American Financial Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. AFG primarily operates in specialty property and casualty (P&C) insurance. Its annuity business was sold in May 2021 and is reported as discontinued operations.
Financial performance and condition
- Revenue and earnings: Total revenue was $1.588 billion versus $1.509 billion in Q1 2021. Continuing-operations net earnings were $290 million, or $3.40 per diluted share, compared with $267 million, or $3.08 per diluted share. Core net operating earnings, a non-GAAP measure, rose to $303 million ($3.56 per diluted share) from $206 million ($2.38 per diluted share). Q1 2021 total net earnings of $419 million included $152 million from discontinued annuity operations.
- P&C growth and underwriting: Net earned premiums rose 11% to $1.302 billion; gross written premiums increased 20% to $1.936 billion, with management attributing part of the increase to premium-recognition timing. Excluding that timing effect, gross and net written premiums grew 9% and 10%, respectively. P&C pretax earnings increased 47% to $422 million. Underwriting profit was $207 million versus $134 million, and the aggregate combined ratio improved to 84.1% from 88.6%.
- Investment income and realized results: Net investment income rose 22% to $230 million; P&C investment income increased 40% to $223 million, driven substantially by alternative investments. Net realized securities results shifted to a $15 million loss from a $77 million gain, primarily reflecting fair-value changes in equity securities.
- Cash flow: Operating cash flow was $503 million versus $627 million; investing activities used $1.111 billion versus $938 million; financing activities used $342 million versus $172 million. Cash and cash equivalents declined by $950 million during the quarter to $1.181 billion. Excluding managed investment entity activity, operating cash flow was $331 million versus $665 million; the filing cites the annuity-business sale as a key factor in the comparison.
- Balance sheet and liquidity: Total assets were $28.762 billion and total liabilities $23.927 billion at March 31, 2022. Shareholders’ equity was $4.835 billion, down from $5.012 billion at year-end, including a $250 million after-tax other comprehensive loss, largely from fixed-income securities. Long-term debt carrying value was $1.917 billion; principal debt was $1.945 billion. A $500 million revolving facility was undrawn. The reported debt-to-total-capital ratio was 28.2% including subordinated debt; management’s pro forma adjusted ratio was 26.9% after the announced debt redemption and special dividend.
Material changes and unusual items
- Continuing net earnings increased year over year, reflecting higher underwriting profit, higher investment income and lower holding-company expenses, partly offset by the swing from securities gains to losses.
- Prior-year reserve development was favorable by $88 million in aggregate, compared with $59 million in Q1 2021. Catastrophe losses were $9 million versus $20 million. The filing notes that reserve estimates remain judgmental and can change.
- AFG paid a $2.00-per-share special dividend in March 2022, in addition to regular dividends; total cash dividends paid were $216 million. It repurchased $48 million principal amount of 3.50% senior notes for $50 million, recording a $2 million pretax retirement loss.
- After quarter-end, AFG announced it would redeem the remaining approximately $375 million of 3.50% senior notes due 2026 on June 3, 2022, expecting a pretax retirement loss below $10 million. It also declared an $8.00-per-share special dividend, approximately $680 million in total, payable May 27, 2022.
- AFG acquired Verikai in December 2021 for $120 million, with up to $50 million of potential contingent consideration. The contingent consideration liability was $23 million at March 31, 2022.
Outlook, commentary and risks
- Management expects continued premium growth and strong underwriting results in what it describes as a favorable P&C market. It expects deploying cash in a rising-rate environment to improve investment returns in 2022 compared with 2021. These are expectations, not quantified earnings guidance.
- Management cited inflation, supply-chain disruption, labor shortages, the Russia-Ukraine conflict and the COVID-19 pandemic as sources of uncertainty affecting premiums, claims costs and investment returns. The filing also identifies market and interest-rate movements, catastrophe losses, reserve adequacy, reinsurance availability and recoverability, competition, regulation, credit quality and cybersecurity as risks.
- A 100-basis-point immediate rise in interest rates was estimated to reduce the fair value of the fixed-maturity portfolio by approximately $271 million, or 2.5%, before tax. AFG reported $220 million of gross unrealized losses on available-for-sale fixed maturities; management said it intended and was able to hold the securities until recovery.
- Management identifies insurance reserves—particularly asbestos, environmental and mass-tort exposures—and reinsurance recoverables as significant areas of estimation risk. The filing reports no significant change in previously disclosed contingencies. About 61% of the $90 million in COVID-19-related reserves remained incurred-but-not-reported at March 31, 2022.
- AFG reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It implemented a new general ledger and financial reporting system and said it did not materially affect controls.
Important facts for investors to verify
- Whether premium growth persists after adjusting for the disclosed crop and transportation premium-recognition timing effects, and whether renewal-rate increases keep pace with loss-cost inflation.
- Whether the improved combined ratio and favorable prior-year reserve development are sustainable, including the development of casualty and other long-tail reserves.
- How alternative-investment returns contribute to investment income and whether those returns are repeatable.
- The effect of interest-rate and credit-market movements on portfolio values, AOCI, liquidity and any future impairment charges.
- Completion and cash impact of the announced 2026 notes redemption and $8.00-per-share special dividend, including the resulting leverage and capital position.
- Developments in asbestos, environmental and mass-tort claims, reinsurance recoverables, and the Verikai contingent consideration and purchase-price allocation.