American Financial Group, Inc. (NYSE/NASDAQ: AFG) announced today the completion of the sale of its Medicare Supplement and Critical Illness businesses (headquartered in Austin, Texas and doing business as Great American Supplemental Benefits Group) to Cigna Corporation (NYSE: CI) for approximately $305 million in cash. AFG will realize an after-tax gain of approximately $120 - $130 million on the sale, subject to post-closing adjustments. AFG’s remaining supplemental insurance operations consist solely of its run-off long-term care business, which has a book value of approximately $170 million, and which will continue to be based in Austin, Texas. AFG’s Austin-based life and annuity operations will transition to its home office in Cincinnati, Ohio before the end of the year.
As discussed in AFG’s SEC filings, adverse changes in reinvestment rates or modifications to actuarial assumptions in our annuity and run-off long-term care businesses could result in material charges to earnings. Even though AFG has been able to maintain excellent annuity spreads and adequate yields in its long-term care business through the first half of 2012, a further continuation of the recent low interest rate environment is likely to lead to loss recognition in the long-term care business and, to a lesser extent, “unlocking” of the Company’s interest rate assumptions for annuities to reflect lower future reinvestment rates.
Furthermore, although AFG's long-term care new claims experience through the first half of 2012 was reasonably consistent with current assumptions, 2012 experience may not be indicative of future trends. The Company continues to analyze its projected long-term care claims and persistency experience with the assistance of an external actuarial consulting firm, including a comparison to their large, uniform database of industry experience. The Company expects to complete its analysis of the actuarial assumptions used to amortize deferred acquisition costs and establish reserves in our long-term care business prior to the end of 2012.