Business Overview and History
American Financial Group, Inc. (AFG) is a diversified insurance holding company based in Cincinnati, Ohio. Through its subsidiaries, the company operates in the property and casualty insurance market, focusing on specialized commercial products for businesses. With a history spanning over 150 years, AFG has established itself as a leading player in the industry, known for its entrepreneurial culture, disciplined underwriting practices, and strategic investment management.
American Financial Group was founded in 1959 as a small insurance agency in Cincinnati, Ohio. Over the past 60+ years, the company has undergone significant transformation and expansion, growing into a diversified insurance holding company. In the 1960s and 1970s, AFG focused on acquiring regional property and casualty insurance companies, building its presence across the United States. This acquisition strategy continued throughout the 1980s and 1990s as AFG sought to expand its specialized commercial insurance offerings.
One of the company's major challenges came in the early 2000s when it faced significant asbestos and environmental-related liabilities from its former railroad and manufacturing operations. AFG was diligent in addressing these legacy issues, increasing reserves and working to resolve outstanding claims. This required significant attention and resources over several years.
Despite these challenges, AFG continued to grow and diversify its specialty property and casualty insurance business. In the 2010s, the company made strategic acquisitions to expand its crop insurance, financial institutions, and other specialty lines. This allowed AFG to become a top-tier specialty insurance provider, known for its entrepreneurial culture and disciplined underwriting approach.
Today, AFG operates 36 insurance businesses that make up the Great American Insurance Group. The company has developed a reputation for innovation, maintaining a diversified portfolio of specialized commercial insurance products. AFG has weathered various market cycles and industry challenges over its long history, demonstrating the resiliency of its business model and the expertise of its management team.
One of the key factors behind AFG's success has been its decentralized business model, which empowers its 36 insurance subsidiaries to make autonomous decisions on underwriting, claims, and policy servicing. This entrepreneurial approach has allowed the company to be agile and responsive to changing market conditions, while capitalizing on the efficiencies of centralized investment and administrative support functions.
AFG's property and casualty insurance operations are organized into three main sub-segments: Property and Transportation, Specialty Casualty, and Specialty Financial. The Property and Transportation group focuses on coverages such as commercial auto, inland and ocean marine, and agricultural-related products. The Specialty Casualty segment offers excess and surplus liability, executive and professional liability, and workers' compensation insurance, among others. The Specialty Financial division provides risk management programs for lending and leasing institutions, as well as fidelity and surety products.
Financial Performance and Ratios
Over the years, AFG has demonstrated a strong track record of financial performance, consistently generating solid underwriting profits and robust investment returns. In 2024, the company reported net earnings of $887 million, or $10.57 per diluted share, compared to $852 million, or $10.05 per diluted share, in 2023. The company's core net operating earnings, which exclude realized gains and losses on securities, were $10.75 per share in 2024, up from $10.56 per share in 2023.
AFG's financial ratios further underscore its stability and profitability. The company's debt-to-total capital ratio, a measure of financial leverage, stood at 24.1% as of December 31, 2024, well within its target range of 30% or below. The company's return on equity (ROE), excluding accumulated other comprehensive income (AOCI), was 19.3% in 2024, reflecting its ability to generate strong shareholder returns.
For the fiscal year 2024, AFG reported annual revenue of $8.32 billion, annual net income of $887 million, annual operating cash flow of $1.15 billion, and annual free cash flow of $1.15 billion. In the most recent quarter (Q4 2024), the company reported revenue of $2.15 billion and net income of $255 million. Compared to Q4 2023, revenue increased 7.2% while net income decreased 3.0%, primarily due to higher net realized losses on securities and lower underwriting profit.
AFG's Property and Casualty Insurance segment, which is the core of the company's business, generated $7.04 billion in net earned premiums in 2024, an 8% increase from 2023. The segment reported an underwriting profit of $620 million, with a combined ratio of 91.2%, compared to $631 million and a combined ratio of 90.4% in 2023. This solid underwriting performance, consistently outperforming the industry average, demonstrates AFG's specialized expertise and disciplined approach.
The Property and Transportation sub-segment contributed 39% of AFG's net written premiums in 2024, with gross written premiums of $4.74 billion, a 14% increase from 2023. The Specialty Casualty sub-segment accounted for 43% of net written premiums, with gross written premiums of $4.54 billion, up 4% year-over-year. The Specialty Financial sub-segment contributed 15% of net written premiums, with gross written premiums of $1.25 billion, a 10% increase from 2023.
AFG's Other segment, which includes the holding company's operations and managed investment entities, reported a pre-tax loss of $204 million in 2024, compared to a loss of $191 million in 2023. This segment generated $380 million in investment income in 2024, down from $421 million in 2023, reflecting changes in the fair value of collateralized loan obligation (CLO) assets and liabilities.
Investments and Capital Management
One of the hallmarks of AFG's success has been its in-house team of investment professionals, who have a proven track record of generating strong investment returns. As of December 31, 2024, the company's $15.9 billion investment portfolio was diversified across fixed maturities, equity securities, and alternative investments. The portfolio's overall yield was 5.0% in 2024, up from 4.7% in 2023, driven by higher reinvestment rates and improved returns on alternative investments.
AFG's capital management strategy is focused on maintaining a strong financial position while also returning capital to shareholders. In 2024, the company returned $791 million to shareholders, including $545 million (or $6.50 per share) in special dividends and $246 million in regular common stock dividends. The company has a track record of consistently increasing its quarterly dividend, with the latest increase to an annual rate of $3.20 per share beginning in October 2024.
Liquidity
American Financial Group maintains a strong liquidity position to support its operations and meet its financial obligations. The company's liquidity is derived from various sources, including cash flow from operations, investment income, and access to credit facilities. As of December 31, 2024, AFG reported cash and investments totaling $15.85 billion, providing a solid foundation for its ongoing operations and potential investment opportunities.
The company's debt-to-equity ratio, including subordinated debt, was 0.331 as of December 31, 2024. Excluding subordinated debt, the ratio was 0.133, indicating a conservative capital structure. AFG maintains a $450 million revolving credit facility, which was undrawn as of the most recent quarter, further enhancing its financial flexibility.
Challenges and Risks
Like any insurance company, AFG faces a range of risks and challenges that could impact its financial performance and growth. One significant risk is exposure to catastrophic events, such as hurricanes, wildfires, and other natural disasters. The company mitigates this risk through individual risk selection, minimizing coastal and fault-line exposures, and the purchase of reinsurance coverage.
Another challenge for AFG is the ongoing issue of social inflation, which has led to higher claim severity and frequency in certain liability-focused business lines, such as excess liability and commercial auto. The company has been proactive in addressing these challenges, implementing underwriting actions, including rate increases and adjustments to policy terms and conditions, to maintain profitability in these lines.
Pandemic-related disruptions have also posed challenges for the industry, and AFG has not been immune. The company estimates that losses related to the 2024 California wildfires will be in the range of $60 million to $70 million, which is reflected in its 2025 business plan assumptions.
Outlook and Guidance
Looking ahead, AFG's management remains cautiously optimistic about the company's prospects. For 2025, the company is guiding for core net operating earnings per share of approximately $10.50 and a core operating return on equity (excluding AOCI) of around 18%. This guidance assumes a combined ratio of approximately 92.5%, a reinvestment rate of 5.75% on its fixed maturity portfolio, and an 8% annual return on its $2.7 billion alternative investments portfolio.
The company's 2025 business plan also anticipates 5% growth in net written premiums from the $7.1 billion reported in 2024, driven by continued favorable market conditions and the company's ability to identify and capitalize on profitable growth opportunities in its specialty insurance segments.
Human Capital and Geographic Presence
As of December 31, 2024, AFG had approximately 8,700 employees, none of whom were covered by collective bargaining agreements. The company reported a voluntary turnover rate of 7.1% in 2024, with an average employee tenure of nearly 10 years. The average tenure of AFG's approximately 200 most senior leaders is almost 20 years, indicating a stable and experienced leadership team.
While AFG primarily operates in the United States, approximately 2% of its direct written premiums in 2024 were derived from non-U.S. based insurers, demonstrating a focused geographic strategy with some international exposure.
Conclusion
American Financial Group, Inc. has established itself as a leading player in the specialty property and casualty insurance market, thanks to its diversified business model, disciplined underwriting approach, and strategic investment management. The company's strong financial performance, evidenced by its solid revenue growth, consistent profitability, and robust capital position, underscores its resilience and ability to navigate challenging market conditions.
AFG's decentralized operating model, which allows each of its businesses autonomy in underwriting, claims, and policy servicing, promotes agility and innovation. This approach, combined with the company's focus on niche markets where it holds strong competitive positions, has enabled AFG to consistently outperform industry averages in terms of underwriting profitability.
While the company faces ongoing challenges, such as social inflation, catastrophe risk, and evolving market conditions, its strong financial position, seasoned management team, and entrepreneurial culture position it well to address these issues. The company's consistent track record of returning capital to shareholders through regular and special dividends further demonstrates its commitment to creating long-term value for investors.
As AFG looks to 2025 and beyond, its guidance reflects a balanced approach to growth and profitability. The anticipated 5% increase in net written premiums and targeted 18% core operating return on equity indicate management's confidence in the company's ability to capitalize on market opportunities while maintaining disciplined underwriting practices.
In summary, American Financial Group's diversified portfolio of specialty insurance businesses, strong financial performance, and proven ability to navigate industry challenges position it as a resilient and attractive player in the property and casualty insurance market. As the company continues to leverage its strengths and adapt to evolving market conditions, it remains well-positioned to deliver value to its policyholders, shareholders, and employees in the years to come.