Q4 2022 Earnings Release Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N - Q4 2022 American Financial Group Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 02, 2023 / 4:30PM GMT

OVERVIEW:

AFG reported full-year 2022 core net operating EPS of $11.63. Co. also reported 4Q22 core net operating EPS of $2.99, net EPS of $3.24. Expects 2023 core net operating EPS of $11.00-12.00.

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FEBRUARY 02, 2023 / 4:30PM, AFG.N - Q4 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

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

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

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

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

Operator

Thank you for standing by, and welcome to the American Financial Group 2022 Fourth Quarter and Full Year Results Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now tuthe conference to your host, Ms. Diane Weidner, Vice President of Investor Relations. Please go ahead.

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

Thank you. Good morning, and welcome to American Financial Group's Fourth Quarter 2022 Earnings Results Conference Call.

We released our 2022 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.

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 am pleased to tuthe call over to Carl Lindner III to discuss our results.

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

Well, good morning.

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FEBRUARY 02, 2023 / 4:30PM, AFG.N - Q4 2022 American Financial Group Inc Earnings Call

We're pleased to share highlights of AFG's 2022 fourth quarter and full year results, after which Craig and Brian and I will respond to your questions.

AFG's financial performance during the fourth quarter was excellent, and a strong finish to an outstanding year. Core operating retuon equity topped 21% and nearly all of our Property & Casualty businesses grew during the year, establishing a record level of premium production for the company. We are also very pleased to report record full year underwriting profit and investment income in our Specialty Property and Casualty business.

Our compelling mix of specialty insurance businesses, an entrepreneurial culture, disciplined operating philosophy and an astute team of in-house investment professionals collectively have enabled us to outperform many of our peers over time. 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 results, investment performance and our overall financial position at December 31.

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

Thanks, Carl.

As you'll see on Slide 3, AFG's core net operating earnings were $11.63 per share for the full year 2022, generating a core operating retuon equity of 21.2%, which was even better than the excellent 18.6% core ROE achieved in 2021. The earnings power of our operations, coupled with efficient capital management, allows AFG to produce returns on equity in excess of most of our peer property and casualty insurers.

Understanding that capital management is a critical component of delivering top-tier ROEs, we make capital management 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.

Carl and I are pleased that we returned $1.23 billion to shareholders during 2022, including just over $1 billion or $12.00 per share in special dividends and $197 million in regular common stock dividends. Our quarterly dividend was increased by 12.5% to an annual rate of $2.52 per share beginning in October of 2022. We're proud of our track record of value creation.

During 2021 and 2022, we returned a total of $3.9 billion in capital to shareholders in the form of dividends and share repurchases. In addition to deploying the excess capital created from the sale of our annuity business, we've continued to generate and deploy excess capital through AFG's strong property and casualty operations. Growth in adjusted book value per share plus dividends was an impressive 18.5% in 2022.

Turning to Slides 4 and 5 you'll see that the fourth quarter of 2022 core net operating earnings per share of $2.99 produced an annualized fourth quarter core retuon equity of 22.3%. Net earnings per share of $3.24 included after-taxnon-core realized gains on securities of $0.25 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 discuss the performance of AFG's investment portfolio, 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 6 and 7. Pretax unrealized losses on AFG's fixed maturity portfolio were $630 million at the end of the fourth quarter, reflecting the increase in market interest rates and widened credit spreads compared to year-end 2021. As we entered 2022, the duration in our fixed maturity portfolio was at its lowest in recent history.

Over the course of the year, we acted on opportunities presented by the increasing interest rate environment and extended the duration of our P&C fixed maturity portfolio, including cash and cash equivalents, from approximately 2 years at December 31, 2021, to approximately 3 years at December 31, 2022. In the current interest rate environment, we're able to invest in high quality, medium-duration fixed maturity securities at yields of approximately 5.5%, which compare favorably to the 4.15% yield earned on fixed maturities in our P&C portfolio during the fourth quarter of 2022.

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FEBRUARY 02, 2023 / 4:30PM, AFG.N - Q4 2022 American Financial Group Inc Earnings Call

In addition to the favorable impact of higher reinvestment rates, as we look forward, we expect our portfolio of floating rate securities, most of which are tied to 1-month or 3-month indices, to benefit from additional increases in short-term interest rates. Altogether, we expect the yield earned on P&C fixed maturity portfolio to increase by 20 basis points by the fourth quarter of 2023 compared to 4.15% earned for the fourth quarter of 2022.

Looking at the results for the quarter, for the three months ended December 31, 2022, Property & Casualty net investment income was 19% lower than the comparable 2021 period. These results included an annualized retuon alternative investments in the fourth quarter of 2022 of approximately 5.3% compared to an exceptionally strong 26.3% retufor the fourth -- for the 2021 fourth quarter. The average annual retuon AFG's alternative investments over the five calendar years ended December 31, 2022, was approximately 14%.

Excluding the impact of alternative investments, net investment income in our Property & Casualty insurance operations for the three months ended December 31, 2022 increased 64% year-over-year as a result of the impact of rising interest rates, enhanced by the strategic positioning of our portfolio coming into 2022 and higher balances of invested assets. For the 12 months ended December 31, 2022, P&C net investment income was approximately 3% higher than the comparable 2021 period and included a retuon investments on alternative investments of 13.2% for 2022 compared to the remarkably strong 25.3% earned on alternative investments in 2021.

We're very pleased with the double-digit retuon alternative investments earned in 2022 in a challenging investment environment. Excluding alternative investments, net investment income in our property and casualty insurance operations for 2022 increased 29% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets.

As we look forward to 2023, our guidance for the year reflects a retuof approximately 7% on our $2.1 billion portfolio of alternative investments as an assumed high single-digit retuon our multi-familyhousing-related investments is anticipated to be partially offset by somewhat weaker performance of traditional private equity investments.

Please tuto Slide 8, where you'll find a summary of AFG's financial position at December 31, 2022. Our excess capital was approximately $1.4 billion at December 31, 2022. This number included parent company cash and investments of approximately $876 million.

During the quarter, we returned $224 million to our shareholders through the payment of a $2.00 per share special dividend and our regular $0.63 per share quarterly dividend. Yesterday, we announced a special dividend of $4.00 per share payable on February 28, 2023. This special dividend is in addition to the Company's regular quarterly cash dividend of $0.63 per share most recently paid on January 25, 2023.

Even with the $4.00 per share special dividend declared yesterday, we expect our operations to generate significant excess capital in 2023 to the point where we could deploy in excess of $500 million of excess capital for share repurchases or additional special dividends through the end 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-cap target of 30%, and that capital number 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 December 31, 2022, AFG's growth in book value per share plus dividends was 8.7%. For the 12 months ended December 31, 2022, AFG's book value per share plus dividends increased by 4.8%, reflecting very strong earnings partially offset by the increased unrealized losses on fixed maturities from the impact of rising interest rates and widened credit spreads.

Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of 6.3% during the fourth quarter, and 18.5% for the full year. 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 2022.

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

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FEBRUARY 02, 2023 / 4:30PM, AFG.N - Q4 2022 American Financial Group Inc Earnings Call

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

Thank you, Craig.

Please tuto Slides 9 and 10 of the webcast, which include an overview of fourth quarter results.

Our Specialty Property & Casualty businesses closed out 2022 on a strong note, producing record full year underwriting profit and record full year pretax Property & Casualty core operating earnings. I'm especially pleased that each of our Specialty Property & Casualty sub-segments produced combined ratios of 90% or better for the fourth quarter, despite elevated industry catastrophe losses. We set new records for premium production in 2022 and are meeting or exceeding targeted returns in nearly all of our businesses.

When we look at a year-over-year comparison of our Property & Casualty results for the fourth quarter, it's easy to lose sight of the strong fourth quarter results in 2022, especially noting the average crop results achieved in 2022, following the extremely strong results reported in our crop business in the comparable prior year period. As you'll see on Slide 9, the fourth quarter 2022 combined ratio was an excellent 86.6%, although 5.9 points higher than the exceptional 80.7% reported in the comparable prior year period.

If we put our crop business to the side, our combined ratio for the fourth quarter was comparable to the 2021 fourth quarter results. Results for the 2022 fourth quarter include a modest 0.9 points in catastrophe losses, despite elevated industry catastrophe losses during the quarter. By comparison, catastrophe losses in the 2021 fourth quarter added 1.8 points to the combined ratio. Fourth quarter 2022 results included 3.6 points of favorable prior year reserve development, compared to 5.0 points in the fourth quarter of 2021.

Gross and net written premiums increased 6% and 5%, respectively, in the 2022 fourth quarter compared to the prior year quarter. Year-over-year growth was reported within each of the Specialty Property and Casualty groups during the fourth quarter 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 P&C businesses. In the aggregate, year-over-year growth in gross written premium for the full year in 2022, excluding crop insurance, is about half attributable to new business opportunities and change in exposures and half attributable to rate increases.

Average renewal pricing across our Property and Casualty Group, excluding workers' comp, was up approximately 6% for the quarter, and up approximately 5% overall, in line with renewal rate increases reported in the prior quarter. The renewal rate environment has remained relatively consistent throughout the year, and has enabled us to meet or exceed targeted returns in nearly all of our specialty P&C businesses.

We've been focused on achieving adequate pricing for some time and have achieved overall rate increases across our entire specialty book for 26 straight quarters. We feel very good about the level of rate increases that we continue to achieve and importantly, the impact of cumulative rate increases over time, which have enabled us to stay ahead of prospective loss ratio trends and help us to feel even more confident in the adequacy of our reserves.

Given the focus on the reinsurance pricing and capacity, I wanted to provide an update on our reinsurance renewals. In January, we successfully renewed our 2023 property cat and property per risk treaties within a challenging reinsurance market. Our other divisional January 1 renewals have gone very well, and were executed with terms similar to 2022.

Talking about our property cat, our property cat coverage has traditionally attached at levels that are relatively low compared to similar-sized peers. Having long-standing, trusted relationships with reinsurance partners who understand our underwriting discipline and risk appetite and an existing catastrophe bond attaching at $125 million provided a solid foundation as we entered renewal discussions.

We placed $75 million of coverage in excess of a $50 million per event primary retention for the vast majority of our U.S.-based operations. This new structure provides for an increase in our per occurrence retention from $20 million to $50 million and collapses our treaty tower to one layer

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