Q2 2022 Earnings Release Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N - Q2 2022 American Financial Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 04, 2022 / 3:30PM GMT

OVERVIEW:

AFG reported 2Q22 core net operating EPS of $2.85 and expects full-year 2022 core net operating EPS to be $10.75-11.75.

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AUGUST 04, 2022 / 3:30PM, AFG.N - Q2 2022 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 S. 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

Charles William Lederer Wolfe Research, LLC - Research Analyst

Meyer Shields Keefe, Bruyette, & Woods, Inc., Research Division - MD

Michael Wayne Phillips Morgan Stanley, Research Division - Equity Analyst

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

Rudy R. Miller The Miller Group - Chairman, CEO, and President

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

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to American Financial Group's Second Quarter 2022 Results Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker host, Diane Weidner, Vice President of Investor Relations. Please go ahead.

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

Good morning, and welcome to American Financial Group's Second Quarter 2022 Earnings Results Conference Call. We released our 2022 second 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 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 in 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're 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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AUGUST 04, 2022 / 3:30PM, AFG.N - Q2 2022 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 2022 second quarter results, after which Craig, Brian and I will be glad to respond to your questions.

AFG's financial performance during the second quarter was outstanding. We're pleased to report an annualized core operating retuof nearly 21% in the quarter, including record second quarter underwriting profit alongside double-digit premium growth. Strategic positioning of our investment portfolio enabled us to invest opportunistically, and the returns in our alternative investment portfolio continued to exceed our expectations.

Our entrepreneurial, opportunistic culture and disciplined operating philosophy have positioned us well in this increasing interest rate environment and favorable Property and Casualty market.

Craig and I thank God, our talented management team, and all of our employees for helping us to achieve these exceptionally strong results.

I'll now tuthe discussion over to Craig to walk us through AFG's second quarter results, investment performance and our overall financial position at June 30.

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

Thank you, Carl. Please tuto Slides 3 and 4 for summary earnings information for the quarter. AFG reported core net operating earnings of $2.85 per share, compared to $2.39 per share in the second quarter of 2021. The increase was primarily the result of significantly higher underwriting profit in our Specialty P&C insurance operations. As Carl mentioned, annualized core operating retuon equity in the second quarter was a very strong 20.7%.

On Slide 4, you'll see that net earnings included after tax non-core realized losses on securities of $73 million, or $0.86 per share, in the quarter. Included in this number is $65 million, or $0.76 per share in after tax losses from the mark-to-market of equity securities that we continued to own at June 30.

Now I'd like to discuss the performance of AFG's investment portfolio, financial position and share a few comments about AFG's capital and liquidity. During the second quarter, we continued to act on the opportunities presented by the increasing interest rate environment and increased the duration of our P&C fixed maturity portfolio, including cash and cash equivalents, from approximately 2 years at December 31, 2021, to approximately 2.7 years at June 30, 2022.

Our fixed maturity reinvestment rate is approximately 4.5% and compares favorably to the fixed maturity portfolio book yield of approximately 3.3% at the end of the second quarter. In addition, our portfolio of floating rate securities, most of which are tied to one-month or three-month indices, continue to benefit from rising interest rates.

For the three months ended June 30, 2022, net investment income was slightly higher than the comparable 2021 period as both periods included very strong results from alternative investments. The annualized retuon alternative investments in the second quarter of 2022 was approximately 12.4% compared to 21.1% for the 2021 quarter.

The $62 million in pretax earnings from our portfolio of alternative assets in the 2022 quarter included $38 million in earnings from the sale of certain multi-family housing investments in a very favorable market. We held these investments for 4 to 5 years and achieved an average annual retuin excess of 25% over that period.

Excluding the impact of alternative investments, net investment income in our Property and Casualty insurance operations for the three months ended June 30, 2022 increased 18% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets.

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AUGUST 04, 2022 / 3:30PM, AFG.N - Q2 2022 American Financial Group Inc Earnings Call

Carl will come back to drivers of our overall increased guidance for 2022, but I'm going to take a few minutes now to talk about the investment income assumptions embedded in our updated guidance.

First of all, we'll continue to benefit from the higher interest rate environment, both from our floating-rate fixed maturities and reinvestment opportunities. With regards to alternative investments, our guidance assumes an overall annual yield of 10% to 12% on alternative investments for the full year, based on the strong performance of this portfolio in the first half of 2022. Our guidance reflects minimal income from alternative investments in the second half of 2022, as we assume that the continued strong performance of multi-family housing investments will offset weaker performance of traditional private equity investments, which may be under pressure from macro-economic environment.

As a reminder, investments tied to multi-family housing represents approximately 55% of our alternative investment portfolio.

As you can see on Slide 6, our investment portfolio continues to be high quality, with 91% of our fixed maturity portfolio rated investment grade and 98% of our P&C Group fixed maturity portfolio with an NAIC designation of 1 or 2, its highest two categories.

Please tuto Slide 7, where you'll find a summary of AFG's financial position at June 30, 2022. Our excess capital was approximately $1.1 billion at June 30, 2022. This number included parent company cash and investments of approximately $750 million.

During the quarter, we returned $728 million to our shareholders through the payment of our regular $0.56 per share quarterly dividend and $8.00 per share in a special dividend paid in May. Book value per share plus dividends declined nine-tenths of a point in the second quarter.

Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of 3.6% during the second quarter. The short duration of our fixed maturity portfolio and somewhat limited exposure to publicly traded common stocks when compared to some peer companies helped our performance in this period.

Year to date, AFG paid $10.00 per share in special dividends and paid a total of $36.00 per share in special dividends since the sale of its annuity operations in May of 2021. Through a combination of these special dividends, share repurchases, the redemption of debt and the purchase of Verikai, we have deployed the $3.57 billion in cash proceeds from the sale of our Annuity business while continuing to be in a strong excess capital position.

While all of AFG's excess capital is available for internal growth and acquisitions, based on assumptions underlying AFG's current guidance, we still expect to have $400 million to $500 million of excess capital available for potential share repurchases or additional special dividends through the end of 2022 while staying within our most restrictive debt to capital guideline. I will now tuthe call back to Carl to discuss the results of our P&C operations and to discuss our expectations for 2022.

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

Thanks, Craig. Please tuto Slides 8 and 9 of the webcast, which include an overview of the second quarter results. Operating earnings in our Property and Casualty segment established a new second quarter record for AFG, and I'm pleased that virtually all of our businesses are meeting or exceeding retuon equity targets.

As you'll see on Slide 8, the Specialty P&C insurance operations generated an underwriting profit of $197 million, compared to $153 million in the second quarter of 2021, a 29% increase year-over-year, also setting a new record for the second quarter underwriting profit.

Higher year-over-year underwriting profit in our Specialty Casualty and Specialty Financial Groups was partially offset by lower underwriting profit in our Property and Transportation Group. The second quarter 2022 combined ratio was a very strong 85.8%, improving 2.1 points from the prior year period. Results in this quarter included 1.6 points in catastrophe losses and 6.3 points of favorable prior year reserve development.

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AUGUST 04, 2022 / 3:30PM, AFG.N - Q2 2022 American Financial Group Inc Earnings Call

And gross and net written premiums increased 10%, 11%, respectively, in the 2022 second quarter compared to the prior year quarter. Year-over-year growth that was reported within each of the Specialty Property and Casualty Groups as a result of a combination of new business opportunities, increased exposures and a good renewal rate environment.

The drivers of growth vary considerably across our portfolio of Specialty Property and Casualty businesses. In the aggregate, year-over-year growth in gross written premium for the second quarter of 2022, excluding crop, is about 65% attributable to new business opportunities and change in exposures and about 35% attributable to rate increases.

Average renewal pricing across our P&C Group, excluding workers' comp, was up about 6% for the quarter, and up about 4% overall. Even though the pace of rate increases has slowed in some lines, renewal rate increases in the majority of our businesses continue to be at or in excess of estimated prospective loss ratio trends, which have been approximately 5% for our Specialty P&C businesses excluding workers' comp and approximately 3% overall throughout 2022.

As a reminder, when we talk about prospective loss ratio trend, it's our view on loss costs going forward in light of the current economic and legal environment, adjusted for the automatic increases in premium on exposures that move with inflation.

Now when we remove the benefit of inflation-sensitive exposure growth from our prospective loss ratio trend, such as payrolls and property values, among other considerations, we arrive at an underlying prospective loss cost trend estimate that's closer to 5% overall, and 6.5% excluding workers' compensation. With these things in mind, we feel very good about the level of rate increases that we continue to achieve and that we've achieved over the last few years, which were meaningfully in excess of loss ratio trends.

Now I'd like to tuto Slide 9 to review a few highlights from each of our Specialty Property and Casualty business groups. Property and Transportation Group reported an underwriting profit of $39 million in the second quarter of 2022 compared to $62 million in the second quarter of 2021, reflecting a couple of larger losses and higher catastrophe losses in our property and inland marine business and lower levels of favorable prior year reserve development when compared to an elevated level of favorable development in the first half of 2021.

Several of the businesses benefited from COVID-19-related lower claims frequency in the first half of 2021. Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums, were $19 million in the second quarter of 2022, compared to $7 million in the comparable '21 period.

With higher catastrophe losses and lower favorable development, the businesses in the Property and Transportation Group achieved a 92.4% calendar year combined ratio overall in the second quarter, 5.8 points higher than the comparable period in 2021.

Second quarter 2022 gross and net written premiums in this group were 13% and 12% higher, respectively, when compared to the 2021 second quarter. The year-over-year growth was primarily attributed to increased exposures and higher rates in our transportation businesses and growth in our crop insurance business. All the businesses in this group reported growth in gross written premiums during the quarter.

Overall renewal rates in this group increased 5% on average for the second quarter of 2022.

Now as far as our crop insurance business, with the exception of some isolated dry areas, much of the nation's coand soybean crop is in decent shape. Industry reports indicate 61% of coand 60% of soybean crops are in good to excellent condition, and in line with results last year at this time.

Current commodity pricing is really in great shape. Cois up approximately 1% and soybeans are currently down approximately 4% from spring discovery prices. Assuming that there's adequate rainfall throughout August, we would point to an average or better crop year.

The Specialty Casualty Group reported an underwriting profit of $130 million in the 2022 second quarter compared to $71 million in the comparable '21 period, primarily the result of higher profitability in our workers' compensation, excess and surplus lines, and executive liability businesses.

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