American Financial Group, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; the filing also reports fourth-quarter results. AFG is an insurance holding company focused on specialty property and casualty insurance and fixed, fixed-indexed and variable-indexed annuities. Unless noted, figures are in U.S. dollars.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $7.15 billion | $6.87 billion |
| Earnings before income taxes | $639 million | $724 million |
| Net earnings attributable to shareholders | $530 million | $475 million |
| Diluted GAAP EPS | $5.85 | $5.28 |
| Core net operating earnings per diluted share (non-GAAP) | $8.40 | $6.55 |
| Net cash from operating activities | $2.08 billion | $1.80 billion |
| Long-term debt, carrying value | $1.30 billion | $1.30 billion |
- Property and casualty: Net earned premiums rose 6% to $4.87 billion. Underwriting gain increased to $302 million from $242 million; the combined ratio improved to 93.8% from 94.7% (below 100% indicates an underwriting profit). Net catastrophe losses declined to $103 million from $140 million. Net investment income rose 21% to $438 million, supported in part by unusually strong limited-partnership and similar investment returns.
- Annuities: Pretax earnings decreased 5% to $361 million. Net spread earned on fixed annuities fell to 1.07% from 1.23%. Statutory annuity premiums rose 25% to $5.41 billion; these deposit-type premiums are generally recorded as policy liabilities, not GAAP revenue.
- Investments and equity: Net investment income increased 14% to $2.09 billion. Cash and investments totaled $48.50 billion; total assets were $63.46 billion. Shareholders’ equity decreased to $4.97 billion from $5.33 billion, with accumulated other comprehensive income falling to $48 million from $813 million, reflecting market-related changes including fixed-maturity valuations.
- Cash flow and liquidity: Investing activities used $5.35 billion and financing activities provided $2.44 billion; cash and cash equivalents declined by $823 million to $1.52 billion. AFG reported $223 million of parent-company cash and securities and an undrawn $500 million revolving credit facility, expiring June 2021. The consolidated debt-to-capital ratio was 21.2%; management’s stated target is no more than 25%. Insurance subsidiaries’ capital ratios exceeded regulatory requirements.
Material changes and unusual items
- Full-year shareholder earnings increased to $530 million from $475 million despite pretax earnings falling, aided by higher core operating earnings, lower special asbestos and environmental charges, reduced interest expense and the lower U.S. corporate tax rate.
- AFG recorded $266 million of net realized losses on securities in 2018, versus $5 million of gains in 2017. Adoption of accounting guidance requiring equity securities to be marked through earnings contributed $257 million of holding losses on securities still owned at year-end.
- Fourth-quarter shareholder results were a $29 million loss ($0.33 diluted loss per share), versus $166 million of earnings ($1.84 per diluted share) a year earlier. Fourth-quarter core net operating earnings were $159 million versus $197 million. The comparison reflects investment losses, weaker annuity earnings and lower P&C underwriting profit; 2017 also included a Neon tax benefit and debt-retirement loss.
- P&C gross written premiums grew 5% to $6.84 billion. AFG acquired ABA Insurance Services for approximately $30 million in November 2018.
Outlook, risks and contingencies
- The filing provides no specific company-wide earnings guidance. Management said strong returns from limited partnerships and similar investments should not be expected to recur, and expects annuity net interest spreads to narrow over time. It also noted that some adverse annuity effects from 2018 market movements may reverse if markets return toward long-term assumptions.
- Key risks include reserve estimation and claims inflation, natural catastrophes, investment credit and interest-rate exposure, annuity spread compression and policyholder behavior, reinsurance availability and collection, competition, regulatory changes, cyber incidents, and dependence on insurance-subsidiary dividends.
- Property and casualty asbestos and environmental reserves were $524 million gross and $395 million net of reinsurance at year-end. AFG recorded an $18 million pretax P&C reserve charge in 2018; management cautions that ultimate liabilities may differ materially from estimates. Recoverables from reinsurers totaled $3.35 billion.
- A 100-basis-point immediate increase in interest rates was estimated to reduce after-tax accumulated other comprehensive income by approximately $865 million. AFG also had approximately $949 million of commitments to fund credit facilities and contribute capital to investment entities.
- AFG’s 2018 financial statements and internal controls received unqualified audit opinions; management reported effective internal control over financial reporting.
Investor verification points
- Review the quality and repeatability of 2018 core earnings, especially unusually high investment partnership returns and favorable prior-year reserve development.
- Track P&C pricing, expense trends, catastrophe losses and reserve development, including asbestos and environmental exposures.
- Assess annuity spread trends, surrender and policyholder behavior, and the sensitivity of derivative accounting and guaranteed benefits to equity markets and interest rates.
- Check the collectibility and concentration of reinsurance recoverables, and the timing and availability of subsidiary dividends and parent liquidity.
- Separate the 2018 equity-security mark-to-market losses and lower AOCI from underlying operating performance when comparing periods.