American Financial Group (AFG) delivered a strong finish to 2025, reporting Q4 core net operating earnings of $3.65 per share, resulting in an annualized core return on equity (ROE) of 25.2%. For the full year, core earnings reached $10.29 per share with an 18.2% core ROE. Underwriting performance was exceptional, setting a quarterly record with an 84.1% combined ratio, driven by record crop insurance results and favorable prior year development. The company returned over $700 million to shareholders in 2025 via dividends and buybacks and declared a $1.50 special dividend for Q4. Looking ahead to 2026, management projects core EPS of approximately $11.00, supported by 3-5% premium growth and a combined ratio of roughly 92.5%, assuming a normalization of crop results and a recovery in alternative investments.
| Metric | Value | Change |
|---|---|---|
| Q4 Core Net Operating Earnings per Share | $3.65 | N/A |
| FY 2025 Core Net Operating Earnings per Share | $10.29 | N/A |
| Q4 Annualized Core ROE | 25.2% | N/A |
| FY 2025 Core ROE | 18.2% | N/A |
| Q4 Combined Ratio | 84.1% | -4.9 points YoY |
| Q4 P&C Net Investment Income | N/A | -12% YoY |
| FY 2025 Net Written Premium Growth | 0% | Flat |
| Book Value Growth plus Dividends | 17.2% | N/A |
AFG continues to prioritize aggressive capital deployment, having returned $6.3 billion to shareholders over the past five years. In 2025, the company distributed over $700 million. Notably, management slightly reduced the Q4 special dividend to $1.50 per share (from $2.00) specifically to preserve 'dry powder' for opportunistic share repurchases. This signals that management views the current stock valuation as attractive and suggests a potential shift toward buybacks to enhance per-share metrics.
The company's underwriting discipline remains a core competitive advantage, marked by 38 consecutive quarters of renewal rate increases. Despite 'pockets of softening,' AFG achieved an 84.1% combined ratio in Q4. Management emphasized that they are meeting or exceeding targeted returns across nearly all 36 of their specialty businesses, allowing them to navigate rate softness in areas like Financial Institutions while maintaining profitability.
The Property and Transportation segment delivered a standout 70.6% combined ratio, driven by record crop yields and favorable commodity pricing. While the 2026 business plan assumes an 'average crop year' (a headwind to the combined ratio), the segment's strength provides a powerful earnings engine. Management also noted that corrective underwriting actions in social inflation-exposed casualty lines are largely complete, positioning these businesses for a return to growth in 2026.
Management is navigating a challenging environment for alternative investments, primarily within multifamily real estate. Returns dropped to 0.9% in Q4 due to oversupply. However, AFG is strategically holding these assets, citing data that new starts are down 50% and completions are rapidly declining. They forecast a recovery in the second half of 2026, which would allow them to revert to their historical 10%+ return target on the $2.8 billion portfolio.
AFG is actively investing in future growth vectors, including 'start-up businesses' in specialty construction, E&S binding, and a new 'Embedded Solutions' vertical. Management indicated these initiatives are beginning to bear fruit and will contribute to the 3-5% premium growth target for 2026. This focus on internal innovation complements their disciplined M&A approach.
The alternative investment portfolio, representing a significant portion of AFG's investment income, experienced a sharp decline in performance, with annualized returns falling to 0.9% in Q4 2025 from 4.9% in the prior year. This 12% drop in P&C net investment income highlights the volatility of this asset class. Management's 2026 guidance assumes an 8% return, below their historical 10%+ bogey, creating a potential earnings headwind if the real estate market takes longer to recover than anticipated.
Management issued a warning regarding reserve development, specifically that the significant favorable development seen in workers' compensation in 2024 and 2025 is unlikely to repeat. Additionally, they noted adverse development in social inflation-exposed casualty lines during 2025. While they believe corrective underwriting actions will address this, the shift from favorable to neutral or adverse reserve development could pressure the combined ratio in 2026.
The California workers' compensation line remains a persistent sore spot, with industry combined ratios reportedly exceeding 120%. While AFG's book is smaller (<$200M premium) and improving due to double-digit rate hikes, management admitted to being 'unhappy' with the results. This specific line requires constant management attention and aggressive pricing to offset a difficult legal and regulatory environment.
Premium growth volume remains sluggish, with net written premiums flat for the full year 2025 and down 1% in Q4. The 2026 guidance calls for only 3-5% growth. Management acknowledged 'pockets of softening rates' and heightened competitive pressure in certain E&S and executive liability lines, which could limit top-line expansion even as underwriting remains profitable.
Overall: Management exhibited a high level of confidence and pride throughout the call, frequently using superlatives like 'exceptionally strong,' 'outstanding,' and 'record' to describe performance. They maintained a disciplined yet optimistic tone regarding the 2026 outlook, acknowledging specific headwinds like multifamily investments and California workers' compensation while emphasizing the resilience of their diversified specialty model.
Confidence: HIGH - Management provided specific 2026 guidance assumptions (EPS, combined ratio, growth) and detailed explanations for performance drivers. Their willingness to aggressively deploy capital via special dividends while preserving 'dry powder' for opportunistic buybacks signals strong conviction in their valuation and future earnings power.
Approximately $11.00
Approximately 92.5%
3% to 5%
Approximately 18%
Approximately 8%
Approximately 5.25%
Hedging & Uncertainty: Management utilized temporal and probability hedges to set expectations for 2026, particularly regarding the alternative investment portfolio and reserve development. Phrases like 'we expect that in the last half of 2026' and 'would not expect the adverse development... to reoccur' suggest a cautious outlook on timing. They also conditioned their 2026 EPS guidance of ~$11.00 on performance being 'in line with these assumptions,' providing wiggle room if the 'average crop year' or alternative recovery does not materialize as planned.
We expect that performance in line with these assumptions would result in core net operating earnings per share of approximately $11 in 2026... - Carl Lindner, Co-CEO
We're mindful of pockets of softening rates and continued competitive conditions... - Carl Lindner, Co-CEO
I wouldn't say that that's a run rate. I think the California workers' comp adjustment probably elevates the loss ratio a little bit. - Brian Hertzman, CFO
We think it's probably going to take another couple of quarters to get back to a more normal environment. - Craig Lindner, Co-CEO
We wouldn't read too much into no share repurchases in the fourth quarter. - Craig Lindner, Co-CEO
Analyst Sentiment: Analysts were generally positive but focused heavily on the sustainability of the strong underwriting results and the timeline for the recovery of the alternative investment portfolio. There was specific skepticism regarding the 'run rate' of casualty losses and the impact of an 'average crop year' assumption on future earnings.
Management Responses: Management responses were detailed and transparent, readily admitting to caution in loss picks for social inflation and California workers' comp. They effectively used the company's diversification as a defense against softening in specific pockets and expressed confidence in the pricing environment, citing 38 consecutive quarters of increases.
Analysts probed the 2026 business plan assumptions, specifically asking about the impact of prior period releases on the 92.5% combined ratio target and the pricing assumptions relative to Q4 levels.
There was significant focus on the Casualty segment's underlying loss ratio uptick, with analysts asking if it reflected a change in loss picks or specific trends in frequency/severity.
The alternative investment portfolio, particularly multifamily real estate, was a major topic. Analysts asked for indicators to signal a return to historical return levels.
Questions regarding the 'start-up businesses' and their potential to drive growth in a softening market were prevalent.
The lender-placed insurance business faced questions regarding political risk and pricing inflection.
American Financial Group remains a premier specialty insurer with a proven track record of value creation, evidenced by a record Q4 combined ratio of 84.1% and a full-year core ROE of 18.2%. The company's diversified portfolio of niche businesses provides resilience, while its disciplined underwriting supports consistent profitability. Although the alternative investment segment is currently facing headwinds from multifamily oversupply, management's historical acumen and data indicating a supply-demand rebalancing in H2 2026 suggest this is temporary. The 2026 guidance of $11 EPS implies an attractive valuation for a company of this quality. Furthermore, management's decision to preserve 'dry powder' for share repurchases signals strong confidence in the stock's intrinsic value. The shift from special dividends to buybacks could act as a significant catalyst for the stock in the coming year.
Management highlighted the benefit of the current rate environment, stating they can invest fixed maturities at approximately 5.25%, supporting net investment income growth outside of alternatives.
The multifamily market is currently suffering from 'excess supply,' causing alternative returns to drop to 0.9%. However, management noted that new starts are down 50% and completions are 'rapidly declining,' predicting a tightening supply that will drive higher rents in the second half of 2026.
Record yields for corn and soybeans and favorable commodity pricing drove exceptional results in the crop insurance business. The 2026 plan assumes a return to an 'average' crop year.
Social inflation continues to impact casualty lines, requiring 'cautious' loss picks and corrective underwriting actions. However, rate increases in these lines (10-15%) are outpacing the loss trends.