AFG estimates <$70mn CA wildfire hit, blames excess liability unit for adverse development

By Chris Munro

Feb 5 - (The Insurer) - American Financial Group (AFG) has pegged its losses from the California wildfires at $60mn to $70mn, while the company’s management has laid the blame for its Q4 2024 adverse reserve at a unit focused on writing excess liability business for Fortune 500 and Fortune 1,000 companies.

After markets closed on Tuesday, Cincinnati, Ohio-based AFG reported core net operating earnings per share of $3.12 for the fourth quarter, up on the prior-year period’s $2.84 and ahead of the $3.01 consensus forecast.

However, New York-listed AFG's share price closed down 6.3 percent on Wednesday at $127.42 in response to the results.

During a call with analysts on Wednesday to discuss the Q4 and full-year 2024 results, AFG co-CEO Carl Lindner said the company’s estimate for losses related to the southern California wildfires “based on what we know currently” is $60mn to $70mn.

“This remains a developing situation,” he said.

Lindner said the wildfire hit has come from its property-oriented businesses.

“The lender-placed property, sure, that will have losses,” he said. “Things like property and inland marine, our non-profit business that has property exposures in California, would be the exposed businesses generally,” the executive explained.

In its fourth-quarter 2024 earnings, AFG’s specialty P&C combined ratio deteriorated by 1.3 percentage points to 89.0 percent as adverse development in its specialty casualty business took its toll.

“In the fourth quarter, the favourable development in workers' comp was more than offset by adverse development in our social inflation-exposed umbrella and excess liability businesses,” explained Lindner.

“The adverse development reflects higher than previously anticipated severity across several accident years,” he added.

That adverse reserve development also more than offset favourable reserve releases in its property and transportation (P&T) and specialty financial units.

Overall, AFG booked $36mn of adverse development in Q4 2024, compared with $56mn of favourable development in the prior-year period.

The Q4 2024 adverse development represented 1.8 points of AFG’s fourth-quarter 2024 combined ratio of 89.0 percent.

Specialty casualty adverse reserve development totalled $36mn in Q4 2024, compared with favourable development of $37mn in the prior-year period.

Its P&T unit recorded $3mn of favourable reserve development in 2024’s fourth quarter, compared with $12mn of favourable reserve development in Q4 2023.

And AFG’s specialty financial platform saw $8mn of favourable development in the three months to 31 December 2024, the same as in the prior-year period.

Lindner explained that the adverse development in Q4 2024 "reflects higher than previously anticipated severity across several accident years”.

“Predominantly, the adverse development is coming from an excess liability writing unit of ours that focuses on kind of the Fortune 500, Fortune 1,000 larger entities.

“[In] our other excess liability entity, the profitability is very good. So [the adverse development is] really focused on kind of on one of our business units focused on larger companies.”

Across the business, Lindner said AFG “continue[s] to feel confident in the strength of our reserves and remain relentless in our focus on rate adequacy”.

“Our insurance professionals are working collaboratively across our own operations and across the industry to address this.

“I'm pleased that despite the adverse development, the businesses in our specialty casualty group reported a combined ratio of below 90 percent for the fourth quarter,” Lindner stated.

Drilling down into AFG’s business segments, the company’s P&T unit posted a combined ratio of 89.2 percent in Q4 2024, an improvement of 1.1 points year on year.

P&T renewal rates in 2024’s fourth quarter increased 7 percent on average, in line with pricing the previous quarter.

“We continue to remain focused on rate adequacy, particularly in our commercial auto line of business where rates were up approximately 20 percent in the fourth quarter. This is our 13th year of rate increases in this line,” Lindner said.

Specialty casualty’s combined ratio deteriorated by 4.4 points to 89.0 percent in 2024’s fourth quarter, while the unit’s net premiums written increased 4 percent year on year to $725mn.

Primary drivers of that growth were new business opportunities and favourable renewal pricing in several of AFG’s targeted businesses and its excess and surplus lines platform.

“Our mergers acquisition business also benefitted from an increase in M&A activity,” Lindner said.

That growth was, however, tempered by lower year-over-year workers' compensation premiums.

Excluding workers' comp businesses, specialty casualty renewal rates were up approximately 11 percent in Q4 2024, an improvement of about 1 point from the previous quarter.

Including workers’ comp, specialty casualty pricing increased 8 percent, in line with the third quarter of 2024.

AFG’s specialty financial unit posted a combined ratio of 80.7 percent for the three months to 31 December 2024, an improvement of 60 basis points year on year.

Specialty financial’s renewal pricing increased 3 percent in 2024’s fourth quarter.