American Financial Group: A Storm Brewing in Specialty Insurance?

The insurance sector has long been a haven for steady, dividend-driven investments. But American Financial Group (AFG), a century-old specialty insurer, is now flashing warning signs. Recent data reveals a troubling convergence of deteriorating underwriting metrics, margin pressures, and competitive disadvantages that could derail its performance in 2025. Let’s dissect the risks.

The Underwriting U-Turn: A Loss Ratio Crisis

AFG’s core business—specialty property and casualty insurance—is facing a critical inflection point. Loss and LAE (Loss Adjustment Expense) ratios, which measure claims payouts relative to premiums, are soaring across key segments:

• Property & Transportation: The loss ratio jumped to 66.8% in Q1 2024, up from 59.2% a year earlier. This segment, which includes commercial property and transportation risks, now accounts for nearly a third of net earned premiums.
• Specialty Financial: Loss ratios rose to 44.4%, reflecting heightened risks in lending institution risk management and trade credit insurance.

Combined with rising underwriting expenses (e.g., Specialty Casualty’s expense ratio increased to 27.7%), these trends are squeezing profitability. The Property & Casualty Specialty Combined Ratio, which includes both losses and expenses, now stands at 94.7%—a 4.6-percentage-point decline from 2023. A ratio above 100 means underwriting losses, and AFG is perilously close.

Profitability in Freefall

Beyond underwriting, AFG’s net profit has been collapsing. Over the past four quarters, profits dropped from $263 million to $181 million—an average quarterly decline of 11.7%. Meanwhile, earnings per share (EPS) are projected to plummet 21.4% in Q1 2025 to $2.17, despite a 2.9% revenue increase. This disconnect between top-line growth and bottom-line weakness signals unsustainable cost inflation or premium erosion.

Revenue Growth Isn’t Enough

AFG’s revenue has risen for three consecutive quarters, hitting $2.36 billion in Q3 2024. But this growth is failing to impress investors. The price-to-sales (P/S) ratio of 1.3x is less than half that of peer Progressive Corp (PGR), which trades at 2.1x. This valuation gap suggests the market doubts AFG’s ability to convert premium growth into shareholder value.

Dividends Under Siege

AFG’s dividend—$0.80 per share for Q1 2025—has long been a selling point for income investors. But with net profits shrinking and underwriting margins under pressure, maintaining this payout could become a strain. A dividend coverage ratio (net profit per share divided by dividend per share) below 2.7x (based on projected EPS) raises red flags.

The Competitive Divide

AFG is losing ground to rivals like Progressive Corp (PGR), which has outperformed it by 37.5% over one year and 149.4% over three years. This gap reflects AFG’s struggles in:
- Market share: Its reliance on independent agents/brokers creates dependency on third-party relationships, which may lack the scale or agility of direct sales channels.
- Valuation: AFG’s P/E ratio of 11.09 is far below PGR’s 15.6, signaling investor skepticism about its growth trajectory.

Regulatory and Operational Risks

The insurance industry is highly regulated, and changes in risk assessment models or pricing rules could further strain AFG’s margins. For instance, new climate-related underwriting standards could increase loss ratios in property insurance—a key segment for AFG.

The Bottom Line: Storm Clouds Ahead

The data paints a clear picture: American Financial Group is at a critical crossroads. Its declining underwriting efficiency, profitability collapse, and competitive underperformance create a high-risk profile for 2025. Key metrics to watch include:
- The Property & Casualty Combined Ratio—if it breaches 100%, underwriting losses will compound financial pressures.
- Net profit trends: A sustained decline below $200 million quarterly could force dividend cuts or strategic pivots.
- Valuation multiples: A P/S ratio of 1.3x versus peers suggests investors are already pricing in disappointment.

Investment Takeaway: AFG’s risks are not theoretical. With a 52-week stock price range of $118.97–$150.19 and a recent monthly return decline of -3.18%, investors should proceed with caution. Unless AFG demonstrates a turnaround in underwriting metrics or competitive positioning, the storm clouds on its horizon may soon become a full-blown deluge.

This analysis underscores that AFG’s legacy in specialty insurance is now overshadowed by its growing vulnerabilities. For investors, this is a “wait and see” story—one where patience may be the only safe bet.