Acquisitions and Sale of Businesses

12 Months Ended

Dec. 31, 2020

Neon In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing Neon Underwriting Ltd. and its other Lloyd’s subsidiaries in run-off. Neon and its predecessor, Marketform, failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008.

On June 30, 2020, AFG acquired 100% of the indirect noncontrolling interest in Neon from certain former and current Neon executives for cash based on the nominal fair value of the interest acquired as determined by a third-party valuation firm.

On December 31, 2020, AFG completed the sale of GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited for proceeds of $6 million. The sale completed AFG’s exit from the Lloyd’s of London insurance market.

On the sale date, the carrying value of the assets and liabilities disposed represented approximately 1% of both AFG’s assets and liabilities and are detailed in the table below.

Under GAAP accounting guidance, 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. Because AFG’s primary business continues to be commercial property and casualty insurance, as well as the immaterial expected impact on AFG’s ongoing results of operations, the sale of Neon has not been reported as a discontinued operation.

The gain on the sale of Neon, which was recorded in AFG’s financial statements as of December 31, 2020, is shown below (in millions):


Sale proceeds, net of expenses	$	3

Assets of businesses to be sold:
Cash and investments	$	453
Recoverables from reinsurers	224
Prepaid reinsurance premiums	8
Agents’ balances and premiums receivable	42
Other assets	60
Total assets	787
Liabilities of businesses to be sold:
Unpaid losses and loss adjustment expenses	640
Unearned premiums	49
Payable to reinsurers	19
Other liabilities	92
Total liabilities	800
Reclassify accumulated other comprehensive income	(7)
Net liabilities of businesses sold	$	(20)

Pretax gain on subsidiaries recorded in 2020	$	23

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


	Year ended December 31,
	2020		2019		2018
Net earned premiums	$	200	$	384	$	306
Loss and loss adjustment expenses	218		225		204
Commissions and other underwriting expenses	117		195		165
Underwriting loss	(135)		(36)		(63)

Net investment income (loss)	(5)		6		10
Other income and expenses, net	(5)		(10)		(5)
Loss before income taxes and noncontrolling interests	$	(145)	$	(40)	$	(58)

The impact of Neon exited lines on AFG’s net earnings for the year ended December 31, 2020 is shown below (in millions):


Underwriting loss	$	(135)
Net investment income (loss)	(5)
Other income and expenses, net	(5)
Loss before income taxes and noncontrolling interests	(145)
Pretax gain on sale of subsidiaries	23
Total pretax loss from Neon exited lines	(122)
Tax benefit related to sale of subsidiaries	72
Less: Net loss attributable to noncontrolling interests	(11)
Net loss from Neon exited lines attributable to shareholders	$	(39)

As discussed in Note M — “Income Taxes,” the sale of Neon allowed AFG to recognize a $72 million tax benefit.

Paratransit Book of Business Effective in June 2019, National Interstate, a property and casualty insurance subsidiary of AFG, entered into an agreement with Atlas Financial Holdings, Inc. (“AFH”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimated that the majority of AFH’s $110 million paratransit business was eligible for quotation under this arrangement following inception of the agreement. Under the terms of the agreement (as extended in 2020), AFH acts as an underwriting manager for National Interstate until at least August 2021 for fleets with seven or fewer vehicles, after which time National Interstate is entitled to acquire the renewal rights for the business from AFH for a purchase price equal to 15% of the in force gross written premiums at that date. In November 2020, National Interstate acquired the renewal rights for fleets with eight or more vehicles from AFH for approximately $3 million. The majority of the purchase price ultimately paid for the renewal rights will be recorded as an intangible renewal rights asset and will be amortized over the estimated life of the business acquired. In connection with the transaction, AFG was granted a five-year warrant to acquire approximately 2.4 million shares of AFH (19.9% at the acquisition date). The estimated fair value of the warrant was approximately $1 million at the date it was received.

ABA Insurance Services Inc. In November 2018, AFG acquired ABA Insurance Services Inc. (“ABAIS”) from American Bankers Mutual Insurance, Ltd. for approximately $30 million using cash on hand at the parent company. Additional contingent consideration of up to $3 million could be due four years after the acquisition date based on achieving certain operating milestones. ABAIS is based in Ohio and is a market-leading provider of directors and officers liability and other complementary insurance solutions for banks, small businesses and nonprofit organizations.

The allocation of the purchase price is shown in the table below (in millions):


	November 30, 2018
Total purchase price	$	30

Tangible assets acquired	28
Liabilities acquired	26
Net tangible assets acquired, at fair value	2
Excess purchase price over net tangible assets acquired	$	28

Allocation of excess purchase price:
Intangible assets acquired (*)	$	25
Deferred tax on intangible assets acquired (*)	(5)
Goodwill	8
	$	28

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

Approximately $25 million of the purchase price was recorded as a finite lived customer relationship intangible asset, which will be amortized over its estimated life of 9 years. The fair value of this intangible was estimated using a multi-period excess earnings method, which is a form of the income approach. The acquisition resulted in the recognition of $8 million in goodwill based on the excess of the purchase price over the fair value of the net assets acquired. The goodwill represents the fair value of acquired intangible assets that do not qualify for separate recognition, including the value of ABAIS’s assembled workforce. Business generated by ABAIS is included in the Specialty casualty sub-segment.