American Financial Group’s Q1 Earnings Reflect Strategic Trade-Offs in a Challenging Market

American Financial Group (NYSE: AFG) reported a 2.6% decline in Q1 2025 revenue to $1.856 billion, driven by deliberate underwriting actions and macroeconomic headwinds. The results underscore a balancing act between short-term profitability and long-term resilience in an industry grappling with social inflation, competitive pricing, and catastrophic risks.

Revenue Decline: A Strategic Choice, Not a Failure

AFG’s revenue contraction stemmed largely from strategic non-renewals of underperforming property and casualty (P&C) insurance accounts. Management cited proactive measures to exit unprofitable business lines, particularly in the Property and Transportation Group, where gross premiums fell 6% year-over-year. Similarly, the Specialty Casualty Group saw a 3-4% drop in premiums as the company prioritized pricing discipline over volume growth.

The trade-off was clear: while these actions reduced near-term revenue, they aimed to improve underwriting margins in a market where social inflation and competitive pressures are eroding profitability. “Maintaining underwriting discipline has been paramount,” said CEO Carl Lindner III. “We achieved strong rate increases in our most inflation-exposed lines… while non-renewing several larger accounts with unfavorable loss experience.”

Underwriting Challenges: Catastrophes and Reserves

The Specialty P&C segment’s combined ratio worsened to 94.0% in Q1 2025, up 3.9 points from a year earlier. This deterioration was fueled by:
- Elevated catastrophe losses: California wildfires added 4.5 points to the ratio, compared to 2.3 points in Q1 2024.
- Reduced reserve benefits: Favorable prior-year reserve adjustments contributed just 1.3 points, down from 3.3 points in 2024.

The Property and Transportation Group faced the sharpest margin contraction, with its combined ratio rising to 92.5% (up 4 points) due to crop insurance losses and wildfire-related damage. Meanwhile, the Specialty Casualty Group’s combined ratio jumped to 97.6%, its highest level in years, reflecting softer performance in workers’ compensation and executive liability lines.

Investment Income: A Mixed Picture

AFG’s investment portfolio faced headwinds from declining returns in alternative investments, which caused a 17% year-over-year drop in net investment income. Fair-value adjustments in private equity holdings were a key drag, though rising interest rates provided some offset in fixed-income yields. Management remains optimistic about long-term returns, citing a five-year average annualized return of 12% in alternative assets.

Capital Management: Prioritizing Shareholders Amid Headwinds

Despite the Q1 earnings decline—GAAP net income fell 36% to $154 million—AFG returned $292 million to shareholders, including a $2.00-per-share special dividend and $58 million in buybacks. This underscores the company’s commitment to capital returns even during challenging quarters.

Forward-Looking Outlook: Rate Hikes and Premium Growth

Management remains confident in full-year premium growth, citing average renewal rate increases of 7% (excluding workers’ compensation) and new business opportunities in sectors like mergers & acquisitions. The Specialty Financial Group’s 16% gross premium growth highlights the potential for niche segments to offset broader market pressures.

Risks and Considerations

• Catastrophe exposure: The California wildfires demonstrate vulnerability to weather-related losses, which could persist in 2025.
• Competitive pricing: P&C premiums fell 2% year-over-year, reflecting market pressures that may limit growth unless offset by further rate hikes.
• Alternative investments: Returns remain volatile, though AFG’s long-term outlook for these assets is positive.

Conclusion: AFG’s Strategic Resilience

American Financial Group’s Q1 results reveal a company making tough choices to prioritize long-term health over short-term gains. While revenue and earnings declined, the disciplined underwriting actions—such as non-renewals and rate hikes—position AFG to weather current challenges. Key data points reinforce this narrative:

• Rate momentum: 7% average renewal rate increases (excluding workers’ comp) signal pricing power in a tough market.
• Shareholder returns: $292 million returned in Q1, including a special dividend, demonstrates financial flexibility.
• Growth opportunities: The Specialty Financial Group’s 16% premium surge highlights segments where AFG can capitalize on demand.

Investors should weigh these positives against risks like catastrophe volatility and competitive pressures. However, AFG’s focus on underwriting discipline, capital returns, and selective growth positions it to outperform peers in the coming quarters—if the company can execute its strategy amid ongoing market headwinds.

As Carl Lindner III noted: “These actions have positioned us for future success.” The question now is whether the market will reward patience—or demand faster results.