American Financial Group's Q1 Earnings Miss: What Investors Need to Know

American Financial Group (AFG) reported its first-quarter 2025 earnings, revealing adjusted earnings per share (EPS) of $1.81—well below the FactSet consensus estimate of $2.03. The miss, driven by soft underwriting performance and weaker-than-expected investment returns, sent shares down 5.7% year-to-date and underperformed the broader market. Let’s dissect the results, risks, and opportunities for investors.

Key Takeaways from Q1 2025

1. Earnings Decline: Core EPS fell 34% year-over-year (YoY) to $1.81, compared to $2.76 in Q1 2024. Non-core items, including lower realized gains on securities, contributed to the drop.
2. Revenue Dip: Total revenue slid 2.6% YoY to $1.86 billion, missing estimates by 3.8%, with declines in net investment income (-12.6%) and alternative investments weighing heavily.
3. Catastrophe Impact: California wildfires added $72 million in losses, driving the combined ratio for Specialty P&C to 94.0%—up 3.9 points from 2024.

Driving Forces Behind the Miss

1. Property and Casualty (P&C) Underwriting Struggles

• Combined Ratio Challenges: The 94.0% combined ratio reflects elevated catastrophe losses (adding 4.5 points) and weaker prior-year reserve benefits.
• Segment Performance:
• Property and Transportation: Underwriting profit fell 38% to $37 million, as non-renewals of large agricultural policies and higher wildfire costs took a toll.
• Specialty Casualty: Profit collapsed 67% to $20 million, with workers’ compensation and executive liability lines under pressure.
• Specialty Financial: A bright spot, with 12% profit growth to $37 million, driven by strong financial institutions coverage.

2. Investment Headwinds

• Alternative Investments: The annualized return on alternative investments plummeted to 1.8% in Q1 2025, down from 9.0% in 2024, due to private equity valuation declines.
• Net Investment Income: Fell 17% YoY when including alternatives, though core fixed-income gains rose 6% on higher interest rates.

3. Capital Returns and Book Value

• AFG returned $292 million to shareholders via $167 million in special dividends and $58 million in buybacks.
• Book value per share dipped 1.3% to $52.50, though management highlighted a pending $100 million after-tax gain from the sale of its Charleston Harbor Resort & Marina in Q3 2025.

Risks and Opportunities Ahead

Risks

• Catastrophe Volatility: Elevated wildfire risks in California and social inflation pressures could strain underwriting margins further.
• Investment Uncertainty: Private equity returns remain weak, and macroeconomic headwinds may delay a rebound in alternative investments.
• Premium Growth Concerns: Gross written premiums fell 2% YoY, despite renewal rate hikes averaging 7% (excluding workers’ comp).

Opportunities

• Strategic Divestitures: The Charleston resort sale could boost EPS by $1.20, offsetting some of the Q1 underperformance.
• Underwriting Discipline: Management emphasized non-renewals of unprofitable policies and rate increases, which could stabilize the combined ratio over time.
• Long-Term Investment Outlook: AFG’s five-year average return on alternative investments remains 12%, suggesting resilience in its portfolio.

Conclusion: AFG’s Path Forward

While AFG’s Q1 miss raises near-term concerns, the company’s fundamentals remain intact. The combined ratio, though elevated, is still below breakeven at 94%, and underwriting discipline—evident in 7% rate hikes—is a positive sign. The pending resort sale and strong Specialty Financial segment provide tailwinds, while alternative investments could rebound as private equity valuations stabilize.

However, investors must weigh these positives against persistent risks. Catastrophe losses and weak investment returns could linger, and AFG’s stock—down 5.7% YTD—may remain under pressure until profitability improves.

Final Take: AFG is a hold for now. Investors should monitor Q2 results for signs of underwriting stabilization and track the impact of strategic capital returns. The Charleston sale’s $1.20 EPS boost in Q3 could offer a temporary reprieve, but long-term success hinges on reversing the P&C profitability slide.

This analysis underscores that while AFG faces near-term challenges, its diversified business model and disciplined capital strategy position it to weather current headwinds. Patience—and a focus on structural improvements—will be key for shareholders.