American Financial (AFG) - 2021 Q3 - Quarterly Report

Part I — Financial Information Item 1 — Financial Statements AFG's Q3 2021 unaudited consolidated financial statements reflect a transformed balance sheet post-annuity sale, with net earnings surging to $1.64 billion Consolidated Financial Statements AFG's consolidated financial statements reflect a transformed balance sheet post-annuity sale, with total assets decreasing and net earnings significantly increasing Consolidated Balance Sheet Highlights (in Millions) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $29,942 | $73,710 | | Total Cash and Investments | $16,387 | $13,494 | | Assets of Discontinued Annuity Operations | $0 | $47,885 | | Total Liabilities | $24,702 | $66,921 | | Liabilities of Discontinued Annuity Operations | $0 | $44,458 | | Total Equity | $5,240 | $6,789 | Consolidated Earnings Highlights (in Millions) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total Revenues | $4,794 | $4,056 | | Net Earnings from Continuing Operations | $726 | $47 | | Net Earnings (Loss) from Discontinued Operations | $914 | $(20) | | Net Earnings Attributable to Shareholders | $1,640 | $40 | Consolidated Cash Flow Highlights (in Millions) | Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,425 | $1,696 | | Net Cash from Investing Activities | $(103) | $(772) | | Net Cash from Financing Activities | $(1,299) | $509 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, the $3.57 billion annuity business sale, updated segments, and the high-quality investment portfolio - On May 28, 2021, AFG completed the sale of its Annuity business for proceeds of $3.57 billion, realizing a net gain of $656 million; results are now reported as discontinued operations[49] - Following the annuity sale, AFG's business is managed in two segments: Property and casualty insurance, and Other, with P&C further divided into sub-segments[62][63] - The company's investment portfolio is primarily composed of fixed maturity securities, with 88% rated as investment grade as of September 30, 2021[189] - For the nine months of 2021, the company recorded a net decrease in the provision for claims of prior years of $208 million, indicating favorable reserve development[149] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses AFG's financial condition and results, emphasizing the strategic annuity business sale, enhanced capital, and strong P&C performance Overview AFG's primary business is now specialized commercial P&C insurance post-annuity sale, with net earnings from continuing operations significantly increasing in Q3 and YTD 2021 - On May 28, 2021, AFG sold its annuity business for $3.57 billion, realizing an after-tax gain of $656 million; results are now reported as discontinued operations[161] Net Earnings from Continuing Operations (attributable to shareholders) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Q3 | $219M ($2.56/share) | $88M ($1.00/share) | | First Nine Months | $726M ($8.45/share) | $60M ($0.66/share) | Liquidity and Capital Resources AFG maintains strong liquidity, enhanced by the annuity sale proceeds, actively deploying capital through repurchases and dividends, while maintaining a 28.2% debt-to-total capital ratio Debt to Total Capital Ratio | Date | Ratio (including subordinated debt) | | :--- | :--- | | Sep 30, 2021 | 28.2% | | Dec 31, 2020 | 26.6% | - Following the annuity sale, AFG deployed significant capital, repurchasing 2.8 million shares for $318 million and declaring special dividends totaling $1.70 billion in the first nine months of 2021[179] - AFG has access to a $500 million revolving credit facility expiring in December 2025, which remained undrawn during 2020 and the first nine months of 2021[181] Investments AFG's investment portfolio includes $10.43 billion in high-quality fixed maturities, with 88% investment grade, and is sensitive to interest rate changes, with a 100 bps increase impacting fair value by $209 million - The investment portfolio at September 30, 2021, included $10.43 billion in available-for-sale fixed maturities and $29 million in trading fixed maturities[184] - Approximately 88% of the fixed maturity portfolio was rated investment grade, with municipal bonds representing 19% of the portfolio and being 99% investment grade[189][190] Interest Rate Sensitivity of Fixed Maturity Portfolio | Metric | Value | | :--- | :--- | | Fair Value of Portfolio | $10,456 million | | Pretax Impact of 100 bps Rate Increase | $(209) million (-2.0%) | Results of Operations This section analyzes AFG's operating results for Q3 and YTD 2021, introducing 'core net operating earnings' and detailing strong P&C segment performance driven by premium growth and underwriting profit - The company uses "core net operating earnings", a non-GAAP measure, to provide a clearer view of ongoing operational performance by excluding realized gains/losses, discontinued operations, and special charges[213][218] - The run-off operations of Neon (Lloyd's of London business exited in 2020) are excluded from core net operating earnings for the property and casualty segment[215] Results of Operations — Third Quarter For Q3 2021, AFG's core net operating earnings increased to $231 million, driven by a 63% rise in P&C core underwriting profit and an improved combined ratio of 89.0%, with gross written premiums growing 19% Q3 2021 vs. Q3 2020 Core Net Operating Earnings (in Millions) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Core Net Operating Earnings | $231 | $121 | | Diluted Core EPS | $2.71 | $1.38 | Q3 Property & Casualty Insurance Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Gross Written Premiums | $2,656 M | $2,223 M | | Core Underwriting Gain | $168 M | $103 M | | Combined Ratio (Specialty) | 89.0% | 92.1% | - Overall average renewal rates for P&C insurance increased approximately 11% in Q3 2021[247] Results of Operations — First Nine Months For the first nine months of 2021, core net operating earnings reached $642 million, driven by an 87% growth in P&C core underwriting profit and a 17% increase in gross written premiums, with discontinued annuity operations contributing $914 million YTD 2021 vs. YTD 2020 Core Net Operating Earnings (in Millions) | Metric | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | | Core Net Operating Earnings | $642 | $306 | | Diluted Core EPS | $7.48 | $3.40 | YTD Property & Casualty Insurance Performance | Metric | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | | Gross Written Premiums | $6,209 M | $5,288 M | | Core Underwriting Gain | $454 M | $243 M | | Combined Ratio (Specialty) | 88.4% | 93.2% | - The discontinued annuity operations contributed $914 million to net earnings for the first nine months of 2021, which includes a $656 million after-tax gain on the sale[214] Item 3 — Quantitative and Qualitative Disclosure about Market Risk No material changes to market risk disclosures from the 2020 Form 10-K, except for the fixed maturity portfolio reduction post-annuity sale, with a 100 bps rate increase impacting fair value by $209 million - The primary change in market risk exposure is the decline in the size of the fixed maturity portfolio due to the May 2021 sale of the annuity business[390] Interest Rate Sensitivity Analysis (as of Sep 30, 2021) | Metric | Value | | :--- | :--- | | Fair value of fixed maturity portfolio | $10,456 million | | Percentage impact of 100 bps rate increase | (2.0%) | | Pretax impact of 100 bps rate increase | $(209) million | Item 4 — Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of Q3 2021, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2021, the Co-CEOs and CFO concluded that the company's disclosure controls and procedures are effective[392] - There were no changes in internal control over financial reporting during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, these controls[392] Part II — Other Information Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds AFG repurchased 2,769,182 shares at $114.75 per share in the first nine months of 2021, with approximately 7.7 million shares remaining available for repurchase Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | 10,973 | $120.01 | | August | — | — | | September | 83,987 | $129.67 | - For the first nine months of 2021, a total of 2,769,182 shares were repurchased at an average price of $114.75 per share[395] Item 6 — Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications as required by Sarbanes-Oxley, and Inline XBRL documents - Exhibits filed include CEO and CFO certifications pursuant to sections 302(a) and 906 of the Sarbanes-Oxley Act[397] - The filing includes XBRL Instance Documents and various taxonomy extension documents for interactive data[397]