American Financial Group Preferred Stock 5.875% Series

Company Overview

Business Model: American Financial Group, Inc. (AFG) operates as an insurance holding company primarily engaged in property and casualty (P&C) insurance through its Great American Insurance Group. The Company focuses on specialized commercial products for businesses, with an in-house team of investment professionals managing its investment portfolio. AFG employs an entrepreneurial business model, granting its individual businesses autonomy in underwriting, claims, and policy servicing to foster agility, innovative product design, unique pricing segmentation, and strong distribution relationships. The primary objectives are solid underwriting profitability and excellent service to policyholders and agents.

Market Position: AFG is positioned as a top-tier specialty P&C insurer, with management estimating that over 55% of its 2025 gross written premiums in the Specialty P&C group are generated by businesses ranking in the "top 10" among competitors. The Company's specialty niche focus, product line diversification, and underwriting discipline have consistently enabled it to outperform the industry, evidenced by a statutory combined ratio averaging 90.5% from 2016 to 2025, compared to the industry average of 98.1%. AFG maintains strong financial strength ratings, with its key insurance subsidiaries (Great American Insurance, National Interstate, Summit (Bridgefield Casualty and Bridgefield Employees), Republic Indemnity, Mid-Continent Casualty) holding A+ ratings from A.M. Best, and most also from S&P.

Recent Strategic Developments:

• Acquisitions: In Q3 2025, AFG acquired the remaining 52% of Radion Insurance Holdings, LLC, a managing general underwriter specializing in healthcare coverage, for $7 million in cash, making it a wholly-owned subsidiary. This acquisition resulted in a $3 million realized gain from the remeasurement of the existing investment. In Q4 2024, AFG acquired an insurance agency business for $6 million (including $5 million cash) and a consulting company for $4 million in cash. In July 2023, AFG completed the acquisition of Crop Risk Services (CRS) from American International Group for $234 million in cash, significantly expanding its agricultural-related product offerings.
• Capital Allocation: In September 2025, AFG issued $350 million in 5.00% Senior Notes due September 2035 for general corporate purposes. In December 2025, the Board of Directors authorized the repurchase of five million shares of Common Stock. On February 3, 2026, a special cash dividend of $1.50 per share, totaling approximately $125 million, was declared.
• Operational Alignment: Effective 2025, the results of AFG's internal reinsurance facility are now included within the same sub-segments as the ceding businesses, aligning with senior management's view of the program and enhancing financial reporting.

Geographic Footprint: AFG's primary operations are in the U.S., which accounted for approximately 98% of its direct written premiums in 2025. Key U.S. markets by statutory direct written premiums in 2025 included California (12.1%), Texas (8.3%), and Florida (8.0%). The Company also has limited international exposure, with approximately 2% of its direct written premiums in 2025 derived from non U.S.-based insurers, operating in jurisdictions such as the United Kingdom, Ireland, Mexico, Bermuda, the Cayman Islands, Canada, and Singapore.

Financial Performance

Revenue Analysis

Profitability Metrics:

• Operating Margin: 13.1%
• Net Margin: 10.3%

Investment in Growth:

• Capital Expenditures: $135 million
• Strategic Investments:
  • Acquisition of Radion Insurance Holdings, LLC for $7 million cash (2025).
  • Acquisition of an insurance agency business for $6 million ($5 million cash) and a consulting company for $4 million cash (2024).
  • Acquisition of Crop Risk Services for $234 million cash (2023).
  • Ongoing investments in IT security, customer experience, and data analytics initiatives.

Business Segment Analysis

Property and Casualty Insurance Segment

Financial Performance:

• Revenue (Net Earned Premiums): $7,046 million (+0.1% YoY)
• Operating Margin (Underwriting Profit Margin): 8.9%
• Underwriting Profit: $629 million (+1.5% YoY)
• Combined Ratio: 91.0% (-0.2 ppt YoY)
• Catastrophe Losses (net of reinsurance): $137 million (2.0 points on combined ratio) in 2025, down from $182 million (2.6 points) in 2024.
• Net Prior Year Reserve Development: Net favorable development of $86 million in 2025, up from $70 million in 2024.
• Net Investment Income: $725 million (-8.0% YoY)
• Average Invested Assets: $16,144 million (+4% YoY)
• Yield (net investment income as % of average invested assets): 4.49% (-0.57 ppt YoY)

Product Portfolio:

• Property and transportation: Includes federally reinsured multi-peril crop insurance, coverage for commercial vehicles (buses, trucks), commercial properties, builders' risk, equipment, inland marine, and ocean marine.
• Specialty Casualty: Offers excess and surplus liability, umbrella and excess coverage for unique risks, executive and professional liability (D&O, E&O), general liability for contractor-related businesses, energy, and environmental sectors, specialty coverages in targeted markets, customized programs for small to mid-sized businesses, and workers’ compensation insurance.
• Specialty Financial: Provides risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products, and trade credit insurance.

Market Dynamics: AFG's Specialty P&C operations continue to achieve premium growth through new business opportunities, a favorable renewal rate environment, and increased exposures. Overall average renewal rates increased approximately 5% in 2025 (6% excluding workers’ compensation). Competition is primarily based on service, product design, claims handling reputation, financial strength ratings, price, commissions, and profit-sharing terms. AFG leverages sophisticated data analysis, specialized knowledge, and loss prevention services to maintain its competitive edge.

Sub-segment Breakdown:

• Property and transportation:
  • Revenue: $2,746 million
  • Underwriting Profit: $335 million (+57% YoY)
  • Combined Ratio: 87.8% (-4.6 ppt YoY)
  • Key Growth Drivers: Strong earnings in crop insurance (benefiting from record yields for corn and soybeans and favorable commodity pricing), and growth in transportation alternative risk transfer programs. Average renewal rates increased approximately 7% in 2025.
• Specialty casualty:
  • Revenue: $3,215 million
  • Underwriting Profit: $129 million (-54% YoY)
  • Combined Ratio: 96.0% (+4.8 ppt YoY)
  • Key Growth Drivers: Growth in mergers and acquisitions liability and several targeted markets businesses due to new business, higher rates, and strong policy retention, alongside growth in workers’ compensation. Growth was partially offset by lower premiums in excess and surplus and directors’ and officers’ liability. Average renewal rates increased approximately 6% in 2025.
• Specialty financial:
  • Revenue: $1,085 million
  • Underwriting Profit: $170 million (+28% YoY)
  • Combined Ratio: 84.4% (-2.8 ppt YoY)
  • Key Growth Drivers: Growth in the financial institutions business and AFG’s European operations. Average renewal rates decreased approximately 1% in 2025.

Other Segment

Financial Performance (2025):

• Pretax Loss (excluding realized gains/losses): $225 million (increased $21 million YoY)
• Net Investment Income: $25 million (-14% YoY)
• P&C Fees and Related Expenses (net): $98 million in fees, $68 million in expenses, contributing to a reduction in P&C underwriting costs.
• Other Income: $16 million (includes $11 million in management fees from AFG-managed collateralized loan obligations (CLOs)).
• Other Expenses: $161 million (excluding special A&E charges).
• Interest Charges on Borrowed Money: $80 million (+5% YoY), reflecting the issuance of $350 million Senior Notes in September 2025.
• Special A&E Charges: $25 million (pretax) related to former railroad and manufacturing operations.

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: $99 million (799,398 shares) in 2025.
• Dividend Payments: $606 million in 2025 ($7.28 per share). Special cash dividends of $4.00 per share were paid in 2025, $6.50 per share in 2024, and $5.50 per share in 2023.
• Future Capital Return Commitments: The Board of Directors authorized the repurchase of five million shares in December 2025, effective until December 31, 2030. A special cash dividend of $1.50 per share, totaling approximately $125 million, was declared on February 3, 2026.

Balance Sheet Position (as of December 31, 2025):

• Cash and Equivalents: $1,727 million (consolidated).
• Total Debt: $1,820 million (long-term debt).
• Debt to Total Capital Ratio: 27.5% (including subordinated debt) and 17.5% (excluding subordinated debt), within management's target of at or below 30%.
• Credit Rating: All debentures and notes issued by AFG are rated investment grade by two nationally recognized rating agencies.
• Debt Maturity Profile: No debt maturities until 2030 ($253 million due), with $1.60 billion due thereafter.
• Regulatory Capital: All AFG insurance companies exceeded Risk-Based Capital (RBC) requirements.

Cash Flow Generation (2025):

• Operating Cash Flow: $1,533 million (consolidated).

Operational Excellence

Production & Service Model: AFG operates with a decentralized model, empowering its 36 insurance businesses within Great American Insurance Group to make local decisions on underwriting, claims, and policy servicing. This approach allows for responsiveness to specialty market conditions while leveraging centralized investment and administrative support. The Company's philosophy prioritizes underwriting profitability, even if it means limiting premium growth. AFG is recognized as an innovator in risk sharing and alternative risk transfer programs for policyholders and agents.

Supply Chain Architecture: Key Suppliers & Partners:

• Reinsurers: AFG cedes a portion of its P&C business to other insurance companies, with significant recoverables from Everest Reinsurance Company, Hannover Rueck SE, and Swiss Reinsurance America Corporation (each 9-11% of total P&C reinsurance recoverable at December 31, 2025). Reinsurance is primarily with investment-grade rated companies or secured by collateral.
• Catastrophe Reinsurance: AFG utilizes traditional reinsurance and a fully collateralized catastrophe bond structure with Riverfront Re Ltd. to mitigate catastrophe exposure.
• Crop Insurance: The multi-peril crop insurance business is reinsured through the Federal Crop Insurance Corporation (FCIC) via the Standard Reinsurance Agreement (SRA).
• Third-Party Service Providers: AFG outsources certain technology and business process functions, managing associated data security and service disruption risks through a Third-Party Risk Management program.

Facility Network: AFG's headquarters in Cincinnati, Ohio, is leased, and it owns several other buildings in downtown Cincinnati. P&C subsidiaries own and occupy significant office space in Richfield, Ohio (90% of 281,000 sq ft) and Lakeland, Florida (100% of 135,000 sq ft). The majority of other office and storage facilities are leased across the U.S. and internationally.

Operational Metrics:

• Combined Ratio: 91.0% (2025).
• Catastrophe Losses (net of reinsurance): $137 million (2025).
• Average Employee Tenure: 10 years overall, with senior leaders averaging 20 years.
• Voluntary Turnover Rate: 8.3% in 2025.
• Employee Engagement: A 2024 survey showed 92% participation and positive feedback on product quality, job contribution, and respect.

Market Access & Customer Relationships

Go-to-Market Strategy: Distribution Channels: AFG primarily distributes its P&C insurance products through independent insurance agents and brokers. A smaller portion is written through employee agents. Incentive programs, including bonus commissions, are offered to agents and brokers based on policy profitability or business volume.

Customer Portfolio: Enterprise Customers: AFG's commercial marketplace requires large policy limits ($25 million or more) in several of its lines, indicating a focus on substantial enterprise relationships. The Company also provides risk sharing and alternative risk transfer programs for specific customer groups in industries like passenger transportation, moving and storage, and trucking. Customer Concentration: AFG writes insurance through several thousand agents and brokers, suggesting a diversified customer base.

Geographic Revenue Distribution (2025 Statutory Direct Written Premiums):

• California: 12.1%
• Texas: 8.3%
• Florida: 8.0%
• Illinois: 5.7%
• New York: 5.3%
• Georgia: 3.4%
• Indiana: 2.7%
• Iowa: 2.7%
• Pennsylvania: 2.7%
• New Jersey: 2.6%
• Ohio: 2.5%
• Michigan: 2.3%
• Kansas: 2.3%
• Missouri: 2.2%
• North Carolina: 2.1%
• Other: 35.1%
• Non U.S.-based insurers: Approximately 2% of total direct written premiums.

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics: The P&C insurance industry is highly competitive and subject to fluctuations driven by competitive pressures, rising loss costs, and changes in reinsurance pricing and capacity. The industry experiences cyclical changes that are not uniform across product lines. Demand for P&C insurance is sensitive to overall economic activity. Recent trends include increased participation from various investors and the emergence of technology-enabled business models and alternative distribution channels from technology companies and other third parties.

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors: AFG competes with a diverse group including other individual insurers, state funds, and insurance groups of varying sizes, some of which are mutual insurance companies. It also competes with self-insurance plans, captive programs, and risk retention groups. The S&P 500 Property & Casualty Insurance Index includes companies such as The Allstate Corporation, Chubb Limited, The Progressive Corporation, and The Travelers Companies, Inc., among others.

Emerging Competitive Threats: New entrants, existing competitors with substantial capital infusions or access to third-party capital, and technology companies developing disruptive business models or alternative distribution channels pose competitive threats. The increasing use of AI by competitors or third parties could also impact AFG's competitive position.

Competitive Response Strategy: AFG's strategy involves maintaining its specialty niche focus, product line diversification, and stringent underwriting discipline. It leverages sophisticated data analysis, specialized knowledge, and loss prevention services. The Company continuously evaluates expansion in existing and new specialty markets that meet its profitability objectives and is prepared to withdraw from markets that do not.

Risk Assessment Framework

Strategic & Market Risks

Market Dynamics:

• Catastrophes & Severe Weather: AFG's results are vulnerable to unpredictable natural (e.g., hurricanes, wildfires, floods) and man-made (e.g., terrorism, war) catastrophes. These events can lead to significant losses that may exceed reinsurance protection. Changing weather patterns, potentially due to climate change, increase the unpredictability, frequency, and severity of weather-related losses, making accurate pricing and risk mitigation more challenging.
• Crop Price/Yield Volatility: The crop insurance business is highly sensitive to weather conditions, crop yields, commodity prices, pests, plant disease, and government policies, leading to potential volatility in results.
• Insurance Industry Cyclicality: The P&C industry is cyclical, with competitive pressures, rising loss costs, and changes in reinsurance pricing and capacity influencing AFG's revenues and profitability.
• International Operations: Operations in foreign jurisdictions expose AFG to political and economic risks, including foreign currency fluctuations, credit risk, and restrictive governmental actions (e.g., price/capital controls, ownership limits). Compliance with international laws like the Foreign Corrupt Practices Act and UK Bribery Act also presents risks.
• Mass Tort Claims: AFG faces significant uncertainties from current and potential future mass tort claims, including asbestos and environmental (A&E), per- and polyfluoroalkyl substances (PFAS), talc, opioids, and cumulative trauma. Estimating liabilities for these claims is highly complex due to long delays, evolving legal interpretations, and increasing litigation funding. Gross A&E reserves were $460 million at December 31, 2025.

Operational & Execution Risks

Supply Chain Vulnerabilities:

• Supplier Dependency: AFG relies on reinsurers to limit retained risk. While most reinsurance is with highly-rated companies or collateralized, AFG remains liable to policyholders if reinsurers fail to meet obligations. The availability and cost of reinsurance are subject to market conditions, which could impact underwriting volume and profitability.

Technology & Data Security:

• Cybersecurity Threats: AFG is a frequent target of cyber-attacks, ransomware, and other intrusions. System failures, data breaches, or unauthorized access could disrupt operations, lead to data theft, financial losses, reputational damage, and legal/regulatory actions. The Company employs a comprehensive cybersecurity framework (NIST) including phishing tests, encryption, defense-in-depth, training, audits, and third-party risk management.
• AI Use Risks: Increasing reliance on AI technologies introduces risks of flawed, inaccurate, biased, or unreliable outputs, potentially leading to mispriced policies, unintended risks, operational disruptions, and legal/regulatory liabilities. Rapid AI adoption by competitors could also impact AFG's competitive position.
• Third-Party Technology/Data Security: Outsourcing technology and business process functions exposes AFG to risks associated with third-party system failures or security breaches.

Financial & Regulatory Risks

Market & Financial Risks:

• Investment Portfolio Market Risk: AFG's investment portfolio, heavily concentrated in fixed maturity securities, is exposed to interest rate risk, which can reduce fair values and increase unrealized losses. Equity securities are subject to price risk. The portfolio also carries credit risk from potential defaults or impairments.
• Alternative Investment Illiquidity/Volatility: Investments in limited partnerships and subordinate tranches of CLOs are illiquid, volatile, and lack quoted prices, potentially affecting investment income and overall portfolio liquidity.
• Access to Capital: Future capital requirements are influenced by rating agency and regulatory demands, investment performance, and business growth. Market volatility could limit access to capital markets or increase borrowing costs.
• Credit & Liquidity: A downgrade in financial strength or credit ratings could adversely affect business volumes, capital market access, and borrowing costs.

Regulatory & Compliance Risks:

• Comprehensive Regulation: AFG's insurance subsidiaries are subject to extensive U.S. state (e.g., holding company statutes, RBC, SAP, cybersecurity, ORSA, dividend restrictions, investment rules) and federal (e.g., Gramm-Leach-Bliley, TRIA, Dodd-Frank) regulations. International operations are subject to regulations like Solvency II and GDPR. These regulations primarily protect policyholders, not investors, and compliance costs can be significant.
• AI Regulation: Evolving laws and regulations concerning AI use could limit AFG's development and application of AI, create compliance issues, or compromise proprietary technology.
• Holding Company Dependence: As a holding company, AFG relies on dividends from its insurance subsidiaries, which are subject to state regulatory restrictions.
• Tax Law Changes: Changes in U.S. federal income tax laws (e.g., Inflation Reduction Act, corporate alternative minimum tax) or interpretations could increase corporate taxes and reduce earnings.
• Accounting Changes: New or revised accounting standards could impact reported financial results and increase earnings volatility.

Innovation & Technology Leadership

Research & Development Focus: Core Technology Areas: AFG's R&D efforts are focused on leveraging sophisticated data analysis for refining risk profiles, enhancing IT security, improving customer experience, and developing data analytics capabilities. The Company is increasingly utilizing and investing in AI technologies across its business operations, products, and services.

Leadership & Governance

Executive Leadership Team

Leadership Continuity: AFG maintains a consistent and methodical approach to succession planning for senior leaders and future talent development. The average tenure of the Company's approximately 200 most senior leaders is 20 years, indicating strong leadership continuity.

Board Composition: The Board of Directors and its Committees oversee human capital management issues, including succession planning, compensation, and employee engagement. The Audit Committee is specifically responsible for oversight of cybersecurity threat risks. One independent Director, Amy Y. Murray, holds a CERT Certificate in Cybersecurity Oversight.

Human Capital Strategy

Workforce Composition: As of December 31, 2025, AFG had approximately 8,500 employees, with about 7,700 employed at Great American Insurance Group. The workforce is characterized by specialized experts in their fields.

Talent Management: Acquisition & Retention: AFG aims to attract and retain exceptional talent by fostering a workplace culture that inspires and rewards employees. The voluntary turnover rate in 2025 was 8.3%, and the overall average employee tenure is 10 years. The Company offers competitive compensation and benefits, including an extensive wellness program, six weeks of paid parental leave, an employee stock purchase program, a retirement savings plan with employer matching, and company-wide profit-sharing programs. Diversity & Development: AFG cultivates specialized knowledge through professional education and leadership development. The Company is committed to a culture of inclusion, respect, and valuing unique employee perspectives. Employee engagement surveys are conducted biennially to gather feedback and inform management decisions.

Environmental & Social Impact

Environmental Commitments: AFG acknowledges the impact of changing weather patterns, potentially linked to climate change, on the frequency and severity of catastrophe losses. The Company is subject to increasing regulation requiring disclosure of sustainability and climate-related data.

Social Impact Initiatives: AFG is committed to being a responsible employer and contributing to communities' economic sustainability by providing employees with opportunities to achieve financial goals and promoting a safe and harassment-free workplace.

Business Cyclicality & Seasonality

Demand Patterns: AFG's business is subject to cyclicality and seasonality. The crop insurance business experiences significant volatility due to unpredictable weather conditions and commodity prices. Demand for P&C insurance generally fluctuates with the overall level of economic activity. The P&C industry itself is cyclical, characterized by periods of intense competition and lower premium rates, followed by periods of less competition and higher rates.

Planning & Forecasting: Management anticipates overall premium growth and strong underwriting results in the current P&C insurance market. Improved returns on alternative investments are expected to positively impact net investment income starting in the second half of 2026.

Regulatory Environment & Compliance

Regulatory Framework: AFG's insurance subsidiaries are subject to comprehensive regulation by U.S. state and federal agencies, as well as international jurisdictions. Key U.S. regulations include state statutes governing holding company systems, Risk-Based Capital (RBC) requirements, Statutory Accounting Principles (SAP), and cybersecurity regulations (e.g., NYDFS, NAIC Insurance Data Security Model Law). Federal laws such as the Gramm-Leach-Bliley Act, Fair Credit Reporting Act, Terrorism Risk Insurance Act (TRIP), and Dodd-Frank Wall Street Reform and Consumer Protection Act also apply. International operations are subject to regulations like Solvency II, anti-corruption laws, and GDPR.

Legal Proceedings: AFG and its subsidiaries are involved in routine litigation incidental to their insurance operations, as well as litigation related to asbestos and environmental claims from historical operations. APU Consolidated, Inc. faces claims for hazardous waste remediation costs from former railroad and manufacturing operations, and Great American Financial Resources, Inc. has a $8 million liability for environmental costs. While no individual claim is material, the ultimate liabilities may vary materially from current estimates.

Tax Strategy & Considerations

Tax Profile: AFG's statutory income tax rate is 21%. The Company's tax profile is influenced by geographic tax planning across U.S. federal, state, and local jurisdictions (e.g., California, Florida, Illinois), and foreign tax effects. Tax Reform Impact: Recent U.S. tax legislation, including the Inflation Reduction Act (IRA) and the One Big Beautiful Bill Act (July 4, 2025), and international proposals like the OECD Pillar Two global minimum corporate tax rate, are being monitored. Management does not expect a material impact from these changes on future results of operations. Tax Examinations: AFG's 2014-2018 and 2021-2025 tax years are subject to IRS examination. Unrecognized tax benefits and related penalties totaled $3 million at December 31, 2025.

Insurance & Risk Transfer

Risk Management Framework: AFG employs a robust risk management framework. It purchases information security risk insurance to protect against potential losses from cybersecurity incidents. The Company utilizes various risk transfer mechanisms, including facultative and treaty reinsurance, catastrophe reinsurance, and workers' compensation catastrophe reinsurance. Additionally, AFG has a fully collateralized catastrophe bond structure with Riverfront Re Ltd. and uses interest rate swaps as cash flow hedges to mitigate interest rate risk, and a total return swap to offset deferred compensation obligations.