Executive Summary / Key Takeaways

• Disciplined Specialization Drives Resilience: American Financial Group (AFGD) maintains a robust investment thesis rooted in its highly specialized commercial property and casualty (P&C) insurance segments and astute investment management, consistently delivering strong underwriting profits and shareholder returns despite market volatility.
• Strategic Underwriting Counteracts Social Inflation: AFGD's proactive underwriting, including 36 consecutive quarters of rate increases and strategic non-renewals in social inflation-exposed lines, is crucial for maintaining margin integrity and is expected to drive improved loss experience in 2025.
• Investment Portfolio Poised for Recovery: While alternative investment returns tempered recent results due to multifamily market dynamics, AFGD's short-duration fixed maturity portfolio benefits significantly from higher interest rates, and management anticipates a rebound to 10%+ long-term returns from alternatives as market conditions normalize.
• Commitment to Shareholder Returns: The company consistently generates substantial excess capital, enabling significant shareholder distributions through regular and special dividends, alongside opportunistic share repurchases, reinforcing its long-term value creation strategy.
• Operational Technology Enhances Future Performance: AFGD's ongoing investments in IT security, customer experience, and data analytics, while a near-term expense, are strategically designed to bolster operational efficiency, risk management, and competitive positioning for sustained future success.

A Legacy of Specialization and Strategic Acumen

American Financial Group, Inc. (AFGD), an Ohio-based holding company, has meticulously crafted a business model centered on specialized commercial property and casualty insurance and astute investment management. Its history reflects a dynamic approach to portfolio optimization, including past divestitures from railroad and manufacturing operations, and more recently, the strategic acquisition of Crop Risk Services (CRS) in 2024, which propelled the company to new records in premium production. This evolution underscores AFGD's entrepreneurial culture and disciplined operating philosophy, which are foundational to its current market standing.

AFGD's overarching strategy is to identify and dominate niche commercial markets, leveraging deep underwriting expertise and a flexible capital allocation approach. The company's recent reclassification of its internal reinsurance facility's results, integrating them directly into the ceding businesses, exemplifies its commitment to enhancing financial reporting and providing a clearer view of underlying operational performance. This strategic clarity is vital in an industry facing broad trends such as elevated interest rates, persistent social inflation, and evolving real estate market dynamics.

Technological Edge: Powering Precision and Performance

AFGD's competitive differentiation is not solely in its product offerings but also in its strategic application of technology to enhance operational efficiency and risk management. While not a developer of a singular, patentable "core technology" in the traditional sense, AFGD is making significant investments in software and IT initiatives across critical areas: information security, customer experience, and data analytics. These investments, though contributing to a modest increase in the expense ratio in the near term, are integral to its long-term strategy.

The strategic intent behind these technological enhancements is to fortify AFGD's competitive moat. Improved data analytics enable more precise underwriting, allowing the company to better assess and price risks, particularly in complex specialty lines. Enhanced customer experience platforms aim to deepen client relationships and streamline policy management, fostering loyalty and retention. Robust IT security measures protect sensitive data, maintaining trust and operational continuity. These initiatives collectively contribute to better risk selection, operational cost control, and ultimately, superior profitability, providing a tangible benefit over competitors who may lag in these critical operational technology domains. The company views these as essential for sustaining its "great results" for years to come.

Disciplined Underwriting: The Core P&C Engine

AFGD's Property and Casualty (P&C) insurance operations are the bedrock of its earnings power. In the second quarter of 2025, the P&C segment generated net earned premiums of $1,647 million, a 4% increase year-over-year, contributing to a half-year total of $3,227 million, up 3% from the prior year. Despite a 25% decrease in underwriting profit to $113 million in Q2 2025 and a 32% decrease to $207 million for the first six months, the combined ratio remained strong at 93.1% for Q2 and 93.6% for H1. This performance, while reflecting some headwinds, demonstrates AFGD's continued underwriting discipline.

The company has achieved overall renewal rate increases for 36 consecutive quarters, with average pricing up approximately 6% in Q2 2025 (7% excluding workers' compensation). This consistent pricing power is critical in outpacing prospective loss ratio trends. Catastrophe losses impacted Q2 2025 by 2.3 points on the combined ratio ($38 million), consistent with the prior year, but H1 2025 saw higher cat losses of $110 million (3.4 points), primarily from California wildfires and other storms.

Specialty Segment Performance

Property & Transportation: This segment saw gross written premiums (GWP) surge 15% in Q2 2025 to $1,247 million, largely due to earlier crop acreage reporting. Excluding crop, GWP grew 6%, driven by increased exposures and a favorable rate environment in transportation. Underwriting profit, however, decreased 33% to $27 million in Q2, reflecting exceptionally strong crop results in the prior year. Commercial auto liability rates were up approximately 15% in Q2, underscoring AFGD's focus on rate adequacy in this challenging line. Management remains optimistic about the 2025 crop year, noting acceptable commodity futures pricing and slightly better corn/soybean conditions.

Specialty Casualty: GWP increased 4% to $1,062 million in Q2 2025, fueled by growth in M&A liability and other businesses, but tempered by a challenging Directors & Officers (D&O) market and strategic non-renewals in social services (housing and daycare accounts). Underwriting profit declined 43% to $49 million in Q2, primarily due to lower profitability in excess and surplus (E&S) and social services. Renewal rates (excluding workers' comp) were up 8%, with mid-teens increases in social inflation-exposed businesses. Workers' compensation, representing about 13.5% of overall GWP, saw overall pricing down 1% in Q2, but California approved an 8.7% rate increase effective September 1, 2025—the first hike in a decade—signaling a potential market firming.

Specialty Financial: This segment delivered excellent underwriting margins, with a combined ratio of 86.1% in Q2 2025 (3.6 points better than Q2 2024) and 86.5% for H1 2025. GWP grew 15% to $344 million in Q2, primarily from the financial institutions business. The lender-placed property business, a significant contributor with approximately $700 million in GWP last year, is highly profitable. The industry-wide shift from insuring based on unpaid mortgage balance to replacement cost value is a beneficial trend for this business, helping to offset low single-digit loss ratio trends.

Astute Investment Management: Fueling Returns

AFGD's investment portfolio, totaling approximately $16 billion, is a critical component of its earnings. The company intentionally maintains a short duration for its P&C fixed maturity portfolio (2.8 years at June 30, 2025), positioning it to benefit from higher interest rates. Net investment income (excluding alternative investments) for P&C operations increased 10% year-over-year in Q2 2025, as reinvestment rates of approximately 5.75% (and over 6% in Q1 2025) compare favorably to the 5.2% yield earned on its existing fixed maturity portfolio.

However, returns from the alternative investment portfolio tempered overall results. The annualized return on alternatives in the P&C portfolio was approximately 1.2% for Q2 2025 (down from 5.1% in Q2 2024) and 1.5% for H1 2025 (down from 7.0% in H1 2024). This decline was primarily attributed to reduced fair values in some multifamily investments due to a surge in new apartment supply. Management, however, remains optimistic about the long-term prospects for alternative investments, expecting annual returns averaging 10% or better. They anticipate current multifamily inventory to be absorbed over the next 12 months, with plummeting new construction starts (down 20% year-over-year, nearly 50% from 2022 peaks) driving higher rental and occupancy rates in the coming years.

Capital Allocation and Shareholder Value Creation

AFGD's operations consistently generate significant excess capital, which management strategically deploys to enhance shareholder value. In Q2 2025, over $100 million was returned to shareholders through regular dividends and $39 million in share repurchases. For the first half of 2025, the company repurchased 782,134 shares for $97 million and paid a special cash dividend of $2.00 per share ($167 million) in Q1. The parent company maintains a strong liquidity position, holding approximately $349 million in cash and investments at June 30, 2025, complemented by a $450 million revolving credit facility with no current borrowings. This robust capital position provides flexibility for opportunistic acquisitions, further special dividends, or share repurchases.

Competitive Edge in a Dynamic Market

AFGD operates in a competitive landscape against larger, more diversified insurers such as Progressive (PGR), Travelers (TRV), Chubb (CB), and Allstate (ALL). AFGD's competitive advantage lies in its deep specialization within niche commercial P&C markets, where its underwriting expertise and relationship-based distribution channels foster strong customer loyalty. For instance, in the lender-placed property business, AFGD benefits from a smaller pool of competitors and capitalizes on market disruptions. In commercial auto, AFGD consistently outperforms the industry, with management noting an 8-point lead in performance, and sees opportunities from potential exits by managing general agents (MGAs).

While competitors like Progressive and Allstate leverage digital agility and broad consumer reach, AFGD's technological investments in data analytics and customer experience aim to enhance its efficiency and service delivery within its specialized segments. Against global players like Chubb, AFGD's focused domestic expertise allows for deeper market penetration and tailored solutions, potentially leading to more stable profitability in its core U.S. markets. The company's disciplined approach to pricing and willingness to non-renew underperforming accounts, even if it tempers short-term growth, differentiates it from competitors who may prioritize top-line expansion at the expense of profitability.

Outlook and Risks

AFGD's 2025 business plan, initially set in Q4 2024, projected core net operating earnings of approximately $10.50 per share, a 5% growth in net written premiums, a combined ratio of around 92.5%, and an 8% return on alternative investments. This outlook included an estimated $60 million to $70 million in catastrophe losses from the Southern California wildfires. While the Q1 2025 gain from the Charleston Harbor Resort & Marina sale ($1.20 per share after-tax) is incremental, Q1 and Q2 alternative investment returns were below expectations, and ongoing economic uncertainty suggests the original $10.50 EPS target may face pressure. Premium growth for the full year 2025 is still expected to be positive, though likely lower than the initial 5% projection due to strategic underwriting actions and competitive pressures.

Key risks include the ongoing impact of social inflation, particularly in casualty lines, which necessitates continuous adjustments to loss picks and pricing. The volatility of alternative investment returns, especially in real estate, remains a factor, though management's long-term outlook for 10%+ returns is optimistic. Secondary risks from an economic slowdown or tariffs could affect certain businesses, but AFGD believes its diversified portfolio and mitigation strategies will temper these impacts. Management's consistent focus on reserve adequacy, prudent growth, and strategic investment positioning remains central to its ability to navigate these challenges.

Conclusion

American Financial Group stands as a compelling investment opportunity, characterized by its unwavering commitment to specialized underwriting and disciplined investment management. The company's strategic focus on niche commercial P&C markets, coupled with proactive responses to industry challenges like social inflation and market competition, underpins its resilient profitability. While recent alternative investment performance has presented headwinds, AFGD's short-duration fixed income portfolio is a clear beneficiary of higher interest rates, and its long-term outlook for alternatives remains robust.

AFGD's consistent generation of excess capital and its dedication to returning value to shareholders through dividends and buybacks further solidify its investment appeal. The company's ongoing investments in operational technology, while not a flashy "core tech" in the traditional sense, are strategically vital for enhancing efficiency, risk management, and customer experience, ensuring its competitive standing. This blend of specialized expertise, financial prudence, and a clear roadmap for value creation positions AFGD favorably to continue delivering strong results and long-term shareholder value in a dynamic and often unpredictable market.