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. The company has ample liquidity, with $323 million in cash and investments held at the parent company level and access to a $450 million revolving credit facility.

AFG’s insurance subsidiaries also maintain sufficient liquidity and capital to meet commitments. Changes in statutory accounting rules, rating agency measures, or significant declines in investment portfolio values could create a need for additional capital, but management believes current capital levels are adequate.

Investments

AFG’s investment portfolio totaled $15.99 billion at March 31, 2025, consisting primarily of $10.57 billion in fixed maturity securities classified as available-for-sale and $531 million in equity securities. The portfolio also includes $2.33 billion in investments accounted for using the equity method, such as limited partnerships.

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 result in a 3.0% decrease, or $319 million, in the fair value of the fixed maturity portfolio. Approximately 95% of the fixed maturities were rated investment grade.

AFG recorded $122 million in gross unrealized gains and $301 million in gross unrealized losses on the available-for-sale fixed maturity portfolio at March 31, 2025. Management believes the company 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 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 due to lower underwriting profit and lower investment income from alternative investments, partially offset by higher investment income outside of alternative investments.

Gross written premiums for the property and casualty segment decreased 2% year-over-year, 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. The decrease was primarily due to lower underwriting profit in the Property and Transportation and Specialty Casualty sub-segments, partially offset by higher underwriting profit in the Specialty Financial sub-segment.

The overall loss and loss adjustment expense (LAE) ratio for the property and casualty segment was 61.1% in the first quarter of 2025, up from 58.6% in the prior year period. This increase was driven by higher current year catastrophe losses and less favorable prior year reserve development.

Commissions and other underwriting expenses for the property and casualty segment increased to 33.0% of net earned premiums in the first quarter of 2025, up from 31.5% in the prior year period, reflecting the impact of a change in business mix and higher costs for certain initiatives.

Net investment income for the property and casualty segment decreased 17% year-over-year, primarily due to lower returns on the alternative investments portfolio, partially offset by higher balances of invested assets and higher yields on fixed maturity investments.

The Holding Company, Other and Unallocated segment reported a pretax loss of $52 million in the first quarter of 2025, compared to a $50 million loss in the same period of 2024. This increase was driven by lower net investment income and P&C fee income, partially offset by lower expenses.

Outlook

Management believes AFG’s strong financial position and current liquidity and capital at its subsidiaries will provide the flexibility to effectively address and respond to anticipated and unanticipated challenges. The company’s insurance subsidiaries maintain capital at or in excess of the levels required by ratings agencies to maintain their current ratings.

Economic inflation, social inflation, supply chain disruption and other economic conditions may impact premium levels, loss cost trends and investment returns. However, 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.

Analysis

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

The decrease in underwriting profit was primarily due to higher catastrophe losses, less favorable prior year reserve development, and an increase in the underwriting expense ratio. While the company was able to achieve average renewal rate increases of around 5%, strategic decisions to optimize long-term results, including non-renewal of certain underperforming accounts, tempered premium growth.

The decline in net investment income was largely attributable to lower returns on AFG’s alternative investments portfolio, which includes partnerships and similar investments, as well as the company’s managed investment entities. This was partially offset by higher investment income on the company’s fixed maturity portfolio, driven by higher average balances and yields.

Despite the weaker financial performance in the first quarter, AFG maintains a strong financial position, with a conservative debt-to-capital ratio and ample liquidity at both the parent company and subsidiary levels. The company’s investment portfolio also remains high-quality, with the majority of fixed maturity securities rated investment grade.

Looking ahead, management’s outlook for the remainder of 2025 appears cautiously optimistic. The company expects premium growth in many of its business units and continued strong underwriting results, supported by the favorable property and casualty insurance market conditions. The elevated interest rate environment is also expected to provide a boost to investment income.

However, the company faces several potential headwinds, including the impact of economic inflation, social inflation, supply chain disruption, and other macroeconomic factors on premium levels, loss costs, and investment returns. Careful underwriting, risk management, and disciplined capital allocation will be crucial for AFG to navigate these challenges and maintain its strong financial position.

Overall, AFG’s first-quarter 2025 results highlight the cyclical nature of the property and casualty insurance industry and the importance of diversification and prudent risk management for the company’s long-term success. While the near-term financial performance was weaker, the company’s strong balance sheet and management’s proactive approach to addressing market conditions suggest it is well-positioned to weather any potential storms and capitalize on future growth opportunities.