Q1 2023 Earnings Release Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N - Q1 2023 American Financial Group Inc Earnings Call

EVENT DATE/TIME: MAY 03, 2023 / 3:30PM GMT

OVERVIEW:

Co. reported 1Q23 core net operating EPS of $2.89.

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MAY 03, 2023 / 3:30PM, AFG.N - Q1 2023 American Financial Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brian Scott Hertzman American Financial Group, Inc. - Senior VP & CFO

Carl Henry Lindner American Financial Group, Inc. - Co-President,Co-CEO & Director

Diane P. Weidner American Financial Group, Inc. - VP of IR

Stephen Craig Lindner American Financial Group, Inc. - Co-President,Co-CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Charles Gregory Peters Raymond James & Associates, Inc., Research Division - Equity Analyst

Jon Paul Newsome Piper Sandler & Co., Research Division - MD & Senior Research Analyst

Michael David Zaremski BMO Capital Markets Equity Research - MD & Senior Equity Research Analyst

Jing Li Keefe, Bruyette, & Woods, Inc - AVPŸEquity Research Division

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by. Welcome to the American Financial Group 2023 First Quarter Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Diane Weidner, Vice President of Investor Relations. Diane, you have the floor.

Diane P. Weidner - American Financial Group, Inc. - VP of IR

Good morning, and welcome to American Financial Group's First Quarter 2023 Earnings Results Conference Call. We released our 2023 first quarter results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call.

I'm joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group, and Brian Hertzman, AFG's CFO.

Before I tuthe discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website.

We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy, and as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.

Now I'm pleased to tuthe call over to Carl Lindner III to discuss our results.

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MAY 03, 2023 / 3:30PM, AFG.N - Q1 2023 American Financial Group Inc Earnings Call

Carl Henry Lindner - American Financial Group, Inc. - Co-President,Co-CEO & Director

Good morning. We're pleased to share highlights of AFG's 2023 first quarter, after which Craig, Brian and I will respond to your questions. AFG's financial performance during the first quarter was excellent, with a core operating retuon equity of 22%. Our Specialty Property and Casualty businesses produced strong underwriting margins, investment income benefited from a higher interest rate environment when compared to the 2022 first quarter, and we continue to be pleased with the performance of our alternative investment portfolio, where returns exceeded our expectations during the quarter.

Our entrepreneurial, opportunistic culture and disciplined operating philosophy continue to serve us well in a favorable Property and Casualty market and a dynamic economic environment. Craig and I thank God, our talented management team, and our talented employees for helping us to achieve these exceptionally strong results.

Shortly before we shared our first quarter earnings results, we announced a definitive agreement to acquire Crop Risk Services from AIG. This business is a great strategic fit with our existing crop insurance operations and will provide opportunities to continue to benefit from economies of scale in this business. We're delighted to welcome CRS' CEO, Brian Young, its leadership team and employees to Great American Insurance Group. I'll share a bit more about CRS later in the call.

Now I'd like to tuthe discussion over to Craig to walk us through AFG's first quarter results, investment performance and our overall financial position at March 31.

Stephen Craig Lindner - American Financial Group, Inc. - Co-President,Co-CEO & Director

Thanks, Carl. Please tuto Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.89 per share in the 2023 first quarter. The year-over-year decrease was primarily due to lower returns on AFG's alternative investment portfolio when compared to the exceptionally strong performance of this portfolio in the prior year period, and lower year-over-year underwriting profit in our Specialty Property and Casualty insurance operations. Both of these items were partially offset by higher other net investment income.

Now I'd like to tuto an overview of AFG's investment performance, financial position and share a few comments about AFG's capital and liquidity. The details surrounding our $14.5 billion investment portfolio are presented on Slides 5 and 6. Pretax unrealized losses on AFG's fixed maturity portfolio were $523 million at the end of the first quarter, compared to pretax unrealized losses of $630 million at the end of 2022, reflecting the decline in longer-term interest rates.

We have acted on opportunities presented by a higher interest rate environment and extended the duration of our P&C fixed maturity portfolio, including cash and cash equivalents, from approximately 2 years at the end of 2021 to approximately 3 years at March 31, 2023. In the current interest rate environment, we're able to invest in high-quality,medium-duration fixed maturity securities at yields of approximately 5%, which compares favorably to the 4.40% yield earned on fixed maturities in our P&C portfolio during the first quarter of 2023.

We expect the yield earned on our P&C fixed maturity portfolio to increase by about 10 to 20 basis points by the fourth quarter of 2023 compared to the 4.40% earned in the first quarter of 2023. This yield compares very favorably to the 3.63% earned for the full year in 2022.

Looking at results for the quarter, Property and Casualty net investment income was 7% lower than the comparable 2022 period. These results included an annualized retuon alternative investments in the first quarter of 2023 of 14.2% compared to an exceptionally strong 29.1% retufor the 2022 first quarter.

The retuon alternative investments in the first quarter of 2023 was the result of strong performance in both the multi-family and private equity portfolios. The average retuon AFG's alternative investments over the five years ended December 31, 2022, was approximately 14%.

Excluding the impact of alternative investments, net investment income in our Property and Casualty insurance operations for the three months ended March 31, 2023, increased by 54% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets. We

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MAY 03, 2023 / 3:30PM, AFG.N - Q1 2023 American Financial Group Inc Earnings Call

thought it would be useful to provide a summary of our exposure to the banking industry as well as exposure to the office real estate market, which you'll see on Slide 7 and 8.

In summary, our exposure to the banking industry is well diversified and highly rated. Our direct exposure to the office real estate market is very modest in size and reflects our historic underweight positioning of this asset class. In addition, indirect exposure to office real estate in our fixed maturity portfolio is principally in securitizations and is very small and well-protected by the credit enhancement embedded in such securitizations.

Looking forward, our guidance for 2023 reflects a retuof approximately 8% on our $2.3 billion portfolio of alternative investments. Although rental rates on our multi-family investments are flattening out after several years of very strong increases, we are confident in the long-term outlook for this portfolio.

Our properties are primarily in regions with very strong population growth. In addition, 53 of the 57 underlying properties have assumable, attractively priced fixed-rate debt. The debt has an average weighted term of approximately eight years and an average interest rate of 3.85%. Our earnings guidance assumes a high single-digit retuon our multi-familyhousing-related investments for the full year 2023.

Please tuto Slide 9, where you'll find a summary of AFG's financial position at March 31, 2023. Our excess capital was approximately $1.0 billion at March 31, 2023. This number included parent company cash and investments of approximately $672 million.

During the quarter, we returned $418 million to our shareholders through the payment of our regular $0.63 per share quarterly dividend, a $4.00 per share special dividend and $24 million in share repurchases. Our acquisition of CRS provides an attractive opportunity to deploy our excess capital to expand our specialty niche businesses and serves as an example of our nimbleness and efficiency in executing a transaction of this nature.

AFG will pay AIG $240 million, which includes approximately $30 million in tangible assets in cash at the closing date. Following the transaction, we will have significant excess capital available for share repurchases or special dividends. We expect our operations to generate significant excess capital in 2023 to the point that we could deploy in excess of $500 million of excess capital for share repurchases or additional special dividends through the end of 2023, which is in addition to the capital returned to shareholders during the first quarter of 2023.

As you may recall, the portion of our excess capital that we view as available for special dividends and share repurchases is limited by our internal total debt-to-capital target of 30%, and that capital is impacted by unrealized gains and losses on fixed maturities. However, it's important to note that each dollar of debt repurchased frees up approximately $2 of excess capital for distribution to shareholders.

For the three months ended March 31, 2023, AFG's growth in book value per share plus dividends was 7%. Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of 4.2% during the first quarter.

I will now tuthe call back over to Carl to discuss the results of our P&C operations and our expectations for 2023.

Carl Henry Lindner - American Financial Group, Inc. - Co-President,Co-CEO & Director

Thank you, Craig. Please tuto Slides 10 and 11 of the webcast, which include an overview of our first quarter results. As you'll see on Slide 10, the Specialty Property and Casualty insurance operations generated an underwriting profit of $155 million, compared to $208 million in the first quarter of 2022, with each of our Specialty Property and Casualty Groups producing lower year-over-year underwriting profit following the record first quarter results reported in the prior year period.

The first quarter 2023 combined ratio was a strong 89.2%, though 5.2 points higher than the prior year period. Results for the first quarter in 2023 include 2.2 points in catastrophe losses and 4.5 points of favorable prior year reserve development. Catastrophe losses were $31 million in the first quarter of 2023, compared to $9 million in the prior year period.

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MAY 03, 2023 / 3:30PM, AFG.N - Q1 2023 American Financial Group Inc Earnings Call

Gross and net written premiums were both up 11% in the 2023 first quarter compared to the prior year quarter. Year-over-year growth was reported within each of the Specialty Property and Casualty Groups as a combination of new business opportunities, increased exposures, and a good renewal rate environment.

Average renewal pricing across our Property and Casualty Group, excluding workers' comp, was up approximately 5% for the quarter, and up approximately 4% overall. We've been focused on achieving adequate pricing for some time and have achieved overall rate increases across our entire specialty book for 27 straight quarters. When we compare pricing to prospective loss ratio trends, there are some areas where more rate is needed such as public D&O, commercial auto liability, and excess liability, particularly where we're writing higher layers for Fortune 1000 accounts.

While our overall pricing guidance, excluding workers' comp is in line with our overall prospective loss ratio trends excluding comp, it's essential that that we're looking at this on a business-by-business basis. The impact of cumulative rate increases over time has generally enabled us to stay ahead of prospective loss ratio trends and helps us to feel confident in the adequacy of our reserves. Importantly, we were successful in achieving or exceeding targeted returns in nearly all of our Specialty Property and Casualty businesses in the first quarter of 2023.

Now I'd like to tuto Slide 11 to review a few highlights from each of our Specialty Property and Casualty business groups.

The Property and Transportation Group reported an underwriting profit of $43 million in the first quarter of 2023 compared to $62 million in the first quarter of 2022. Higher year-over-year underwriting profit in our transportation businesses was more than offset by lower profitability in our property and inland marine and agricultural businesses, which was primarily the result of elevated catastrophe losses attributable to the February and March storms across much of the United States. Crop insurance profitability was also lower year-over-year compared to the very strong results recorded in the first quarter of 2022. Catastrophe losses in this group were $19 million in the first quarter, compared to $6 million in the comparable 2022 period.

First quarter 2023 gross and net written premiums in this group were 15% and 10% higher, respectively, than the comparable prior year period. New business opportunities arising from sales of crop insurance products with higher cessions, coupled with increased rates and exposures in our commercial transportation businesses were the primary drivers of the increase in premiums.

Overall renewal rates in this group increased 6% on average in the first quarter of 2023, consistent with the pricing achieved in this group for the full year in 2022.

The crop year is off to a solid start. Coplantings are in line with five-year historical averages and soybean plantings are running ahead. Drought conditions improved over the winter, and based on our book of business, we don't have concerns about drought-impacted areas at this time. While there's been heavy rainfall in California, we don't expect this to impact our results. Commodity pricing is in an acceptable range, with coand soybeans down approximately 12% and 8%, respectively, from spring commodity prices. It's still very early, but we're pleased with what we see so far.

While we're on the subject of crop insurance, we thought it'd be helpful to provide a brief overview of Crop Risk Services' business. As our press release noted, CRS is a primary crop insurance general agent based in Decatur, Illinois, with 2022 gross written premiums of approximately $1.2 billion. They're the seventh largest provider of multi-peril crop insurance in the United States, based on the 2022 premiums.

Multi-peril crop insurance accounts for over 90% of total crop insurance in the U.S. and is provided by a total of 14 approved insurance providers, or AIPs. Following the closing of the transaction, Great American will remain the fifth largest writer of U.S. crop insurance and the largest U.S.-owned participant in the United States multi-peril crop insurance program.

CRS writes business in 37 states with a premium split and mix of coverage offerings that are similar to ours, and with a focus on many of the same states. We're especially excited about CRS's track record of organic growth and strong 2022 performance.

On a pro forma basis, the combined MPCI gross written premium by CRS and AFG for the year ended December 31, 2022 would have been $2.7 billion, with about half of this premium generated from the states of Illinois, Kansas, Iowa, Texas, Indiana, and South Dakota.

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