American Financial (AFG) - 2022 Q1 - Quarterly Report

Part I — Financial Information Financial Statements This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2022 Consolidated Balance Sheet Total assets slightly decreased to $28.76 billion, while shareholders' equity declined due to comprehensive income losses Consolidated Balance Sheet Summary (in Millions) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $28,762 | $28,931 | | Total cash and investments | $15,601 | $15,745 | | Goodwill | $246 | $246 | | Total Liabilities | $23,927 | $23,919 | | Unpaid losses and loss adjustment expenses | $10,986 | $11,074 | | Long-term debt | $1,917 | $1,964 | | Total Shareholders' Equity | $4,835 | $5,012 | | Retained earnings | $3,541 | $3,478 | | Accumulated other comprehensive income (loss) | $(131) | $119 | Consolidated Statement of Earnings Net earnings from continuing operations increased to $290 million, though total net earnings fell due to prior-year discontinued operations Q1 Earnings Summary (in Millions, Except Per Share Data) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Total Revenues | $1,588 | $1,509 | | P&C Insurance Net Earned Premiums | $1,302 | $1,173 | | Net Investment Income | $230 | $188 | | Realized Gains (Losses) on Securities | $(15) | $77 | | Total Costs and Expenses | $1,227 | $1,174 | | Net Earnings from Continuing Operations | $290 | $267 | | Net Earnings from Discontinued Operations | $— | $152 | | Net Earnings | $290 | $419 | | Total Diluted EPS | $3.40 | $4.84 | Consolidated Statement of Comprehensive Income Comprehensive income significantly decreased to $40 million, driven by a $250 million other comprehensive loss from unrealized security losses Comprehensive Income Summary (in Millions) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Net Earnings | $290 | $419 | | Other Comprehensive Loss, net of tax | $(250) | $(306) | | Total net unrealized losses on securities | $(245) | $(292) | | Comprehensive Income | $40 | $113 | Consolidated Statement of Changes in Equity Shareholders' equity decreased to $4.84 billion, impacted by comprehensive losses and dividends that outpaced net earnings - Dividends paid in Q1 2022 totaled $2.56 per share, amounting to $217 million[15] - Total shareholders' equity stood at $4.835 billion as of March 31, 2022, down from $5.012 billion at December 31, 2021[15] Consolidated Statement of Cash Flows Net cash from operations was $503 million, but a net decrease in cash of $950 million resulted from investing and financing activities Cash Flow Summary (in Millions) | Activity | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $503 | $627 | | Net cash used in investing activities | $(1,111) | $(938) | | Net cash used in financing activities | $(342) | $(172) | | Net Change in Cash and Cash Equivalents | $(950) | $(483) | Notes to Consolidated Financial Statements The notes detail key accounting policies, transactions, segment data, and subsequent events affecting the financial statements - Discontinued Operations: The sale of the Annuity business was completed on May 31, 2021, for $3.57 billion, realizing a net gain of $656 million in 2021[45][47] - Acquisition: AFG acquired Verikai, Inc, a machine learning and AI company, for $120 million in cash in December 2021 to support its medical stop loss business[53] - Segments: Following the annuity sale, AFG operates in two segments: Property and casualty insurance, and Other[56] - Subsequent Events: In May 2022, AFG redeemed $375 million in Senior Notes and declared a special cash dividend of $8.00 per share[126] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial results, highlighting strong underwriting performance, capital deployment, and segment operations - Net earnings from continuing operations for Q1 2022 were $290 million ($3.40 per diluted share), up from $267 million ($3.08 per diluted share) in Q1 2021[395] - Core net operating earnings, a non-GAAP measure, increased to $303 million in Q1 2022 from $206 million in Q1 2021[443][444] - Management expects continued premium growth and strong underwriting results, with rising interest rates improving investment returns[398] Liquidity and Capital Resources The company maintains a strong liquidity position and actively deploys excess capital through dividends and share repurchases - In Q1 2022, AFG repurchased $5 million of its Common Stock and paid a special cash dividend of $2.00 per share ($170 million total)[411] - Subsequent to the quarter, AFG announced the redemption of its 3.50% Senior Notes and declared another special dividend of $8.00 per share (approx. $680 million)[412] Debt to Total Capital Ratio | Metric | March 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Ratio of debt to total capital (incl. subordinated) | 28.2% | 29.0% | | Ratio of debt to total capital (excl. subordinated) | 18.4% | 19.2% | Investments The investment portfolio experienced unrealized losses due to rising interest rates but remains high quality with a focus on fixed maturities - The fixed maturity portfolio is sensitive to interest rate changes; a 100 basis point increase in rates would decrease its fair value by an estimated $271 million (2.5%)[162][163] Fixed Maturities Unrealized Gains/Losses (in Millions) | Status | Fair Value | Gross Unrealized Gain/(Loss) | | :--- | :--- | :--- | | Securities With Unrealized Gains | $3,293 | $82 | | Securities With Unrealized Losses | $6,957 | $(220) | Results of Operations P&C insurance segment earnings grew 47% due to strong underwriting profit and higher investment income, improving the combined ratio - Overall P&C renewal rates increased approximately 5% in Q1 2022, or 8% excluding workers' compensation[202] - The P&C segment recorded net favorable prior year reserve development of $88 million, an increase from $59 million in the prior-year quarter[215][219] P&C Insurance Segment Performance (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Written Premiums | $1,368M | $1,205M | 14% | | Net Earned Premiums | $1,302M | $1,173M | 11% | | Underwriting Gain | $207M | $134M | 54% | | Net Investment Income | $223M | $159M | 40% | | Earnings Before Income Taxes | $422M | $288M | 47% | P&C Combined Ratio | Ratio Component | Q1 2022 | Q1 2021 | Change | | :--- | :--- | :--- | :--- | | Loss and LAE ratio | 53.2% | 56.9% | (3.7 pts) | | Underwriting expense ratio | 30.9% | 31.7% | (0.8 pts) | | Combined ratio | 84.1% | 88.6% | (4.5 pts) | Quantitative and Qualitative Disclosure about Market Risk The company's primary market risk is interest rate risk, with no material changes to disclosures from the 2021 Form 10-K Interest Rate Sensitivity of Fixed Maturity Portfolio (as of March 31, 2022) | Metric | Value | | :--- | :--- | | Fair value of fixed maturity portfolio | $10,839 million | | Percentage impact of 100 bps rate increase | (2.5%) | | Pretax impact of 100 bps rate increase | $(271) million | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022 - Management concluded that disclosure controls and procedures are effective[250] - A new general ledger system was implemented in Q1 2022 to enhance efficiency, with no material impact on internal controls[251] Part II — Other Information Unregistered Sales of Equity Securities and Use of Proceeds AFG repurchased 35,201 shares of its Common Stock for approximately $5 million during the first quarter of 2022 Q1 2022 Share Repurchases | Month | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | January | — | $— | | February | 30,000 | $130.37 | | March | 5,201 | $134.99 | | Total | 35,201 | $131.05 | Exhibits This section lists all exhibits filed with the Form 10-Q, including required CEO and CFO certifications - Exhibits filed include certifications from the Co-Chief Executive Officers and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002[256]