American Financial Group, Inc. — Q3 2022 Form 10-Q
Business context and period. AFG is primarily a specialty property and casualty insurer. Its annuity business was sold in May 2021 and is reported as discontinued operations. This summary covers the quarter and nine months ended September 30, 2022; financial amounts are in millions unless noted.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Total revenue | $1,984 | $1,754 | $5,111 | $4,794 |
| Net earnings from continuing operations | $165 | $219 | $622 | $726 |
| Diluted EPS from continuing operations | $1.93 | $2.56 | $7.29 | $8.45 |
| Core net operating earnings (non-GAAP) | $192 | $231 | $738 | $642 |
| Core diluted EPS (non-GAAP) | $2.24 | $2.71 | $8.65 | $7.48 |
- Revenue and premiums: Q3 P&C net earned premiums rose 16% to $1,767; nine-month premiums rose 13% to $4,462. Nine-month gross written premiums increased 16% to $7,212, reflecting growth in crop insurance, increased exposures, new business and rate increases.
- Underwriting: The Q3 aggregate combined ratio was 91.2%, versus 89.0% a year earlier; the nine-month ratio improved to 87.5% from 88.4%. Ratios below 100% indicate underwriting profit. Q3 underwriting profit was $155, down from $168; nine-month underwriting profit was $558, up from $454.
- Investments and realized results: Q3 net investment income was $151, down from $169, as weaker alternative-investment returns outweighed higher fixed-maturity yields. Nine-month net investment income rose to $549 from $521. Securities realized losses were $35 in Q3 and $143 for nine months, compared with losses of $17 and gains of $103, respectively, in 2021; 2022 losses were principally equity-security fair-value declines.
- Cash flow: Nine-month operating cash flow was $1,043, versus $1,425; investing cash outflow was $1,062, versus $103; financing cash outflow was $1,318, versus $1,299. Cash and cash equivalents fell to $794 at September 30 from $2,131 at year-end 2021.
- Debt and liquidity: Long-term debt carrying value was $1,533, down from $1,964 at year-end; principal was $1,559. AFG retired $434 of senior-note principal during the first nine months. Its $500 revolving credit facility had no borrowings. Debt to total capital, including subordinated debt, was 25.7%, versus 29.0% at year-end.
- Balance sheet and capital: Total assets were $29,532 and shareholders’ equity was $3,932, compared with $28,931 and $5,012 at year-end. AFG recorded $721 of nine-month other comprehensive loss, primarily from unrealized investment-security losses; AOCI moved from $119 of income to a $602 loss. Available-for-sale fixed maturities had $728 of gross unrealized losses; management said it intended and was able to hold the securities until recovery.
Changes, outlook, risks and unusual items
- Q3 continuing-operations earnings declined year over year because of lower underwriting profit and investment income, higher holding-company expenses and larger realized securities losses; lower interest expense partly offset these items. Nine-month core earnings increased 15% to $738, while GAAP earnings were affected by securities losses.
- The 2021 comparison includes $914 of earnings from discontinued annuity operations, including a $656 after-tax sale gain. This makes the reported nine-month net-earnings comparison with 2021 substantially less comparable.
- Hurricane Ian contributed to Q3 catastrophe losses. Nine-month catastrophe losses were $64 before reinstatement premiums, primarily from Ian and storms in multiple U.S. regions. AFG’s catastrophe program includes traditional reinsurance and supplemental catastrophe-bond protection.
- Prior-year reserve development was favorable by $226 for the first nine months, helping results; AFG’s Q3 internal review found no net change in P&C asbestos and environmental reserves. Those P&C reserves were $391 net of reinsurance. Management identifies insurance-reserve adequacy and former railroad/manufacturing environmental and asbestos exposures as material areas of uncertainty.
- Management expects continued premium growth and strong underwriting results in what it described as a favorable P&C market. It also expects rising rates and reinvestment of cash to support higher fixed-maturity investment income. It cited inflation, supply-chain disruption, labor shortages, the Russia-Ukraine conflict and COVID-19 as ongoing uncertainties; no numerical earnings guidance was provided.
- Management said the parent had no near-term debt maturities and subsidiaries had capital at or above rating-agency requirements. AFG declared a $2.00-per-share special dividend on November 2, 2022, payable November 22; the expected aggregate payment was approximately $170.
- Interest-rate exposure is notable: management estimated an immediate 100-basis-point rate increase would reduce fixed-maturity portfolio fair value by about 3%, or $302 pretax. The filing also notes market, credit, catastrophe, reinsurance, reserve, regulatory, tax, cyber and competitive risks.
Important facts for investors to verify
- Whether premium growth and renewal pricing can continue, and whether crop-related premium growth is sustainable.
- Hurricane Ian ultimate losses, reinsurance recoveries and the effect of catastrophe costs on future underwriting results.
- The durability of favorable prior-year reserve development and the adequacy of long-tail, COVID-19, asbestos and environmental reserves.
- Whether unrealized investment losses recover as management expects, and how changing rates and alternative-investment performance affect income and capital.
- The cash and capital impact of dividends, debt reduction and future shareholder returns, including the post-quarter $2.00 special dividend.
- Potential effects of the Inflation Reduction Act’s 2023 provisions; AFG said it could not yet determine whether it would be subject to the new corporate alternative minimum tax.