American Financial Group Navigates Stormy Waters in Q1: Earnings Miss, but Strategy Holds Steady

American Financial Group (AFG) kicked off 2025 with a mixed performance, posting Q1 net earnings of $154 million, or $1.84 per share—well below the $2.08 per share consensus. While the results highlighted headwinds from elevated catastrophe losses and softer investment returns, management framed the quarter as a temporary setback within a broader strategy of disciplined underwriting and capital stewardship.

The decline in profitability was most pronounced in underwriting. Core net operating earnings fell to $1.81 per share from $2.76 in the prior year, driven by a 13.3% annualized return on equity (ROE), down sharply from 21.2% in Q1 2024.

Insurance Segment Challenges
The Specialty Property and Casualty (P&C) division, AFG’s core business, faced a triple threat: rising catastrophe costs, weaker reserve benefits, and competitive pricing pressures. The combined ratio worsened to 94.0% from 90.1%, with California wildfires contributing 4.5 points to the ratio—more than double the prior-year impact.

• Property and Transportation Group: Underwriting profit collapsed to $37 million from $60 million, as crop insurance margins shriveled and catastrophe losses mounted.
• Specialty Casualty Group: Profit fell to $20 million from $61 million, with workers’ compensation and executive liability lines underperforming.
• Specialty Financial Group: A bright spot, with underwriting profit rising 12% to $37 million, fueled by 16% premium growth in financial institutions business.

The company’s pricing discipline showed in renewal rates: excluding workers’ comp, premiums rose 7%, a sign of market resilience in non-disrupted segments.

Investment Struggles and Strategic Shifts
Investment income took a hit as alternative investments—like private equity—suffered valuation declines, dragging total P&C net investment income down 17%. Fixed-income gains, bolstered by higher interest rates, couldn’t offset the pain. Management remains bullish on long-term alternative returns, targeting 10% annually.

A silver lining emerged in the planned sale of the Charleston Harbor Resort & Marina. The $100 million after-tax gain, expected in Q3, could add $1.20 per share to earnings—a timely boost for shareholders.

Capital Returns and Forward Guidance
Despite the earnings miss, AFG returned $292 million to shareholders, including $167 million in special dividends. Book value per share grew 4% to $52.50, excluding volatile items like alternative investments. CEO S. Craig Lindner emphasized maintaining underwriting discipline: “We’re non-renewing unprofitable business and focusing on lines with pricing power.”

Looking ahead, management expects premium growth in 2025, particularly in the Specialty Financial Group, though catastrophe exposure and economic uncertainty pose risks. The company’s high-quality investment portfolio—95% rated investment-grade—provides a cushion against volatility.

Conclusion: AFG’s Path Forward
American Financial Group’s Q1 results underscore the fragility of insurance profitability in an era of climate volatility and shifting markets. The 13.3% ROE and widening combined ratios signal near-term challenges, but strategic moves—like exiting unprofitable lines and monetizing non-core assets—suggest a focus on long-term resilience.

Investors should monitor two critical factors:
1. Catastrophe Costs: The 4.5-point hit from wildfires highlights vulnerability to extreme weather.
2. Alternative Investments: AFG’s 1.8% quarterly return on alternatives in Q1 lags its 10% target, and recovery here is pivotal for total returns.

The Charleston sale, while a one-time gain, underscores management’s opportunism—a hallmark of the Lindner family’s leadership. With book value holding steady at $52.50 per share and a disciplined underwriting stance, AFG’s fundamentals remain intact. However, investors must weigh short-term pain against the promise of selective growth and capital returns.

In a sector where resilience is measured in decades, AFG’s Q1 stumble appears less a crisis and more a bump in a journey defined by its “entrepreneurial, opportunistic culture.” The next test? Demonstrating that underwriting discipline can outpace the storm clouds.