Q3 2023 Earnings Release Transcript
REFINITIV STREETEVENTS
EDITED TRANSCRIPT
AFG.N - Q3 2023 American Financial Group Inc Earnings Call
EVENT DATE/TIME:
OVERVIEW:
Company Summary
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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 American Financial Group Third Quarter 2023 Results Conference Call.
(Operator Instructions)
Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today,
Good morning, and welcome to
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
A detailed description of these risks and uncertainties can be found in AFG's filings with the
Now I'm pleased to tuthe call over to Carl Lindner III to discuss our results.
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Good morning. I'll begin my remarks by sharing a few highlights from AFG's 2023 third quarter, after which Craig and I will walk through more details. We'll then open it up for Q&A, where Craig, Brian and I will respond to your questions.
I am pleased to report strong underwriting results during the quarter despite elevated catastrophe losses. Higher interest rates contributed to meaningfully higher year-over-year investment income, culminating in a very strong annualized third quarter core operating retuon equity of 18.3%.
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. These factors, coupled with a commitment to effective capital management, enable us to continue to create long-term value for our shareholders. Craig and I thank God, our talented management team, and our great employees for helping us to achieve these results.
I'll now tuthe discussion over to Craig to walk us through AFG's third quarter results, investment performance, and to discuss 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
Looking at results for the third quarter, Property and Casualty net investment income was 17% higher than the comparable 2022 period. Excluding the impact of alternative investments, net investment income in our P&C insurance operations for the three months ended
As you'll see on Slide 6, approximately 68% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in high-quality,medium-duration fixed maturity securities at yields of approximately 6.0%. Current reinvestment rates compare favorably to the 4.68% yield earned on fixed maturities in our P&C portfolio during the third quarter of 2023 and 3.63% earned for the full year in 2022.
We have a long-standing commitment to quality, with 93% of this portfolio rated investment grade and 96% of the P&C portfolio rated NAIC 1 or 2, and have strategically managed duration to take advantage of market opportunities. We expect the yield earned on our P&C fixed maturity portfolio to increase by about 10 basis points in the fourth quarter of 2023 compared to the 4.68% earned in the third quarter of 2023.
Our third quarter 2023 P&C net investment income includes an annualized retuon alternative investments of 4.2% compared to a 7.1% retufor the 2022 third quarter. Third quarter 2023 alternative investment returns were lower in both the multi-family and private equity components of this portfolio. The average annual retuon AFG's alternative investments over the five years ended
Please tuto Slide 7, where you'll find a summary of AFG's financial position at
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As part of our earnings release, we declared a special cash dividend of
Looking at a longer-term horizon, AFG has declared
For the three months ended
I'll now tuthe call back over to Carl to discuss the results of our P&C operations and our expectations for the remainder of 2023.
Thanks, Craig. Please tuto Slides 8 and 9 of the webcast, which include an overview of our third quarter results. As you'll see on Slide 8, third quarter 2023 Property and Casualty operating earnings increased 3% year-over-year. Underwriting margins continue to be strong and are generating desired returns in nearly all of our Specialty Property and Casualty businesses. And we're growing our Specialty Property and Casualty businesses through increasing exposures, new opportunities, and a continued favorable pricing environment.
The Specialty Property and Casualty insurance operations generated an underwriting profit of
Results for the 2023 third quarter include 3.0 points in catastrophe losses, a half a point higher than last year's third quarter, and 2.3 points of favorable prior year reserve development, eight-tenths of a point lower than the comparable period.
Gross written premiums were flat, and net written premiums were up 4% when compared to the third quarter of 2022. As we discussed last quarter, earlier plantings of coand soybeans pushed some crop insurance premium into 2023's second quarter versus the third. Our 2023 crop premiums also reflect the impact of less favorable spring commodity futures pricing and related volatility in 2023 compared to 2022. Excluding the crop business, gross and net written premiums grew by a healthy 7% and 10%, respectively, when compared to the prior year period.
Average renewal pricing across our
Now I'd like to tuto Slide 9 to review a few highlights from each of our Specialty Property and Casualty business groups. Improved underwriting results in our
Third quarter 2023 gross and net written premiums in this group were 8% and 6% lower, respectively, than the comparable prior year period because of the earlier plantings of coand soybeans and the impact of spring commodity futures pricing and related volatility on premiums in
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our crop insurance business, as I discussed earlier. Excluding our crop business, gross and net written premiums grew by 2% and 4%, respectively, when compared to the 2022 third quarter.
Most of the remaining businesses in this group reported growth in gross and net written premiums during the quarter as a result of higher rates, new business opportunities and organic growth. We continue to stay focused on rate adequacy, particularly in our property business. Just as important as rate, we're closely monitoring insured values to ensure that premiums appropriately reflect inflationary considerations.
Overall renewal rates in this group increased 6% on average in the third quarter of 2023, consistent with the pricing achieved in this group for the second quarter of 2023. I'm pleased we're continuing to achieve rate increases in niches like commercial auto liability, which are in the high single digits.
The month of October is the discovery period for the majority of our coand all of our soybean business. Harvest pricing for coand soybeans settled 17% and 7% lower than spring discovery prices, respectively. Crop maturity is ahead of last year and the harvest is underway with approximately 71% and 85% of coand soybean crops harvested, respectively. Both are ahead of five-year averages. Yield variability will be important to our final results. Based on what we know about harvest pricing, coupled with the impact from hail damage throughout the WesteCoBelt over the past couple of months that impacted our private products, we're now expecting a below-average crop year.
The businesses in the
Third quarter 2023 gross and net written premiums increased 4% and 7%, respectively, when compared to the same prior year period. Factors contributing to the year-over-year growth included payroll growth in our workers' comp businesses, along with new business opportunities, strong policy retention and rate increases in several of our targeted market businesses, as well as new opportunities and higher policy renewals in our excess and surplus lines business. This growth was partially offset by lower year-over-year premiums in our mergers and acquisitions liability and executive liability businesses.
Renewal pricing for this group, excluding our workers' comp businesses, was up approximately 8% in the third quarter. Rates were up 5% including workers' comp. Both measures reflect a two-point improvement over the renewal pricing in the previous quarter. I'm especially pleased with continued strong rate increases achieved in our public entity, excess liability and social services businesses.
Now the
Third quarter 2023 gross and net written premiums were up 39% and 48%, respectively, when compared to the prior year period. While nearly all businesses in this group reported year-over-year growth, our financial institutions business was the primary driver of the higher premiums, which resulted from growth in the mortgage protection and residential investor businesses. The growth in this business is an example of where we're acting on opportunities presented by the tightening property market and improving policy terms. Overall renewal rates in this group were up about 5% for the third quarter.
Turning to our A&E reserves, during the third quarter of 2023, we completed our annual ground-up review of our asbestos and environmental exposures related to the run-off operations within the
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We also assessed the adequacy of our asbestos and environmental reserves for our historic railroad and manufacturing operations. As a result of this study, AFG recorded a special non-core A&E charge to increase its liabilities for environmental exposures by
Now please tuto Slide 10, where you'll see a full-page summary of our 2023 outlook. Overall, we continue to expect an ongoing favorable Property and Casualty market, with growth arising from new business opportunities, continued rate increases and increasing exposures.
Based on the results reported in the first nine months of the year and expectations for the remainder of the year, we continue to estimate AFG's 2023 core net operating earnings to be in the range of
As Craig noted, we continue to assume a retuon alternative investments for the full year of 2023 of approximately 9%, compared to 13.2% earned on these investments in 2022.
We now expect a 2023 combined ratio for the
Now looking at each sub-segment. Based on our results through the third quarter and expectation of a below-average crop year, we now expect a combined ratio in the range of 92% to 95% in our
We continue to expect our
And we now estimate the
Based on the results through the first nine months of the year, we continue to expect renewal rates to increase between 3% and 5% overall. Excluding workers' comp, we now expect renewal rate increases to be in the range of 5% to 7%.
Craig and I are proud of our proven track record of long-term value creation. We believe that our strong balance sheet and financial flexibility position us very well as we close out 2023 and look forward to 2024. We'll now open the lines for the Q&A portion of today's call. And Craig and Brian and I will be happy to respond to your questions.
Q U E S T I O N S A N D A N S W E R S
Operator
(Operator Instructions)
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Our first question comes from the line of
Hi, good morning. It's Jing on for Meyer. Thank you for taking my questions. My first question will be on -- just curious on the A&E reserve charge. Is that onetime only for this quarter?
This is Brian. On A&E, we monitor our A&E exposures, both in our Property and Casualty operations and in our run-off railroad and manufacturing operations every quarter. And then on an annual basis, we do an in-depth review of those reserves. So this charge in this quarter is related to that annual deep review of the exposures in the run-off railroad manufacturing operations. So it is the first charge of that size we've had in a number of years, but we do monitor it all the time. So there's always the possibility of expense there, but this is coming out of that annual once-a-year deep review.
^ Got you. So for next year, would it be like similar charges? Just curious.
We wouldn't -- I mean, we don't know of anything right now that's not recorded. But those can change over time. And we have had charges in other years. The reason we do the annual review is to sort of catch anything that might be out there, but it's impossible to predict what might happen in future periods.
Gotcha, thank you. My second question is on the renewal pricing still trending up. Can you break down the way on rates and exposures?
This is Brian again. So when we talk about renewal pricing, we're giving you just the pricing increase, not the exposure increase. So the exposure increases would help to increase premium growth beyond what we're giving you just for rate. So what we're giving for rate is just the price component.
Oh, sorry about that. Okay. Thank you.
Operator
Our next question comes from the line of
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Hey, good afternoon. Just curious, I heard the commentary on workers' comp profitability won't be the -- likely won't be as profitable, but still very profitable as last year. Is that something new? Or is that just -- is that what you've been -- what you reminded us last quarter when I think you made some revisions? And maybe just on work comp is -- is pricing -- has anything changed pricing-wise since last quarter? Obviously, higher interest rates are a great tailwind to you all in that line. And some of your peers, too, a long-winded question, have said that they're not really seeing any change in medical trend, but keeping a close eye on it.
Yes. I think my commentary is pretty consistent throughout the year in that as of the last quarter. This quarter is just a reminder that we have excellent workers' comp results. They're just not going to be at the same levels as 2022 in that lower prior year favorable development is the significant factor there.
On the loss ratio trend side, yes, I think we're seeing the same as others. There's not big changes there in that overall. They seem to be a reasonable perspective loss ratio trend. I mean, we still think that our overall prospective loss ratio trend is probably down with the exposure change of about 4% down, maybe 2% or so. So those seem to be reasonable.
Our
Pricing, not -- pricing is down about 4% year-to-date when you look at our overall workers' comp business. Not sure that's much different than any of the previous couple of quarters. I hope that's helpful.
Yes. That's helpful. And maybe switching gears a little bit to casualty ex-workers' comp. I know -- I think it was last quarter, you talked about, right, and not just you, all others as well have been talking about a bit of a higher trend line in certain lawsuit inflationary lines like public entity, commercial auto. I know you changed your expectations there a bit. But I'm kind of just curious as -- I know it's only been one quarter, but has anything changed? I mean, we can see pricing seems to be actually moving in the right direction. I don't know if you want to call out if you guys been trying to add to your reserves or anything?
Yes. I think the positive, say, it's a heavy public entity renewal period. And I think the good news is it reflects what I -- I think what I talked about on the last call about the changes that we've been putting into place on that particular business in that. And seeing the strong price increases was particularly strong, double-digit in the period in that. But that's as well as decreasing limits, raising retentions and being really appropriate and being involved in heavily on -- with mock trials and monitoring counsel and being heavily involved in active claims. So we're doing quite a few things. But yes, the third quarter is very pleased, in particular with the strong public entity price increase there and -- which drove the overall segment up.
Okay. And just lastly, with the inclusion of the crop acquisition, I know you've given guidance on it, too, but just curious now that you've maybe learned a little bit more, is -- when we think of not this year, but next year and outer years, is a normal crop year -- has that changed due to the acquisition or just maybe other variables?
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Well, yes, I mean, the dollar amount will change just because there's going to be a lot more business. But -- yes, the profit margins, I don't -- I think our criteria will probably be pretty much the same.
Thank you.
Operator
Thank you. Our next question comes from the line of
Hey, good afternoon. Just looking at reserves in the quarter and reserve development, can you kind of help us think about how social inflation impacted movements this quarter? Has your view of social inflation changed?
This is Brian. So we're still being very mindful of social inflation and think that it is something that the industry as a whole is going to be monitoring for a long time. So when you look at our Casualty segment, the lower levels of overall favorable development reflect two things.
One is the lower levels of favorable development coming out of workers' comp that we talked about earlier. And then also, we're not seeing favorable development in the social inflation exposed businesses that we might have seen in previous periods.
So I would say, there's an absence of favorable development. There are ins and outs, where some units have had some unfavorable development. But overall, I would say, social inflation is reducing our favorable development as much as it would be increasing any adverse development.
Okay. And on the workers' comp business, can you kind of help us -- you mentioned the loss ratio trend and some of the pricing in the calendar year view, but how should we think about where you're booking workers' comp accident year picks compared to last year?
Sure. So a couple of things are going on there. One is, as Carl mentioned, there are rate decreases happening in workers' comp. So that puts some pressure on the accident year. And then even though we haven't been experiencing medical cost inflation, we're mindful of that and being careful to consider that, as we set current year accident pick. So the accident year loss ratio in workers' comp would be a little bit higher for those two things, but still producing those ROEs when you look at the business overall that Carl mentioned earlier.
Okay. Thank you.
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Operator
Thank you. Our next question comes from the line of
Well good afternoon, everyone. I thought I'd start with my first question, going back to Craig's presentation on the investment portfolio and the performance. And I think, Craig, you mentioned that the fixed income yields are now up to around 6.0%, which is a nice lift from where it was a year ago. Can you maybe step back and give us some perspective on how -- because of the higher yield environment, you might be altering allocations where you have new money going into whether it's industry group or sector type? And also as investments come up and mature, how you're allocating those inside the portfolio?
Sure, Greg. I wouldn't say that we are significantly altering our allocations. I'd say, certainly, fixed income is more attractive than it's been in a long time. So probably a bit heavier weighting to medium-term fixed maturity investments versus certain other asset classes. But I wouldn't expect us to change the allocations at a very significant way. We do think on the real estate side as an example, there are going to be some really interesting opportunities over the next couple of years. And time will tell whether we're right on how things are going to evolve there. But we do think that there's going to be an opportunity to get some extraordinary returns in the real estate market. I don't think you should expect to see a significant change, though, in the allocation in the investment portfolio.
Okay. Fair enough. It makes sense. And then I guess, pivot back to Carl. And let's focus on the Property business -- Property and Transportation business ex-crop. I think you called out in your comments, an underperforming book of transportation business, maybe it was
Are you asking me to focus on commercial auto in particular? Is that...
Well, yes, commercial auto would be one topic. But inside Property and Transportation, there are other businesses on top of just commercial auto outside of crop. So just the -- I'm just focused on ex-crop business inside Property and Transportation.
Yes. I mean, there's a number of different businesses. Our transportation business is a significant part. I think it's a mixed picture within the transportation business. There are some parts of the business that seem to be more competitive, others that seem to be tightening. And with competitors -- some competitors like Nationwide and others leaving part of the space in that.
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