American Financial Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. AFG’s continuing business is primarily specialty property and casualty (P&C) insurance. Its annuity business was sold to MassMutual in May 2021 and is reported as discontinued operations.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.754 billion | $1.556 billion | $4.794 billion | $4.056 billion |
| Continuing pretax earnings | $267 million | $40 million | $890 million | Loss of $5 million |
| Continuing net earnings attributable to shareholders | $219 million | $88 million | $726 million | $60 million |
| Diluted continuing EPS | $2.56 | $1.00 | $8.45 | $0.66 |
| Core net operating earnings (non-GAAP) | $231 million; $2.71 diluted EPS | $121 million; $1.38 diluted EPS | $642 million; $7.48 diluted EPS | $306 million; $3.40 diluted EPS |
Including discontinued operations, net earnings attributable to shareholders were $219 million in Q3 and $1.64 billion for the first nine months of 2021. The latter includes $914 million from discontinued annuity operations, including the $656 million after-tax gain on sale; it is not a like-for-like measure of ongoing earnings.
- P&C premiums: Q3 net earned premiums were $1.529 billion, up 11%; nine-month premiums were $3.952 billion, up 5%. Q3 gross written premiums rose 19% to $2.656 billion.
- Underwriting: P&C combined ratio was 89.0% in Q3 versus 98.8% a year earlier, and 88.4% for nine months versus 97.0%. Ratios below 100% indicate underwriting profit. Nine-month favorable prior-year reserve development was $208 million in aggregate, including $210 million within Specialty operations, partly offset by adverse development elsewhere.
- Investment income: Consolidated net investment income was $169 million in Q3 and $521 million for nine months. P&C investment income rose 49% in Q3 and 66% for nine months, largely reflecting stronger alternative-investment returns; lower fixed-income yields and short-term rates were offsets.
- Cash flow: Nine-month operating cash flow was $1.425 billion, versus $1.696 billion in 2020. Investing cash flow was a $103 million use, including annuity-sale proceeds and cash transferred with the sold business; financing cash flow was a $1.299 billion use. Cash and equivalents were $2.833 billion at September 30.
- Balance sheet and debt: Total assets were $29.942 billion and shareholders’ equity $5.240 billion. Long-term debt carrying value was $1.964 billion; principal was $1.993 billion. Debt-to-total-capital was 28.2% including subordinated debt, compared with 26.6% at year-end 2020. A $500 million revolving facility was undrawn.
- Capital returns: AFG paid $1.482 billion in common dividends and repurchased $318 million of shares during the first nine months. It declared special dividends totaling $20 per share during that period.
Material changes and management commentary
- The annuity-business sale generated $3.57 billion in proceeds and materially changed the company’s scale, business mix, cash flows and period-to-period comparisons. The 2020 comparison includes annuity and Neon operations that are no longer part of continuing results.
- Management attributed stronger continuing results mainly to higher P&C underwriting profit and investment income, as well as the absence of 2020 special asbestos and environmental (A&E) charges and Neon losses. Nine-month results also benefited from net realized securities gains versus losses in 2020.
- Q3 average P&C renewal rates increased approximately 11% overall; nine-month rates increased approximately 10%. Management cited an improving economy, new business and renewal pricing as drivers of premium growth.
- AFG’s 2021 internal A&E review found no new trends and resulted in no net change to P&C A&E reserves. Net P&C A&E reserves were $414 million at quarter-end. A minor charge was recorded for former railroad and manufacturing exposures; the prior-year quarter included special charges of $47 million in P&C and $21 million for former operations.
- Management said liquidity and subsidiary capital were adequate, including under ongoing COVID-19 uncertainty. It identified opportunities to return excess capital through dividends and repurchases and to invest in profitable organic growth or acquisitions. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies and unusual items
- Insurance reserve estimates remain a key judgment and risk area, particularly asbestos, environmental and mass-tort claims. Actual claims frequency, severity, legal outcomes and reserve development may differ from estimates.
- AFG reported $14 million of COVID-19-related P&C losses in the first nine months of 2021 and approximately $96 million of cumulative COVID-19-related losses, about 63% held as incurred-but-not-reported reserves.
- Catastrophe losses were $31 million in Q3 and $61 million for nine months, primarily related to Hurricane Ida, storms and, for the year-to-date period, Texas winter storms. Reinsurance availability and recoverability are risks.
- A 100-basis-point increase in interest rates was estimated to reduce the fair value of the fixed-maturity portfolio by about 2%, or $209 million pretax. Changes in rates, credit quality and investment markets may affect earnings, equity and liquidity.
- Other cited uncertainties include inflation and economic conditions, regulation and legislation, competition and pricing, COVID-19 effects, cyber incidents, reinsurer credit, and changes in insurance or credit ratings. AFG noted that retroactive business-interruption mandates could alter coverage exposure; most property policies contain virus exclusions and generally require direct physical damage.
Important facts for investors to verify
- Separate ongoing continuing-operation performance from the annuity sale gain and other discontinued-operation results; compare reported and core non-GAAP earnings on a consistent basis.
- Assess sustainability of favorable prior-year reserve development and the adequacy of A&E, COVID-19 and catastrophe reserves.
- Evaluate whether strong alternative-investment returns persist, given their significant contribution to investment-income growth.
- Review the use of sale proceeds, special dividends, share repurchases, and remaining liquidity and debt capacity.
- Monitor renewal pricing, premium growth, reinsurance costs and cessions, catastrophe exposure, and sensitivity to interest rates and market values.