AFG Q3 Deep Dive: Specialty Insurance Outperformance, Capital Deployment Flexibility

Insurance holding company American Financial Group (NYSE:AFG) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 4.5% year on year to $2.33 billion. Its non-GAAP profit of $2.69 per share was 7.2% above analysts’ consensus estimates.

Is now the time to buy AFG? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

American Financial Group’s third quarter was marked by strong performance in its Specialty Property and Casualty insurance operations, with management emphasizing robust underwriting margins and stable investment income as key contributors. The company’s annualized core operating return on equity reached 19%, and management pointed to improved profitability across most insurance lines. Notably, a disciplined approach to underwriting and selective growth allowed American Financial Group to benefit from favorable pricing trends, especially in commercial auto liability and specialty casualty businesses. Co-CEO Carl Lindner highlighted, “Our compelling mix of Specialty Insurance businesses and disciplined operating philosophy continue to position us well for the future.”

Looking ahead, American Financial Group’s outlook is shaped by expectations of continued organic growth in Specialty Property and Casualty, potential rebound in premium growth, and disciplined capital deployment. Management anticipates that tightening supply in multifamily real estate will improve investment yields, while a pipeline of new business start-ups could support future expansion. Co-CEO Craig Lindner noted, “We expect our operations to continue to generate significant excess capital, providing ample opportunity for acquisitions, special dividends, or share repurchases.” The company also sees opportunities in rising renewal rates and enhanced rate adequacy, particularly in social inflation-exposed insurance segments.

Key Insights from Management’s Remarks

Management cited underwriting discipline, favorable renewal rates, and prudent capital management as primary drivers of performance in the third quarter, alongside improvements in specialty financial and transportation lines.

• Underwriting discipline preserved margins: Strong underwriting in Specialty Property and Casualty helped maintain profitability, even as the company exited less attractive markets or accounts and managed catastrophe exposure.
• Favorable renewal pricing momentum: Renewal rates increased for the 37th consecutive quarter, with commercial auto liability rates up 11% and specialty casualty segments seeing mid-teens price increases in social inflation-exposed businesses.
• Specialty Financial Group margin expansion: The group’s combined ratio improved due to lower catastrophe losses and robust growth in financial institutions and European operations, despite selective ceding of coastal property risk.
• Investment portfolio resilience: Net investment income grew 5% year-over-year, supported by higher interest rates and a diversified fixed maturity portfolio; management expects improved returns as multifamily real estate supply tightens.
• Capital return flexibility: Regular and special dividends remain central to shareholder returns, and the company retains “dry powder” for potential share repurchases or acquisitions, with management evaluating capital deployment alternatives on an ongoing basis.

Drivers of Future Performance

Management expects disciplined underwriting, stable investment income, and capital deployment to drive performance through the remainder of 2025 and into 2026.

• Organic and pipeline-driven growth: The company projects a rebound in premium growth next year, citing optimism around new business start-ups and the anticipated completion of recent underwriting actions in Specialty and Casualty segments.
• Continued rate adequacy focus: Management believes renewal rate increases will continue to outpace loss trends, particularly in lines exposed to social inflation, maintaining targeted returns and supporting underwriting profitability.
• Investment yield improvement prospects: AFG anticipates higher investment returns as the multifamily real estate market stabilizes and supply constraints emerge, potentially enhancing overall portfolio performance by the end of 2026.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the rebound in premium growth from new business start-ups and recovery in specialty lines, (2) sustained underwriting profitability amid evolving loss trends and social inflation exposure, and (3) evidence of improved investment yields as multifamily real estate supply tightens. Execution on capital deployment—whether through acquisitions, special dividends, or opportunistic buybacks—will also be a key indicator of management’s strategic flexibility.

American Financial Group currently trades at $135.18, up from $131.43 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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