UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period EndedSeptember 30, 2009
Commission File
AMERICAN FINANCIAL GROUP, INC.
Incorporated underthe Laws of Ohio
IRS Employer I.D.No. 31-1544320
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days. Yes X No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company: Large Accelerated Filer X Accelerated Filer Non-Accelerated Filer Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company. Yes No X
As of November 1, 2009, there were 116,225,330 shares of the Registrant's Common Stock outstanding, excluding14.9 million shares owned by subsidiaries.
TABLE OF CONTENTS
Page
AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM I - FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited)
(Dollars In Millions)
September 30,
December 31,
2009
2008
Assets:
Cash and cash equivalents
$ 1,434.6
$ 1,264.0
Investments:
Fixed maturities:
Available for sale - at fair value
(amortized cost - $16,499.8 and $15,948.1)
16,421.5
14,079.3
Trading - at fair value
323.5
280.5
Equity securities - at fair value:
Common stocks (cost - $124.4 and $118.6)
351.9
216.5
Perpetual preferred stocks (cost - $115.1 and $178.4)
105.4
137.1
Mortgage loans
304.4
308.9
Policy loans
277.2
283.6
Real estate and other investments
409.5
300.6
Total cash and investments
19,628.0
16,870.5
Recoverables from reinsurers and prepaid
reinsurance premiums
3,980.9
4,301.7
Agents' balances and premiums receivable
798.9
629.7
Deferred policy acquisition costs
1,662.8
2,343.1
Other receivables
423.4
414.8
Variable annuity assets (separate accounts)
522.6
415.9
Other assets
629.5
1,241.6
Goodwill
207.6
210.2
Total Assets
$27,853.7
$26,427.5
Liabilities and Equity:
Unpaid losses and loss adjustment expenses
$ 6,252.0
$ 6,764.2
Unearned premiums
1,837.3
1,697.9
Annuity benefits accumulated
11,154.2
10,652.7
Life, accident and health reserves
1,577.8
1,539.8
Payable to reinsurers
646.4
504.1
Long-term debt
877.1
1,029.7
Variable annuity liabilities (separate accounts)
Accounts payable, accrued expenses and other
liabilities
1,184.2
1,221.6
Total liabilities
24,051.6
23,825.9
Shareholders' Equity:
Common Stock, no par value
- 200,000,000 shares authorized
- 116,533,990 and 115,599,169 shares outstanding
116.5
115.6
Capital surplus
1,261.3
1,235.8
Retained earnings
2,169.9
1,841.6
Accumulated other comprehensive income (loss),
net of tax
121.9
(703.0
Total shareholders' equity
3,669.6
2,490.0
Noncontrolling interests
132.5
111.6
Total equity
3,802.1
2,601.6
Total liabilities and equity
2
CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
(In Millions, Except Per Share Data)
Three months ended
Nine months ended
Income:
Property and casualty insurance premiums
$ 621.4
$ 850.6
$1,808.8
$2,104.4
Life, accident and health premiums
109.3
330.5
325.9
Investment income
300.4
283.1
899.6
820.3
Realized gains (losses) on:
Securities (*)
8.8
(150.1)
(16.9)
(293.5)
Subsidiaries
(5.0)
-
Other income
55.5
77.0
177.5
231.8
1,092.7
1,169.9
3,194.5
3,188.9
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses
296.1
551.8
845.7
1,185.8
Commissions and other underwriting expenses
217.7
226.0
643.0
659.0
Annuity benefits
111.8
100.9
323.1
287.6
Life, accident and health benefits
86.6
81.1
268.1
253.8
Annuity and supplemental insurance
acquisition expenses
38.5
46.1
136.2
140.9
Interest charges on borrowed money
18.5
16.3
47.9
52.3
Other operating and general expenses
120.8
119.7
353.8
355.5
890.0
1,141.9
2,617.8
2,934.9
Operating earnings before income taxes
202.7
28.0
576.7
254.0
Provision for income taxes
71.6
9.5
203.8
91.4
Net earnings, including noncontrolling interests
131.1
372.9
162.6
Less: Net (earnings) loss attributable to
noncontrolling interests
(3.9
2.4
(14.6
(5.4
Net Earnings Attributable to Shareholders
$ 127.2
$ 20.9
$ 358.3
$ 157.2
Earnings Attributable to Shareholders per Common Share:
Basic
$1.10
$.18
$3.09
$1.38
Diluted
$1.09
$3.07
$1.34
Average number of Common Shares:
116.1
115.2
115.8
114.0
117.2
116.9
117.0
Cash dividends per Common Share
$.13
$.125
$.39
$.375
(*)
Consists of the following:
Realized gains (losses) before impairments
$35.3
($ 41.7)
$135.9
($ 27.6)
Losses on securities with impairment
(47.4)
(108.4)
(300.3)
(265.9)
Non-credit portion recognized in other
comprehensive income (loss)
20.9
147.5
Impairment charges recognized in earnings
(26.5
(108.4
(152.8
(265.9
Total realized gains (losses) on securities
$ 8.8
($150.1)
($ 16.9)
($293.5)
3
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
(Dollars in Millions)
Shareholders' Equity
Accumulated
Common Stock
Other
Noncon-
Common
and Capital
Retained
Comprehensive
trolling
Total
Shares
Surplus
Earnings
Income (Loss)
Interests
Equity
Balance at December 31, 2008
115,599,169
$1,351.4
$1,841.6
($703.0)
$2,490.0
$111.6
$2,601.6
Cumulative effect of accounting change
17.5
(17.5)
Net earnings
358.3
14.6
Other comprehensive income, net of tax:
Change in unrealized gain (loss)
on securities
827.3
6.6
833.9
Change in foreign currency translation
14.5
1.3
15.8
Change in unrealized pension and other
postretirement benefits
.6
Total comprehensive income
1,200.7
22.5
1,223.2
Dividends on Common Stock
(45.2)
Shares issued:
Exercise of stock options
903,133
16.2
Benefit plans
190,629
2.3
Dividend reinvestment plan
16,589
.3
Stock-based compensation expense
8.1
Shares exchanged in option exercises
(175,530)
(2.1)
(2.3)
(4.4)
1.6
(1.6
Balance at September 30, 2009
116,533,990
$1,377.8
$2,169.9
$121.9
$3,669.6
$132.5
$3,802.1
Balance at December 31, 2007
113,499,080
$1,300.0
$1,733.5
$ 12.6
$3,046.1
$ 99.9
$3,146.0
157.2
5.4
Other comprehensive income (loss),
net of tax:
(389.0)
(7.8)
(396.8)
(10.2)
(1.7)
(11.9)
Change in unrealized pension and
other postretirement benefits
.2
Total comprehensive (loss)
(241.8)
(4.1)
(245.9)
(42.7)
Redemption of convertible notes
2,364,640
24.4
1,234,365
24.9
209,297
5.5
186,024
5.2
Other stock-based compensation expense
7.7
Shares acquired and retired
(1,803,000)
(20.7)
(26.7)
(247,632)
(2.8)
(3.6)
(6.4)
Noncontrolling interest of
acquired subsidiary
18.7
1.1
Balance at September 30, 2008
115,442,774
$1,345.3
$1,817.7
($386.4)
$2,776.6
$114.5
$2,891.1
4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Millions)
Operating Activities:
$ 372.9
$ 162.6
Adjustments:
Depreciation and amortization
155.0
185.8
Realized losses on investing activities
26.0
287.2
Net (purchases) sales of trading securities
(24.7)
47.5
Deferred annuity and life policy acquisition costs
(128.6)
(143.3)
Decrease (increase) in reinsurance and other receivables
187.5
(657.0)
Decrease (increase) in other assets
85.0
(74.7)
Increase (decrease) in insurance claims and reserves
(334.8)
672.1
Increase in payable to reinsurers
142.3
165.8
Decrease in other liabilities
(43.8)
(71.3)
Other, net
1.2
2.9
Net cash provided by operating activities
761.1
865.2
Investing Activities
Purchases of and additional investments in:
Fixed maturity investments
(3,245.5)
(4,998.5)
Equity securities
(19.7)
(138.5)
(112.2)
Real estate, property and equipment
(49.0)
(35.9)
Maturities and redemptions of fixed maturity investments
1,387.8
1,534.6
Sales of:
1,504.2
2,670.3
41.1
334.6
8.5
Decrease in securities lending collateral
48.1
43.7
Cash and cash equivalents of businesses acquired
44.3
Increase in other investments
(68.4
(10.8
Net cash used in investing activities
(405.2
(659.9
Financing Activities
Annuity receipts
1,092.3
1,275.9
Annuity surrenders, benefits and withdrawals
(986.2)
(1,049.9)
Net transfers from (to) variable annuity assets
(7.0)
39.6
Additional long-term borrowings
526.4
600.0
Reductions of long-term debt
(682.0)
(584.9)
Decrease in securities lending obligation
(94.6)
(43.7)
Issuances of Common Stock
12.6
20.6
Repurchases of Common Stock
Cash dividends paid on Common Stock
(44.9)
(37.2)
(1.9
(.6
Net cash provided by (used in) financing activities
(185.3
172.4
Net Increase in Cash and Cash Equivalents
170.6
377.7
Cash and cash equivalents at beginning of period
1,264.0
815.9
Cash and cash equivalents at end of period
$1,434.6
$1,193.6
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________________________
INDEX TO NOTES
A.
F.
B.
G.
C.
H.
D.
I.
E.
J.
K.
________________________________________________________________________________
Basis of Presentation
As a result of a new accounting standard adopted on January 1, 2009, noncontrolling interests in subsidiaries (formerly referred to as minority interest) is reported in the Balance Sheet as a separate component of equity and in the Statement of Earnings as a deduction from net income (instead of as an expense) in deriving net earnings attributable to AFG's shareholders.
Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to September 30, 2009, and prior to November 6, 2009 (the filing date of this Form 10-Q), have been evaluated for potential recognition or disclosure herein.
The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.
Fair Value Measurements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
fair value measurements. Adoption of these standards did not have a significant impact on AFG's financial condition or results of operations.
In the second quarter of 2009, AFG adopted new accounting guidance regarding interim disclosures about fair value of financial instruments that requires fair value disclosures in interim financial statements for financial instruments, including those that are not reflected in the balance sheet at fair value. Formerly, these disclosures were only required annually. Disclosures required by this guidance are contained in Note C - "Fair Value Measurements."
Investments
Premiums and discounts on fixed maturity securities are amortized using the interest method; mortgage-backed securities ("MBS") are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
Gains or losses on securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other than temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses)) and the cost basis of that investment is reduced.
In April 2009, AFG adopted new accounting guidance relating to the recognition and presentation of other-than-temporary impairments. Under the guidance, if management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then an entity may separate other than temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings) and 2) the amount related to all other factors (recorded in other comprehensive income (loss)). The credit-related portion of an other than temporary impairment is measured by comparing a security's amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. Both components are required to be shown in the Statement of Earnings. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge is required to reduce the amortized cost of that security to fair value. AFG adopted this guidance effective January 1, 2009, and recorded a cumulative effect adjustment of $17.5 million to reclassify the non-credit component of previously recognized impairments from retained earnings to accumulated other comprehensive income (loss). Additional disclosures required by this guidance are contained in Note D - "Investments."
Certain AFG subsidiaries loan fixed maturity and equity securities to other institutions for short periods of time. The borrower is required to provide collateral on which AFG earns investment income, net of a fee to the lending agent. AFG records the collateral held (included in other assets) in its Balance Sheet at fair value. The obligation to return the collateral is included in other liabilities. The securities loaned remain a recorded asset on AFG's Balance Sheet.
7
Derivatives
On January 1, 2009, AFG adopted a new accounting standard relating to disclosures about derivative instruments and hedging activities. The standard requires enhanced disclosures about objectives and strategies for using derivatives, how they are accounted for and how the instruments affect the entity's financial statements. See Note E "Derivatives" for the related disclosures. Adoption of this standard had no impact on AFG's financial position or results of operations.
Reinsurance
Certain annuity and supplemental insurance subsidiaries cede life insurance policies to a third party on a funds withheld basis whereby the subsidiaries retain the assets (securities) associated with the reinsurance contracts. Interest is credited to the reinsurer based on the actual investment performance of the retained assets. These reinsurance contracts are considered to contain embedded derivatives (that must be adjusted to fair value) because the yield on the payables is based on specific blocks of the ceding companies' assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolios of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to these transactions are classified as "trading." The adjustment to fair value on the embedded derivatives offsets the investment income recorded on the adjustment to fair value of the related trading portfolios.
Deferred Policy Acquisition Costs ("DPAC")
8
unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses.
DPAC related to annuities and universal life insurance products is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains (losses).
DPAC related to annuities is also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of "Accumulated Other Comprehensive Income (Loss), net of tax" in the Shareholders' Equity section of the Balance Sheet.
DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues.
DPAC includes the present value of future profits on business in force of annuity and supplemental insurance companies acquired ("PVFP"). PVFP represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. PVFP is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.
Unpaid Losses and Loss Adjustment Expenses
Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the Statement of Earnings in the period in which determined. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.
Annuity Benefits Accumulated
9
Life, Accident and Health Reserves
Variable Annuity Assets and Liabilities
Premium Recognition
Noncontrolling Interests
Income Taxes
AFG records a liability for the inherent uncertainty in quantifying its income tax provisions. Related interest and penalties are recognized as a component of tax expense.
Stock-Based Compensation
Benefit Plans
10
Earnings Per Share
Stock-based compensation plans
1.7
1.9
Convertible notes
AFG's weighted average diluted shares outstanding excludes the following anti-dilutive potential common shares related to stock compensation plans: third quarter of 2009 and 2008 - 4.6 million and 3.9 million; nine months of 2009 and 2008 - 6.0 million and 4.2 million, respectively. Adjustments to net earnings attributable to shareholders in the calculation of diluted earnings per share were nominal in the 2009 and 2008 periods.
Statement of Cash Flows
AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses, trucks and recreational vehicles, inland and ocean marine, agricultural-related products and other property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, general liability, executive liability, umbrella and excess liability and customized programs for small to mid-sized businesses, (iii) Specialty financial, which includes risk management insurance programs for lending and leasing institutions (including collateral and mortgage protection insurance), surety and fidelity products and trade credit insurance, and (iv) California workers' compensation. AFG's annuity and supplemental insurance business markets traditional fixed, indexed and variable annuities and a variety of supplemental insurance products. AFG's reportable segments and their components were de termined based primarily upon similar economic characteristics, products and services.
11
The following tables (in millions) show AFG's revenues and operating earnings before income taxes by significant business segment and sub-segment.
Revenues
Premiums earned:
Specialty
Property and transportation
$ 239.1
$ 457.6
$ 675.8
$ 915.9
Specialty casualty
195.2
199.1
563.7
611.3
Specialty financial
127.6
123.7
388.4
369.9
California workers' compensation
42.0
51.6
128.6
155.3
17.6
51.7
Other lines
(.1
.1
621.4
850.6
1,808.8
2,104.4
102.2
98.1
312.8
296.3
Realized gains (losses)
17.1
(57.7)
(133.1)
26.6
42.7
87.3
124.7
767.3
933.7
2,250.0
2,392.3
Annuity and supplemental insurance:
194.4
183.0
584.7
523.7
Realized losses
(13.2)
(93.0)
(63.0)
(157.8)
26.9
29.8
88.8
90.4
319.7
229.1
941.0
782.2
5.7
7.1
3.5
14.4
$1,092.7
$1,169.9
$3,194.5
$3,188.9
Operating Earnings Before Income Taxes
Underwriting:
$ 46.3
$ 12.0
$ 120.7
$ 63.6
29.6
46.6
108.1
143.1
29.0
(1.9)
96.4
19.8
10.5
(2.4)
33.7
5.8
4.7
2.8
7.3
(.8
.9
(5.5
(7.9
107.6
72.8
320.1
259.6
Investment and other operating income
80.4
83.3
253.3
252.4
(57.7
(133.1
205.1
98.4
614.5
378.9
Operations
46.5
49.2
127.1
120.3
(13.2
(93.0
(63.0
(157.8
33.3
64.1
(37.5)
(35.7
(26.6
(101.9
(87.4
$ 202.7
$ 28.0
$ 576.7
$ 254.0
12
Level 1 - Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG's Level 1 financial instruments consist primarily of publicly traded equity securities and highly liquid government bonds for which quoted market prices in active markets are available.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG's Level 2 financial instruments include separate account assets and liabilities, corporate and municipal fixed maturity securities and mortgage-backed securities ("MBS") priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. The unobservable inputs may include management's own assumptions about the assumptions market participants would use based on the best information available in the circumstances. AFG's Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information.
AFG's management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. This data is reviewed by internal investment professionals who ensure the fair value is representative of an exit price and consistent with accounting standards.
Assets and liabilities measured at fair value on September 30, 2009, are summarized below (in millions):
Level 1
Level 2
Level 3
Available for sale ("AFS")
$304
$15,461
$657
$16,422
Trading
322
1
323
Equity securities:
Common stocks
98
251
352
Perpetual preferred stocks
81
21
105
Variable annuity assets (separate accounts) (a)
523
Other investments
67
Total assets accounted for at fair value
$483
$16,627
$682
$17,792
Liabilities:
Derivatives embedded in annuity
benefits accumulated
$ -
$111
$ 111
(a) Variable annuity liabilities equal the fair value of variable annuity assets.
13
Approximately 4% of the total assets measured at fair value were Level 3 assets. Approximately 50% of these assets were MBS whose fair values were determined primarily using non-binding broker quotes; the balance was primarily private placement debt and equity securities whose fair values were determined internally using significant unobservable inputs, including the evaluation of underlying collateral and issuer creditworthiness, as well as certain Level 2 inputs such as comparable yields and multiples on similar publicly traded issues.
Changes in balances of Level 3 financial assets and liabilities during the third quarter and first nine months of 2009 and 2008 are presented below (in millions). Transfers into (out of) Level 3 are due to a change in the availability of market observable inputs for individual securities and are reflected in the table at fair value as of the date of transfer.
Fixed Maturities
Embedded
AFS
Securities
Assets
Balance at June 30, 2009
$712
$ 5
$ 26
($93)
Total realized/unrealized gains (losses):
Included in net income
(2)
(23)
Included in other comprehensive
income (loss)
68
Purchases, sales, issuances and settlements
185
Transfers into (out of) Level 3
(313
(4
$ 1
$ 24
($111)
Balance at June 30, 2008
$ 10
$ 60
$ 3
($124)
(15)
(1)
16
(20)
44
(3)
(26
$665
$ 59
$ 6
$706
$ 44
($96)
(11)
71
144
(4)
(276
(6
(5
$527
$ 11
$ 56
($155)
61
(39)
164
(10)
(17)
14
Fair Value of Financial Instruments
Carrying
Fair
Value
$ 1,435
$ 1,264
Fixed maturities
16,745
14,360
457
354
304
300
309
303
277
284
Variable annuity assets
(separate accounts)
416
Annuity benefits accumulated(*)
$10,942
$10,834
$10,436
$ 9,536
877
876
1,030
916
Variable annuity liabilities
Excludes life contingent annuities in the payout phase.
The carrying amount of cash and cash equivalents approximates fair value. Fair values for mortgage loans are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of policy loans is estimated to approximate carrying value; policy loans have no defined maturity dates and are inseparable from insurance contracts. The fair value of annuity benefits was estimated based on expected cash flows discounted using forward interest rates adjusted for the Company's credit risk and includes the impact of maintenance expenses and capital costs. Fair values of long-term debt are based primarily on quoted market prices.
December 31, 2008
Amortized
Gross Unrealized
Cost
Gains
Losses
Direct obligations of the
United States Government
$ 286
$ 299
$ 13
$ 298
$ 323
$ 25
agencies and authorities
208
212
239
246
States, municipalities and
political subdivisions
1,563
1,608
53
(8)
967
965
18
Foreign government
235
150
155
Residential MBS
4,355
4,051
(409)
4,899
4,046
34
(887)
Commercial MBS
1,257
1,230
(43)
1,089
(215)
All other corporate
8,596
8,783
397
(210
8,306
7,468
64
(902)
$16,500
$593
($671)
$15,948
$14,079
$155
($2,024)
$ 124
$ 352
$228
$ 119
$ 217
$112
($ 14)
$ 115
$ 105
$ 4
$ 178
$ 137
$ 2
($ 43)
The non-credit related portion of other than temporary impairment charges are included in other comprehensive income (loss). Such charges taken for securities still owned at September 30, 2009 were $256 million for residential MBS and $5 million for corporate bonds.
15
The following tables show gross unrealized losses (in millions) on fixed maturities and equity securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008.
Less Than Twelve Months
Twelve Months or More
Unrealized
Fair Value as
Loss
% of Cost
September 30, 2009
99%
-%
100%
107
(6)
91%
28
98%
(59)
418
88%
(350)
1,785
84%
(42)
605
94%
(12
276
96%
(198
1,982
($ 74)
$ 904
92%
($ 597)
$4,467
Common Stocks
93%
Perpetual Preferred Stocks
($ 2)
$ 7
79%
($ 12)
$ 45
187
(5)
41
89%
(567)
2,262
80%
(320)
914
74%
(169)
669
(46)
173
(507
4,387
90%
(395
1,284
77%
($1,258)
$7,510
86%
($ 766)
$2,415
76%
$ 23
62%
($ 19)
$ 61
($ 24)
$ 35
59%
At September 30, 2009, the gross unrealized losses on fixed maturities of $671 million relate to approximately 1,100 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 63% of the gross unrealized loss and 81% of the fair value. MBS and corporate bonds comprised approximately 86% of the fair value of the available for sale fixed maturity portfolio at September 30, 2009, and 99% of the gross unrealized losses. Gross unrealized losses on these two groups increased significantly during 2008 as widespread deterioration in economic conditions resulted in significantly wider spreads. As a result of improving financial markets, spreads narrowed during the second and third quarters of 2009 significantly reducing the unrealized loss on these two groups. Approximately 89% of the gross unrealized losses on these two groups at September 30, 2009, included securities that were in an unrealize d loss position for more than 12 months.
Gross Unrealized Losses on MBS
the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data. For the third quarter and first nine months of 2009, AFG recorded in earnings $22 million and $73 million, respectively, in other than temporary impairment charges related to its residential MBS. For the same periods AFG recorded $37 million and $223 million, respectively, in other comprehensive income (loss) for the non-credit portion of these impairment charges.
Gross Unrealized Losses on All Other Corporates
An additional $34 million (17%) of the unrealized loss on "all other corporate" securities with unrealized losses for more than one year related to investments in insurance companies. Investment grade rated securities represented 78% of the unrealized loss and 91% of the fair value. Approximately $5 million of the unrealized loss (2 securities) relates to securities that were more than 20% impaired.
The remaining $75 million in unrealized losses for "all other corporate" securities that have been in a loss position for more than one year relates to 201 securities spread across a wide variety of industries and issuers. Approximately $23 million of the unrealized loss (18 securities) relates to securities that were more than 20% impaired, compared to $81 million (57 securities) at June 30, 2009. Management intends to hold these securities and has concluded that the unrealized losses were temporary and due primarily to widened credit spreads and sector-related issues.
AFG recognized in earnings approximately $6 million and $100 million in other than temporary impairment charges on "all other corporate" securities during the three and nine months ended September 30, 2009, respectively. Management concluded that no additional charges for other than temporary impairment were required based on many factors, including AFG's ability and intent to hold the investments for a period of time sufficient to allow for anticipated recovery of its amortized cost, the length of time and the extent to which fair value has been below cost, analysis of historical and projected company-specific financial data, the outlook for industry sectors, and credit ratings.
17
The following tables progress the credit portion of other than temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income (loss) (in millions).
$67.1
Additional credit impairments on:
Previously impaired securities
4.2
Securities without prior impairments
8.3
Reductions - disposals
$75.7
Balance at January 1, 2009
$13.7
14.1
59.1
(11.2
The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2009 (in millions). Asset-backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. MBS had an average life of approximately five years at September 30, 2009.
Fair Value
Amount
%
Maturity
One year or less
$ 498
$ 505
3%
After one year through five years
4,661
4,758
29
After five years through ten years
4,892
5,022
31
After ten years
837
856
10,888
11,141
MBS
5,612
5,281
32
100
Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.
Investments in fixed maturity securities of banks and credit institutions represent approximately 10% of AFG's available for sale fixed maturities. There were no investments in individual issuers (other than U.S. Treasury Notes) that exceeded 10% of Shareholders' Equity at September 30, 2009 or December 31, 2008. AFG subsidiaries held collateral for securities on loan of approximately $1 million at September 30, 2009 and approximately $85 million at December 31, 2008. Fair value of securities loaned (plus accrued interest) was approximately $94 million at December 31, 2008.
Net Unrealized Loss on Marketable Securities
Deferred Tax and
Amounts Attributable
to Noncontrolling
Pre-tax
Net
Unrealized gain (loss) on:
Fixed maturity securities
($ 78.3)
$ 26.6
($ 51.7)
217.8
(77.0)
140.8
60.8
(21.3)
39.5
Annuity benefits and other
(2.2
.8
(1.4
$ 198.1
($ 70.9)
($1,868.8)
$655.1
($1,213.7)
56.6
(19.0)
37.6
Securities lending collateral
(10.0)
(3.4)
790.2
(276.6)
513.6
(25.7
9.0
(16.7
($1,057.7)
$375.1
($ 682.6)
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments are summarized as follows for the quarter and nine month periods ended September 30, 2009 and 2008(in millions):
Fixed
Tax
Maturities
Other(*)
Effects
Quarter ended September 30, 2009
Realized before impairments
$ 37.2
$ 2.0
($ 3.8)
($ 11.3)
($1.4)
$ 22.7
Realized - impairments
(28.9)
(7.3)
9.7
9.4
.4
(16.7)
Change in Unrealized
1,038.9
98.0
(405.4)
(256.2)
(4.3)
471.0
Quarter ended September 30, 2008
($ 2.4)
$ 11.6
$ 14.8
$1.8
($ 25.9)
(47.8)
(69.8)
10.0
36.4
3.0
(68.2)
(713.0)
516.6
57.8
(107.1)
Nine months ended September 30, 2009
$ 168.0
($ 11.7)
($ 20.4)
($ 46.2)
($2.4)
$ 87.3
(182.3)
(26.5)
56.0
53.7
(98.3)
1,833.7
161.2
(712.2)
(448.8)
(6.6)
Nine months ended September 30, 2008
$ 7.8
($ 45.8)
$ 9.6
$ 10.0
($ 16.6)
(108.9)
(179.1)
22.9
91.5
(170.6)
(1,137.2)
17.3
513.9
209.2
7.8
Primarily adjustments to deferred policy acquisition costs related to annuities.
Realized gains includes net gains of $31.6 million and $128.9 million in the third quarter and first nine months of 2009, respectively, from the mark-to-market of derivative MBS, primarily interest-only securities with interest rates
19
that float inversely with short-term rates. In the 2008 periods, realized gains included $10 million in the third quarter and $58.6 million for the first nine months from the mark-to-market of these securities. Gross realized gains and losses (excluding impairment writedowns and mark-to-market of derivatives) on available for sale fixed maturity and equity security investment transactions included in the Statement of Cash Flows consisted of the following (in millions):
Gross gains
$67.9
$32.9
Gross losses
(24.3)
(81.1)
5.9
53.4
(98.9)
Certain securities held in AFG's investment portfolio, primarily interest-only MBS with interest rates that float inversely with short-term rates, are considered to contain embedded derivatives. AFG has elected to measure these securities (in their entirety) at fair value in its financial statements. These investments are part of AFG's overall investment strategy and represent a small component of AFG's overall investment portfolio.
AFG's indexed annuities, which represented 24% of annuity benefits accumulated at September 30, 2009, provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase of call options on the appropriate index. AFG's strategy is designed so that an increase in the liabilities, due to an increase in the market index, will be generally offset by unrealized and realized gains on the call options purchased by AFG. Both the index-based component of the annuities and the related call options are considered derivatives.
As discussed under "Reinsurance" in Note A, certain reinsurance contracts in AFG's annuity and supplemental insurance business are considered to contain embedded derivatives.
The following derivatives are included in AFG's Balance Sheet at September 30, 2009 (in millions):
Derivative
Balance Sheet Line
Asset
Liability
Derivative MBS
$247
Indexed annuities
(embedded derivative)
111
Equity index call options
58
Reinsurance contracts
Other liabilities
$305
$115
20
The following table summarizes the gain (loss) included in the Statement of Earnings for changes in the fair value of these derivatives for the third quarter and first nine months of 2009 (in millions):
Statement of
Third
Nine
Earnings Line
Quarter
Months
Realized gains
$32
$129
(14
(24
$26
$99
Included in other assets in AFG's Balance Sheet is $62.6 million at September 30, 2009 and $76.4 million at December 31, 2008, in amortizable intangible assets related to property and casualty insurance acquisitions, primarily the 2008 acquisitions of Marketform and Strategic Comp. These amounts are net of accumulated amortization of $19.8 million and $38.0 million, respectively. Amortization of these intangibles was $6.6 million in the third quarter and $19.1 million during the first nine months of 2009 compared to $6.1 million in the third quarter and $18.2 million during the first nine months of 2008.
Direct obligations of AFG:
9-7/8% Senior Notes due June 2019
$350.0
7-1/8% Senior Debentures due February 2034
115.0
7-1/8% Senior Debentures due April 2009
136.1
Borrowings under bank credit facility
45.0
465.0
512.9
719.0
Obligations of AAG Holding (guaranteed by AFG):
7-1/2% Senior Debentures due November 2033
112.5
7-1/4% Senior Debentures due January 2034
86.3
Notes payable secured by real estate
due 2009 through 2016
66.1
66.9
Secured borrowings ($18.9 guaranteed by AFG)
54.4
National Interstate bank credit facility
15.0
American Premier Underwriters 10-7/8% Subordinated
Notes due May 2011
7.9
2.0
2.1
344.2
290.7
Payable to Subsidiary Trusts:
AAG Holding Variable Rate Subordinated Debentures
due May 2033
20.0
$877.1
$1,029.7
Scheduled principal payments on debt for the balance of 2009 and the subsequent five years were as follows: 2009 - $3.1 million; 2010 - $12.3 million; 2011 - $65.1 million; 2012 - $27.5 million; 2013 - $19.9 million; and 2014 - $1.6 million.
As shown below (in millions), the majority of AFG's long-term debt is unsecured obligations of the holding company and its subsidiaries:
Unsecured obligations
$756.6
$ 962.8
Obligations secured by real estate
Other secured borrowings
AFG can borrow up to $500 million under its revolving credit facility, which expires in March 2011. Amounts borrowed bear interest at rates ranging from .5% to 1.25% (currently .75%) over LIBOR based on AFG's credit rating. At September 30, 2009, AFG had $45 million in borrowings outstanding under the credit facility (interest rate of 1.0% at September 30, 2009).
In April 2009, AFG paid $136.1 million to redeem its outstanding 7-1/8% Senior Notes at maturity. In June 2009, AFG issued $350 million of 9-7/8% Senior Notes due 2019 and used the proceeds to repay borrowings under the credit facility. As a result of this issuance, AFG terminated its 364 day credit facility under which it could borrow up to $120 million.
In the first nine months of 2009, AFG subsidiaries borrowed a total of $59.2 million at interest rates ranging from 3.8% to 4.25% over LIBOR (weighted average interest rate of 4.36% at September 30, 2009). The loans require principal payments over the next four years.
22
Accumulated Other Comprehensive Income (Loss), Net of Tax
Pretax
Foreign
Net Unrealized
Currency
Gains (Losses)
Translation
on Securities
Adjustment
Other (a)
($18.7)
($10.7)
$373.8
$ 10.3
(26.9)
Unrealized holding gains on securities
arising during the period
1,265.8
(441.3)
(8.2)
816.3
Realized losses included in net earnings
16.9
(7.5)
11.0
Foreign currency translation gains
(1.3)
(.2
($ 2.9)
($ 9.9)
($ 65.8)
$ 2.4
($ 30.9)
$27.9
$ 4.8
$ 8.3
$ 2.5
Unrealized holding losses on securities
(899.5)
310.7
(576.2)
293.5
(101.5)
(4.8)
187.2
Foreign currency translation losses
($ 636.9)
$16.0
$ 5.0
$217.5
$12.0
(a) Net unrealized pension and other postretirement plan benefits.
(b) Includes $89.5 million in net pretax unrealized losses ($58.2 million net of tax) related to securities
for which only the credit portion of an other than temporary impairment has been recorded in earnings.
Stock Incentive Plans
AFG uses the Black-Scholes option pricing model to calculate the "fair value" of its option grants. Expected volatility is based on historical volatility over a period equal to the expected term. The expected term was estimated based on historical exercise patterns and post vesting cancellations. The fair value of options granted during 2009 was $5.85 per share based on the following assumptions: expected dividend yield - 2.7%; expected volatility - 37%; expected term - 7.5 years; risk-free rate - 2.1%.
Total compensation expense related to stock incentive plans of AFG and its subsidiaries was as follows: third quarter of 2009 and 2008 - $3.2 million and $3.3 million, respectively; nine months of 2009 and 2008 - $9.9 million and $11.8 million, respectively. Stock-based compensation expense for the first nine months of 2008 includes $2.0 million in first quarter non-deductible stock awards.
23
environmental exposures, asbestos and other mass tort claims as well as environmental and occupational injury and disease claims of former subsidiary railroad and manufacturing operations.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
AAG
All Other
Consol.
AFG
GAFRI
Holding
Subs
Entries
Consolidated
Cash and investments
$ 69.1
$ 20.8
$ .4
$19,539.3
($ 1.6)
$19,628.0
Recoverables from reinsurers and
prepaid reinsurance premiums
15.6
6.2
1,635.5
120.0
1,783.1
Investment in subsidiaries and
affiliates
4,273.2
1,429.8
1,514.4
695.8
(7,913.2
Total assets
$4,357.9
$1,456.4
$1,521.0
$28,313.2
($7,794.8)
Unpaid losses, loss adjustment expenses
and unearned premiums
$ 8,089.3
Annuity, life, accident and health
benefits and reserves
12,733.6
(1.6)
12,732.0
219.4
144.7
(.5)
175.4
20.1
110.4
2,212.9
(165.6
2,353.2
688.3
20.7
329.8
23,180.5
(167.7)
1,435.7
1,191.2
5,000.2
(7,627.1)
$ 188.5
$ 20.4
$16,663.7
($ 2.1)
$16,870.5
11.6
6.0
6.1
2,084.3
174.5
2,282.5
3,131.6
812.8
900.4
711.8
(5,556.6
$3,331.7
$ 839.2
$ 906.5
$26,734.3
($5,384.2)
$ 8,462.1
12,194.2
12,192.5
.7
91.0
(.4)
122.7
21.8
110.8
1,945.7
(59.4
2,141.6
841.7
330.2
22,693.0
(61.5)
816.7
576.3
3,929.7
(5,322.7)
24
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2009
Income
(6.2)
9.8
3.8
Investment and other income
3.6
350.0
(5.8)
355.9
Equity in earnings of subsidiaries
225.7
30.8
(297.6
229.4
32.7
1,092.8
(303.3)
Insurance benefits and expenses
750.7
6.4
3.2
(5.5)
Other expenses
99.1
(.3
30.6
8.0
853.0
(5.8
198.8
28.5
33.1
239.8
(297.5)
Provision (credit) for income taxes
9.9
79.9
(98.1
Net earnings, including noncontrolling
interests
127.2
20.2
23.2
159.9
(199.4)
Less: Net earnings attributable to
Net Earnings Attributable to
Shareholders
$127.2
$ 20.2
$ 23.2
$ 156.0
($199.4)
SEPTEMBER 30, 2008
(153.4)
2.6
361.5
(5.4)
360.1
50.3
(47.6
(43.0
40.3
52.6
(43.0)
1,168.0
37.5
1,005.9
12.5
6.5
(5.9)
3.7
104.3
22.2
8.4
1,113.4
30.4
(48.9)
(51.4)
54.6
43.3
(18.7
(14.7
23.7
Net earnings, including
(30.2)
(36.7)
30.9
33.6
Less: Net loss attributable to
Net Earnings (Loss) Attributable to
($30.2)
($36.7)
$ 33.3
$ 33.6
25
FOR THE NINE MONTHS ENDED
(16.3)
.5
(21.9)
7.6
1,084.5
(17.1)
1,077.1
629.3
60.6
94.4
(784.3
631.5
62.0
3,207.5
(800.9)
2,216.1
35.4
19.2
10.2
(17.0)
34.0
4.0
304.1
69.4
2,530.4
(17.8
562.1
49.4
71.2
677.1
(783.1)
21.1
233.0
(268.2
35.3
50.1
444.1
(514.9)
$358.3
$50.1
$429.5
($514.9)
(2.5)
2.5
(.3)
9.2
1,068.8
(25.6)
1,052.1
Equity in earnings (loss) of subsidiaries
322.0
(51.2
(32.7
(238.1
319.2
(42.0)
(32.7)
3,205.6
(261.2)
2,527.1
45.3
22.3
11.1
25.3
4.5
312.4
70.6
14.2
26.8
2,850.6
(27.3
Operating earnings (loss) before income taxes
248.6
(56.2)
(59.5)
355.0
(233.9)
(20.8
131.0
(92.4
Net earnings (loss), including
(35.4)
(41.7)
224.0
(141.5)
$157.2
($35.4)
($41.7)
$ 218.6
($141.5)
26
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
$ 35.3
$ 50.1
$ 444.1
Equity in net earnings
of subsidiaries
(406.7)
(43.2)
(65.7)
515.6
Dividends from subsidiaries
284.5
(287.3)
Other adjustments, net
14.8
2.2
(3.5
375.4
(.7
388.2
Net cash provided by (used in)
operating activities
250.9
(2.9
(19.1
819.5
(287.3
Investing Activities:
Purchase of investments, property and
equipment
(8.7)
(3,305.5)
(3,314.2)
Purchase of subsidiaries
Capital contributions to subsidiaries
(129.6)
(118.5)
(98.0)
346.1
Maturities and redemptions of fixed
maturity investments
1,387.5
Sale of investments, property and
8.2
1,537.6
1,546.5
(21.0
(20.3
investing activities
(129.8
(117.1
(98.0
(406.4
Financing Activities:
Annuity surrenders, benefits and
withdrawals
Net transfers to variable annuity assets
467.2
59.2
(676.3)
(.1)
(5.6)
11.9
Capital contribution from parent
128.0
117.5
100.6
(346.1)
Cash dividends paid
287.3
(96.5
financing activities
(242.1
127.9
(58.8
Net increase (decrease) in cash and cash
equivalents
(121.0)
283.3
Cash and cash equivalents at beginning
of period
160.2
1,102.1
$ 39.2
$1,385.4
27
($ 35.4)
$ 224.0
Equity in net (earnings) loss of
subsidiaries
(204.7)
28.8
24.1
151.8
263.0
72.5
(335.8)
713.3
(10.3
702.6
223.3
(17.5
57.9
937.3
(335.8
(4.5)
(5,124.6)
(5,172.9)
Capital contribution to subsidiaries
(210.2)
(111.6)
(100.0)
421.8
1,548.7
(20.0)
37.9
2,970.8
3,013.4
(2.5
(1.5
81.2
77.2
(212.4
(113.2
(100.0
(636.1
401.8
Net transfers from variable annuity assets
585.0
(519.9)
(69.5)
(15.4)
19.5
135.0
175.2
(421.8)
335.8
(44.3
134.9
42.1
61.4
(66.0
Net increase (decrease) in cash and
cash equivalents
10.9
362.6
797.7
$ 26.5
$ 6.8
$1,160.3
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
INDEX TO MD&A
Forward-Looking Statements
Uncertainties
37
Overview
30
Results of Operations
Critical Accounting Policies
General
Liquidity and Capital Resources
Income Items
Sources of Funds
Expense Items
43
Recent Accounting Standards
_____________________________________________________________________________________________________
FORWARD-LOOKING STATEMENTS
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", "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 and investment activities; 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 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.
of Financial Condition and Results of Operations - Continued
OVERVIEW
Financial Condition
AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Therefore, certain analyses are best done on a parent only basis while others are best done on a total enterprise basis. In addition, because most of its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.
Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses and in the sale of traditional fixed, indexed and variable annuities and a variety of supplemental insurance products.
Net earnings attributable to AFG's shareholders for the third quarter and first nine months of 2009 were $127 million ($1.09 per share, diluted) and $358 million ($3.07 per share, diluted), respectively, compared to $21 million ($.18 per share, diluted) and $157 million ($1.34 per share, diluted) reported in the same periods of 2008. The improved results reflect lower realized losses on investments (including other than temporary impairments), higher investment income and improved underwriting results in the property and casualty insurance operations.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note A to the financial statements. The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and thus impact amounts reported in the future. The areas where management believes the degree of judgment required to determine amounts recorded in the financial statements make accounting policies critical are as follows:
For a discussion of these policies, see Management's Discussion and Analysis - "Critical Accounting Policies" in AFG's 2008 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Ratios
2007
$ 877
$1,030
$ 937
Total capital (*)
4,693
4,351
4,108
Ratio of debt to total capital:
Including debt secured by real estate
18.7%
23.7%
22.8%
Excluding debt secured by real estate
17.5%
22.5%
21.5%
(*) Includes long-term debt, noncontrolling interests and
shareholders' equity (excluding unrealized gains (losses)
related to fixed maturity investments).
AFG's ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 2.52 for the nine months ended September 30, 2009 and 1.63 for the entire year of 2008. Excluding annuity benefits, this ratio was 10.89 and 4.75, respectively. Although the ratio excluding interest on annuities is not required or encouraged to be disclosed under Securities and Exchange Commission rules, it is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.
Parent Holding Company Liquidity
AFG retired the $136 million of 7-1/8% Senior Debentures at maturity in April 2009, using cash on hand. In June 2009, AFG issued $350 million of 9-7/8% Senior Notes due 2019. As a result of this issuance, AFG terminated its 364 day credit facility under which it could borrow up to $120 million and voided its intercompany credit facility with a subsidiary under which it could borrow up to $50 million.
AFG can borrow up to $500 million under its revolving credit facility, which expires in 2011. AFG had $45 million in borrowings outstanding under this agreement at September 30, 2009, bearing interest at a rate of 1.0%.
Under tax allocation agreements with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary's contribution to amounts due under AFG's consolidated tax return.
Subsidiary Liquidity
Great American Life Insurance Company ("GALIC"), a wholly-owned annuity and supplemental insurance subsidiary, became a member of the Federal Home Loan Bank
of Cincinnati ("FHLB") in the third quarter of 2009. The FHLB makes loans and provides other banking services to member institutions. Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds borrowed. GALIC's $14.5 million investment in FHLB capital stock at September 30, 2009, is included in investment in equity securities. Membership in the FHLB will provide the annuity and supplemental insurance operations with a substantial additional source of liquidity.
The liquidity requirements of AFG's insurance subsidiaries relate primarily to the liabilities associated with their products as well as operating costs and expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from premiums and investment income have provided more than sufficient funds to meet these requirements without requiring a sale of investments or contributions from AFG. Funds received in excess of cash requirements are generally invested in additional marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short-term investments.
The excess cash flow of AFG's property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves.
In the annuity business, where profitability is largely dependent on earning a "spread" between invested assets and annuity liabilities, the duration of investments is generally maintained close to that of liabilities. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to guaranteed minimums. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG's annuity products.
AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries' investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.
Fair values for AFG's portfolio are determined by AFG's internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on closing prices obtained from the pricing services. For mortgage-backed securities ("MBS"), which comprise approximately one-third of AFG's fixed maturities, prices for each security are generally obtained from both pricing services and broker quotes. For the other two-thirds, approximately [95%] are priced using a pricing service and the balance is priced internally or by using non-binding broker quotes. When prices obtained for the same security vary, AFG's investment professionals select the price they believe is most indicative of an exit price.
The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of MBS are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers' prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.
Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG's internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), changes in interest rates, general economic conditions and the credit quality of the specific issuers. Prices obtained from a broker or pricing service are adjusted only in cases where they are deemed not to be representative of an appropriate exit price (fewer than 1% of the securities).
Increasing turmoil in the global financial markets caused credit spreads (the difference in rates between U.S. government bonds and other fixed maturities) to widen significantly during 2008. These wider spreads, as well as a lack of liquidity and the collapse of several financial institutions, were the primary cause of AFG's pretax net unrealized loss on fixed maturities rising from $47 million at December 31, 2007, to $2.0 billion at March 31, 2009. The impact of improving market conditions on the fair value of AFG's portfolio subsequent to March 31, 2009, reduced the pretax net unrealized loss to $78 million at September 30, 2009.
In general, the fair value of AFG's fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG's fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve would have at September 30, 2009 (dollars in millions). Increases or decreases from the 100 basis points illustrated would be approximately proportional.
Fair value of fixed maturity portfolio
$16,745
Pretax impact on fair value of 100 bps
increase in interest rates
$ 754
Pretax impact as % of total fixed maturity portfolio
4.5%
Approximately 92% of the fixed maturities held by AFG at September 30, 2009, were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and noninvestment grade. Management believes that the high quality investment portfolio should generate a stable and predictable investment return.
AFG's $5.4 billion investment in MBS represented approximately one-third of its fixed maturities at September 30, 2009. MBS are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates.
33
Summarized information for AFG's MBS (including those classified as trading) at September 30, 2009, is shown (in millions) in the table below. Agency-backed securities are those issued by a U.S. government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime. The Alt-A securities, the majority of which are backed by fixed-rate mortgages, have an average life of approximately five years. The subprime securities have an average life of approximately four years; substantially all are collateralized by fixed-rate mortgages.
% Rated
Investment
Collateral type
Gain (Loss)
Grade
Residential:
Agency-backed
$ 725
104%
$ 29
Non-agency prime
2,269
2,147
95
(122)
90
Alt-A
993
862
87
(131)
Subprime
391
314
80
(77)
69
48
Commercial
1,292
1,265
(27
$5,701
$5,370
($331)
Issuers will sometimes purchase monoline insurance to "wrap" or enhance the credit of a security issuance in order to benefit from better market execution. At September 30, 2009, AFG owned approximately $1.0 billion of fixed maturity securities wrapped by monoline insurers. Since many of these issuers have ratings equal or superior to the insurer, credit was enhanced in only $355 million of the securities insured. FSA International provided 57% of the credit enhancement and National Public Finance Guarantee Corporation provided 34%. AFG's direct investment in monoline credit insurers was approximately $13 million at September 30, 2009. None of the insured subprime securities carries an explicit underlying rating. Management does not believe the risk of loss on the securities without underlying credit ratings is material to AFG's financial condition.
The table below summarizes (in millions) AFG's investments where credit was enhanced by monoline insurers at September 30, 2009.
Weighted Average Rating
With
Insurance
Underlying
Gain/(Loss)
Insured Securities
With underlying ratings
AA
A+
$300
$51
Without underlying ratings
AA-
Not Rated
55
(1
$355
$50
The weighted average credit rating was calculated by assigning numerical values to the ratings categories and weighting the result by securities' fair value.
Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet at September 30, 2009, is shown in the following table (dollars in millions). Approximately $483 million of available for sale "Fixed maturities" and $67 million of "Equity securities" had no unrealized gains or losses at September 30, 2009.
Available for Sale Fixed Maturities
Fair value of securities
$10,568
$5,371
Amortized cost of securities
$ 9,975
$6,042
Gross unrealized gain (loss)
$ 593
($ 671)
Fair value as % of amortized cost
106%
Number of security positions
2,318
1,136
Number individually exceeding
$2 million gain or loss
Concentration of gains (losses) by type or
industry (exceeding 5% of unrealized):
Mortgage-backed securities
$ 121
($ 452)
Banks, savings and credit institutions
40
(93)
Insurance companies
(34)
States and municipalities
Gas and electric services
96
(7)
Percentage rated investment grade
97%
81%
Equity Securities
$ 336
$ 54
Cost of securities
$ 104
$ 68
$ 232(*)
Fair value as % of cost
322%
59
(*) Includes $203 million on AFG's investment in Verisk Analytics, Inc.
See Note K - "Subsequent Event."
The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities at September 30, 2009, based on their fair values. Asset-backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
4%
1%
47
Mortgage-backed securities (average
life of approximately five years)
35
The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount.
Aggregate
Value as
Basis
Fixed Maturities at September 30, 2009
Securities with unrealized gains:
Exceeding $500,000 (332 issues)
$ 3,817
$ 341
110%
$500,000 or less (1,986 issues)
6,751
252
104
Securities with unrealized losses:
Exceeding $500,000 (401 issues)
$ 2,847
($ 557)
$500,000 or less (735 issues)
2,524
(114
$ 5,371
The following table summarizes (dollars in millions) the unrealized loss for all securities with unrealized losses by issuer quality and length of time those securities have been in an unrealized loss position.
Securities with Unrealized
Losses at September 30, 2009
Investment grade fixed maturities with losses for:
Less than one year (169 issues)
$ 692
($ 30)
One year or longer (579 issues)
3,682
(392
91
$4,374
($422)
Non-investment grade fixed maturities with losses for:
Less than one year (93 issues)
$ 212
($ 44)
83%
One year or longer (295 issues)
785
(205
79
$ 997
($249)
Common equity securities with losses for:
Less than one year (8 issues)
One year or longer (none)
Perpetual preferred equity securities with losses for:
Less than one year (3 issues)
One year or longer (18 issues)
45
$ 52
When a decline in the value of a specific investment is considered to be "other than temporary," a provision for impairment is charged to earnings (accounted for as a realized loss) and the cost basis of that investment is reduced by the amount of the charge. The determination of whether unrealized losses are "other than temporary" requires judgment based on subjective as well as objective factors. See Note D to the financial statements.
36
Based on its analysis, management believes (i) AFG will recover its cost basis in the securities with unrealized losses and (ii) that AFG has the ability and intent to hold the securities until they recover in value. Although AFG has the ability to continue holding its investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers' creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG's ability or intent change with regard to a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other than temporary impairment could be material to results of operations in future periods. Significant declines in the fair value of AFG's investment portfoli o could have a significant adverse effect on AFG's liquidity.
Asbestos and Environmental Reserve Study
RESULTS OF OPERATIONS
AFG reported operating earnings before income taxes of $203 million for the third quarter of 2009 compared to $28 million for the 2008 third quarter. Results for the third quarter of 2009 include (i) $9 million in realized gains on securities, compared to realized losses of $150 million in the third quarter of 2008, (ii) a $36 million improvement in Specialty property and casualty underwriting results, and (iii) a $17 million increase in investment income.
Nine month pretax operating earnings increased $323 million in 2009 compared to 2008 reflecting (i) a $277 million decrease in realized losses on securities, (ii) an increase of $79 million in investment income, and (iii) a $58 million improvement in Specialty property and casualty underwriting results.
Property and Casualty Insurance - Underwriting
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 B - "Segments of Operations" for the detail of AFG's operating profit by significant business segment.
Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses, loss adjustment expenses, 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 or federal income taxes.
Premiums and combined ratios for AFG's property and casualty insurance operations were as follows (dollars in millions):
Gross Written Premiums (GAAP)
$ 864
$1,079
$1,541
$1,822
311
935
983
137
158
409
448
57
154
189
(2
$1,369
$1,626
$3,037
$3,440
Net Written Premiums (GAAP)
$ 236
$ 536
$ 662
$1,044
200
210
597
636
116
132
349
371
50
60
134
172
52
56
$ 620
$ 960
$1,794
$2,279
Combined Ratios (GAAP)
80.6%
97.4%
82.1%
93.0%
84.8
76.6
80.8
77.3
101.6
75.2
94.6
105.5
79.7
101.8
78.3
Total Specialty
82.7
81.9
87.4
Aggregate (including
discontinued lines)
82.7%
91.3%
82.2%
87.7%
Favorable (Unfavorable) Prior Year
Development
$ 8
$17
$ 47
$ 55
74
88
78
Other specialty
77
222
192
Other (including
(8
$76
$58
$216
$184
The overall decreases in gross and net written premiums in the third quarter and first nine months of 2009 were the result of soft market conditions, decreases in commodity prices in the crop operations and a decision to further reduce near-coastal property exposures. In addition, higher premium cessions under a crop reinsurance agreement contributed to lower net written premiums. Excluding crop, net written premiums decreased approximately 11% in the third quarter and
38
9% in the first nine months of 2009 compared to the same periods of 2008. Overall average renewal rates in the first nine months of 2009 were up slightly when compared with the same period of last year.
The specialty insurance operations generated underwriting profits of $108 million and $326 million in the third quarter and first nine months of 2009, respectively, compared to $72 million and $268 million for the same periods of 2008. Specialty financial results for the third quarter and first nine months of 2009 include $30 million and $69 million, respectively, in favorable reserve development related to the run-off automobile residual value insurance ("RVI") operations. The absence of large catastrophe losses during 2009 also contributed to the improved results. Losses from catastrophes totaled $3 million in the third quarter and $16 million in the first nine months of 2009 compared to $38 million and $65 million, respectively, for the comparable 2008 periods.
Property and transportation gross and net written premiums for the 2009 third quarter and first nine months reflect volume reductions and soft market conditions in the property and inland marine, transportation and equine operations as well as lower commodity prices in the crop operations. Net written premiums were also impacted by an increase in crop business ceded under a reinsurance agreement. Excluding crop, 2009 net written premiums for this group decreased 15% and 11% for the quarter and first nine months of 2009, respectively, when compared to the 2008 periods. This group reported an underwriting profit of $46 million in the 2009 third quarter, $34 million higher than the 2008 third quarter. The combined ratio for the quarter improved more than 16 points over the 2008 quarter as a result of higher underwriting profits in the crop operations and lower catastrophe losses in the property and inland marine operations. Strong crop yields and favorable commodity price tr ends contributed to the results in the crop operations. This, along with lower catastrophe losses in the property and inland marine group, helped to produce an 11 point decrease in the combined ratio of this group during the 2009 nine month period. Results for the third quarter and first nine months of 2008 include $30 million (7 points) and $54 million (6 points), respectively, of catastrophe losses. The 2009 catastrophe results were negligible. Favorable reserve development in the Property and transportation group in the first nine months of 2009 and 2008 is due primarily to lower than expected loss frequency in crop and ocean marine products and lower severity in farm losses.
Specialty casualty gross and net written premiums declined for the third quarter and first nine months of 2009 due primarily to lower general liability premiums resulting from the softening in the homebuilders market and strong competition in the excess and surplus lines. These declines were partially offset by additional premium growth from Marketform, a majority-owned Lloyd's insurer that was acquired in January 2008 and has served as a platform to expand overseas distribution in several product lines. This group reported an underwriting profit of $30 million in the 2009 third quarter, $17 million lower than the third quarter of 2008. Improved underwriting results in the executive liability operations were more than offset by lower underwriting profits in the excess and surplus lines, general liability, and targeted markets operations, primarily as a result of lower levels of favorable reserve development in 2009. Most of the businesses in this group continued to generat e excellent underwriting profit margins but at a lower level due to reduced premiums. Marketform is finalizing the evaluation and closing of claims incurred prior to AFG's acquisition; preliminary information suggests that there will be additional unfavorable
39
development in the reserves of its Italian medical malpractice business. Such development is not expected to be material to AFG's net earnings for the year. Favorable reserve development in the Specialty casualty group in both the 2009 and 2008 periods reflects lower severity on claims in general liability and directors and officers liability as well as lower than expected frequency in the program business (leisure camps, fairs and festivals, and sports and leisure) business.
Specialty financial gross and net written premiums were lower for the third quarter and first nine months of 2009 due to decreased demand in the automotive
lines of business partially offset by premium growth in the financial institutions and fidelity and crime businesses. This group reported underwriting income of $29 million for the third quarter of 2009, compared to a loss of $2 million for the same period a year ago. Favorable trends in used car sales prices resulted in approximately $30 million of underwriting profit in the run-off RVI operations. The remaining RVI reserves relate primarily to Canadian leases that terminate through the end of 2010. Improved profitability in the financial institutions operations was more than offset by lower underwriting profits in the lease and loan operations. Year to date underwriting income for the Specialty financial group was $96 million, up from $20 million in the comparable 2008 period. The favorable reserve development in the Specialty financial group in the first nine months of 2009 relates to lower than expected frequency and severity in the RVI operations and lower loss severity in AFG's fidelity and crime products. The favorable development during the first nine months of 2008 relates primarily to lower loss severity in fidelity and crime products.
California workers'
Annuity and Supplemental Insurance Operations
Statutory Annuity Premiums
403(b) Fixed and Indexed Annuities:
First Year
$ 14
$ 49
$ 34
Renewal
121
Single Sum
103
101
Subtotal
256
Non-403(b) Indexed Annuities
108
142
282
442
Non-403(b) Fixed Annuities
99
198
250
Bank Fixed Annuities
138
288
291
Variable Annuities
Total Annuity Premiums
$423
$486
$1,092
$1,303
The decrease in annuity premiums for the third quarter and first nine months of 2009 compared to the same periods in 2008 reflects lower sales of indexed and traditional fixed annuities in the non-403(b) single premium market. This reduction in premium is consistent with management's expectations and reflects AFG's disciplined pricing in this difficult economy.
Life, Accident and Health Premiums and Benefits
Premiums
Supplemental insurance operations
First year
$ 21
$ 63
82
247
242
Life operations (in run-off)
$109
$331
$326
Benefits
$ 77
$ 70
$236
$217
$ 87
$ 81
$268
$254
The increase in supplemental insurance benefits in the third quarter and first nine months of 2009 compared to 2008 is due primarily to significantly less favorable results in AFG's long-term care business.
In the third quarter of 2009, management made a decision to cease new sales of long-term care insurance by the end of 2009. Renewal premiums will be accepted until policies lapse.
Investment Income
The amortized cost of AFG's portfolio of non-agency residential MBS decreased $442 million during the first nine months of 2009 due primarily to paydowns. As these securities continue to pay down, management expects to reinvest the proceeds principally in high quality corporate bonds placing downward pressure on AFG's investment portfolio yield.
Realized Gains (Losses) on Securities
Realized gains (losses) before
impairments:
Disposals
$10
($ 65)
$ 32
($ 95)
Change in the fair value
of derivatives
124
Adjustments to annuity deferred
policy acquisition costs and
related items
(20
(42
136
(28
Impairment charges:
(36)
(118)
(209)
(288)
(108
(153
(266
$ 9
($150)
($ 17)
($294)
The change in fair value of derivatives includes net gains of $32 million and $129 million in the third quarter and first nine months of 2009 and $10 million and $59 million in the third quarter and first nine months of 2008 from the mark-to-market of derivative MBS, primarily interest-only securities with interest rates that float inversely with short-term rates. See Note E "Derivatives."
Approximately $182 million and $109 million of the impairment charges in the first nine months of 2009 and 2008 related to fixed maturity investments, primarily corporate bonds and MBS. In the first nine months of 2008, $179 million of the impairment charges were attributable to equity investments, primarily in financial institutions, including $47 million for National City Corporation.
Realized Losses on Subsidiaries
42
Real Estate Operations
$15
$18
$45
$59
49
Income from real estate operations includes net pretax gains on the sale of real estate assets of $6 million in the second quarter of 2008.
Other Income
Annuity Benefits
Changes in investment yields, crediting rates, actual surrender, death and annuitization experience or modifications in actuarial assumptions can affect these additional reserves and could result in charges (or credits) to earnings in the period the projections are modified.
Annuity and Supplemental Insurance Acquisition Expenses
The vast majority of the annuity and supplemental insurance group's DPAC asset relates to its fixed annuity, variable annuity and life insurance lines of business. Unanticipated spread compression, decreases in the stock market, adverse mortality experience and higher than expected lapse rates could lead to write-offs of DPAC or PVFP in the future. If the current interest rate environment persists through the end of the year, the Company may be required to write off DPAC related to its fixed annuity business. Any such write-off is not expected to have a material impact on AFG's net earnings for the year.
Interest Charges on Borrowed Money
New accounting standards implemented in 2009, are discussed in Note A - Accounting Policies under the following subheadings.
Accounting Standard
Note A Reference
Interim Disclosures about Fair Value
of Financial Instruments
Recognition and Presentation of
Other-Than-Temporary Impairments
Effective Date of FASB Statement on
Determining Fair Value When the Volume
and Level of Activity for the Asset or
Liability Have Significantly Decreased
and Identifying Transactions That Are
Not Orderly
Noncontrolling Interests in Consolidated
Financial Statements
Disclosures about Derivative Instruments
and Hedging Activities
Subsequent Events
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
As of September 30, 2009, there were no material changes to the information provided in Item 7A - "Quantitative and Qualitative Disclosure of Market Risk" of AFG's 2008 Form 10-K.
ITEM 4
Controls and Procedures
AFG's management, with participation of its Co-Chief Executive Officers and its principal financial officer, has evaluated AFG's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG's Co-CEOs and principal financial officer concluded that the controls and procedures are effective. There have been no changes in AFG's internal control over financial reporting during the third fiscal quarter of 2009 that materially affected, or are reasonably likely to materially affect, AFG's internal control over financial reporting.
In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new systems. There has been no change in AFG's business processes and procedures during the third fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect, AFG's internal controls over financial reporting.
PART II
OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Additional Stock Buyback Authorization
ITEM 6
Exhibits
Number
Exhibit Description
Computation of ratios of earnings to fixed charges.
Certification of the Co-Chief Executive Officer pursuant
to section 302(a) of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to
section 302(a) of the Sarbanes-Oxley Act of 2002.
Certification of the Co-Chief Executive Officers and Chief
Financial Officer pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, American Financial Group, Inc. has duly caused this Report to be signed on its behalf by the undersigned duly authorized.
American Financial Group, Inc.
November 6, 2009
BY: s/Keith A. Jensen
Keith A. Jensen
Senior Vice President
(principal financial and
accounting officer)
46