AFG’s earnings rose in the third quarter as the company reports the highest P&C renewal price in 15 years
American Financial Group, Inc. (AFG) reported net income of $ 164 million and core operating income of $ 217 million for the third quarter of 2020, compared to earnings of $ 147 million and $ 205 million, respectively, in the third quarter of 2019.
AFG notes that the year-over-year increase in core operating income is primarily due to higher underwriting profit in Specialty Property and Casualty (P&C) insurance as well as higher alternative investment profits of $ 2.3 billion, which are intended for the market are core operating income.
However, this was somewhat offset by lower net investment income from property and casualty insurance.
Within AFG’s Specialty P & C division, the underwriting result increased to 104 million US dollars in the third quarter of 2020 compared to 88 million US dollars in the third quarter of 2019. The combined ratio was 92.1% in the reporting period and includes 2, 7 percentage points of catastrophe losses. In comparison, the combined ratio in the third quarter of 2019 was 94% and included a hit of 1.6 percentage points due to catastrophe claims.
The underwriting result for the third quarter of 2020 also benefited from 3.7 percentage points of the favorable reserve development in the previous year compared to 3.1 points in the same period of 2019, explains AFG.
The company adds that no additional reserve fees were booked for COVID-19 during the quarter. Given the uncertainties surrounding the final number or scope of claims related to the pandemic, approximately 82% of the COVID-19 reserves from the $ 95 million fees recorded in the first half of 2020 will be deemed accrued, but not reported (IBNR). . These reserves represent AFG’s current best estimate of losses from the pandemic and the associated economic disruptions, the company explains.
Within Specialty P&C, gross written premiums decreased 5% and net written premiums decreased 8% in the third quarter of 2020, mainly due to the run-up of Neon.
During the quarter, average renewal prices across AFG’s P&C group increased approximately 13%, and excluding employee compensation, renewal prices increased an even more significant 16%. The company notes that renewal prices are the highest it has had in each of its Specialty P&C subsegments and in its Specialty P&C group as a whole for more than 15 years.
Carl H. Lindner III and S. Craig Lindner, Co-Chief Executive Officers (CEOs) of AFG, commented: “Our core operating results were excellent in the third quarter, resulting in an annualized core operating return of more than 17%. We are particularly pleased with the recovery and performance of our alternative investments, which are assessed by the core result on the market. Our liquidity and excess capital give us the flexibility to effectively address and respond to the uncertainties caused by COVID-19. We believe our results demonstrate the value of our disciplined operating philosophy and portfolio of diversified specialty insurance companies.
“As of September 30, 2020, AFG had excess capital of approximately $ 1 billion. That figure included parent company cash of approximately $ 600 million. As shown in the table below, taking into account the additional excess capital of $ 375 million to $ 400 million created by our recently announced block reinsurance contract and the November 2055 repayment of our 6% subordinated debt, a AFG’s pro forma excess capital based on September 30, 2020 would be approximately $ 1.2 billion. Capital is forecast for our insurance subsidiaries that is above the level expected by the rating agencies in order to maintain their current ratings. “
Carl Lindner III commented on the underwriting performance of the Specialty P&C business as follows: “I am very pleased with the excellent underwriting results of our Specialty P&C group for the quarter, particularly with the higher frequency of catastrophe claims in the industry and the ongoing uncertainty from the COVID-19 pandemic. We achieved broad price increases during the quarter, with exceptionally strong renewal prices in our longer term liability businesses.
“Based on our results for the nine months of the year and our current expectations for the impact of COVID-19, we now expect P&C core operating income before tax excluding the impact of alternative investments in the range of $ 650 million to $ 690 million. an increase from our previous forecast of $ 615 million to $ 675 million. We continue to expect an overall combination rate for the 2020 calendar year in the range of 92% to 94%. We expect net written premiums to decrease by 5% to 9% compared to the $ 5.3 billion reported in 2019, largely due to the settlement of Neon. Excluding the effects of neon, net rewards booked are estimated to be 1% lower to 3% higher than the rewards reported in 2019. “