AMERICAN FINANCIAL GROUP, INC. 10-Q

Overview

American Financial Group, Inc. (AFG) is a holding company with almost all of its operations conducted through subsidiaries. The company is primarily engaged in property and casualty insurance, focusing on specialized commercial products for businesses.

AFG reported net earnings of $154 million ($1.84 per share, diluted) for the first three months of 2025, down from $242 million ($2.89 per share, diluted) in the same period of 2024. The decrease was due to lower underwriting profit and lower net investment income from AFG’s alternative investment portfolio, partially offset by higher investment income on fixed maturity investments.

Management expects premium growth in many of AFG’s business units and continued strong underwriting results in the ongoing favorable property and casualty insurance market. The elevated interest rate environment is also expected to have a positive impact on investment income in 2025.

Financial Condition and Liquidity

AFG maintains a strong financial position, with a debt to total capital ratio of 24.7% at March 31, 2025, including subordinated debt. Excluding subordinated debt, the ratio was 13.6%. AFG can borrow up to $450 million under its revolving credit facility, which expires in 2028, but had no borrowings during 2024 or the first three months of 2025.

AFG’s insurance subsidiaries have sufficient liquidity and capital to meet commitments, with capital levels adequate to maintain business and rating agency ratings. However, changes in accounting rules, rating agency measures, or significant investment portfolio declines could create a need for additional capital.

Investments

AFG’s investment portfolio at March 31, 2025 contained $10.57 billion in fixed maturity securities classified as available for sale, $71 million in fixed maturities classified as trading, $531 million in equity securities carried at fair value, and $2.33 billion in equity method investments. Approximately 89% of the fixed maturity portfolio was priced using pricing services.

The fair value of the fixed maturity portfolio is inversely correlated to changes in interest rates. A 100 basis point increase in interest rates would have decreased the fair value of the fixed maturity portfolio by 3.0%, or $319 million. Approximately 95% of the fixed maturities were rated investment grade.

AFG recorded net unrealized losses of $301 million on its available for sale fixed maturity portfolio at March 31, 2025, with the largest concentrations in mortgage-backed securities, other asset-backed securities, banking, asset managers, and collateralized loan obligations. Management believes AFG will recover its cost basis in the securities with unrealized losses and has the ability and intent to hold them until they recover in value.

Results of Operations

AFG’s net earnings decreased from $242 million in the first three months of 2024 to $154 million in the same period of 2025, a 36% decline. This was primarily due to lower underwriting profit and lower net investment income from alternative investments, partially offset by higher investment income on fixed maturity investments.

Property and Casualty Insurance Segment

AFG’s property and casualty insurance segment contributed $246 million in pretax earnings in the first three months of 2025, down from $340 million in the same period of 2024. The decrease was driven by lower underwriting profit and lower investment income from alternative investments.

Gross written premiums decreased 2% in the first three months of 2025 compared to 2024, as strategic decisions to optimize long-term results, including non-renewal of certain underperforming accounts, tempered growth. Overall average renewal rates increased approximately 5% in the first quarter of 2025.

The Specialty property and casualty insurance operations generated an underwriting profit of $94 million in the first three months of 2025, down from $154 million in the same period of 2024. This decrease was due to lower underwriting profit in the Property and Transportation and Specialty Casualty sub-segments, partially offset by higher underwriting profit in Specialty Financial.

The overall loss and loss adjustment expense (LAE) ratio increased to 61.1% in the first three months of 2025 from 58.6% in the same period of 2024, primarily due to higher catastrophe losses. The underwriting expense ratio increased to 33.0% from 31.5% over the same period, reflecting the impact of lower earned premiums, changes in business mix, and higher costs for certain initiatives.

Net investment income in the property and casualty segment decreased 17% in the first three months of 2025 compared to 2024, driven by lower returns on alternative investments, partially offset by higher balances of invested assets and higher yields on fixed maturity investments.

Holding Company, Other and Unallocated

AFG’s net pretax loss outside of the property and casualty insurance segment (excluding realized gains and losses) was $52 million in the first three months of 2025, compared to $50 million in the same period of 2024. This increase was primarily due to lower net investment income and P&C fee income, partially offset by lower expenses.

Realized Gains and Losses on Securities

AFG recorded net realized gains on securities of $3 million in the first three months of 2025, down from $14 million in the same period of 2024. The decrease was primarily due to lower gains from changes in the fair value of equity securities.

Outlook

Management believes AFG’s strong financial position, current liquidity, and capital at its subsidiaries will provide the flexibility to address and respond to anticipated and unanticipated challenges. The company expects premium growth in many business units and continued strong underwriting results in the favorable property and casualty insurance market. The elevated interest rate environment is also expected to have a positive impact on investment income in 2025.

However, economic inflation, social inflation, supply chain disruption, and other economic conditions may impact premium levels, loss cost trends, and investment returns. Management remains focused on optimizing long-term results through strategic decisions, underwriting discipline, and effective capital management.

Analysis

AFG’s financial performance in the first three months of 2025 was mixed, with lower net earnings driven by decreased underwriting profit and investment income, partially offset by higher investment income on fixed maturity investments. The property and casualty insurance segment, which accounts for the majority of the company’s operations, saw a significant decline in underwriting profit, primarily in the Property and Transportation and Specialty Casualty sub-segments.

The decrease in underwriting profit was largely due to higher catastrophe losses and an increase in the overall loss and LAE ratio, which offset the benefits of premium growth and improved current accident year results in certain business lines. The rise in the underwriting expense ratio also weighed on profitability, as the impact of lower earned premiums, changes in business mix, and higher costs for various initiatives outweighed the benefits of scale.

AFG’s investment portfolio performance was mixed, with lower returns on alternative investments partially offset by higher investment income on fixed maturity securities, reflecting the impact of the elevated interest rate environment. The company’s strong balance sheet and liquidity position provide a solid foundation to navigate the current market conditions, but the potential for continued economic and inflationary pressures could pose challenges going forward.

Overall, AFG’s first-quarter results highlight the importance of underwriting discipline, effective risk management, and diversification in the property and casualty insurance industry. The company’s ability to adapt to changing market conditions and optimize its portfolio of specialized commercial products will be crucial in driving long-term profitability and shareholder value.