Acquisitions and Sale of Businesses

9 Months Ended

Sep. 30, 2020

Acquisitions and Sale of BusinessesParatransit 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 will act as an underwriting manager for National Interstate until at

least August 2021 for fleets with seven or fewer vehicles and until November 2020 for accounts with eight or more 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. 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.

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 September 28, 2020, AFG announced that it has reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited for estimated proceeds of $6 million. The sale is subject to customary conditions, including receipt of regulatory approval, is expected to close in the fourth quarter of 2020, and will complete AFG’s exit from the Lloyd’s of London insurance market.

Based on the status of the sale transaction at the end of the third quarter, management determined that the pending sale of Neon met the GAAP “held for sale” criteria as of September 30, 2020. Accordingly, AFG recorded a loss in the third quarter of 2020 to establish a liability (included in other liabilities in AFG’s Balance Sheet) equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. The loss may be adjusted at the closing date based on the final proceeds and the final net assets disposed. At September 30, 2020, the carrying value of the assets and liabilities to be 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 pending sale of Neon has not been reported as a discontinued operation.

The impact of Neon exited lines on AFG’s net earnings for the three months ended September 30, 2020 is shown below (in millions):


Underwriting gain (loss)	$	(38)
Net investment income	1
Other income and expenses, net	(3)
Pretax loss from operations	(40)
Estimated loss on sale of subsidiaries	(30)
Total pretax loss from Neon exited lines	(70)
Tax benefit related to sale of subsidiaries	73
Net earnings from Neon exited lines	$	3

The estimated loss on the pending sale of Neon, which was recorded in AFG’s financial statements as of September 30, 2020, is shown below (in millions):


Estimated sale proceeds, net of expenses	$	4

Assets of businesses to be sold:
Cash and investments	$	461
Recoverables from reinsurers	198
Prepaid reinsurance premiums	30
Agents’ balances and premiums receivable	48
Other assets	73
Total assets	810
Liabilities of businesses to be sold:
Unpaid losses and loss adjustment expenses	598
Unearned premiums	83
Payable to reinsurers	39
Other liabilities	47
Total liabilities	767
Reclassify accumulated other comprehensive income	(9)
Net assets of businesses to be sold	$	34

Pretax loss on subsidiaries recorded in the third quarter of 2020	$	(30)

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net earned premiums	$	42	$	97	$	174	$	274
Loss and loss adjustment expenses	60		66		166		172
Commissions and other underwriting expenses	20		50		90		135
Underwriting loss	(38)		(19)		(82)		(33)

Net investment income	1		2		(5)		5
Other income and expenses, net	(3)		(3)		(5)		(8)
Loss before income taxes and noncontrolling interests	$	(40)	$	(20)	$	(92)	$	(36)

As discussed in Note L — “Income Taxes,” the pending sale of Neon allowed AFG to recognize a $73 million tax benefit.