The Long and Short

American Financial Group offers value in the long end

| February 9, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

American Financial Group’s (AFG: Baa1/BBB+) securities with 2047 maturity trade at some of the widest spreads in the entire P&C insurance sector despite a solid risk profile. In particular, bonds trade wide to similarly rated issuers such as AIG (Baa2/BBB+/BBB+), which trades more than 40 bp tighter, or fellow specialty lender Markel (MKL: Baa2/BBB), which trades as much as 10 bp tighter. AFG bonds look set to outperform while the company continues to post strong underwriting results, maintain stable credit metrics, and while corporate bond investors continue to show extraordinary appetite for long maturities in this part of the market.

The AFG 4.50% 06/15/47 compare favorably to other debt of P&C peers rated ‘BBB’ or higher. The issue trades at roughly 140 bp over the 20-year Treasury or 144 bp over the government curve (Exhibit 1). It shows a yield-to-maturity of 5.87% and a price of $82.70.

Exhibit 1. AFG 2047s compared to P&C insurance peers (BBB or higher)

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications

AFG 4.50% 06/15/47 @ +140/20yr; G+144; 5.87%; $82.70

American Financial Group (AFG)
CUSIP: 025932AL8
Amount Outstanding: $590mm (index eligible)
Debt Ratings: Baa1/BBB+
Insurance Financial Strength (IFS) Ratings: A1/A+/A+(AM Best)
Private Placement 144a

AFG is primarily a specialty commercial P&C operator, with a diversified operating profile with over 30 individual business lines. AFG at one time qualified as multi-line, with about 25% of revenue coming from annuities franchises (ie life), but those businesses were sold to Mass Mutual for $3.5 billion back in 2021. AFG otherwise mostly maintains a diverse mix of specialized P&C and reinsurance franchises, which are largely operated independent of one another under their various operating subsidiaries. This provides AFG with diverse cash flow streams, while maintaining brand identity at some of their various niche industries such as agricultural, equine, marine, aviation, construction and so on. The bigger operating segments are under the Great American brand.

AFG does not appear likely to bring a debt deal in the near-term. The company is an infrequent issuer, last bringing a deal in 2020 during the early days of Covid-related assistance when many issuers were tapping the market. Those 2030 notes are the next maturity after redeeming a 2026 maturity early. The only other debt maturing are the 2047 notes. AFG also has a $450 million revolving credit facility available through 2028 and approximately $1.23 billion in cash as of year-end.

Management remains acquisitive, consistently looking for opportunities to expand business lines; however, most of those acquisitions appear to smaller, strategic, bolt-on additions and typically are not funded with debt. Most recently, AFG completed the acquisition of Crop Risk Services for $240 million in mid-2023. Prior to that the company bought Verikai in early 2022 for $120 million.

AFG is a smaller operator within the P&C segment but with a well-diversified geographic footprint for its size. The company has just under $19 billion in statutory P&C assets with total cash and investments of just under $15 billion. Capital and surplus came in at $4.3 billion as of last quarter, and the risk-based capital ratio was 407% as of last year.

The company reported fourth-quarter operating results earlier this week with top-line revenue of $2.08 billion exceeding the $1.66 billion consensus estimate, while EPS of $3.13 beat the $2.90 consensus estimate. Management was able to return $900 million in capital to shareholders this year, of which more than half was paid out through a special dividend. While leverage remains slightly high to the peer group at about 30%, AFG appears to be managing a balance between maintaining solid credit metrics and appeasing shareholders.

Two of the noteworthy tail risks associated with AFG credit include residual asbestos exposure and their workers’ comp business lines. Market risk attributed to annuities business—typically not present in pure play P&C names—is no longer a concern following the completion of the sale of that business in 2021. AFG’s asbestos exposure is explicitly disclosed in their company financials and appears to be both manageable and well reserved. Asbestos makes up about 4% of total company reserves, and workers’ comp accounts for about 21% of reserves.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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