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AFG’s earnings up in Q3 as firm reports highest P&C renewal pricing in 15 years

29th October 2020 - Author: Luke Gallin

American Financial Group, Inc. (AFG) has reported net earnings of $164 million for the third-quarter of 2020 and core net operating earnings of $217 million, compared with earnings of $147 million and $205 million, respectively, in the third-quarter of 2019.

AFG notes that the year-on-year increase in core net operating earnings is primarily attributable to higher underwriting profit in its Specialty Property and Casualty (P&C) insurance business, alongside elevated earnings from its $2.3 billion of alternative investments that are marked to market through core operating earnings.

However, this was somewhat offset by reduced other property and casualty net investment income.

Within AFG’s Specialty P&C operation, underwriting income increased to $104 million in Q3 2020, compared with $88 million in Q3 2019. The combined ratio for the period totalled 92.1% and includes 2.7 percentage points of catastrophe losses. In comparison, the combined ratio was 94% in Q3 2019 and included a 1.6 percentage point hit from catastrophe losses.

The underwriting result for Q3 2020 also benefited from 3.7 percentage points of favourable prior year reserve development, against 3.1 points in the same period in 2019, explains AFG.

The company adds that during the quarter, it did not record any additional reserve charges for COVID-19. Noting that in light of the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic, roughly 82% of its COVID-19 related reserves from the $95 million in charges recorded in H1 2020 are held as incurred but not reported (IBNR). These reserves represent AFG’s current best estimate of losses from the pandemic and related economic disruption, explains the firm.

Within Specialty P&C, gross written premiums fell by 5% and net written premiums by 8% in Q3 2020, primarily as a result of the run-off of Neon.

For the quarter, the average renewal pricing across AFG’s entire P&C Group was up by about 13%, and excluding its workers’ comp operation, renewal pricing was up by an even more significant 16%. The company notes that renewal pricing is the highest it has achieved in more than 15 years in each of its Specialty P&C sub-segments and in its Specialty P&C Group overall.

Carl H. Lindner III and S. Craig Lindner, AFG’s Co-Chief Executive Officers (CEOs), commented: “Results in our core operating businesses were excellent during the third quarter, producing an annualized core operating ROE in excess of 17%. We are especially pleased with the recovery in and performance of our alternative investments, which are marked to market through core earnings. Our liquidity and excess capital afford us the flexibility to effectively address and respond to the uncertainties introduced by COVID-19, and we believe our results demonstrate the value of our disciplined operating philosophy and portfolio of diversified specialty insurance businesses.

“AFG had approximately $1 billion of excess capital at September 30, 2020. This number included parent company cash of approximately $600 million. As illustrated in the table below, taking into account the $375 to $400 million in additional excess capital created by our recently announced annuity block reinsurance agreement and adjusting for the November redemption of our 6% Subordinated Debentures due 2055, AFG’s excess capital on a pro forma basis at September 30, 2020 would be approximately $1.2 billion. Our insurance subsidiaries are projected to have capital in excess of the levels expected by ratings agencies in order to maintain their current ratings.”

Commenting on the underwriting performance within its Specialty P&C operation, Carl Lindner III added: “I’m very pleased with the excellent underwriting results produced by our Specialty P&C Group during the quarter, especially with higher frequency of catastrophe losses across the industry and continued uncertainty from the COVID-19 pandemic. We achieved broad-based pricing increases in the quarter, with exceptionally strong renewal pricing in our longer-tailed liability businesses.

“Based on our results through the nine months of the year and our current expectations of the impact of COVID-19, we now expect P&C pretax core operating earnings, excluding the impact of alternative investments, in the range of $650 million to $690 million, an increase from our previous guidance of $615 million to $675 million. We continue to expect an overall 2020 calendar year combined ratio in the range of 92% to 94%. We expect net written premiums to be down 5% to 9% when compared to the $5.3 billion reported in 2019, due primarily to the run-off of Neon. Excluding the impact of Neon, net written premiums are estimated to be 1% lower to 3% higher than the premiums reported in 2019.”

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