American Financial Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. AFG primarily operates specialty property and casualty insurance businesses. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,840 | $1,539 | $3,580 | $3,127 |
| Net earnings | $200 | $167 | $412 | $457 |
| Diluted EPS | $2.34 | $1.96 | $4.83 | $5.36 |
| Core net operating earnings (non-GAAP) | $202 | $243 | $449 | $546 |
| P&C net earned premiums | $1,507 | $1,393 | $2,944 | $2,695 |
| P&C underwriting profit | $124 | $196 | $278 | $403 |
| P&C aggregate combined ratio | 91.7% | 86.0% | 90.5% | 85.0% |
| Net investment income | $198 | $168 | $415 | $398 |
Q2 net earnings improved mainly because realized securities losses were much lower and fixed-maturity investment yields were higher. Core earnings declined as underwriting profit and alternative-investment returns fell. For the first half, lower underwriting profit and alternative-investment returns outweighed higher fixed-maturity income and lower realized securities losses.
Financial position, cash flow and capital
- At June 30, cash and cash equivalents were $988, total cash and investments were $14,489, total assets were $29,048, shareholders’ equity was $3,993, and long-term debt carrying value was $1,474. Debt principal was $1,498.
- For the first six months, operating cash flow was $518, investing activities provided $368, and financing activities used $770. Cash increased $116 to $988. Operating cash flow excluding managed investment entities was $448.
- AFG reported a 25.0% debt-to-total-capital ratio including subordinated debt and 13.7% excluding it. The new $450 revolving credit facility expires in June 2028; there were no borrowings at quarter-end. Parent-company cash and investments were $551.
- AFG paid $446 in common dividends in the first half, including a $4.00-per-share special dividend totaling $341, and repurchased $67 of common stock.
- Available-for-sale fixed maturities had $627 of gross unrealized losses; AOCI was a loss of $511, net of tax. Management said it intended and was able to hold the affected securities until recovery. A 100-basis-point immediate rise in interest rates was estimated to reduce fixed-maturity fair value by approximately $298 pretax.
Material changes and operating trends
- P&C gross written premiums rose 12% in Q2 and 11% in the first half. Management attributed growth to new business, increased exposures and renewal pricing; average renewal rates rose about 4% in both periods.
- Underwriting profitability weakened: the Q2 aggregate combined ratio increased 5.7 percentage points year over year, and the first-half ratio increased 5.5 points. Catastrophe losses were $51 in Q2 versus $22 a year earlier and $82 in the first half versus $31.
- First-half favorable prior-year reserve development was $125, down from $175 in 2022. Gross unpaid losses and loss-adjustment expenses were $11,925 at June 30. Management cited favorable experience in several lines, partly offset by adverse severity in public-sector and excess-liability business.
- P&C net investment income increased 22% in Q2 to $191, while first-half P&C net investment income rose 5% to $398. Higher fixed-income yields were partly offset by weaker alternative investments; the first-half annualized return on alternatives was 11.8%, versus 20.7% in 2022.
- Q2 realized securities losses narrowed to $2 from $93; first-half losses narrowed to $48 from $108. Much of the prior-year difference reflected changes in fair value of equity securities.
Outlook, risks and unusual items
- Management expects continued premium growth and strong underwriting results in what it describes as a favorable P&C market, and expects higher yields to continue benefiting fixed-maturity investment income during 2023. The filing provides no specific earnings or premium-growth guidance.
- Management cited inflation, social inflation, supply-chain disruption, labor shortages, banking-system instability, market conditions, the Russia-Ukraine conflict and lingering pandemic effects as uncertainties. Principal risks include catastrophe losses, reserve adequacy, reinsurance availability and collectibility, investment values and interest rates, competition, regulation, litigation, cyber incidents and tax or accounting changes.
- Reserve estimates, particularly asbestos, environmental and mass-tort claims, require significant judgment. The filing reported no significant change in previously disclosed contingencies for such matters. Management also identified recoverability of reinsurance and investment valuation as significant estimation areas.
- On July 3, 2023, after quarter-end, AFG completed its acquisition of Crop Risk Services for approximately $235, using cash on hand. The purchase-price allocation and post-closing adjustments remained subject to finalization; AFG had incurred $3 of acquisition expenses.
- AFG consolidated managed CLO entities in its financial statements; their assets and liabilities are presented separately and are nonrecourse to AFG. AFG said its maximum economic exposure is limited to its investments in those entities.
Important facts for investors to verify
- Whether premium growth and renewal pricing continue to offset higher catastrophe losses, claims severity and underwriting expenses.
- Whether favorable reserve development persists and whether estimates for long-tail, COVID-19, asbestos and environmental claims remain adequate.
- How investment income, alternative-asset returns and unrealized fixed-income losses evolve with market rates and credit conditions.
- The final cost, purchase accounting and subsequent performance of Crop Risk Services.
- Parent and subsidiary liquidity, capital adequacy, debt covenant headroom and future capital returns, including dividends and repurchases.