AMERICAN FINANCIAL GROUP INC (AFG) stock intrinsic value fair value estimate & owner earnings analysis

American Financial Group is the parent of Great American Insurance Group, a specialty property-casualty insurer writing niche commercial lines such as excess and surplus liability, executive liability, workers' compensation, crop insurance, ocean and inland marine, aviation, surety, and fidelity/crime coverage. In 2021 the company sold its life-and-annuity business, and it has operated as a pure specialty P&C underwriter ever since; we valued it on that current business rather than the larger, more capital-market-sensitive company it used to be. We measure owner earnings as operating cash flow after stripping out the swings in reserves, receivables, and other working-capital-like items, after subtracting a small amount of stock compensation, and after subtracting only the ongoing (maintenance) portion of spending on offices and equipment, treating any spending tied to growth in the business separately. On that basis, owner earnings per share have been $11.84, $10.48, $9.82 and $9.14 in 2022 through 2025. We used the middle (median) of those four years, about $10.15 per share, as the starting point for the valuation, rather than the most recent year, so a single soft year does not drive the answer. The recent decline is worth explaining plainly: it is not coming from weaker underwriting. AFG's underwriting margin (the combined ratio) has stayed in a tight, healthy 90-91% band for three straight years, and actually improved sharply in the fourth quarter of 2025 versus the fourth quarter of 2024. The decline instead reflects two things: spending on offices and equipment roughly doubled from 2023 to 2024-2025, and a one-time investment loss that had been boosting cash flow in 2022-2023 faded away as bond markets stabilized. Because of this, and because management has stated that reinvesting maturing bonds at today's higher interest rates should start lifting investment income in the second half of 2026, we assumed earnings grow modestly (2%) in the first year rather than continuing last year's roughly 7% decline - we would not have made that assumption without those specific, recently reported facts pointing the other way. For the years after that, our base case assumes earnings grow in the mid-single digits for several years as underwriting stays disciplined and rates catch up with rising claim costs, then settles into low-single-digit growth. Beyond the ten-year forecast, we valued the business as a going concern that keeps renewing its book of specialty insurance business year after year, funded by the expenses already built into its underwriting results - not as an asset that wears out - assuming it can sustain only a modest 1% per year growth rate indefinitely. That indefinite-future piece is a large share of the total value here (roughly two-thirds), which is typical for a well-run, capital-light insurer; it rests on AFG continuing to underwrite at close to its historical 90% combined ratio, a record it has beaten the industry average on in the large majority of the last decade. Our bear case (roughly a one-in-ten downside outcome) assumes the specialty insurance market turns competitive again, pushing pricing down and the combined ratio up toward the high-90s over the next two to three years, combined with a weak run for the alternative investment portfolio and no pickup in reinvestment income. In that world, per-share earnings power stalls out near current levels rather than growing, which we estimate is worth around $155 a share. Our bull case (a one-in-ten upside outcome) assumes underwriting discipline holds, pricing stays firm for longer than expected, and the guided investment-income pickup fully materializes, worth around $307 a share. Given the spread between the bear and base cases, the margin-of-safety price sits meaningfully below our base-case estimate - around $191 a share - to allow for the risk that underwriting conditions soften or investment returns disappoint. We did not find anything in the filings we could not reconcile: cash flow, earnings, and the underlying reserve and reinsurance line items tied out cleanly for every year we reviewed.