration and capital maintenance agreement and is shown net of estimated expenses.

Revenues, costs and expenses, and earnings before income taxes for the subsidiaries sold were (in millions):



	Year ended December 31,
	2015			2014
Life, accident and health net earned premiums:
Long-term care	$	73		$	74
Life operations	11			11
Net investment income	73			75
Realized gains (losses) on securities and other income	(11		)	(6		)
Total revenues	146			154
Annuity benefits	8			7
Life, accident and health benefits:
Long-term care	91			119
Life operations	11			11
Annuity and supplemental insurance acquisition expenses	12			11
Other expenses	16			14
Total costs and expenses	138			162
Earnings before income taxes	$	8		$	(8	)

Other In addition to the loss on the sale of substantially all of AFG’s run-off long-term care insurance business (discussed above), AFG recorded a $5 million pretax realized gain in the third quarter of 2015 representing an adjustment to a previously recognized realized loss on a small property and casualty subsidiary sold several years ago.