American Financial Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless stated otherwise, amounts are in millions. AFG’s continuing business is primarily specialty property and casualty insurance; its annuity operations are presented as discontinued operations following the pending sale agreement.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total consolidated revenue | $1,509 | $1,055 |
| Continuing-operations pretax earnings (loss) | $335 | $(185) |
| Net earnings (loss) attributable to shareholders | $419 | $(301) |
| Diluted EPS, continuing operations | $3.08 | $(1.57) |
| Diluted EPS, total | $4.84 | $(3.34) |
| Core net operating earnings, non-GAAP | $206; $2.38 diluted per share | $125; $1.36 diluted per share |
| Net cash provided by operating activities | $627 | $532 |
Total results include discontinued annuity operations: those operations contributed $152 of net earnings in Q1 2021 versus a $160 net loss in Q1 2020. Continuing-operations revenue before realized security gains was $1,432 versus $1,383.
- Property and casualty: Net earned premiums were $1,173, down 3% from $1,209, reflecting in part the prior-year Neon exited lines. Gross written premiums rose 2% to $1,616 and net written premiums rose 4% to $1,205. Renewal rates increased approximately 12% overall.
- Underwriting and margins: Specialty underwriting profit was $134 versus $89. The Specialty combined ratio improved to 88.5% from 92.2%; the aggregate ratio including exited lines was 88.6% versus 92.8%. A ratio below 100% indicates underwriting profit.
- Investment income and realized items: Continuing-operations net investment income increased to $188 from $104, including P&C investment income of $159 versus $99 excluding Neon. Realized security gains were $77 versus losses of $328, primarily due to equity-security fair-value changes.
- Cash flow: Investing activities used $938, compared with $1,653 used in Q1 2020; financing activities used $172, versus $480 provided. Operating cash flow excluding managed investment entity effects was $665 versus $443. Consolidated cash at quarter-end was $2,327, including $636 in discontinued operations; continuing-operations cash was $1,691.
- Balance sheet and debt: Total assets were $74,197 and total liabilities $67,512 at March 31, 2021. Shareholders’ equity was $6,685, down from $6,789 at year-end, principally reflecting a $306 decline in accumulated other comprehensive income. Long-term debt carrying value was $1,963 ($1,993 principal); no amounts were drawn on the $500 revolving credit facility.
- Capital and liquidity: Debt to total capital was 25.9% including subordinated debt and 17.1% excluding it. AFG reported an “as if” post-sale adjusted ratio of 23.8% and 15.7%, respectively. The company paid $43 in common dividends and repurchased $192 of stock during the quarter.
Material changes and transaction
AFG agreed to sell its annuity business to MassMutual for $3.5 billion in cash, subject to closing adjustments, with closing expected in Q2 2021. The businesses’ GAAP equity excluding AOCI was $3,012 at March 31, 2021, compared with a $2.8 billion reference amount under the agreement. AFG expects an after-tax sale gain of $680–$700, or $7.85–$8.10 per share, upon closing. AFG will acquire approximately $460 of equity-method real estate partnerships and its parent will acquire approximately $100 of directly owned real estate before closing. The reported Q1 discontinued-operations result includes $41 of tax liabilities triggered by the pending sale.
Compared with Q1 2020, the marked improvement in reported earnings reflected the swing from realized security losses to gains, higher P&C underwriting profit and investment income, and the change in annuity results. Core net operating earnings increased $81. Higher holding-company expenses and interest charges partially offset the improvement.
Outlook, risks and unusual items
- Management said it expects pandemic impacts to continue through 2021, while believing subsidiary capital and liquidity are sufficient to respond and maintain ratings. It did not provide numerical earnings or premium guidance in the supplied filing text.
- AFG identified uncertainty around COVID-19-related claims and potential legislation or regulation, including possible retroactive business-interruption coverage. The company said most property policies contain virus exclusions and business-interruption coverage generally requires direct physical damage.
- Q1 P&C catastrophe losses were $20, primarily from Texas winter storms, versus $9 in the prior-year quarter. COVID-19-related reserves were $98 at quarter-end, approximately 69% incurred but not reported; Q1 2021 included $9 of COVID-19 reserve charges.
- Prior-year P&C reserves developed favorably by $59, compared with $48 in Q1 2020. Reserve adequacy remains a key estimate, particularly for asbestos, environmental and mass-tort claims. Management reported no significant change in the previously disclosed contingency matters.
- Market risks include interest-rate, equity-market and credit movements. AFG estimated that an immediate 100-basis-point increase in rates would reduce the after-tax AOCI impact by approximately $841 across the total fixed-maturity portfolio, after estimated offsets.
- The annuity sale is subject to closing conditions and timing uncertainty. Other risks cited include reinsurance availability and collectability, catastrophe losses, inflation, investment valuations, regulation, cyber disruption and economic effects of COVID-19.
Important facts for investors to verify
- Whether the MassMutual sale closed on schedule, final closing adjustments, and the realized after-tax gain versus the $680–$700 estimate.
- Whether premium growth and renewal pricing translate into durable underwriting performance; monitor combined ratios, catastrophe losses and the level of favorable reserve development.
- Whether elevated investment income and core earnings persist, particularly given alternative-investment returns and market-sensitive realized gains.
- Development of COVID-19 claims and the $98 reserve balance, along with asbestos, environmental and other long-tail reserve estimates.
- Post-sale capital deployment, including dividends, repurchases, acquisitions and the company’s debt-to-capital position.