American Financial Group, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. AFG is an insurance holding company focused primarily on specialty commercial property and casualty (P&C) insurance through Great American Insurance Group. Its former annuity business was sold in 2021 and is reported as discontinued operations.
Financial results and condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenues | $7.827 billion | $7.040 billion | Up 11% |
| P&C net earned premiums | $6.531 billion | $6.085 billion | Up 7% |
| Net earnings | $852 million ($10.05 diluted EPS) | $898 million ($10.53 diluted EPS) | Down 5% |
| Core net operating earnings, non-GAAP | $895 million ($10.56 diluted EPS) | $993 million ($11.63 diluted EPS) | Down 10% |
| P&C underwriting gain | $631 million | $776 million | Down 19% |
| P&C combined ratio | 90.4% | 87.3% | Up 3.1 percentage points |
| Net cash from operating activities | $1.970 billion | $1.153 billion | Up $817 million |
Revenue and net earnings include consolidated managed investment entity (CLO) activity; CLO assets and liabilities are presented separately and are nonrecourse to AFG. Core earnings are a company-defined non-GAAP measure.
- Underwriting and growth: Gross written premiums rose 7% to $9.656 billion; net written premiums rose 8% to $6.692 billion. The 90.4% combined ratio indicates an underwriting profit, but deterioration from 2022 reflected higher loss costs, expenses and catastrophe losses. Current-year catastrophe losses were $162 million, versus $88 million in 2022.
- Investment income: P&C net investment income increased 7% to $729 million, mainly from higher fixed-maturity yields and invested assets, partly offset by lower alternative-investment returns. Fixed-maturity earned yield for continuing operations was 4.7%, compared with 3.5% in 2022.
- Cash and liquidity: Consolidated cash and cash equivalents were $1.225 billion at year-end, and total cash and investments were $15.263 billion. Investing activities provided $414 million; financing activities used $2.031 billion. Parent-only cash and investments were approximately $485 million. The filing notes that customary current-ratio analysis is not meaningful for AFG’s financial businesses.
- Debt and capital: Long-term debt had a $1.475 billion carrying value ($1.498 billion principal). Debt-to-total-capital was 24.7%, including subordinated debt, below management’s 30% target. There were no borrowings under the $450 million revolving credit facility, which expires in June 2028; no principal maturities are scheduled through 2028. Insurance subsidiaries exceeded RBC requirements.
- Equity and shareholder returns: Shareholders’ equity was $4.258 billion, up from $4.052 billion. AFG repurchased $213 million of common stock and paid $684 million in cash dividends during 2023, including $466 million in special dividends. In February 2024, it declared an additional $2.50-per-share special dividend.
Material changes versus 2022
- Net earnings decreased $46 million, principally because of lower alternative-investment returns and lower P&C underwriting profit. Higher fixed-maturity investment income and lower realized securities losses partly offset the decline.
- P&C underwriting gain fell $145 million; the combined ratio worsened from 87.3% to 90.4%. The increase in catastrophe losses and less favorable underwriting experience contributed to the change.
- AFG acquired Crop Risk Services (CRS) on July 3, 2023, for $234 million in cash. CRS expanded AFG’s crop-insurance business; its reported contribution in 2023 was limited to the post-acquisition period.
- Operating cash flow increased, while cash dividends declined from $1.213 billion to $684 million. Consolidated cash rose to $1.225 billion from $872 million.
- Accumulated other comprehensive loss improved to $319 million from $543 million, principally reflecting a $210 million after-tax improvement in unrealized securities gains and losses.
Outlook, risks and unusual items
- Management outlook: Management expects continued premium growth and strong underwriting results in what it describes as a favorable P&C market. It expects higher fixed-maturity yields and deployment of cash in the elevated-rate environment to support investment income in 2024. No specific earnings or premium-growth guidance was provided.
- Reserves: Gross unpaid P&C losses and LAE were $13.087 billion; net reserves were $8.799 billion. Reserve estimates are judgmental and exposed to inflation, litigation, social inflation, claim severity and changes in coverage interpretations. A 1% change in cost trends in significant long-tail lines was estimated to affect net earnings by approximately $178 million in aggregate, based on the disclosed line sensitivities.
- A&E and former operations: P&C gross asbestos and environmental reserves were $498 million, net of $128 million of reinsurance recoverables. A 2023 review produced no net change in P&C A&E reserves. AFG recorded a separate $15 million pretax non-core charge for former railroad and manufacturing-operation liabilities; outcomes remain uncertain.
- Catastrophe and reinsurance exposure: Severe weather, climate-related uncertainty and crop-price volatility may cause material loss volatility. Reinsurance reduces but does not eliminate exposure, and AFG remains liable to policyholders if reinsurers fail to pay. Reinsurance recoverables totaled $4.477 billion on the balance sheet.
- Investments: A 100-basis-point increase in interest rates was estimated to reduce the fair value of fixed maturities by approximately $313 million pretax. The portfolio also faces credit, equity-price, prepayment and alternative-investment liquidity risks. At year-end, $470 million of gross unrealized losses existed on available-for-sale fixed maturities; management said it had the ability and intent to hold the affected securities until recovery.
- Unusual item: AFG recorded a $26 million goodwill impairment related to Verikai, partly offset by a $22 million reduction in contingent consideration, resulting in a $4 million realized loss on subsidiaries. The impairment followed slower-than-anticipated growth.
- Other risks: Competition, rate adequacy, regulatory and capital requirements, cyber incidents, AI-related risks, litigation, rating changes and access to reinsurance or capital could adversely affect results. Management reported no material adverse cybersecurity events during the prior three years. The financial statements and internal controls received unqualified auditor opinions; CRS was excluded from the 2023 internal-control assessment and is to be included in 2024.
Important facts for investors to verify
- Track subsequent P&C combined ratios, catastrophe losses, renewal pricing and reserve development, especially in casualty lines.
- Review the development and adequacy of the $13.087 billion gross loss and LAE reserve, including A&E and former-operations contingencies.
- Assess whether investment income growth continues and how alternative-investment returns, interest rates and unrealized fixed-maturity losses affect earnings and capital.
- Confirm CRS’s post-acquisition premium contribution, underwriting results and integration performance, and monitor Verikai’s performance following impairment.
- Monitor reinsurance availability, recoverability and counterparty concentration, as well as statutory capital, dividend capacity and shareholder distributions.