American Financial (US:AFG)2022-08-05 17:40Part I — Financial Information Item 1 — Financial Statements Presents unaudited consolidated financial statements for Q2 2022, showing decreased assets and net earnings due to the annuity business sale Consolidated Balance Sheet Total assets decreased to $28.08 billion, while shareholders' equity declined to $4.07 billion by June 30, 2022 Consolidated Balance Sheet Highlights (in Millions) | Balance Sheet Item | June 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $28,084 | $28,931 | ($847) | | Total Cash and Investments | $14,268 | $15,745 | ($1,477) | | Total Liabilities | $24,017 | $23,919 | $98 | | Long-term Debt | $1,542 | $1,964 | ($422) | | Total Shareholders' Equity | $4,067 | $5,012 | ($945) | | Retained Earnings | $2,979 | $3,478 | ($499) | | Accumulated Other Comprehensive Income (Loss) | ($348) | $119 | ($467) | Consolidated Statement of Earnings Net earnings significantly decreased in Q2 and H1 2022, primarily due to discontinued operations and realized investment losses Statement of Earnings Summary (in Millions, Except Per Share Data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,539 | $1,531 | $3,127 | $3,040 | | Net Earnings from Continuing Operations | $167 | $240 | $457 | $507 | | Net Earnings from Discontinued Operations | $— | $762 | $— | $914 | | Net Earnings | $167 | $1,002 | $457 | $1,421 | | Diluted EPS (Continuing Operations) | $1.96 | $2.81 | $5.36 | $5.90 | | Total Diluted EPS | $1.96 | $11.70 | $5.36 | $16.51 | Consolidated Statement of Comprehensive Income The company reported a comprehensive loss in Q2 and H1 2022, driven by significant unrealized losses on securities Comprehensive Income (Loss) Summary (in Millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $167 | $1,002 | $457 | $1,421 | | Other Comprehensive Loss, Net of Tax | ($217) | ($777) | ($467) | ($1,083) | | Comprehensive Income (Loss) | ($50) | $225 | ($10) | $338 | Consolidated Statement of Changes in Equity Shareholders' equity decreased to $4.07 billion by June 30, 2022, due to dividends and comprehensive loss - For the six months ended June 30, 2022, total shareholders' equity decreased by $945 million. Key drivers included net earnings of $457 million, offset by dividends of $945 million and an other comprehensive loss of $467 million18 Consolidated Statement of Cash Flows Net cash from operations decreased, while investing and financing activities used cash, leading to a $1.16 billion cash reduction Cash Flow Summary (in Millions) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $514 | $970 | | Net Cash from (used in) Investing Activities | ($501) | $661 | | Net Cash used in Financing Activities | ($1,177) | ($1,076) | | Net Change in Cash | ($1,164) | $555 | Notes to Consolidated Financial Statements Provides detailed explanations of accounting policies, the annuity business sale, segment reporting, and financial item specifics Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, focusing on P&C operations post-annuity sale, liquidity, and investment impacts - AFG's core business is now primarily property and casualty insurance, focusing on specialized commercial products, following the sale of its annuity operations in May 2021155 - Net earnings from continuing operations for Q2 2022 were $167 million, down from $240 million in Q2 2021. The decrease was driven by net realized losses on securities, which offset higher underwriting profit155 - For the first six months of 2022, net earnings from continuing operations were $457 million, down from $507 million in the prior year period, also due to realized investment losses offsetting improved underwriting profit and higher net investment income156 Overview Operations focus on P&C insurance; net earnings decreased due to annuity sale and realized losses, but premium growth is expected - Management expects continued premium growth and strong underwriting results in the favorable P&C market. The deployment of cash in a rising interest rate environment is expected to improve investment returns in 2022 compared to 2021159 Liquidity and Capital Resources AFG maintains strong liquidity with a 26.3% debt-to-capital ratio, deploying capital from the annuity sale Debt to Total Capital Ratio | Ratio | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Including subordinated debt | 26.3% | 29.0% | | Excluding subordinated debt | 15.0% | 19.2% | - In the first six months of 2022, AFG retired $425 million in principal of its 3.50% Senior Notes for $433 million cash, resulting in an $11 million pretax loss172 - The company paid special cash dividends totaling $850 million in the first half of 2022 and repurchased $5 million of its common stock172 Investments AFG's $9.79 billion investment portfolio is high quality but sensitive to interest rates, with unrealized losses - At June 30, 2022, 91% of the fixed maturities portfolio was rated investment grade. Municipal bonds represented 14% of the portfolio and were over 99% investment grade181182 Interest Rate Sensitivity of Fixed Maturity Portfolio (June 30, 2022) | Metric | Value | | :--- | :--- | | Fair Value of Portfolio | $9,822 million | | Pretax Impact of 100 bps Rate Increase | ($295) million | | Percentage Impact | (3.0%) | Results of Operations — Second Quarter Q2 2022 core net operating earnings increased, but GAAP net earnings from continuing operations decreased due to realized losses Core Net Operating Earnings Reconciliation - Q2 (in Millions) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Core Net Operating Earnings | $243 | $205 | | Realized (losses) gains on securities, net of tax | ($73) | $34 | | Loss on retirement of debt, net of tax | ($7) | $— | | Other non-core items, net of tax | $4 | $1 | | Net Earnings from Continuing Operations | $167 | $240 | Results of Operations — First Six Months H1 2022 core net operating earnings increased significantly, but GAAP net earnings from continuing operations decreased Core Net Operating Earnings Reconciliation - H1 (in Millions) | Metric | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Core Net Operating Earnings | $546 | $411 | | Realized (losses) gains on securities, net of tax | ($85) | $95 | | Loss on retirement of debt, net of tax | ($8) | $— | | Other non-core items, net of tax | $4 | $1 | | Net Earnings from Continuing Operations | $457 | $507 | - The P&C segment's core underwriting gain increased 41% to $403 million for the first half of 2022, up from $286 million in H1 2021300 Item 3 — Quantitative and Qualitative Disclosure about Market Risk No material changes to market risk disclosures; fixed maturity portfolio sensitive to interest rates, with a 3.0% impact from 100 bps shift Interest Rate Sensitivity Analysis (as of June 30, 2022) | Metric | Value | | :--- | :--- | | Fair value of fixed maturity portfolio | $9,822 million | | Percentage impact of 100 bps rate increase | (3.0%) | | Pretax impact on fair value | ($295) million | Item 4 — Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls - Management concluded that disclosure controls and procedures are effective as of the end of the reporting period367 - A new general ledger, accounting, and financial reporting system was implemented in Q1 2022, which is not expected to materially affect internal controls368 Part II — Other Information Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds AFG repurchased 35,201 shares in Q1 2022, with 7.66 million shares remaining available for repurchase Issuer Purchases of Equity Securities (2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | First Quarter | 35,201 | $131.05 | | Second Quarter | — | $— | Item 6 — Exhibits Lists exhibits filed with Form 10-Q, including certifications and Interactive Data Files (XBRL)