Q4 2021 Earnings Release Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N - Q4 2021 American Financial Group Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 10, 2022 / 4:30PM GMT

OVERVIEW:

AFG reported full year 2021 net EPS of $23.30. Co. expects 2022 core net operating EPS to be $9.75-10.75.

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FEBRUARY 10, 2022 / 4:30PM, AFG.N - Q4 2021 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 Investor & Media Relations

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 William Lederer Wolfe Research, LLC - Research Analyst

Dong Yoon Han Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

Michael David Zaremski Wolfe Research, LLC - Research Analyst

Sidney Schultz Raymond James & Associates, Inc., Research Division - Equity Associate

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 2021 Fourth Quarter and Full Year Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your first speaker today, to Diane Weidner, Vice President, Investor Relations. Please go ahead.

Diane P. Weidner - American Financial Group, Inc. - VP of Investor & Media Relations

Thank you. Good morning, and welcome to American Financial Group's Fourth Quarter 2021 Earnings Results Conference Call. We released our 2021 fourth quarter and full year 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 in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

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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FEBRUARY 10, 2022 / 4:30PM, AFG.N - Q4 2021 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 2021 fourth quarter and full year results, after which Craig, Brian and I will be glad to respond to your questions.

AFG's financial performance during the fourth quarter was exceptional and a strong finish to an outstanding year. We're very pleased with the underwriting margins produced by our Specialty Property and Casualty businesses and returns in our portfolio of alternative investments that continued to exceed our expectations.

AFG's total shareholder retuin 2021, representing the change in share price plus dividends, was a very impressive 89%. Our diversified portfolio of specialty insurance operations, and entrepreneurial culture and disciplined operating philosophy have positioned us well in a hard P&C market and an improving economy. Craig and I thank God, our talented management team and 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 fourth quarter and full year results, investment performance and our overall financial position at December 31.

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

Thank you, Carl. As you'll see on Slide 3, AFG's core net operating earnings were a record $11.59 per share for the full year of 2021, generating a core operating retuon equity of 18.6%.

Earnings from AFG's discontinued annuity operations, the significant gain on the sale of this business, and other non-core items contributed meaningfully to full year net earnings per share of $23.30.

AFG's net retuon equity was a very strong 37.5% in 2021. We're very pleased to have achieved a valuation of approximately 140% of adjusted GAAP book value on the sale of AFG's annuity business. This calculation includes proceeds from the sale and dividends paid to AFG in conjunction with the sale. See Slide 4 for additional details.

Capital management is one of our highest priorities. Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future.

The successful sale of our Annuity business provided a unique opportunity for us to retu$2.7 billion to shareholders during the year. We paid $2.4 billion in dividends during the year, including $2.2 billion in special dividends and $176 million in regular common stock dividends and made share repurchases totaling $319 million.

Our quarterly dividend was increased by 12% to an annual rate of $2.24 per share, beginning in October of 2021. Growth in adjusted book value plus dividends was an impressive 34.4%.

Turning to Slides 5 and 6, you'll see that the fourth quarter 2021 core net operating earnings per share of $4.12 were more than double those in the prior period, producing an annualized fourth quarter core retuon equity of 28.1%.

Net earnings per share of $4.18 included after-taxnon-core realized gains on securities of $0.06 per share, which include fair value changes on securities that we continued to hold at the end of the quarter.

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 $15.7 billion investment portfolio are presented on Slides 7 and 8. Pretax unrealized gains on AFG's fixed maturity portfolio were $173 million at the end of the fourth quarter.

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FEBRUARY 10, 2022 / 4:30PM, AFG.N - Q4 2021 American Financial Group Inc Earnings Call

For the 12 months ended December 31, 2021, P&C net investment income was approximately 64% higher than the comparable 2020 period and included significantly higher earnings from alternative investments.

We're especially pleased with the performance of our alternative investments during the quarter. Earnings from these investments may vary from quarter to quarter based on the reported results and valuation of the underlying investments, and generally are reported on a quarter lag.

The annualized retuon alternative investments reported in core operating earnings in the fourth quarter of 2021 was a very strong 26.3% and was 24% for the full year. Incorporating the exceptional performance in 2021, the average annual retuon these investments over the past five calendar years was 13%.

As we look forward to 2022, our guidance for the year reflects an assumed retuof 10% on our portfolio of alternative investments. However, in the first quarter, we expect our alternative investment portfolio to exceed an annualized 10% retudue to the sale of several multi-family real estate investments at favorable valuations.

Alternative investments with underlying real estate exposures have been a key contributor to the performance of this portfolio and help to differentiate our portfolio of alternative investments from our peers. We view our investments in real estate and real estate-related entities as a core competency.

As I've noted in previous calls, we've found great success in investing in multi-family properties in desirable communities where we continue to achieve high occupancy rates and very strong rent increases. These properties represent just over half of our alternative investment portfolio at December 31, 2021.

Excluding the impact of alternative investments, P&C net investment income for the 12 months ended December 31, 2021, decreased 6% year-over-year, reflecting lower market interest rates. As you can see on Slide 8, our investment portfolio continues to be high quality, with 88% of our fixed maturity portfolio rated investment grade and 98% of our P&C Group fixed maturities portfolio with an NAIC designation of 1 or 2, its highest two categories.

We've remained patient and disciplined in this prolonged low interest rate environment, and we're well positioned as interest rates begin to rise. As of December 31, 2021, our P&C company fixed maturity duration was approximately two years, the lowest in recent history.

More specifically, cash and floating rate securities of $3.8 billion account for 27% of our insurance company's investment portfolio. If indications of future interest rate increases come to fruition, these higher rates will produce investment income that contributes to profitability in a meaningful way. Assumptions embedded in our 2022 earnings guidance include four 25-basis point increases in the benchmark Federal Funds rate over the course of 2022.

Please tuto Slide 9, where you'll find a summary of AFG's financial position at December 31, 2021. Our excess capital was approximately $2.1 billion at 12/31/2021. This number included parent company cash and investments of approximately $1.9 billion. Our excess capital affords us the financial flexibility to make opportunistic repurchases, pay additional special dividends, grow our Specialty Property and Casualty business organically and through acquisitions and start-ups that meet our target retuthresholds.

While all AFG's excess capital is available for internal growth and acquisitions, based on assumptions underlying AFG's current guidance, approximately $750 million of excess capital can be used for share repurchases and special dividends by year-end 2022, while staying within our most restrictive debt to capital guideline.

Last month, we announced AFG's acquisition of Verikai in December of 2021 for $120 million in cash. We believe that artificial intelligence and machine learning will continue to have a significant impact on the insurance industry and see Verikai as a thoughtful and effective leader in the use of these technologies.

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FEBRUARY 10, 2022 / 4:30PM, AFG.N - Q4 2021 American Financial Group Inc Earnings Call

We've been very selective and intentional with our investments in the insurtech space and have enjoyed great success with several strategic relationships. Although we don't often invest directly in insurtech entities, we found Verikai to be an outstanding opportunity. Verikai will continue to operate as a stand-alone company to serve its insurance clients.

Book value per share, excluding unrealized gains related to fixed maturities, was $57.42 at December 31, 2021, compared to $63.61 per share at the end of 2020, and reflects $26.00 per share in special dividends paid in 2021.

I'll now tuthe call back over to Carl to discuss the results of our P&C operations and discuss our expectations for 2022.

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

I'd like to begin by congratulating Gary Gruber on his upcoming retirement as Great American's President and Chief Operating Officer. Gary has played a significant role in the tremendous growth and success of our Property and Casualty business over the course of his nearly 45-year career with the company.

Gary is a treasured colleague and a longtime friend to me and many others. It's been an honor to work alongside him, and I wish him many years of health and happiness in retirement. Gary, thank you for your contributions and service to Great American and AFG.

With Gary's retirement, David Thompson has succeeded him as President and Chief Operating Officer of Great American's Property and Casualty Group, effective February 1. David is the 18th President in Great American's 150-year history. His executive leadership experience overseeing numerous Great American specialty property and casualty operations positions us well for growth and success.

Now turning to a review of the quarter, results in our Specialty Property and Casualty Group were outstanding, as you'll see on the overview on Slide 10. Fourth quarter pretax core operating earnings in AFG's P&C Insurance Segment established another record for the fourth time this year at $485 million.

Specialty Property and Casualty insurance operations generated an underwriting profit of $281 million in the 2021 fourth quarter, an impressive 57% increase year-over-year, driven primarily by higher year-over-year underwriting profitability in our Specialty Casualty and Property and Transportation Groups.

Despite the impact of devastating tornadoes in Kentucky and fire-related losses in Colorado, our catastrophe losses were a very manageable $25 million.

Underwriting margins across our portfolio of businesses were excellent, and our overall Specialty Property and Casualty combined ratio was an exceptionally strong 80.7%, improving 5.5 points from the prior year period. The fourth quarter 2021 combined ratio included 1.8 points in catastrophe losses and 5.0 points of favorable prior year reserve development.

Each of our Specialty Property and Casualty sub-segments produced combined ratios in the mid-80s or lower during the quarter, the strongest we've reported in 15 years.

Gross and net written premiums increased 14% and 12%, respectively, for the full year in 2021 and established new records for premium production. Premiums reported in the fourth quarter were significantly impacted by timing differences in the recording of premiums in our Property and Transportation Group.

When you adjust for those items, gross and net written premiums were up 12% and 9%, respectively, for the fourth quarter of 2021, when compared to the same period last year. With consideration to those adjustments, each of our Specialty Property and Casualty groups reported healthy growth as a result of an improving economy, new business opportunities and a continued strong renewal rate environment.

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