Business context and reporting period
American Financial Group, Inc. (AFG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. AFG’s continuing business is primarily specialty property and casualty insurance; its annuity operations were sold in May 2021 and are reported as discontinued operations.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $1.539 billion | $1.531 billion | $3.127 billion | $3.040 billion |
| Net earnings from continuing operations | $167 million | $240 million | $457 million | $507 million |
| Diluted continuing EPS | $1.96 | $2.81 | $5.36 | $5.90 |
| Core net operating earnings (non-GAAP) | $243 million | $205 million | $546 million | $411 million |
| Core diluted EPS (non-GAAP) | $2.85 | $2.39 | $6.41 | $4.78 |
- Insurance growth and underwriting: Second-quarter net earned premiums rose 11% to $1.393 billion; first-half premiums rose 11% to $2.695 billion. The combined ratio improved to 86.0% for Q2 from 87.9%, and to 85.0% for the first half from 88.2%; below 100% indicates underwriting profit. Core underwriting gain was $196 million in Q2 and $403 million in the first half.
- Investment income and realized results: Net investment income was $168 million in Q2 versus $164 million and $398 million for the first half versus $352 million. Realized securities losses were $93 million in Q2 and $108 million in the first half, versus gains of $43 million and $120 million, respectively, in 2021; 2022 losses were primarily equity-security fair-value declines.
- Cash flow: First-half operating cash flow was $514 million, investing cash flow used $501 million, and financing cash flow used $1.177 billion. Cash and cash equivalents fell to $967 million at June 30 from $2.131 billion at year-end. The filing attributes much of the year-over-year cash-flow comparison to the 2021 annuity-business sale and related discontinued operations.
- Debt and liquidity: Long-term debt carrying value was $1.542 billion, down from $1.964 billion at year-end after retiring $425 million principal amount of 3.50% senior notes for $433 million. Debt to total capital, including subordinated debt, was 26.3%, compared with 29.0% at year-end. A $500 million revolving credit facility had no borrowings at quarter-end; management said it believes parent and insurance-subsidiary liquidity and capital are sufficient.
- Equity and distributions: Shareholders’ equity was $4.067 billion versus $5.012 billion at year-end, including AOCI of negative $348 million versus positive $119 million. AFG paid $942 million in common dividends in the first half, including $850 million of special dividends; cash repurchases were $5 million.
Changes, outlook and risks
- Core earnings increased year over year, supported by stronger underwriting and investment income and lower holding-company expenses. GAAP continuing earnings were lower, principally because of securities losses; comparisons with 2021 reported net earnings are also affected by the annuity sale, which contributed $762 million in Q2 2021 and $914 million in first-half 2021 discontinued-operation earnings.
- Management expects continued premium growth and strong underwriting results in what it described as a favorable P&C market, and expects investment returns to improve in 2022 as cash is deployed in a rising-rate environment. The filing provides no specific numerical earnings or revenue guidance.
- First-half prior-year reserve development was favorable by $173 million, supporting results; management notes reserve estimates are judgmental and may change. COVID-19 reserves totaled $86 million, approximately 57% of which was held as incurred-but-not-reported at June 30.
- AFS fixed maturities had $454 million of gross unrealized losses at June 30, versus $28 million at year-end. Management said it intended and was able to hold the securities until recovery, but acknowledged that impairment charges could result if its ability or intent to hold changes. A modeled immediate 100-basis-point rate increase would reduce fixed-maturity fair value by an estimated $295 million pretax.
- Other cited uncertainties include inflation, supply-chain disruption, labor shortages, economic and market conditions, catastrophe losses, reserve adequacy, reinsurer collectability, investment valuations, legal and regulatory changes, cyber risks, and the Russia-Ukraine conflict and COVID-19 pandemic. AFG reported no significant changes to its previously disclosed asbestos, environmental and mass-tort contingencies.
- AFG redeemed its remaining 3.50% senior notes in June, recording an $11 million pretax first-half loss on debt retirement. The filing also reports a $23 million contingent-consideration liability related to the Verikai acquisition.
Key facts for investors to verify
- Whether premium growth and improved combined ratios persist, particularly given higher property and inland-marine losses and catastrophe activity.
- How much underwriting performance depends on favorable prior-year reserve development and whether reserve estimates, including COVID-19 and long-tail claims, change.
- Whether investment income growth continues and how market declines, interest rates and realized equity-security losses affect earnings, AOCI and capital.
- Whether operating cash generation and subsidiary liquidity remain adequate after substantial special dividends and debt retirement.
- How reported GAAP results compare with non-GAAP core earnings and with 2021 periods affected by the annuity-business sale.