Document

_____________________________________________________________________________________________________

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

☐ 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

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).

_____________________________________________________________________________________________________

Table of Contents

AMERICAN FINANCIAL GROUP, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K



			Page
FORWARD-LOOKING STATEMENTS			1

Part I
Item 1	—	Business	2
Item 1A	—	Risk Factors	21
Item 1B	—	Unresolved Staff Comments	none
Item 2	—	Properties	28
Item 3	—	Legal Proceedings	28
Item 4	—	Mine Safety Disclosures	none

Part II
Item 5	—	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6	—	Selected Financial Data	31
Item 7	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A	—	Quantitative and Qualitative Disclosure About Market Risk	111
Item 8	—	Financial Statements and Supplementary Data	113
Item 9	—	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	none
Item 9A	—	Controls and Procedures	113
Item 9B	—	Other Information	none

Part III
Item 10	—	Directors, Executive Officers and Corporate Governance	S-1
Item 11	—	Executive Compensation	S-1
Item 12	—	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	S-1
Item 13	—	Certain Relationships and Related Transactions, and Director Independence	S-1
Item 14	—	Principal Accounting Fees and Services	S-1

Part IV
Item 15	—	Exhibits, Financial Statement Schedules	S-1

Table of Contents

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.

Table of Contents

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.

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.

Table of Contents

Building Long-Term Value for AFG Shareholders

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.

Table of Contents

Timeline of Selected Start-ups, Acquisitions and Dispositions

Table of Contents

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 Indemnity	A	A+	202
Neon Lloyd’s Syndicate	A	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.

Table of Contents

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.


(*)	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.

Table of Contents

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.

Table of Contents

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-related	Federally 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 Automobile	Coverage 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 Marine	Coverage 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 Surplus	Liability, 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 Liability	Coverage for directors and officers of businesses and non-profit organizations, errors and omissions, cyber, and mergers and acquisitions.

General Liability	Coverage for contractor-related businesses, energy development and production risks, and environmental liability risks.

Targeted Programs	Coverage (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 Liability	Coverage in excess of primary layers.

Workers’ Compensation	Coverage for prescribed benefits payable to employees who are injured on the job.

Specialty Financial
Fidelity and Surety	Fidelity 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 Services	Coverage 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.

Table of Contents

2019 SPECIALTY PROPERTY AND CASUALTY BY SUB-SEGMENT


(*)	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 casualty	2,701		2,509		2,280
Specialty financial	617		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.

Table of Contents

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	%

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,

Table of Contents

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