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AFG’s excess capital available for buybacks and M&A deals: Co-CEO Lindner


American Financial Group’s (AFG) current “robust” excess capital is available for more share buybacks and M&A deals, the company’s co-CEO Stephen Lindner said.

The insurer closed the third quarter of 2021 with approximately $3bn in excess capital, including parent company cash and investments of $2.7bn, but AFG senior managers believe that returning capital to shareholders should be a key component of their capital management strategy.

“We expect to continue to have significant excess capital and liquidity through the end of the year and beyond,” Lindner said during a Q3 earnings call with investment analysts.

“Our excess capital affords us the financial flexibility to make opportunistic repurchases, pay additional special dividends [and] grow our specialty P&C niche businesses organically and through acquisitions,” he added.

Lindner commented on the carrier’s capital position after AFG boosted its underwriting profits by 62.5% in Q3, while its specialty casualty group booked a third-quarter underwriting profit of $110mn.

Along with its Q3 underwriting results, AFG announced a special cash dividend of $4 per share, payable on November 22, 2021. Year-to-date, the firm has declared $24 per share in special dividends.

In May, the firm announced plans to pay a special, one-time cash dividend of $12-$14 per share, subject to the board of directors' approval.

But the carrier’s capital management will probably explore other options beyond dividend payments.

AFG will likely engage in an aggressive repurchase plan to take advantage of opportunities whenever its stock trades at “a very large discount” compared to what management considers as “appropriate value.”

"While all AFG's excess capital is available for internal growth and acquisitions, approximately $180mn of excess capital can be used for share repurchases and additional special dividends, while staying within our most restrictive debt-to-capital guideline,” Lindner told analysts.

The company is also monitoring the market to explore further M&A activity, but AFG managers consider themselves “tough buyers” and would expect significant returns on any given deal.

“We not only expect acquisitions to add to earnings or be accretive to earnings, we expect an acquisition to be able to earn double-digit returns over time,” co-CEO Carl Lindner said.

“So, we are tougher buyers, but we're seeing a steady flow of opportunities,” he added.

Another capital management option for the insurer is debt retirement, but to AFG managers that alternative looks currently unlikely, as none of its debt outstanding is callable at par until 2024.

“Bringing it in now would cause us to pay a premium probably in the 10% range,” AFG CFO Brian Hertzman said about the firm’s short-term debt.

“But given the cash and investment position at the parent if a great opportunity came along, we do have the ability to do that to retire a meaningful amount of the debt,” co-CEO Stephen Lindner added.

In early 2021, AFG agreed to sell its annuity business to Boston-based Massachusetts Mutual in a $3.5bn all-cash deal.

The carrier divested its life insurance arm as part of its strategy to redeploy capital into property and casualty insurance segments.

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