Q4 2023 Earnings Release Transcript
REFINITIV STREETEVENTS
EDITED TRANSCRIPT
AFG.N - Q4 2023 American Financial Group Inc Earnings Call
EVENT DATE/TIME:
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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 Fourth Quarter and Full Year 2023 Results Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today,
Thank you. Good morning, and welcome to
I'm joined this morning by Carl Lindner III and
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 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.
Good morning. I'll begin my remarks by sharing a few highlights from AFG's fourth quarter and full year results, 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 any questions.
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The fourth quarter was a strong ending to a great year for AFG. In addition to producing a core operating retuon equity of nearly 20% in 2023, net written premiums grew by 8% during the year, and we continue to create value for our shareholders through effective capital management.
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 great employees for helping us to achieve these results. I'll now tuthe discussion over to Craig to walk us through some of these details.
Thanks, Carl. As you'll see on Slide 3, AFG's core net operating earnings were
As Carl noted, 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. We returned
Turning to Slides 4 and 5, you'll see that fourth quarter 2023 core net operating earnings per share 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
- Casualty net investment income was approximately 1% 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
December 31, 2023 , increased by 19% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets.
For the twelve months ended
As you'll see on Slide 7, approximately 68% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.5%. Current reinvestment rates compare favorably to the approximately 5% yield earned on fixed maturities in our P&C portfolio during the fourth quarter of 2023. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at
Following several years of exceptionally strong returns on investments tied to multi-family housing, which averaged 15% over the past five years, we're seeing the impact of increased supply and the leveling out of rental rates on these investments, which represent about half of our alternative investment portfolio. We expect these headwinds to continue into 2024.
Longer term, we remain very optimistic regarding the prospects of our investments in multi-family housing, as these properties continue to generate strong net operating income and have desirable geographic positioning and high occupancy rates. The retuon P&C alternative investments was
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7% for 2023 compared to 13.2% in 2022. The average annual retuon alternative investments over the past five calendar years ended
Please tuto Slide 8, where you'll find a summary of AFG's financial position at
Yesterday, we announced a special dividend of
We continue to view total value creation, as measured by growth in book value per share plus dividends, as an important measure of performance over the long term. For the twelve months ended
I'll now tuthe call back over to Carl to discuss the results of our P&C operations.
Thank you, Craig. Now if you'd please tuto Slides 9 and 10 of the webcast. I'm pleased to report very strong underwriting profitability for the full year, with an overall Specialty Property and Casualty combined ratio of 90.3%. We're proud of our consistent record of profitable underwriting results over many years. We're seeing opportunities to grow our Specialty Property and Casualty businesses through increasing exposures, new opportunities, and a continued favorable pricing environment. We set new records for premium production in 2023 and we're meeting or exceeding targeted returns in nearly all of our businesses.
As you'll see on Slide 9, our Specialty Property and Casualty businesses reported a strong fourth quarter, a nice finish to a successful year. The Specialty Property and Casualty insurance operations generated an outstanding 87.7% combined ratio in the fourth quarter of 2023, about a point higher than the exceptional 86.6% reported in the prior year fourth quarter. Results for the 2023 fourth quarter include 1.4 points of catastrophe losses, about a half point higher than last year's fourth quarter and 3.3 points of favorable prior year reserve development, compared to 3.6 points in the fourth quarter of 2022.
Fourth quarter 2023 gross and net written premiums were both up 8% when compared to the same period in 2022. Gross and net written premiums increased 7% and 8%, respectively, for the full year in 2023. Average renewal pricing across our
This is our 30th consecutive quarter to report overall renewal rate increases, and we believe we are achieving overall renewal rate increases in excess of prospective loss ratio trends to meet or exceed targeted returns. In addition to renewal pricing, we are focusing on insured values in our property-related businesses to ensure that our premiums reflect inflationary considerations.
Now I'd like to tuto Slide 10 to review a few highlights from each of our Specialty Property and Casualty business groups. Details are included in our earnings release, so I'll focus on summary results here.
The businesses in the
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Overall renewal rates in this group increased 7% on average in the fourth quarter of 2023, a point higher than the previous quarter. Pricing for the full year for this group was up 6% overall. We continue to remain focused on rate adequacy, particularly in our commercial auto liability business. This is our 11th year of rate increases in this line of business dating back to when we first identified an uptick in commercial auto loss severity in 2012, so we've been at it for a long time, and we're pleased that our starting point for rate increases is different than some of our peers.
The businesses in our
3.3 points higher than the 81.3% reported in the comparable prior year period. With combined ratios at these levels, the underwriting margins in these businesses are generating returns in the mid-20s. Fourth quarter 2023 gross and net written premiums increased 6% and 7%, respectively, when compared to the same prior year period. Renewal pricing for this group, excluding our workers' comp business, was up 7% in the fourth quarter and was up 4% overall, with both measures down about a point from the renewal pricing in the previous quarter. Pricing for this group for the full year, excluding workers' comp, was up 6% and up 4% overall.
As noted in yesterday's earnings release, for many years, AFG established a range of core net operating earnings per share guidance for the new year and provided various other guidance measures as a part of its fourth quarter earnings release. After reviewing industry and peer practices and following a number of discussions with analysts and shareholders, we have decided we'll no longer provide a range of core earnings per share guidance or other guidance measures beginning in 2024.
As noted throughout this call, it's clear that our focus has always been on long-term shareholder value creation by generating strong returns on equity that grow book value per share. We believe that historically providing a greater level of guidance metrics as compared to peer companies, has created a distraction from our strong ROEs and a record of long-term value creation. As a result, we believe that this change aligns with that focus.
In lieu of guidance, though we have provided several key assumptions underlying our 2024 business plan, which you'll see summarized on Slide
11. These assumptions for 2024 include: growth in net written premiums of 8% compared to last year, a combined ratio similar to 90.3% achieved in 2023, a reinvestment rate of approximately 5.5% and a retuof approximately 6% on our
We believe that our disclosures are sufficiently detailed and clear, and over the course of 2024, our discussions with investors will focus on the considerations that drive long-term shareholder value. Our IR team and our management team remain available to answer questions and look forward to continuing to educate investors about our business.
Craig and I are pleased to report these exceptionally strong results for the fourth quarter and full year, and we're proud of our proven track record of long-term value creation. Our insurance professionals have exercised their Specialty Property and Casualty knowledge and experience to skillfully navigate the marketplace, and our in-house investment team has been both strategic and opportunistic in the management of our
Now we'll open the line for the Q&A portion of today's call. And Craig and Brian and I would be happy to respond to your questions.
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Q U E S T I O N S A N D A N S W E R S
Operator
(Operator Instructions) Our first question comes from the line of
Hey, good morning. Wondering, can you please break out the reserve development, I guess, for nonworkers' comp Casualty reserve development across accident years 2020 to 2022 versus the softer market years prior to that in the quarter? Can you hear me?
Hi. This is
As we discussed in some of the previous quarters. For the full year 2024, we did have lower levels of favorable development in workers' comp, as our initial loss picks have come down in recent years, reflecting our experience and considering some of the price decreases in that business, as well as being mindful about the potential for medical cost inflation going forward.
We talked in previous quarters about some adverse development from social inflation in areas like public sector. As with any company that has an E&S business, over time, there can be occasional large loss activity, which we had in various lines of business in different quarters across the year.
Got it. Thanks. That's helpful. I guess, sorry if I missed it. Did you say that the adverse on '18 and '19 that you said at the beginning, was that, did you say what lines those were in the quarter?
So most of that for the year, most of that's coming out of the social inflation-exposed businesses. In the quarter, it wasn't necessarily all social inflation. Some of that was the, just the occasional large losses that could happen in something like E&S.
Got it. Okay. And then maybe just on the premium growth embedded in your business plan, would you be able to kind of parse out, I guess, like how much of that, what you're expecting for crop? I guess, from a non-CRS and then including CRS perspective and kind of versus the rest of the business?
We're kind of, we've moved away from talking segment by segment. I'm happy to give you some color on the crop. The crop business -- part of the premium determination for this year is a volatility factor, which is determined in the next month or so and also kind of the average of February futures prices for the December contract in coand the November contract, I believe, in soybeans.
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When you look at the current pricing, it's the average of the whole month of February. So we don't know until we get down to the end of February exactly what the impact on the premiums are. I think our 8% reflects our current view that crop premiums aren't going to be as large as what we would previously projected in that, because of the commodity prices. I can tell you that. With the CRS business that we added, that business will be up about 50% on a gross written premium basis for this year.
Thank you. I guess just one follow-up. Would you expect any changes in your crop retention plans if pricing is materially lower?
No. I think probably one of the positive things if you're starting off if the pricing for coand soybeans ends up being lower from a price exposure since this is revenue protection or revenue coverage, you could argue that it may be tougher to see prices come off by significant amounts from lower spring discovery prices, if that's in fact what happens at the end of February. So that can kind of cut both ways. We'll have lower premium, but maybe you have lower exposure from a price decline standpoint from those base levels, if that makes sense.
Yeah, understood. Thank you.
Operator
Thank you. Our next question comes from the line of
Good morning. Thanks for the call. Wanted to touch maybe back on your comments about pricing being above where you think you could, inflation is to achieve target. At the moment, the ROE is very high. Is that really a comment that you continue to expect to achieve sort of the targeted returns? Or are you thinking that the price increases are sufficiently to maintain the current sort of margins that you have today?
Yes. Paul, I think overall, we're achieving overall price increase levels that are in excess overall of the prospective loss ratio trends in our business. In some businesses, those increases might lead to returns that exceed our targets. In other businesses, they would lead towards meeting our targets. I think we're blessed today except for a few businesses, almost all of our businesses are meeting the targeted returns.
Great. Maybe we could tuto capital management a little bit. I think in the past, you've talked about the stock being attractive in your view and you've got sort of 10x, 11x EPS, which is kind of where it's been. But you haven't seen a huge aggressive amount of stock repurchased. You've focused more on special dividends. Is that still kind of your view? Or is there a different view on allocation of capital because of the M&A environment or just your general thoughts on how those pieces all fit together?
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Yes, I think every year is a different mix based on -- we take an opportunistic approach. We think our stock is especially attractively valued. We've shown over this in the past year that we've been in the market repurchasing shares and value that. Where we're generating large amounts of excess capital at these kinds of returns, special dividends can also be important. But obviously, priorities are organic growth, building the business itself. We are tough buyers on the M&A side, but we look at lots of things and we're always starting businesses, building businesses and acquiring things that make sense and can eadouble-digit returns for us over time. You've seen the increase in our annual dividend has been substantial over time. So we also think our shareholders value a consistent increase in our annual dividend also. That's still the way we think about things. Each year is going to be a different mix.
Great. Always appreciate the help. I'll let some other folks ask questions. Thank you.
Operator
Thank you. Our next question comes from the line of
Hey, great. Good afternoon. Just kind of wanted to make sure as we think through the combined ratio guidance for next year and what ultimately equates to a very strong ROE, of course. If we reflect on 2023 a bit, in an investors' minds, there was a bit of a pothole from kind of social inflationary adverse development. I believe crop was a little below normal. There was an A&E kind of ding, maybe 1% to 2% on earnings. So I guess just want to make sure like that, I'm thinking about those correctly. So on a go-forward basis, you don't expect the combined ratio to improve just because, I guess, maybe pricing can excess a trend, but just the trend is still -- I guess I'm just trying to think through like am I missing something? I guess the trend is maybe moving a little higher, pricing is moving higher, but just returns might not be as excellent if I, even if I ex out those items I just started kind of calling out.
I think the retuis very similar, and we're projecting our business plans for a combined ratio that's at the same level of a really great year. Certainly, in comparison to our peers, that's one of the stronger performances on underwriting and on retuon equity.
So we're proud of those results. And there will be businesses that as in workers' comp, in this year that had less favorable development, that have outstanding results when you look back on this year, but the underwriting profit wasn't as large. There's businesses, as you said, like crop hail that had a below average year and in our business plan, the way it fits together as we, in the past, we've, when we were giving guidance, we said we were planning for an average crop year. So that's, the way we build our plan is really consistent with the way that we used to give guidance as far as how we would get there. Our guidance was generally based off of our business plan in the past.
Mike, this is Craig. One thing that I think you need to recognize in this year's plan is an assumption on retuon alternatives that is somewhat below the historical level and certainly below what we expect to see on a go-forward basis. We have
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To give a little color on our view of multi-family, we still like the asset class longer term. We've generated fantastic returns in the past. As I said in the conference call script, we've averaged a 15% annual retuover the last 5 years. We are in very attractive markets.
But if you, our long-term expectations on alternative investments would be for a retuof 10% plus, historically, we've done better than that. If you normalize this year's retuand use 10% as kind of a normalized number, it would add
So I think that is something that investors need to recognize because of our significant multi-family exposure, which near term is going to hurt these returns, it's an unusually low retuexpectation for this calendar year. And I think that needs to be normalized when you take a look at this year's earnings expectations.
Okay. Okay. That helps. I think investors will understand that. Okay. Lastly, and this might be for Brian. Just on triangulating the excess capital and the parent company cash and all those moving parts, I believe the debt to capital, if I'm thinking about it the right way, is below the company's kind of, maybe it's a max threshold of 30%? Or I don't know if it's a target of 30%? You can clarify that. But if, is there, would there be an option to issue some debt in the future potentially to release excess capital to the extent there weren't M&A opportunities? Or is that not something we should be thinking about as a lever? Thanks.
So yes. So the 30% is sort of a guideline for us. So we would look at as our maximum, not that we couldn't go over that, if the opportunity presented itself. But that does leave open the possibility for borrowing money at the right rate and the right environment to move towards that ratio if it makes sense from a long-term value creation for shareholders' perspective. So it would be on the table, but not in our immediate plan.
Thank you.
Operator
(Operator Instructions) Our next question comes from the line of
Hey, good afternoon. In the press release, you mentioned lower underwriting profit in E&S. Could you expand a bit on that? Was that just large losses on Property or Casualty? And does it reflect a change in underlying loss trend assumption?
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Yes. I think the quarter was in the 80s. The combined ratio for the overall but you got to put that in perspective. So, the quarter had an outstanding combined ratio and to start with. And when you, as Brian said, when you put it in the perspective of the whole year, there was, the difference in the reserve development was less favorable workers' comp for the whole year, some impact from social inflation. And in some quarters, some large loss on the Casualty side activity. I think that's the right way to look back and if you're trying to look at trends for us.
Thank you. And are you seeing any change in the competitive environment within E&S?
I think maybe a bit more competition on, we're not on the E&S property side. We've been expanding our property business on the E&S side. It seems like some more interest in that sector and some more competition there. I think on the positive side, other interesting things I think we're seeing on the D&O side where the pricing has been down double digit. In the fourth quarter, we saw it being down single digit, which I saw as a positive trend, and we've thought that there have been too many competitors, too much capital and pricing levels that don't make sense in public D&O. So that was positive. I think another positive thing we saw in the fourth quarter on the pricing front, was our commercial auto pricing there in National Interstate and
Thanks. And maybe just a quick numbers question.
So it looks like you're looking at our line item for sort of other corporate expenses. So what falls into that line is really everything that's not part of our Property and Casualty operations and then we show the interest expense separately. So that's mostly holding company expenses in that line. But it's also net of any investment income earned by the parent company. So there's a couple of things going on there in the quarter when you compare it to previous quarters, particularly in the fourth quarter of 2022. One of the bigger things in there is that during the fourth quarter of 2023, we had lower levels of cash and investment balances at the parent company as we tend to keep most of our cash and investments down in the P&C operations. So the investment income that sort of netted into that number is about
In the fourth quarter of 2022, we had a benefit related to some employee benefit plans that are tied to the stock market, that didn't recur this year. So when you look at the things in the fourth quarter of 2023 versus the 2022 quarter that are different, I would say the lower parent company investment income, which is about
Yeah I want to go back on the E&S umbrella and excess liability business, just to be clear. When you look at, if you would just look at that part of our business in the fourth quarter, it would be in line with what the combined ratio was for the whole year in that. And we had ended up with excellent underwriting results in E&S, umbrella and excess liability overall.
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