Q1 2020 Earnings Call
<unk> results conference call.
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It is now my pleasure to introduce assistant Vice President Investor Relations Diane Weidner.
[music] good morning, and welcome to American Financial group's first quarter 2020 earnings results Conference call. We hope you in your loved ones are healthy and safe and these extraordinary times.
We released our 2021st quarter results yesterday afternoon, our press release Investor supplement and webcast presentation are posted on <unk> website under the Investor Relations section.
Materials will be reference during portions of today's call.
I'm joined this morning by Carl Lindner, the third and Craig Lindner Co Ceos of American Financial Group, and Jeff Consolino AFG CFO.
Before I turn the discussion over to Carl I would like to draw your attention to the notes on slide two of our webcast. Some of the matters to be discussed today are forward looking.
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 after these filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to cornet 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 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 over statement.
Now I'm pleased to turn the call over the Carl Lindner third to discuss our resolved.
Well good morning.
The past too much about an exceptionally challenging time for all of us.
Cobot 19 pandemic has had profound implications across the globe requiring us to just a new ways of working at interacting with each other.
Our thoughts and prayers remain with all those affected by the virus in the individuals caring for them.
We're especially grateful for the guidance with health officials in government leaders at the local state and federal levels.
Your actions had been instrumental in protecting health and promoting safety and these unprecedented times.
We're also very thankful to those serving and caring for others, including health care professionals first responders military.
Food service personnel and other a central workers.
Our first priority during this time mr. productive well being up our employees, while continuing to provide to secure.
Trusted service and support on what's your agents and policyholders rely.
We've invested a significant amount of time developing testing and implementing our business continuity plans, which are proven effective in enabling us to successfully navigate these challenges and stay focused on our priorities.
We entered the year and the strongest financial position in our company's history, and our liquidity in excess capital afford us the flexibility to effectively address and respond to the uncertainties presented by cobot 19.
Oh walks for some of these uncertainties in consideration some more detail on todays call.
So I'd like to start with a few summary comments about the implications of cobot 19 on our business overall.
The macro impacts of Cobot 19 war factor in church and impact or results it'll take some time before I understand the implications of this pandemic to our business.
Many of our policyholders are struggling to adapt to the economic headwinds that are impacting your operations.
As the economy contracts, the exposure bases that effect or property and casualty businesses will change.
For many there'll be lower employee counts decreased payrolls fewer miles driven and reduced sales as overall economic activity declines.
Cobot 19, Genpact will be felt beyond the first quarter results were sharing today.
Later in the presentation, you'll see.
That we factored these considerations into our 2020 premium guidance.
Some of her line strike commercial auto these economic factors will translate into lower claims frequency well for others. There could be an increase in claims frequency as a result of cobot 19.
How claims to automate way play out will take time to fully discern.
There's a lot.
Much written about business interruption insurance.
As these claims are presented were investigating each claim.
Like most others in the industry our policies require direct physical damage to covered property per business interruption carrbridge to apply.
In addition, the vast majority.
Upper property policies also contain virus exclusions.
We note that their efforts.
Pose retroactive business interruption insurance through government decrease or legislation.
Efforts to impose retroactive business interruption coverage or ill considered unconstitutional and would be de stabilizing to the insurance industry.
Imposing business interruption coverage. After the fact is not what any ensure bargained for when underwriting or pricing. These risks are issuing these policies.
With respect to workers compensation the impacts evolving.
States are grappling with whether they're going to impose certain compatibility presumptions with respect to cobot 19.
How these considerations play out could impact or exposure.
In some instances these presumptions being proposed or overly broad and when undermine a fact based assessment of how workplace injury might have occurred.
Other states are considering presumptions that are more narrowly crafted.
The virus remains active and as Americans began to return to work the full impact of how this virus will resolve itself remains an unknown.
Well, we're seeing some workers compensation cobot 19 claims being presented.
Because many employees had been furloughed or working from home. The impact of these claims is offset due to reduced numbers have workplace injuries in some sectors.
The impact to cobot Nineteens why could it be state specific and probably industry specific.
Less than one half of 1% of our workers compensation gross written premium relates to Carrbridge for first responders.
And approximately 6.5% relates to Carrbridge for healthcare workers first responders and nursing homes combined.
Importantly.
We expect is a company to continue to have significant excess capital and liquidity throughout 2020 and beyond specifically our insurance subsidiaries are projected to have capital aderant insects excess or the levels expected by rating agencies in order to maintain their high current ratings and we have no debt.
Maturities before 2026.
Financially strong and well position to respond to the challenges presented by Cobot 19.
Jeff will review those more during his remarks.
Now I'd like to turn to an overview of our first quarter results on slide four.
Upper webcast.
Asked you reported core operating earnings of $1.98 cents per share in the first quarter 2020.
Compared to $2.02 per share in the first quarter of 19.
Annualized first quarter core return on equity was 13.2%.
These first quarter 2020 results are at the upper end of the guidance provided in our pre release issued on April 15th.
The year over year decrease in core operating earnings resin result of negative adjustments to the company's $2.2 billion of investments that are mark to market through core operating earnings.
The Cobot 19 pandemic has had widespread financial and economic impacts, including a significant decrease in both equity and credit markets, which adversely affected returns on at cheese Mark to market investments.
Excluding the impact of Mark to Mark investments and cheese first quarter 2020 core net operating earnings increased $21 million your 23 cents per share year over year.
Turning to slide five you'll see that the first quarter 2020 net loss per share of $3.34 included.
$5.22 per share losses attributable to after tax non core items, which Jeff will speak to later in the call.
Last month, we provided full year 2020 core net operating earnings guidance per share.
Earnings per share guidance, excluding earnings or losses from investments Mark to market through core operating earnings.
Given the uncertainty of the implications of cobot 19, and the resulting volatility in the financial markets.
And she continues to expect it's 2020 core net operating earnings per share.
Excluding mark to market investments to be in the range of $6.45 to $7.25.
Craig and I will discuss our guidance for each segment of our business in more detail later in the call.
We're pleased with the performance of our core operating businesses during the first quarter of 2020 amid the challenges introduced by the Cobot 19 pandemic.
We believe our underlying results demonstrate the strength of our portfolio a diversified specialty insurance businesses and the contributions.
Sectional employees, who are part of the PFG family.
We thank God are talented management team and our great employees for continuing ability to provide are essential business functions in these difficult times.
Now I'd like to turn our focus to our property and casualty operations.
Please turn to slide six and seven of the webcast, which include an overview of first quarter results.
Our specialty property and casualty group performed exceptionally well during the quarter.
With excellent underwriting margins healthy year over year growth in net written premiums and very strong renewal pricing thats exceeding our objectives.
As you'll see on slide six gross written premiums were down 1% net written premiums were up 2% into 2021st quarter compared to the prior year quarter, primarily those are result of the run off with me on.
Excluding the impact of the neon run off gross and net written premiums increased 11% and 7% respectively year over year.
Core operating earnings in the AV cheese property insurance operations were $181 million in the first quarter 2020 compared to $185 million in the prior year period.
Decrease of 2%.
Absent the impact of Mark to Mark investments first quarter 2020 pre tax core operating earnings in the Fccs PNC insurance segment increased $1 million.
When compared to the prior year period.
Specialty property and casualty insurance operations generated an underwriting profit at $89 million into 2021st quarter compared to $88 million in the first quarter of 2019.
Higher underwriting profitability in our specialty casualty and specialty financial groups was partially offset by lower underwriting profit enter property and transportation group.
The first quarter 2020, combined ratio of 92.2% improved three tenths of a point from the prior year period.
First quarter 2020 results include 4.2 points of favorable prior year reserve development compared to four points in the prior year period.
Catastrophe losses were 0.8 points for the combined ratio in the first quarter 2020 by comparison.
Catastrophe losses added 1.1 points in the prior year period.
We continue to carefully monitor claim some loss trends related to the cobot 19 pandemic.
Numerous legislative and regulatory actions as well as the specifics of each claim continue to contribute to a highly fluid evolving situation.
Our first quarter 2020 results include approximately $10 million in claims reserves and IB in our designated for estimated cobot 19 related losses.
We expect to see more claims and gain greater clarity during the second quarter.
We have been significant exposures to event cancellation travel and accident.
Travel and accident and health as well as other first party coverages.
It's too early currently to to know the impact on some of our lines of business, such as Deno surety and trade credit.
Turning to pricing, we continue to see strong renewal rate momentum.
Average renewal pricing across our entire property and casualty group was up approximately 7% for the quarter.
And if you exclude workers' compensation, our workers comp business renewal pricing was up approximately 11% and the first quarter.
Renewal pricing in our specialty property and casualty group overall is the highest we've achieved in over five years meeting or exceeding our expectations in each of our specialty property and casualty sub segments.
Now I'd like to turn to slide seven to review a few highlights from each of our specialty property and casualty business groups.
Okay.
The property and transportation group.
Reported an underwriting profit of $27 million in the first quarter of 2020.
Appeared to $39 million in the comparable prior year period lower crop earnings were the driver of the lower underwriting profit in the quarter.
First quarter 2020, gross and net written premiums in this group.
Were 13% and 12% higher respectively than the comparable prior year period.
New business opportunities in our transportation proper and in all the marine and Ocean Marine businesses as well as new premiums from the addition of the Atlas Paratransit business were partially offset by declines in passenger transportation premiums caused by the cobot 19 pandemic.
Overall renewal rates in this group increased 6% on average in the first quarter.
I'm pleased where the rate strengthening.
In our commercial auto liability and aviation businesses and in or Singapore branch.
Specialty casualty group reported an underwriting profit of $52 million into 2021st quarter compared to $36 million in the comparable 2019 period higher profitability in our executive liability in workers' compensation businesses as well as 2019 Neil.
Underwriting losses impacting prior year core operating results contributed to the higher year over year underwriting profitability.
Higher year over year adverse development in or in us lines and public sector businesses, partially offset these results.
Underwriting profitability in our workers comp business continues to be very strong. These businesses reported higher year over year underwriting profit, primarily as a result of higher favorable prior year Reserve development.
Gross and net written premiums for the first quarter.
2020 decreased 7% and 6% respectively compared to the same period and 19.
Primarily due to the run off of neon.
If you exclude the impact of neon gross and net written premiums for the first quarter 2020 were up 13% and 4% respectively when compared to the same period in 2019.
Higher session Center, MNS business and excess liability businesses impacted net written premiums.
With exception of workers comp.
The majority of our businesses in this group achieved strong renewal pricing and reported premium growth during the first quarter.
Growth in or excess and surplus lines in excess liability businesses, primarily the result of rate increases new business opportunities and higher retention. So on renewal business was the primary driver at the higher premiums lower premiums in our workers comp business, partially offset this group.
Renewal pricing for this group was up 8% during the first quarter, excluding our workers comp businesses renewal rates in this group were very strong.
And up nearly 17.5%.
Renewal rates and our specialty casualty group overall.
And renewal rates adjusted to exclude the impact of workers comp are the highest that we've seen a more than five years.
Specialty financial group reported an underwriting profit of $17 million in the first quarter of 2020 compared to $13 million in the first quarter 2019.
Higher year over year underwriting profitability in our financial institutions business was partially offset by lower underwriting profitability in our fit Audi and crime operations.
Nearly all businesses in this group continued to achieve excellent underwriting margins.
First quarter 2020, gross written premiums were down 1% net written premiums were up 3%, respectively, when compared to the prior year period.
And renewal pricing. This group was approximately up 5% for the quarter.
We're very excited that the surety and Fidelity Association publish their 2019 industry rankings last week, placing greater American as the third largest largest writer of crime insurance in America.
Congratulations to our fidelity and crime team for obtaining this market leadership.
Now if you would please turn to slide eight for a summary view a bird 2020 outlook for the specialty property and casualty operations.
In light of the challenges and uncertainties presented by the Cobot 19 pandemic. We've conducted a detailed review of our expectations and other key financial and operating earning operating items for each of our specialty property and casualty businesses.
Based on the current expectations of the impact of Cobot 19 in our results through the first three months of 2020, we now expect property and casualty pre tax core operating earnings excluding the impact of investments Mark to market through core operating earnings.
In the range of 630 million the $690 million.
And we continue to expect.
And overall 2020 combined ratio for the specialty property and casualty group overall between 90% to 94%.
We do expect cobot 19 to have an adverse impact on property and casualty premiums.
As the exposure basis that affect our property and casualty businesses will change as overall economic activity declines.
Written premiums are now expected to be 14% to 8% lower than the $5.3 billion reported in 2019, primarily due to the run off of neon.
Excluding the impact of Neon, we expect net written premiums to be a range that is 7% to 1% lower than results reported in 2019.
And then if you exclude neon and workers comp our guidance has in the range of down 4% to up 2%.
Looking at each segment.
We continue to estimate a combined ratio in the range of 92% to 96% in our property and transportation group.
Net written premiums for 2020 are now estimated to be 5% lower to 1% higher than 2019.
And this guidance reflects the impact of return of premium and many of our transportation businesses as insured units were taken out of service in response to state and local stay at home orders and the closing of businesses.
We continue to expect or specialty casualty group to produce a combined ratio in the range of 90% to 94% in 2020.
Our guidance assumes continued strong renewal pricing in our SNS excess liability and several of our longer tail liability business.
Neon accounted for $401 million in net written premiums in 2019.
As a result of this business being placed into run off we expect net written premiums in the specialty casualty group to be down 23% to 17% in 2020.
Excluding the impact of neon Neon run off we expect premiums in this group to be 8% to 2% lower than our prior year results and when you exclude neon and workers comp, we expect premiums to be in a range of down 3% to up 3%.
Our guidance for this group includes the expectation that net written premiums in our workers compensation businesses will be down in 2020 as a result of mid term premium and other adjustments, resulting from lower payrolls and our workers comp businesses.
And the impact of lower rates as well as return of premium provisions for other businesses that were forced to shut down during the pandemic.
Specialty financial group combined ratio is now expected to be in the range of 87% to 91% up slightly from our initial range of 86% to 90%.
We now expect net written premiums to be 12% to 6% lower than 2019 premiums our guidance for this group includes the expected impact.
Various state regulations regarding Moratoria on policy cancellations and placement of force Carrbridge in our financial institutions business.
Given the uncertainty so the M.
Of the implications of Cobot, 19, and the resulting volatility in the financial markets, we're not providing guidance for PNC net investment income our previous guidance assume that annualized return of 10% on investments Mark to market through core earnings approximating the return earned in 2019.
Based on the results through the end of April we expect overall property and casualty renewal pricing in 2020 to be up 5% to 8%.
And improvement from the range of 3% to 5% estimated previously.
And excluding workers comp, we expect renewal rate increases to be in the range of 8% to 11% an increase from the range of 5% to 7% estimated previously.
I'll now turn the discussion over to Craig to review the results in or annuity segment and of cheese investment performance. Thank you.
Thank you Carl.
In addition to your introductory comments expressing our gratitude for those on the front lines caring for others.
I would like to thank thank our employees, who continue to amaze us with their dedication and creativity.
I'd also like to thank or distribution partners.
Various state and local responses to the pandemic have created challenges for them.
As they have traditionally placed a priority on face to face interaction with clients for sales and account servicing.
While sales decreased as a result of stay at home orders and other restrictions are annuity distribution partners are developing new ways to interact with their clients to best serve them and to help them achieve their goals to plan for secure financial futures and retirement.
To that end, we were supporting their E commerce initiatives offering new products and adding new features to existing products.
These new features and products are designed to offer agents and consumers additional options to choose to choose from in a volatile stock market environment, while stir still earning appropriate returns for American financial group.
We have made adjustments to annuity credited rates to ensure that we achieve appropriate returns on new business than we were very pleased with the industrys current discipline in pricing.
We have recently taken actions on renewal rates on enforce business near or after the end of the surrender charge period, which will have a positive impact on our core operating earnings.
We were also acting on opportunities and our investment portfolio.
I'll start with a review of our annuity results for the first quarter beginning on slide nine.
Statutory annuity premiums were $1.2 billion in the first quarter of 2020 compared to $1.4 billion and the first quarter of 2019, a decrease of 13%.
However sales in the first quarter of 2020 represent a 6% increase over sales into fourth quarter of 2019 and reflect a sequential increase in all of you annuity segments major channels.
Turning to slide nine you will see the components of pretax annuity core operating earnings.
First quarter 2020, pre tax annuity core operating earnings before certain items increased 5%.
We believe this increased demonstrates the strong fundamentals of our annuity business.
Earnings from investments Mark to markets grew core operating earnings vary from quarter to quarter based on the reported results of the underlying investments.
As discussed earlier, the cope with 19 pandemic has had widespread financial and economic impacts, including a significant decrease in both equity and credit markets, which impacted returns during the first quarter of 2020.
On the annuity segments $1.3 billion of Mark to market investments.
Although the annuity segments return on these mark to market investments was slightly negative in the first quarter of 2020. The cumulative return on these investments over the past five calendar years was approximately 10%.
Turning to slide 11, you'll see that our quarterly average annuity investments and reserves both grew approximately 8% year over year.
Please turn to slide 12 for a summary of the 2020 outlook for the annuity segment.
Hey, AFG continues to expect an active and attractive return on its mark to market investments over the long term.
Due to ongoing volatility and uncertainty it is difficult to forecast the mark to market returns for the annuity segment in 2020.
Pre tax annuity core operating earnings excluding the impact of Mark to market investments are expected to be in the range of $280 million to $310 million.
By comparison annuity core operating earnings excluding mark to market.
For $298 million in 2019.
Our guidance reflects the impact of lower interest rates in particular, the impact of lower short term rates, which will have a negative impact on the annuity segments. Approximately 4 billion dollar net investment and cash and floating rate securities.
This guidance also reflects recent opportunistic purchases of fixed income securities, which have a positive impact on core operating earnings.
Well Copel 19 had a limited impact on premiums during the first quarter. The pandemic is expected to have a much bigger impact on sales and the second quarter and possibly beyond.
Subject to much uncertainty our current best Best estimate is the 2020 annuity sales will be between 3.3 and $4 billion and result in 5% to 7% growth and average investments and reserves in 2020.
Furthermore, in addition, during strong capital position and our strong underlying fundamentals, we have the ability to lower the crediting rate on $31 billion of annuity reserves by an average of 118 basis points.
And as a result of prudent pricing.
And she has sold fewer annuities with guaranteed living benefits than many of its peers.
At March 31, 2020, less than 13% of a of cheese annuity reserves contained these guarantees.
Please turn to slide 13 for a few highlights regarding our 53.2 billion dollar investment portfolio.
You have entered the crisis precipitated by the Cobot 19 pandemic with a record level of consolidated cash and cash equivalents totaling nearly $3 billion at the end of February 2020.
This record amount of cash allowed us to take advantage of investment opportunities that arose during the month of mortgage and continue through today.
In addition, coming into the crisis, you have g.'s Noninvestment grade corporate bond exposure was near the lowest and our company's history.
At March 31, 2020, our FDIC three through any IC six corporate bond exposure was $1.2 billion at market and represented only 2.2, 0.2% of you have Gs consolidated total investments.
We believe this was substantially less than our peers when expressed as a percentage of total investments.
Importantly, our non investment grade corporate bond exposure is well diversified across industries and is focused on the higher quality end of the non investment grade universe with approximately 81% rated in AI C.
Turning to our fixed maturity portfolio is shown on slide 14.
Our portfolio continues to be high quality with 91% rated investment grade and 97% within FDIC designation of one or two its highest two categories.
We have added a few appendix pages to our investor supplement this quarter that we thought would be helpful resources.
Specifically, we added more detail.
Details about our fixed maturity portfolio, including FDIC ratings and detail on our industry exposures within our corporate bond portfolio.
We've also provided more detailed information about our at asset backed portfolio by collateral type.
You will see here that nearly 100% of our asset backed securities portfolio was rated entity I see one or two at March 31 2020.
We believe these additional exhibits highlight the high quality of are fixed income portfolio.
Principally as a result of the downturn in the equity markets during the first quarter.
You have GE reported first quarter 2020, net realized losses on securities of $435 million after tax and after deferred acquisition costs. This compares to a net realized gains on securities of $145 million and the first quarter of 2019.
Yeah.
Approximately 200, Im sorry, approximately $423 million of the realized losses recorded in the first quarter of 2020 pertain to equity securities that GE continued to hold at March 31 2020.
Primarily as a result of improvement in an equity markets.
Gee recognized net realized gains on securities of approximately $100 million after tax and after DAC during the month of April.
As of March 31.
2020, net unrealized gains on fixed maturities were $16 million after tax and after DAC, a decrease of $846 million since year end.
Given the recovery on asset values during the month of April.
Net unrealized gains on our fixed maturity portfolio were nearly $400 million after tax and after DAC at April 32020.
I will now turn the discussion over to Jeff, who will wrap up or comments with an overview of our consolidated first quarter 2020 results and share a few comments about capital and liquidity.
Thank you Craig.
Slide 15.
To summarize it actually is first quarter consolidated core operating earnings.
After you reported core EPS of $1.88 cents in Q1 2020.
Core net operating earnings in the quarter were $171 million.
The year over year decrease in core earnings in the 2021st quarter.
Was primarily the result of negative adjustments to our $2.2 billion of investments that are mark to market core operating earnings.
We had given you an early indication of this in our April 15th Preannouncement.
Where we reported that the company now believes.
The return on Mark to market investments in 2020 will be significantly lower than its previous expectations.
AFG has limited partnerships in similar investments.
Our accounted for using the equity method.
And reported on a one quarter lag.
The second quarter returns for these investments.
Are going to reflect March 30, Onest 2020 valuations provided by third party sources.
And we'll incorporate the downturn in financial markets during the first quarter.
Our first quarter 2020 results.
Include approximately $10 million.
And claims.
And I'd be NR.
Designated for estimated coated 19 related losses.
Different companies have taken different approaches to categorize encoded 19 related items in their financial reporting.
In terms of the geography of where we're recording the impact of coated 19.
We are not.
Currently recording covert 19 in cat losses.
And we will not exclude cobot 19 impacts from core operating earnings.
Excluding the impact of Mark to market investments.
If you use first quarter 2020 core net operating earnings.
Increased $21 million.
Were 23 cents per share.
Year over year.
Interest and other corporate expenses were $6 million.
Year over year.
Our parent company interest expense increased by $1 million from Q1 2019.
On April 2nd 2020, AFG issued $300 million.
Five in one quarter present senior notes due in April 2030.
Issue to increase liquidity.
And provide flexibility at the parent holding company level.
The net proceeds to the offering will be held for general corporate purposes.
Other expenses were $7 million lower year over year.
Primarily as a result of lower expenses associated with employee benefit plans are tied to the stock market.
Slide 16 reconciles core net operating earnings.
Net earnings.
In the first quarter 2020.
After you recognized $435 million or $4.81 per share.
The net after tax realized losses on securities.
As a result of the downturn in the financial markets in 2020 is first quarter.
Annuity noncore items.
Decreased net earnings attributable to shareholders by $30 million or 34 cents per share.
Expenses related to the runoff of neon.
Were $7 million.
We are seven cents per share.
On slide 17.
You will find a summary of Ftn financial position at March 30, Onest 2020.
And she's balance sheet remains strong.
And we maintained solid levels of capital in our insurance businesses.
To meet our commitments to the ratings agencies.
Our liquidity and capital resources.
Provide us with the flexibility to respond to the challenges and uncertainties presented by Copel 19.
In the ordinary course of our business.
We examine and model a number of stress scenarios for our company.
This is part of our enterprise risk management function.
And for other regulatory purposes.
We have a high level engagement from our senior management, including our co Ceos.
In this scenario testing.
Our teams have created various scenarios to estimate the impact on EPS use excess capital and liquidity.
In an extreme stress scenario.
We have sufficient capital resources and liquidity.
To manage through this economic uncertainty without our capital dropping below the levels, we've committed to rating agencies in order to maintain our current high ratings levels.
After these adjusted book value per share.
Was $55.52 as of March 30, Onest 2020.
We returned $40 million to our shareholders in the first quarter with the payment of our regular quarterly dividend.
We repurchased $61 million at AFG common stock during the quarter.
At an average price per share was $74 in 28 cents.
Share repurchases.
Especially when executed at attractive valuations.
Our an important an effective component of our capital management strategy.
Parent cash was $190 million at the ended the first quarter.
After our April issuance of 300 million principal amount of 10 year five in one quarter percent senior notes.
Due in 2030.
AFG apparent effectively held cash and $485 million at the outset in the second quarter.
In addition, we maintain an undrawn 500 million dollar credit facility.
Our excess capital stood at approximately $610 million at March 30, Onest 2020.
We define excess capital as the sum of parent company cash.
Excess capital within our insurance subsidiaries.
And borrowing capacity up to a 22% debt excluding hybrid subordinated debt to total adjusted capital ratio.
Our management team reviews, all opportunities through the deployment of capital.
On a regular basis.
Wrapping up.
Page 18 shows a single page presentation of our updated 2020 core earnings guidance.
After 2020 core net operating earnings guidance.
Excluding.
The impact of investments Mark to market through core operating earnings.
Is in the range of $6 in 45 cents.
To $7.25 per share.
This is identical to the guidance shared in our April 15th 2020 pre announcement.
If I may comment on guidance in general.
After she is an objective driven company.
We establish could clear objectives in our business.
For our performance expectations.
Putting our self expectations for core operating earnings per share.
In my opinion.
We go farther than most and providing transparency through our guidance.
Respective our core EPS expectation.
And many other key financial and operating items.
Such as premium growth.
Business profit margins and investment income.
The impact of Cobot 19 on companies is evolving rapidly.
And its future effects that are uncertain.
We've seen many companies pair back.
Or withdraw entirely whatever guidance they may have been provided.
Our choice is not to go that route.
But instead share with you to the best of our current ability.
After a rigorous internal process.
Where we stand on these key financial and operating metrics.
Among the various voice is looking for insight into current financial and operating status.
As well as future operational and financial planning.
The FCC has encouraged companies that respond with forward looking disclosures.
And would not expect good faith attempts to provide appropriately framed forward looking information to be second guest.
So I hope those of you listen to this call appreciate our communication of our current expectations.
In accordance with our consistent regular practice.
And appreciate the circumstances under which the guidance was prepared.
Our guidance assumes an effective tax rate of approximately 20%.
On core pre tax operating earnings.
If she is expected 2020 core operating results exclude noncore items.
Such as realized gains and losses.
Annuity non core earnings and losses.
And other significant items that may not be indicative of ongoing operations.
We're now prepared to open the lines.
For any questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key please standby, while we compile the Q and a roster.
No first question comes from the line, Greg Peters with Raymond James.
Good afternoon.
I want to first of all acknowledge.
Indeed, you guys are providing a lot of color in guidance around expectations.
Which is a standout relative to so many of Mueller company's we Paul that's appreciated Theres a lot to one pack in your comments and.
I thought for the purposes first Carl.
Can you give us a sense of which lines in your property casualty business, where you are more concerned about potential headwinds from the cobot 19 crisis and evolving disaster in the economy.
That would be the first question.
Yes, Greg.
First of all.
We're very happy with our operating margins right now, particularly proud of the.
92, or so percent combined ratio and you know with us.
Continuing with guidance out there with 90% to 94%, particularly in an arena, where there are lot of crashes right now you know with other.
Other companies result, so.
I think probably my bottom line perspective as reflected in our guidance you know of 92% to 94%.
Combined ratio, which.
Which really as Jeff mentioned, we kind of gone through painstakingly business by business and really kind of included a day.
A range of what we thought potential loss for the facts that we have today are.
In our projected profitability.
You know I mentioned.
Workers' compensation.
You know the premiums I think probably the biggest premium impact.
When we take a look at things probably is.
Oh, and the area of workers compensation or passenger transportation and commercial auto when you look at the percentage.
Changes.
And that.
Probably our financial institutions business speak as I mentioned because of the Moratoria on.
Can swing or mortgage loans or.
Putting more of a more return on on allowing more time per for mortgage payments that type of thing so.
The the premium impacts are probably larger in some of the that lines like that that said when you reflect on our our premium guidance it impacts each of our different businesses in each of our.
Segments. So.
I mean overall the the biggest impact has been on the asset or the balance sheet side of things.
One our equity portfolio and.
Okay, well some of our.
Our mark to market investments in that.
So.
I think I said what.
Our perspective, the majority or the vast majority of our property policies have pandemic virus exclusions and.
And that and.
Workers' comp, where I think I mentioned percentages on.
And workers comp less than one half a 1% you know of our business is first responders in less than around 6.5%. If you include healthcare workers first responders in nursing homes.
Combined as far as impact to our.
Workers comp business and.
Particularly changed presumptions in a number of states.
That relate to that part of our business. So I mean those are probably the.
Right now the areas of our of our business that.
Where maybe the impact.
Great us.
Thank you for that answer.
To pivot to crack.
And I was I was looking at slide 11 of your Investor Slide Duck.
Where do you disclose the net interest spread and the core operating net spread.
And I was trying to reconcile.
The comments and the realities of I guess, the mark to market some of the mark to market adjustments coming back.
Through.
Through April.
And I guess.
What I'm looking for as just.
Some ideas on how you think that spread either the net interest spread or the core operating spread.
Is going to move around through the balance for the year, considering the volatility of the marketplace.
Sure and Greg when I referred to recovery.
Of asset values on Mark to market I was specifically speaking of.
Common stock investments.
That that we manage.
And to a larger extended was speaking to the fixed income securities.
In our portfolio I was not.
Addressing the mark to market.
Which is what you see on this line on the spread line the investments Mark to market those are TEP typically.
Yes private equity.
A lot of things that are managed by others.
That are mark to market in flow through the investment income as opposed to the realized gain line.
So we have not gotten many marks.
On.
86% of our AR.
Mark to market investments that flow through and investment income are reported on a one quarter lag and we have gotten very few more on first quarter valuation so it.
It's impossible for me to to give you guidance on on that I think given that the stock market was down by 20% in the.
First quarter Iwould, my expectation would be a negative number on mark to market.
That we report on this.
Segment that actually flows through investment income, but I, but I really can't.
Give you an accurate projection of that given that we have very few mortgage there are certain parts of the portfolio that are.
Of that portfolio that are holding up very well we have a significant investment in multifamily is an example, thats one of the bigger.
Segments of investments in.
In that category.
And that has held up very well the collections last month were in excess of 97%.
And right now this month, we're trending at a similar type level. So.
No those valuations.
Yeah. The returns on those investments, you're holding up very well hard for me to predict what the value on.
Yes, more traditional private equity investments will look like because we've we just haven't gotten any result, very we've got very few results.
At this point in time.
Certainly with the lower interest rates.
Impacting our.
Cash and floating rate securities.
I mean, that's going to have a negative impact mark to market for the year isn't going to in my opinion is not going to hit our kind of historical 10% type level.
So that will impact the spreads for the year at least partially mitigating that is our ability to make reductions in.
The credited reach on the in force.
As we've talked before Greg.
We have a model in our annuity business Thats.
Quite a bit different than many others, we have a very low cost putting business on the books.
And so we've been able to achieve are targeted reach a return without significant changes in renewal rates.
On the on the in force.
Now.
Because of that we have 118 basis points of difference between the current credited rate and the GM IRA.
I'm not aware of another company that has a spread that's as why is that.
We're now in this low interest rate environment, taking more aggressive action on adjusting the credited rates on enforce.
And the decisions that we've made already.
We're implementing we will be implemented over the next 12 month period of time with the anniversary of the.
Five days.
Yes, it will have the positive impact we're estimating of around 16 basis points to the cost of funds.
If all that business stays on the books, yet won't we'll have some surrenders, but.
Really a very meaningful impact on the on the cost of funds. We are going to continue to take action on enforce to overtime managed to appropriate reached a return on.
On our annuity block and another factor that I think really differentiates us from many others in the annuity business is.
We have a very low percent of our reserves.
That have lifetime income writers, it's only 13% of of our reserves that help lifetime income writers I think in the early stages are up until very recently I think that the more good really mispriced those riders.
We had.
Much more disciplined pricing and therefore the percentage of.
Business sold with riders.
Extremely low for us and the big significance of that is you when you're in a low interest rate environment is.
When we lower credited rates on to enforce.
It is a true benefit on on all the business that doesn't have writers by the way in or 118 basis point number and 31 basis point $31 billion of reserves, we exclude the portion of reserves that.
That has writers you have business has.
Right or if reserves have riders.
And in the policyholders.
End up exercising those riders, which I think a big percent will it really doesnt do any good there is no benefit and reducing your credited rate.
If the exercise those lifetime income riders, so I really like our position I really like our ability to.
Adjust rates and and have a very meaningful impact on the the returns over time on our in force.
That's excellent color Craig I appreciate it.
Okay.
Reconcile.
Youre annuity operations was some of the other publicly traded peers and on page 14 of your supplement.
It looks like the cost of funds is running higher I see this to 52 Mark.
And I'm, just wondering if youre if youre.
Putting your.
Hedging and other factors into other liability costs are and I'm wondering why it's running a little bit higher.
It is running a little bit higher.
Because we have not made any significant changes to the enforce you're going to youre going to see that change going forward is we are.
More aggressive Greg and adjusting the.
The credited rates on business that has been on the books for five years or more.
Got it.
Okay. Thank you for the for the answer I just final question.
And.
Again, I realize you provide a lot of comments in the call.
I really appreciate the detail in the supplement regarding the additional detail around the investment portfolio. I was wondering just for the purpose of this call. If you could highlight some of the areas in the investment portfolio is we're sitting here or early may where are you continue to see some elevated risk due to our market.
Hi, Dan.
Marty address the B the private equity stop which is reported on a quarter lags maybe you could talk about your sector exposure is to energy or retail or something like that any additional color. There would be helpful. Thank you.
Happy to do that as you know we did give some detail one that in the.
In the supplement we tried to expand.
No detail.
I hope to analyze that but but let's talk energy since you mentioned that specifically.
Hey, guys fixed income energy exposure as a billion and a half dollars, which was approximately 3% of investments.
89% of the total exposure is investment grade rated any IC, one or two and 92% of the high yield exposure is rated double b or.
Three.
70%, 72% over exposure is in the more stable midstream sub sector and well capitalized integrated sub sector.
The G portfolio is modestly underweight energy compared to the bond indices, but clearly as an area that we're keeping an eye on.
Today with energy prices.
Being as volatile as they are.
Are there any other areas the portfolio.
Like to call out I called out I guess energy, but is there anything as I look across the cross section is there any other area that you know that you want to highlight is scenario that you're watching closely well certainly.
Certainly I understand you're watching all or is closely so.
Yeah.
Yes, Greg certainly aviation is something that we're keeping an eye on we are we think pretty well positioned there given the.
Collateral that we have and.
Over the very senior ranking in tranches that we've invested in but we're certainly keeping an eye on.
On aviation exposures are exposure today is.
$615 million about 1% of total investments.
System of $298 million a corporate bonds.
In $317 million of aircraft.
Asset backed securities.
Looking at the corporate bond piece, 94% are investment grade, primarily with North American Carrick carriers.
At approximately 60% are comprised of senior securities that are collateral collateralized by aircraft.
Than we did take a look at the asset backed securities, 98% or in the senior most position with 97% rated entity I see one.
So we feel pretty good a better positioning there, but we certainly are keeping an eye on that.
Yes, a group of investments.
I've taken up enough time, thank you for your answers.
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Thank you.
Our next question comes from the line of Paul Newsome Piper Sandler.
Just a couple of questions.
One is is it.
We looking at your guidance for net written premium.
How should we think.
If theres any going to be difference in how that translates into earned premium.
And that.
It is really function.
Premium on it.
Is that those.
This is essentially hit.
Faster.
Yes.
It wasnt because.
Paul This is Jeff.
I guess is as the first matter.
We've heard of of some companies.
When there is reduced premium more premium give backs.
Looking that as loss expense rather than.
Lower premium.
Just want to confirm that our approach is going to be to record. This in premium income.
We would expect that.
It's possible the exposure base will go down.
And as a result premiums written and premiums earned will come down.
And what we're looking at in our guidance is consistent with that.
So we'll have to see how it plays out.
Quarter by quarter.
Great.
On the annuity side of the house.
I would imagine that we're going to have another rewrite of what happened.
For the index products.
After the financial crisis, which were.
Relatively very very good.
Do you recall how quickly those sales.
Because of the better performance.
After the financial crisis and why.
Yeah.
Deferred.
As it was.
So perspective.
Yes, Paul this is Craig.
There are a lot of similarities to the.
2008, 2009 period, and what we're seeing today.
I think when the.
Distribution partners are able to.
Uh huh.
Get back into action in.
Kind of resume meetings with.
With customers and so forth I my own opinion as a there is a real pent up demand now it is going to require.
The ability to have some face to face meetings, even though the or really changing their sales methods. It really is evolving and are they are using technology and.
Zoom in face time, and so forth the in lot greater way than than they did before but but.
I think that there is tremendous pent up demand I think the indexed annuity product is an excellent product I think the volatility of the stock market.
Frankly is going to cause.
People who or.
And retirement or close close to retirement to really appreciate the fact that any given year you can't go below zero.
On an indexed annuity I think they're going to be very willing to give up some of the upside of the stock market too.
You have.
Got to no downside below below zero at a given year I also think that we're going to see the same thing that we saw in 2008 2009.
I think that there are some companies that.
Or going to be very much capital constrained as a result of this environments.
And we've already we've already seen some companies withdrawal.
A number of products or.
Drop credited rates to a level, where theyre basically sending a message there not interested in writing new business I think is going to create tremendous opportunities for.
Companies that are well capitalized.
At able to write business frankly, the opportunities on the investment side or the best that we've seen sense that.
2008 through 2010 period.
And is I look back over a long history of our annuity business.
Those types of environments, where the times when when we really thrive and create the most value so I'm.
I can't tell you, which quarter is going to be the quarter when things open up again and.
Or distribution partners are unleashed and go do their thing but.
I think I.
I think the strong companies with.
Strong good business models.
And in excess capital or going to.
Think they're going to create a lot of value in this environment.
Right after the property casualty.
Yes.
What personal fees hard markets are driven real hard driven by.
A change in the perception risk, which translates into underwriters doing something different.
They did before is there something yet that's emerged in your book.
We are doing business.
Changing the way you're actually underwriting.
Right something changed terms and conditions.
We calculate Mississippian.
Thats changed yet.
Thanks.
Well.
I guess when you take a look at that change in pricing our pricing.
Trend or result from the for fourth quarter, two the first quarter.
And then in our pre in our pricing guidance I'd say that's pretty.
Pretty substantial change and pricing and you know there's substantial.
Changes in terms also you know that are kind of going along side by side.
With those.
Pricing trends in that.
At which would be different business by business.
And that obviously you know.
Businesses.
That have the greatest exposure to co but every companies is changing their new business.
Outlook or guidelines and that.
To businesses.
You know that are exposed to a lie virus in that in any fashion. So.
Clearly you know that say a driver.
Thank you all this need to go business by business and.
I believe between pricing and in term changes, there's quite a bit of significant changes going on and lots of our businesses.
Paul This this is Jeff I just wanted to.
Add onto Karl said.
When you talk about hard market requiring people to do something differently.
We are different than a lot of companies in terms the continuity we have.
From the leaders in our various business units.
A lot of people are veterans of multiple market cycles, and their particular market niche.
The places where we're seeing the most outstanding rate opportunities in the biggest rate change.
And no navigate the asking for rate increases in changing the terms and conditions.
So I.
I think that we know the playbook and we got not only the right people.
In place with the right experience with the right incentives for them to take.
Take the.
Most added what the market is giving them.
I think co covert 19, just adds to I think.
A tightening momentum that already existed cobot 19 can only increase that from my perspective.
Thank you Nick thanks much.
Our next question comes from the line of Larry Greenberg Janney.
Good morning, well good afternoon, sorry, and thank you.
So I'm wondering if you could just elaborate a bit more on the workers comp environment.
And you talked about having received some co bid related claims, but also seeing SKU, where you know what I would call traditional claims in comp.
And and I'm, just wondering if some of the.
Pose souls to implement the presumptions more to come to fruition.
Whether that.
Change your thinking about the outlook for your workers comp.
Businesses or or do you think that the.
LOE.
Percentage of business Thats in health care and first responders.
Would would really kind of mitigate any potential adverse impact from that.
I'm still very positive about our our workers comp business performed well in the first quarter.
And.
Right. Thank our perspective.
Workers comp business spat, 18% of our overall gross written premium last year.
19, we had very good results.
For the whole year.
Clearly probably expect underwriting margins to be lower.
But.
I think even with the cobot.
19 I.
I think we still have the opportunity to make a small accident year underwriting profit on our overall workers comp business and a solid calendar year underwriting profit.
Now that assumes that every state doesn't.
Opened up.
Create.
Presumption of workers comp coverage for co bid for all business or something I mean, I don't think thats why likely to happen but.
Thats, assuming there isn't some dramatic.
No change there.
Probably express expect net written premiums to be down about 12% for 2020.
Because of lower rates lower payrolls.
Mid term adjustments.
From the Cobot 19 impact.
Pricing is going to be down mid single digits.
So I think the cobot 19 industry claims clearly could help reverse the downward trend on workers comp rates potentially going forward.
Are we feel our reserve position strong.
When we look at.
Our current loss trends in that or loss ratio trend overall is pretty flat.
I think we'll know better and the second quarter in third quarter what.
Maybe be better able to answer your question, yes, we as we.
The experience the second quarter.
The third quarter results in that but.
I'm still optimistic about our workers comp business a California.
This California, I think is recovering so that 15% of our workers comp business.
We have a modest underwriting loss that we're projecting in California right now so.
What happens in California around co bid and they've gone to a broader presumption there.
So things like.
Somebody has to use sickly.
Before or workers paid any any workers workers' comp and are they still must test positive or big diagnosed for instance, as a positive by a position within 14 days or the way I stay worked outside home so.
I think that even could be a I may not be.
It's very difficult right now say in California to really make gauge the impact of that certainly if we're already projecting.
Modest underwriting loss on an accident year, and a calendar year basis for California workers comp.
Cobot 19 losses aren't aren't going to help there.
Thank you that's helpful.
Thank you and then.
In in the first quarter you did have.
And your Mark to markets for your your see yellow portfolio and I imagine that's all recorded on.
As quarter basis.
Can you give us an indication perhaps on how that portfolio performed in April.
I do not have updated numbers.
For for April Larry.
I mean, the underlying loans would have performed.
I don't know that there are a lot of buyers for cibolo equity or the most subordinated tranches right now so.
My expectation.
Isn't that you're going to see a.
A big turn there.
Anytime soon on the under see lows.
Just just kind of given the.
Yes, the lack of buyers today in.
And that asset class.
Theres been a fairly meaningful tightening in the.
Higher rated.
Traunches, which is where we have by far the.
Lower just investment we.
You can see the detail the ratings on our.
And there's been a theres been a fairly significant tightening of spreads on the higher rated portions which is where we have.
Yes, our.
The vast majority of our investment.
Larry.
We want to get away from providing guidance with respect to.
Investments Mark to market through the income statement. So I hope you appreciate decided how much we enjoy.
Along with you that we're speculating about that.
Hi adds greatly appreciate that thank you.
Thank you.
Thank you everyone for your time and attention. This morning, as we've shared our first quarter 2020 results and we look forward to talking with you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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