American Financial Group, Inc. — 2022 Form 10-K
Business and period: AFG is an insurance holding company focused primarily on specialized commercial property and casualty insurance through Great American Insurance Group. This filing covers the year ended December 31, 2022; comparisons are with 2021 unless noted. The annuity business was sold to MassMutual in May 2021, so its 2021 results are reported as discontinued operations.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $7.040 billion | $6.552 billion |
| Continuing-operations pretax earnings | $1.123 billion | $1.335 billion |
| Net earnings from continuing operations attributable to shareholders | $898 million | $1.081 billion |
| Diluted EPS, continuing operations | $10.53 | $12.62 |
| Core net operating earnings (non-GAAP) | $993 million | $993 million |
| Net cash from operating activities | $1.153 billion | $1.714 billion |
- Premiums and underwriting: P&C gross written premiums rose 14% to $9.057 billion; net earned premiums rose 13% to $6.085 billion. Underwriting gain increased to $776 million from $733 million. The GAAP combined ratio was 87.3%, versus 86.5%; below 100% indicates an underwriting profit.
- Investment income and securities: Net investment income was $717 million, down from $730 million. P&C investment income increased to $683 million, but alternative-investment returns were lower than in 2021. Realized securities losses were $116 million, compared with $110 million of gains in 2021.
- Balance sheet and capital: Total assets were $28.831 billion and shareholders’ equity was $4.052 billion at year-end, down from $5.012 billion. AFG reported a $662 million net-of-tax other comprehensive loss, primarily reflecting declines in fixed-maturity values. Cash and investments totaled $14.512 billion, including $872 million of cash and cash equivalents.
- Debt and liquidity: Long-term debt carrying value was $1.496 billion; principal debt was $1.521 billion. Debt to total capital was 24.9%, down from 29.0%. AFG had $500 million available under its revolving credit facility and no bank-line borrowings in 2022. Parent-company cash and investments were approximately $879 million. Insurance subsidiaries’ capital ratios exceeded RBC requirements.
- Claims and reinsurance: Gross unpaid losses and LAE were $11.974 billion; net reserves were $8.207 billion. Reinsurance recoverables were $3.977 billion on the balance sheet. The $525 million gross A&E reserve includes $140 million of net reinsurance recoverables.
Material changes and unusual items
- Continuing-operations net earnings fell about 17%, while core net operating earnings were unchanged at $993 million. Lower alternative-investment returns and securities losses weighed on reported earnings; higher underwriting profit and fixed-income investment income partly offset those effects.
- 2021 shareholder earnings of $1.995 billion included $914 million from discontinued annuity operations, including a $656 million after-tax gain on the sale. This makes total reported earnings a less comparable measure of ongoing performance.
- AFG retired $472 million principal amount of senior notes during 2022, paying $477 million and recording a $9 million pretax loss. It paid $1.213 billion in common dividends, including $1.02 billion in special dividends, and repurchased $11 million of shares.
- Available-for-sale fixed maturities had $669 million of gross unrealized losses at year-end. Management said it intended and had the ability to hold affected securities until recovery; realized losses or impairments could arise if that assessment changes.
- The 2022 internal review of A&E reserves found no new trends and resulted in no net change to the P&C group’s A&E reserves. The filing emphasizes that the ultimate exposure remains unusually uncertain.
Outlook, risks, and contingencies
Management expected continued premium growth and strong underwriting results amid a favorable P&C market, and said higher yields from cash deployed during 2022 should support fixed-maturity investment income in 2023. AFG also declared a $4.00-per-share special dividend in February 2023, payable February 28, 2023. These are management expectations, not guarantees.
- Key risks include catastrophe and severe-weather losses, climate-related uncertainty, crop-price and weather volatility, inflation and social inflation, competitive pricing, and the availability and cost of reinsurance.
- Reserve estimates are judgmental and sensitive to claim severity, inflation, litigation and legal developments. AFG reported adverse prior-year development in other liability-occurrence coverage, partly offset by favorable development in workers’ compensation and other lines.
- Reinsurance does not remove AFG’s obligation to policyholders; recoverables are subject to reinsurer credit risk. AFG disclosed legacy environmental and personal-injury contingencies, including $89 million of liabilities at American Premier and $7 million at GAFRI. Management considers recorded reserves adequate, but outcomes may vary materially.
- Investment risks include interest-rate, credit, equity-market and alternative-investment volatility. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $304 million before tax.
- Other disclosed uncertainties include cybersecurity and privacy, regulatory and tax changes, litigation, ratings, and the transition from LIBOR. AFG said its insurance subsidiaries had capital at or above levels indicated for current ratings and that the parent had no near-term debt maturities.
Investor verification checklist
- Review the drivers and sustainability of the 87.3% combined ratio, including crop results, social-inflation exposures, catastrophe losses and reserve development.
- Assess reserve adequacy and sensitivity, especially long-tail liability, workers’ compensation and A&E claims; compare net reserves with reinsurance recoverables and actual subsequent development.
- Examine fixed-maturity unrealized losses, interest-rate exposure, credit quality and the assumptions supporting management’s intention to hold securities.
- Reconcile GAAP earnings with core earnings and account for the 2021 annuity-sale gain when comparing periods.
- Verify capital deployment, debt reduction, regular and special dividends, and the amount of capital that can be distributed from regulated insurance subsidiaries.