American Financial Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. AFG primarily writes specialized commercial property and casualty insurance through its subsidiaries.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $1.740 billion | $1.588 billion |
| Net earnings | $212 million; diluted EPS $2.49 | $290 million; diluted EPS $3.40 |
| Core net operating earnings (non-GAAP) | $247 million; diluted EPS $2.89 | $303 million; diluted EPS $3.56 |
| P&C net earned premiums | $1.437 billion | $1.302 billion |
| P&C underwriting profit | $154 million | $207 million |
| Aggregate P&C combined ratio | 89.3% | 84.1% |
| Operating cash flow | $403 million | $503 million |
| Cash and investments | $14.451 billion | $14.512 billion |
| Long-term debt, carrying value | $1.478 billion | $1.496 billion |
| Shareholders’ equity | $3.941 billion | $4.052 billion |
- Revenue rose 10%, while net earnings fell 27%. Management attributed the earnings decline mainly to lower alternative-investment returns, lower underwriting profit, and higher realized securities losses; higher fixed-maturity yields partly offset these pressures.
- P&C gross written premiums increased 11% to $2.155 billion. Overall renewal rates increased about 4% (about 5% excluding workers’ compensation rate decreases).
- The combined ratio increased 5.2 percentage points. Catastrophe losses were $31 million versus $9 million a year earlier; favorable prior-year reserve development was $64 million versus $89 million.
- P&C net investment income declined 7% to $207 million: income excluding alternative investments increased 54% to $129 million, but alternative-investment income fell 44% to $78 million.
- Net cash decreased $15 million to $857 million. Financing used $491 million, including $393 million of common dividends; Q1 included a special dividend of $4.00 per share, totaling $341 million. AFG also repurchased $24 million of common stock.
- Debt to total capital, including subordinated debt, was 25.6%, versus 24.9% at year-end. The $500 million revolving facility was undrawn; AFG reported no near-term debt maturities.
Outlook, risks and notable items
- Management expected continued premium growth and strong underwriting results in what it described as a favorable P&C market. It expected higher yields on newly deployed cash to support fixed-maturity investment income through 2023; the filing provides no specific earnings or premium-growth guidance.
- On May 2, 2023, AFG announced an agreement to acquire Crop Risk Services from AIG for approximately $240 million in cash, including estimated net tangible assets of $30 million. Closing was anticipated in Q3 2023, subject to regulatory approvals and other conditions. CRS reported approximately $1.2 billion of 2022 gross written premiums.
- Available-for-sale fixed maturities had $577 million of gross unrealized losses at March 31. Management said it intended and was able to hold the securities until recovery, but changes in creditworthiness, liquidity needs or investment decisions could require impairment charges. A 100-basis-point immediate rise in rates was estimated to reduce fixed-maturity fair value by approximately $302 million pretax.
- Key uncertainties include insurance reserve adequacy, asbestos and environmental claims, reinsurance recoverability, catastrophe and severe-weather losses, inflation and social inflation, interest-rate and market movements, and regulatory, legal and economic changes. AFG cited banking-system instability and the Russia-Ukraine conflict among macroeconomic uncertainties.
- AFG reported $64 million of favorable prior-year reserve development, but noted that estimates are judgmental and that about 48% of cumulative COVID-19-related losses of $73 million remained in incurred-but-not-reported reserves. No significant change in previously disclosed contingencies was reported.
- AFG stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth and renewal pricing continue to outpace loss-cost trends, and whether combined ratios improve from Q1.
- How alternative investments perform relative to the unusually strong Q1 2022 comparison, and whether higher fixed-income yields offset that volatility.
- Whether reserve development remains favorable and catastrophe, social-inflation and other severity trends remain manageable.
- The investment portfolio’s unrealized losses, credit quality and liquidity, including any impairment or forced-sale risk.
- Crop Risk Services’ closing conditions, final purchase economics, funding and post-acquisition performance.
- Capital deployment and liquidity after the large special dividend, including future dividends, buybacks and acquisition spending.