Q1 2023 Earnings Release Transcript
REFINITIV STREETEVENTS
EDITED TRANSCRIPT
AFG.N - Q1 2023 American Financial Group Inc Earnings Call
EVENT DATE/TIME:
OVERVIEW:
Co. reported 1Q23 core net operating EPS of
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C O R P O R A T E P A R T I C I P A N T S
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
P R E S E N T A T I O N
Operator
Good day, and thank you for standing by. Welcome to the
I would now like to hand the conference over to your first speaker today,
Good morning, and welcome to
I'm joined this morning by Carl Lindner III and
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
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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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
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
Thanks, Carl. Please tuto Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of
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
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
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
Excluding the impact of alternative investments, net investment income in our Property and Casualty insurance operations for the three months ended
3
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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
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
During the quarter, we returned
AFG will pay AIG
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
For the three months ended
I will now tuthe call back over to Carl to discuss the results of our P&C operations and our expectations for 2023.
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
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
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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
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.
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
While we're on the subject of crop insurance, we thought it'd be helpful to provide a brief overview of
Multi-peril crop insurance accounts for over 90% of total crop insurance in the
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
5
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