American Financial Group, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are primarily with FY2020. The filing also reports fourth-quarter results. AFG is an insurance holding company focused on specialized commercial property and casualty insurance. Following the May 2021 sale of its annuity business, continuing operations comprise property and casualty insurance and other/holding-company activities.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net earned P&C premiums | $5.404 billion | $5.099 billion |
| P&C underwriting gain | $733 million | $224 million |
| P&C combined ratio (GAAP) | 86.5% | 95.5% |
| Continuing-operations net earnings attributable to shareholders | $1.081 billion | $325 million |
| Core net operating earnings, a non-GAAP measure | $993 million | $481 million |
| Total net earnings attributable to shareholders | $1.995 billion | $732 million |
| Net cash provided by operating activities | $1.714 billion | $2.183 billion |
- P&C gross written premiums rose 12% to $7.946 billion; net written premiums increased 11% to $5.573 billion. Average renewal rates increased approximately 9% for the year.
- P&C underwriting profit improved as favorable prior-year reserve development increased and catastrophe and COVID-19 losses declined. Net favorable prior-year development in Specialty P&C was $283 million, versus $213 million in 2020.
- Net investment income from continuing operations was $730 million, up from $461 million. P&C investment income rose 64% to $663 million, driven mainly by stronger returns from alternative investments; fixed-maturity yields remained pressured by low interest rates.
- FY2021 continuing-operations diluted EPS was $12.62; total diluted EPS was $23.30. Fourth-quarter continuing-operations net earnings were $355 million, or $4.18 per diluted share, compared with $265 million, or $3.03, in Q4 2020.
- At year-end, cash and investments were $15.745 billion, total assets $28.931 billion, shareholders’ equity $5.012 billion, and unpaid P&C losses and LAE $11.074 billion. The large year-over-year balance-sheet contraction principally reflects the annuity sale and discontinued-operations reclassification.
- Long-term debt principal was $1.993 billion (carrying value $1.964 billion); debt-to-total-capital was 29.0%, up from 26.6%. No parent-company borrowings were outstanding under its $500 million revolving credit facility, which expires in December 2025. Parent cash and securities were approximately $1.87 billion.
- Consolidated operating cash flow declined year over year. Financing used $1.957 billion, including $2.374 billion in common dividends; AFG repurchased $319 million of shares. FY2021 dividends included special dividends totaling $26 per share.
Material changes and unusual items
- AFG sold its annuity business to MassMutual for $3.57 billion in proceeds and recorded a $656 million after-tax gain. Discontinued annuity operations contributed $914 million of FY2021 net earnings, including that gain; therefore, total net earnings are not directly representative of continuing operations.
- Core net operating earnings increased to $993 million from $481 million. Improved P&C underwriting and investment income were partly offset by higher interest and holding-company expenses.
- AFG acquired Verikai, an insurance-risk analytics company, in December for approximately $120 million in cash; additional contingent consideration of up to $50 million may be payable.
- Unrealized investment losses reduced other comprehensive income by $1.154 billion in 2021, and year-end accumulated other comprehensive income fell to $119 million from $1.273 billion.
- The 2021 internal review of asbestos and environmental (A&E) exposures resulted in no net change to P&C A&E reserves. Gross P&C A&E reserves were $555 million, net of $147 million in reinsurance recoverables. Former railroad and manufacturing operations had related liabilities of $94 million, including $87 million at American Premier and $7 million at GAFRI.
Outlook, risks and contingencies
- No specific numerical earnings or premium guidance is provided. Management describes its financial position and subsidiary capital as strong and says it will consider profitable organic growth, acquisitions, start-ups, dividends and share repurchases in deploying excess capital. Up to approximately $843 million of subsidiary dividends could be paid to AFG in 2022 without prior regulatory approval.
- Management cites uncertainty from COVID-19, inflation and interest-rate movements, investment-market volatility, catastrophe and severe-weather losses, crop conditions, competition and the availability and cost of reinsurance. AFG estimates a modeled 500-year earthquake or windstorm event would affect approximately 2% of shareholders’ equity; actual losses could differ.
- Reserve adequacy is a significant judgment area. AFG reports that a 1% change in cost trends across certain major P&C lines could affect net earnings materially; the filing estimates approximately $35 million of net-earnings sensitivity for a 1% A&E loss-cost trend variation. Long-tail claims, inflation, litigation and coverage interpretations could change ultimate losses.
- Reinsurance recoverables totaled $3.519 billion. AFG remains liable to policyholders if reinsurers do not pay. Other exposures include investment valuation and credit risk, cyber and privacy risks, regulation, and litigation and remediation claims tied to former operations. Management believes reserves are adequate but says ultimate liabilities may vary materially.
- AFG reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate continuing P&C earnings and core operating performance from the $656 million annuity-sale gain and other non-core items; review the company’s non-GAAP reconciliation.
- Assess whether FY2021’s strong combined ratio and favorable reserve development are sustainable, particularly in workers’ compensation and other long-tail lines.
- Review reserve-development disclosures, A&E liabilities, COVID-19 claim estimates and the sensitivity of reserves to inflation and claims severity.
- Evaluate alternative-investment returns and portfolio valuation, including the effect of interest-rate changes and the concentration of Level 3 estimates.
- Consider capital returned to shareholders against year-end equity, leverage, subsidiary capital needs and the impact of lower unrealized gains.
- Monitor reinsurance collectability and protection, catastrophe exposures, and the contribution and contingent purchase price of Verikai.