10-K: American Financial Group Reports Solid 2023 Results Amidst Market Volatility

American Financial Group's 2023 results reflect a decrease in net earnings due to lower returns on alternative investments and reduced underwriting profit, partially offset by higher yields on fixed maturity investments.

Summary

• American Financial Group (AFG) reported net earnings of $852 million for 2023, a decrease from $898 million in 2022.
• The decline in earnings was primarily due to lower returns on alternative investments and a decrease in property and casualty underwriting profit.
• These negative impacts were partially offset by higher yields on fixed maturity investments, increased invested asset balances, and reduced net realized losses on securities.
• AFG's property and casualty insurance operations saw a decrease in underwriting profit, with a combined ratio of 90.4% in 2023 compared to 87.3% in 2022.
• Gross written premiums for the property and casualty segment increased to $9.656 billion in 2023 from $9.057 billion in 2022.
• The company's investment portfolio totaled $15.26 billion at the end of 2023, with a focus on fixed maturity securities.
• AFG's earned yield on fixed maturities was 4.7% in 2023, up from 3.5% in 2022 and 3.0% in 2021.
• The company repurchased 1,872,544 shares of its common stock for $213 million in 2023 and declared special dividends totaling $5.50 per share.
• AFG completed the acquisition of Crop Risk Services (CRS) for $234 million in cash in July 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there are positives such as increased premiums and investment yields, the decrease in net earnings and increased combined ratio, along with various risks, temper the overall sentiment. The company is performing well in some areas but faces challenges in others.

Positives

• AFG's earned yield on fixed maturities increased to 4.7% in 2023, indicating improved returns on its fixed income investments.
• The company's investment portfolio totaled $15.26 billion at the end of 2023, demonstrating a strong asset base.
• AFG repurchased 1,872,544 shares of its common stock for $213 million in 2023, indicating a commitment to returning value to shareholders.
• The acquisition of Crop Risk Services (CRS) expands AFG's presence in the crop insurance market.
• AFG's statutory combined ratio averaged 90.9% for the period 2014 to 2023, outperforming the property and casualty commercial lines industry average of 98.4%.

Negatives

• AFG's net earnings decreased to $852 million in 2023 from $898 million in 2022, indicating a decline in profitability.
• The property and casualty insurance segment's combined ratio increased to 90.4% in 2023 from 87.3% in 2022, suggesting a decrease in underwriting profitability.
• Lower returns on alternative investments negatively impacted overall earnings.
• The company recorded a $15 million pretax non-core special charge to increase liabilities for former railroad and manufacturing operations.

Risks

• AFG's results of operations could be adversely impacted by catastrophes, both natural and man-made, pandemics, severe weather conditions or climate change.
• Volatility in crop prices, as a result of weather conditions or other events, could adversely impact AFG's results of operations.
• Intense competition in the property and casualty insurance industry could adversely affect AFG's results of operations.
• AFG's property and casualty reserves may be inadequate, which could have a material adverse effect on AFG's results of operations.
• Exposure to mass tort claims, including asbestos and environmental matters, could materially adversely affect AFG's results of operations and financial condition.
• AFG's investment portfolio is subject to market risk, including changes in interest rates, which could have a material adverse effect on AFG's results of operations and financial condition.
• AFG may experience difficulties with technology or data security, which could have an adverse effect on its business or reputation.
• A downgrade in AFG's financial strength and/or credit ratings could adversely affect its business, financial condition, results of operations and/or cash flows.
• The inability to obtain reinsurance or to collect on ceded reinsurance could adversely affect AFG's results of operations.
• AFG may suffer losses from litigation, including from effects of emerging claim and coverage issues which could materially and adversely affect AFG's financial condition and business operations.
• AFG is subject to comprehensive regulation, and its ability to earn profits may be restricted by these regulations.

Future Outlook

Management expects continued premium growth and strong underwriting results in the ongoing favorable property and casualty insurance market. In addition, the deployment of cash during the elevated interest rate environment (since early 2022) will continue to have a positive impact on investment income on fixed maturity investments in 2024.

Management Comments

• Management believes that AFG's strong financial position and current liquidity and capital at its subsidiaries will give AFG the flexibility to continue to effectively address and respond to the ongoing uncertainties presented by the macro-economic environment and the conflicts in Ukraine and Israel.
• Management believes that AFG's investment expertise has been the driver of strong investment results and effective portfolio risk management over many years.
• Management believes that AFG's ability to grow book value per share at a double-digit annual rate over time is evidence that the Company's culture, business model and employee incentive plans create a compelling structure to build long-term value for AFG's shareholders.

Industry Context

The property and casualty insurance industry is experiencing cyclical changes, with competitive pressures, rising loss costs, and changes in reinsurance pricing and capacity affecting results. AFG's focus on specialty niche markets and underwriting discipline is intended to help it outperform industry averages.

Comparison to Industry Standards

• AFG's statutory combined ratio averaged 90.9% for the period 2014 to 2023, compared to 98.4% for the property and casualty commercial lines industry over the same period, indicating superior underwriting performance.
• AFG's three-year survival ratios for asbestos and environmental reserves compare favorably with industry survival ratios published by A.M. Best.
• AFG's fixed maturity portfolio total return of 7.2% in 2023 outperformed the Barclays Capital U.S. Universal Bond Index return of 6.2%.

Legal Proceedings

• AFG and its subsidiaries are involved in litigation from time to time, generally arising in the ordinary course of business.
• AFG's insurance company subsidiaries and its 100%-owned subsidiary, American Premier Underwriters, Inc., are parties to litigation and receive claims alleging injuries and damages from asbestos, environmental and other substances and workplace hazards and have established loss accruals for such potential liabilities.
• American Premier is a party or named as a potentially responsible party in a number of proceedings and claims by regulatory agencies and private parties under various environmental protection laws.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net earnings and the increased combined ratio.
• Employees may be affected by changes in compensation and benefits.
• Customers may be impacted by changes in policy terms and pricing.
• Suppliers and creditors may be affected by changes in AFG's financial condition.

Next Steps

• AFG will continue to monitor new and changing federal regulations and the potential impact, if any, on its insurance company subsidiaries.
• AFG will continue to evaluate the impact that the new tax law will have on AFG's financial results.
• AFG will continue to integrate assessing cybersecurity threat risks associated with its use of third-party service providers.

Key Dates

Keywords

insurance, property and casualty, financial results, underwriting, investment portfolio, reinsurance, catastrophe losses, alternative investments, fixed maturity securities, crop insurance