Q2 2020 American Financial Group Inc Earnings Call
[noise], ladies and gentlemen, thank you for standing by welcome to American Financial group 2022nd quarter results.
At this time, all participants owner listen only mode.
After the speakers presentation, there will be a question and answer session.
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Thought into ROE I would now like to end the conference over to your speaker for today, Diane Weidner, Vice President Investor Relations you may begin.
Thank you Towanda good morning, and welcome to American Financial group's second quarter 2020 earnings results Conference call. We hope you in your loved ones are healthy unsafe as we continue to navigate the challenges of the pandemic.
We released our 2022nd 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 lender co Ceos of American Financial Group, and Brian Huntsman, AFG, Vice President controller 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 these matters to be discussed today are forward looking these forward looking statements involve risks and uncertainties that could cause actual results and or financial condition to differ materially from these statements.
Detailed description of these risks and uncertainties can be found that after these 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 responses to questions.
A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
If you're 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 meeting our statements.
Now I am pleased to turn the call over to Carl Lindner, the third to discuss our result.
Good morning.
Poised to assure our wide so they have changed 2022nd quarter results and respond to your questions.
Got you reported or first quarter results in May we have had the opportunity to more thoroughly understand the impact of the cobot 19 pandemic on our business.
Our insurance industry, the financial markets on the global economy.
Our thoughts and prayers remain with all those affected by the virus many individuals caring for them.
He's exceptionally challenging circumstances of high why did the resiliency and commitment of our a after she employees who are the foundation of our success.
Our comprehensive business continuity plans, coupled with flexible in effect of workplace policies and practices have enabled us to focus on providing to secure trusted service and support our what's your agents and policyholders rely while keeping the well being or bring 'em poised says are top priority.
Hi, good I continue to be pleased with you have to strong financial position.
We have the liquidity in excess capital that afford us the flexibility to effectively address and respond to the uncertainties presented by cobot 19, as well as the ability to act on business opportunities.
Now I'd like to turn to never be over second quarter results on slide four or webcast.
Yeah. She reported second quarter core net operating earnings excluding losses from alternative investments are the dollar and 53 cents per share.
Decrease of 13 cents per share from the comparable period in 2019.
Core net operating earnings.
We're a dollar five cents per share in the second quarter and included a 44 million dollar loss or 48 cents per share.
Do you have cheese 2.2 billion dollar portfolio of alternative investments, what's your mark to market through core operating earnings. This compares to $41 million in earnings or 46 cents per share in 2019 second quarter.
Returns on these investments reflect the widespread financial and economic impacts of the cobot 19 pandemic and a significant decrease in both the equity in credit markets in the first quarter.
<unk> returns on these investments are typically recorded on a quarter lag.
Our second quarter 2020 core operating earnings included approximately $85 million or 75 cents per share losses for claims reserves and I'd be in our designated for estimated cobot 19 related losses.
These losses are reported separately from our cat losses.
Turning to slide five you'll see that the second quarter 2020 net earnings per share of the dollar 97 cents included after tax non core items aggregating 92 cents per share.
Last quarter, we provided full year 2020 core net operating earnings per share guidance, excluding earnings or losses from alternative investments due to the uncertainty the implications of cobot 19, and the resulting volatility in the financial markets.
Based on results through the first six months for the year actually now expects its 2020 core net operating earnings per share excluding alternative investments to be in the range of $6 in 60 cents to $7 on 40 cents.
An increase of 15 cents a share from the midpoint of our previous guidance.
Greg and I'll discuss our guidance for each segment of our business in more detail later in the call.
We're very pleased with the performance of our core operating businesses during the second quarter 2020 amid the challenges presented by the Cobot 19 pandemic.
We believe our underlying results demonstrate the strength of our portfolio of diversified specialty insurance businesses.
On the contributions over exceptional employees.
We thank god or our talented management team and our employees for helping to achieve these results.
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 second quarter results, our specialty property and casualty group performed exceptionally well during the quarter with excellent underwriting margins and very strong renewal pricing that's exceeding your expectations.
As you'll see on slide six gross and net written premiums were down eight and 11% respectively when compared to the second quarter of 2019, primarily as a result of the run off of neon.
Excluding the impact to the neon run off no gross written premiums were up 2% and net written premiums decreased 1% year over year.
Core operating earnings and the if you have cheese property and casualty insurance operations, excluding alternative investments was $129 million in the second quarter of 2020 compared to $152 million in the prior year period, a decrease of 15%.
Lower property and casualty net investment income was the driver of the lower year over year earnings.
Specialty property casualty insurance operations generated an underwriting profit.
$54 million and the 2022nd quarter compared to 60 million in the second quarter 2019.
Higher underwriting profitability in our property and transportation group was more than offset by lower underwriting profit center specialty casualty and specialty financial groups.
The second quarter 2020, combined ratio of 95.2% benefited from 7.6 points with favorable prior year reserve development, well catastrophe losses added 2.3 points.
In addition to catastrophes losses attributed to Cobot 19 added 7.6 points to the combined ratio for the second quarter 2020.
We continue to carefully monitor claims and loss trends related to the cobot 19 pandemic.
Numerous legislative and regulatory actions as well as to specifics of each claim contribute to a highly fluid evolving situation.
Year to date, we've recorded approximately $95 million in Kobin 19 related losses, approximately 90% of which established reserves for claims that had been occurred but not reported.
Given the uncertainties surrounding the ultimate number and or scope of claims related to the pandemic and the changing economy. These charges represent the company's current best estimate of losses from the pandemic and related economic disruption.
Our claims professionals and those who support them, we're working tirelessly to review claims with care and attention each deserves.
Like other insurers, we have received confirmation of subrogation benefits in connection with the PGT bankruptcy and the 2017 and 18, Northern California wildfires, our gross recovery was inline with expectations.
She expects to record approximately $8 million and benefits pertaining to these recoveries in our third quarter results.
Turning to pricing.
We continue to see exceptionally strong renewal rate momentum.
In fact, our average renewal rate increases year to date are the highest that we've achieved an over 15 years.
Average renewal pricing across our entire property and casualty group was up approximately 9% for the quarter.
And if you exclude or workers comp business renewal pricing was up approximately 13% in the third quarter.
Both measures reflect an improvement from rates achieved in the first quarter.
Now I'd like to turn to slide seven to review a few highlights from each of our specialty property and casualty business groups.
The property and transportation group reported an underwriting profit a $33 million in the second quarter 2020, primarily the result of higher favorable prior year reserve development and in our transportation businesses.
Results were adversely impacted by $15 million of catastrophe losses in the quarter. In addition to $3 million of cobot 19 related losses.
We continue to be very pleased with the profitability in our transportation businesses.
Crop year is shaping up nicely.
Crop conditions are very favorable and significantly improved over conditions last year at this time.
With industry reports of 72% of corn, and 73% of soybean crops and good to excellent condition.
Current yield projections for both or slightly above their respective yield trends, which has put some pressure on both corn and soybean pricing.
Commodity futures for corn and soybeans are approximately 17.5%.
And 4% lower respectively than the spring discovery prices.
Our pricing is currently within except to acceptable ranges.
We're closely monitoring the corn commodity pricing in particular.
Second quarter 2020, gross and net written premiums in this group or six and 1% higher respectively. Then the comparable prior year period.
The way to air acreage reporting from insurance adversely impacted crop premiums in the second quarter last year.
Excluding crop insurance 2020, gross and net written premiums in this group decreased by 3.3, and 5% respectively, when compared to the 2019 second quarter.
Decreases in premiums due to return of premiums and reduced exposures as a result of cobot 19 were partially offset by new business opportunities in our transportation propping in inland Marine and Ocean Marine businesses.
Overall renewal rates in this group increased 7% on average in the 2022nd quarter, an improvement from renewal rate increases achieved in the first quarter of 2020.
Im, especially pleased where the rates strengthening and commercial auto liability aviation and on our Singapore branch all of which continue.
She substantial increases.
Now underwriting profit center specialty casualty group were lower year over year and were adversely impacted by $52 million and cobot 19 related losses, primarily in our workers compensation and executive liability businesses.
These losses in addition to lower year over year underwriting profits in our alternative markets and social services business.
Were partially offset by higher favorable prior year reserve development.
Higher profitability in our excess and surplus in excess liability businesses and the impact of underwriting losses at neon in the second quarter of last year.
I'm really pleased with the improved market conditions in our excess and surplus wines in excess liability businesses, which have achieved significant renewal rate increases and acted on new business opportunities.
As the markets Harden.
Gross and net written premiums in this group for the second quarter 2020.
Decreased primarily due to the runoff of neon.
If you exclude the impact of neon gross written premiums increased 2% and net written premiums decreased by 5% in the second quarter of 2020, when compared to the same period in 2019.
The Cobot 19 pandemic has resulted in lower payrolls, and our workers compensation businesses, which when coupled with renewal rate decreases significantly impacted premiums.
Now gross and net written premiums in this group.
When excluding both neon and workers comp grew by 9% and 2% respectively.
Renewal pricing for this group was up 12% in the second quarter.
And excluding our workers comp businesses renewal rates in this group were up 21%.
An improvement from the rates achieved in the first quarter.
Now turning to specialty financial is specialty financial group results for the second quarter of 2020.
Included Cobot 19 related losses of $30 million, primarily related to trade credit insurance.
Second quarter 2020, gross and net written premiums were both down 7% when compared to the prior year period.
Lower premiums in our financial institutions business.
Which resulted from the impact of various state regulations regarding moratorium on policy cancellations and the placement of course coverage in our financial institutions businesses.
Renewal pricing. This group was up approximately 6% for the quarter and an improvement for the first quarter.
From the first quarter 2020.
Now if you would turn to slide eight with me for a summary view of our 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 over expectations and other key financial and operating items for each of our specialty property and casualty businesses.
Based on our results to the first six months of the year in our current expectations of the impact of Cobot 19.
We now expect property and casualty pre tax core operating earnings excluding the impact of alternative investments in the range of $615 million to $675 million.
This guidance is $15 million lower than the midpoint of our previous guidance and reflects an equal measure of lower expected underwriting profitability based on reported pandemic losses, and lower expected property and casualty net investment income.
We continue to expect to 2020 combined ratio for the specialty property and casualty group overall between 90% to 94%.
Our revised premium guidance overall and within each of our specialty sub segments requests and improved outlook from our previous guidance.
Excluding the impact of the neon run off.
We expect net written premiums to be 4% lower to 2% higher.
Than our prior year results.
And if we exclude neon and workers compensation, we expect net written premiums to be 2% lower to 4% higher than what we reported in 2019.
You will see on the slide that we adjusted our combined operating ratio and premium guidance.
Within each of our specialty property and casualty sub segments to reflect are most current view of the impact to the cobot 19 pandemic.
The estimate for the combined operating ratio in our property and transportation group improved two points and we've increased our premium expectations.
We have increased our combined operating ratio guidance in our specialty casualty and specialty financial groups to reflect the estimated impact to cobot 19.
Given the uncertainties in the implications of cobot 19, and the resulting volatility in the financial markets, we're not providing guidance for property and casualty net investment income.
And based on the results through the end of June we'd we'd expect overall property and casualty renewal pricing in 2020 to be up 7% to 10%.
And improvement from the range of 5% to 8% estimated previously.
And excluding workers comp, we expect renewal rate increases to be in the range of 10% to 13% an increase from the range of 8% to 11% estimated previously.
Thank you and now I'll turn the discussion over to Craig to review the results in our annuity segment and they have cheese investment performance.
Thank you Carl.
I'll start with a review of our annuity results for the second quarter beginning on slide nine.
Gross statutory annuity premiums were $687 million and the second quarter of 2020.
Appeared to $1.35 billion and the second quarter of 2019, a decrease of 49%.
The duty sales were lower in all channels into 2022nd quarter. As a result of stay at home orders and other factors factors related to the Covance 19 pandemic.
Significantly impacted our access to distribution partners as well as of their access to current and prospective clients.
Turning to slide 10, you will see the components of pre tax annuity core operating earnings.
Second quarter 2020, pre tax annuity core operating earnings excluding alternative investments increased by 12% year over year.
There were several factors contributing to the improved results, including growth in annuity assets higher than expected persistency.
Lower than expected.
Expenses related to guaranteed benefits.
Strong market.
And a reduction in the cost the fun.
These favorable item items.
Which include items that may not necessarily recur were partially offset by a decline in investment returns.
We believe these results demonstrate the strong fundamentals of our annuity business.
The financial and economic implications of Cobot 19 adversely impacted the returns on the annuity segments $1.3 billion of alternative investments during the second quarter 2020.
Although the return on these investments was a negative 3% in 2020, the cumulative return on these investments over the past five calendar years has been nearly 10%.
Turning to slide 11, you will see of Jesus quarterly average annuity investments and reserves grew approximately 7% and 6% respectively year over year.
On the bottom half for the slide you will see information about our annuity spreads starting with our net interest spread which takes into account our cost of funds.
And the second quarter of 2020 or cost of funds and other benefit expenses was 253 basis points, which included amortization of bonuses and accretion of withdrawal benefit reserves.
And the first quarter. This year, we beget began taking more proactive measures and adjusting renewal rates.
Ticket already on those products near the end or out of the surrender charge period.
For fixed indexed annuities these adjustments occur on the policy anniversary.
So we'll continue to see our cost of funds come down over the next several quarters as a result of these adjustments.
We believe it's difficult to compare cost of funds between different companies.
Because the presentations are not consistent.
For example, you have cheese cost of funds in the second quarter of 2020 included six basis points for the cost of bonuses and the cost of guaranteed withdrawal benefits.
These items are not consistently reported as a component of cost of funds by others and the industry.
We have noted that companies that sell significant amounts of products would bonuses and guaranteed benefits that do not include a charge for these features features and their cost of funds or net interest spread calculations.
We believe these costs could be as high as 50 to 100 basis points in some cases.
As a result, this can create an unrealistic picture of the cost of generating business and make comparisons difficult between annuity providers, particularly when comparing for you to companies, whose business model relies on high conditions or upfront bonuses to generate sales.
While net interest spread is an important financial measure for annuity companies. We believe that a helpful measure for investors to consider is return on equity.
The annuity segment operating returns on equity exceeded 12% in 2018 and 2019.
Looking forward is the returns on our annuity investments normalized we would expect to produce returns at that level.
Please turn to slide 12 for a summary of the 2020 outlook for the annuity segment.
Well I have GE continues to expect and attract attractive return audits alternative investments over the long term.
Due to ongoing volatility and uncertainty it's difficult to forecast. These returns for the remainder of 2020.
Pre tax annuity core operating earnings excluding earnings from alternative investments are expected to be in the range of $300 million to $320 million increased from our most recent guidance.
Of $280 million to $310 million.
By comparison annuity core operating earnings excluding alternative investments were $298 million in 2019.
Our guidance reflects the continued impact of low short term interest rates on the annuity segments Approx.
Billion dollars of net investment in cash and floating rate securities.
We began more aggressive renewal actions with policies renewing in April.
Once fully implemented over 12 months, we estimate annualized savings of $35 million to $50 million, depending on surrender activity.
Equivalent to reducing our overall cost of funds by eight to 12 basis points.
Our guidance also assumes that the stock market and longer term interest rates remain relatively flat for the balance of 2020.
As we noted when we announced our first quarter results, we anticipated a significant impact on annuity sales in the second quarter.
This trend has continued into the third quarter.
Despite the slowdown in sales you have geez average annuity investments grew more than 7% over the comparable period.
Comparable the comparable prior year period, and average annuity reserves grew by more than 6%.
Our current estimate is the 2020 gross annuity sales will be between 3.4 billion and $3.9 billion and result in growth and average investments and reserves of 5% to 7% in 2020.
In addition to our strong capital position and our strong underlying fundamentals, we have the ability to lower credited rates on $32 billion of annuity reserves by an average of 114 basis points, giving us a great deal of flexibility in helping us manage returns on our in force business.
Yeah.
Furthermore, as a result of prudent pricing you have GE has sold fewer annuities with guaranteed living benefits than many of its peers.
Earlier this year, we suspended sales of riders to afford us the opportunity to revise the terms to reflect the current interest rate and equity market environment.
At June 32020.
Only about 12% of HFG use annuity reserves contained these guarantees which is about half the industry average, resulting in lower risk and earnings volatility arising from decreases in interest rates and the stock market.
Please turn to slide 13 for a few highlights regarding our 56.7 billion dollar investment portfolio.
You have GE recorded second quarter 2020, net realized gains on securities of $161 million after tax and after deferred acquisition costs. This compares to a realized to realized gains on securities of $45 million and the second quarter of 2000.
Team.
Approximately $124 million of the realized gains recorded in the second quarter of 2020.
Pertaining to equity securities that idea of GE continue to hold at June 32020.
As of June 32020, pre tax pre DAC unrealized gains on F. G is fixed maturity portfolio were $2.4 billion. The highest density of genes history, and an increase of $2.3 billion since the end of the first quarter.
We believe our investment portfolio was appropriately positioned for this uncertain economic environment.
As you can see on slide 14, our portfolio continues to be high quality with 90% of fixed maturity portfolio rated investment grade.
In addition, the percentage of fixed maturity investments rated Noninvestment grade by the National Association of insurance Commissioners remains at less than 3% of the total fixed maturity investments at June 32020, and was lower than the percentage at March 31 2000.
20.
Last quarter, we added information to our Investor supplement with more details about our fixed maturity portfolio, including any IC ratings and detail on our industry exposures within our corporate bond portfolio.
We also included information a better asset backed securities portfolio by collateral type and rating.
This quarter, we added an additional page two or investor supplement that highlights our real estate related investments.
We're extremely pleased with performance of our portfolio of multifamily investment properties.
Through June 30, these properties reported occupancy rates of approximately 95% and collection rates of approximately 98%.
Our portfolio is geographically diversified we not do not own any properties in the large metropolitan areas that have been identified as most at risk from lifestyle changes, resulting from the pandemic.
Our mortgage portfolio has also performed well throughout the pandemic.
Only seven loans with a total principal balance of $193 million were approximately 13% of our portfolio being currently subject to forbearance agreements.
We believe these loans are adequately collateralized and expect full repayment.
We believe these additional exhibits highlight the high quality of our investment portfolio.
I'd like to take a moment to highlight of G.'s financial position and share a few comments about capital and liquidity.
On slide 15, you'll find a summary of jeez financial position at June 32020.
We expect to continue to have significant excess capital and liquidity throughout 2020 and beyond specifically our insurance subsidiaries are projected to have capital in excess of levels expected by ratings agencies in order to maintain their high current ratings and we have no debt matures.
Ladies before 2026.
We returned to $41 million to our shareholders in the second quarter with the payment of our regular quarterly dividend.
We repurchased $76 million of GE common stock during the quarter at an average price per share.
Of $63.71.
Share repurchases, especially when executed at attractive valuations are an important net effective component of our capital management strategy.
Parent cash was $500 million at the end of the second quarter and you have GE maintains an undrawn 500 million dollar credit facility.
Our excess capital stood at approximately $850 million at June 32020.
I'd like to take this opportunity to introduce Brian Hirschmann, you have GE, Vice President and controller, who has been appointed to serve in the interim role of principal financial and accounting officer.
He has served as vice president since 2014 and controller since 2012.
Brian Thanks for joining us this morning.
I will now turn the discussion over to Brian who will walk through the components of our excess capital calculation.
Thank you Greg Please turn to slide 16.
Here at AFG, we define excess capital as a sum of holding company cash excess capital within our insurance subsidiaries and borrowing capacity up to a 22% debt to total adjusted capital ratio.
For purposes of this calculation subordinated or hybrid debt, which has preferred stock type features is excluded from debt and our debt to capital calculation.
In calculating insurance company excess capital we use the most stringent rating agency capital model, among Moody's, which is based on the any icees model standard and poors in A.M. best.
For our property and casualty business. The most stringent models S&P here, we measure capital in excess of was required to maintain an a plus S&P rating.
For our annuity business excess capital is based on the Moody's or any IC capital requirements here, we measure capital in excess of was required for a 375% risk based capital ratio. This target is based on Moody's indication that a ratio at this level or higher as a factor that good.
Lead to an upgrade for our annuity companies.
It also provides a sizable cushion over moody's indication that RBC ratio of less than 345% could lead to a downgrade.
RBC targets vary by annuity company.
Our RBC threshold takes into account several favorable factors cited by moodys, including the annuity segments efficient expense structure.
Our ability to lower our cost of funds are relatively simple product design. It also provides surrender protection.
Because we use the most stringent capital models the capital levels that we target and our excess capital calculation result in statutory capital well in excess of what is expected.
By the other less stringent rating agencies for AMG is property and casualty in annuity segment ratings.
Our management team reviews, all opportunities for deployment of capital on a regular basis.
I will turn the discussion over to Craig for concluding remarks.
Thank you Brian.
We've included a single page presentation of our updated 2020 core earnings guidance on slide 17.
Our guidance assumes an effective tax rate of approximately 20% on core pretax operating earnings.
You have cheese expected 2020 core operating results exclude non core 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.
In conclusion, I'd like to add to Carl and I are very pleased with our financial results over the last six months of we as we have faced unprecedented challenges.
We are financially strong and well positioned to respond to the challenges and opportunities presented by cobot 19 and to produce excellent financial results in the second half of 2020 and beyond.
We will now open the lines for any questions.
Thank you, ladies and gentlemen, as a reminder to ask the question.
Chris Star then one on your telephone.
A question.
Okay.
Again.
Asked a question.
Please.
We compile the Q.
Our first question comes from them on upon.
With Piper Sandler your line is open.
Good morning, Thanks for the call.
I was hoping to get a little bit more detail.
And then make related charges I know you said it was primarily in our increase but.
Well the things that we've been discussing about.
Amongst investment community is whether or not this is.
An ongoing potential claims issue given some DC in home.
Issues and continued.
And.
Seemed to be some differences and people are accounting across the industry. So maybe you could address those issues.
Hi, Paul I think just overall I'll, let Brian run through the breakdown of.
The $85 million that we've.
We posted but overall based off of you know the facts and the knowledge that we have today.
Thats kind of our best estimate.
And that.
90, Percents IB NR.
And that but.
You know conditions can change.
The world can change.
Thanks can get better things could go longer.
So.
Idaho, and some ways I don't know how anybody you know running an insurance company.
And.
Talk about a what the ultimate losses.
But I want you walked through you know are.
Sure so for very AFG like all insurance companies. It is is a.
Difficult calculation to make as Carl mentioned, 90% of our our reserves are for IB in our at this point, we took a very hard look at each individual line of business.
Looking at our exposures based on everything we know through June Thirtyth and booked our best doesn't mean, what that number would be so it's not a pay as you go or anything like that but on the other hand, it's it's not.
Remember that we just put out of the air So for US. It we hope that it is is a number that covers everything that we have in a definitely is as what we believe the prudent number four we knew no through the end of the second quarter. So I would say, it's a fully baked to number for everything that we know through this date.
Yes.
Turning to the alternative investments, which are the hot topic last quarter.
Should we expect.
Full rebound in some of these losses given that the hit a pretty substantial rebound the equity markets or.
Something less or any indications about what could happen with that those performance.
Investments prospectively be great.
Sure. Paul This is Craig I think the first thing.
Need people need to understand is kind of the the the makeup or breakdown of the mark to market assets. Let me, let me run through that with you. So the mark to market assets totaled around $2.2 billion.
7% of that number is in close both debt and equity that we mark to market.
40% is in real estate investments, where our focus is.
Very much on multi family.
Which has held up extremely well.
40% is in more traditional private equity funds, 9% and private debt debt funds.
And then.
Kind of miscellaneous for the balance, but by the way around 85% of our Mark to market assets are recorded with over a one quarter lag.
So as I as I look at the.
Various components.
Certainly the traditional private.
Equity returns are.
Somewhat related to the stock market typically the private equity firms.
Don't Mark.
Investments up as much as.
The overall stock market and a strong period and so typically in a weaker period. They don't also don't write them down as much as the stock market.
Our real estate investments as I mentioned, 40% of the total exposure is really focused on on multifamily. It has held up extremely well both the occupancy and collection rates are very similar to what we experienced prior to the pad.
Mick.
We are in excellent markets.
Frankly, and quite a few more consider kind of benefiting from.
People fleeing certain urban areas are our biggest markets.
In multifamily or Denver, Denver, Colorado Springs, Florida, Phoenix, Arizona.
Dallas, Texas.
Atlanta, Georgia, they've held up extremely well, we have not had to give any any rate reductions too.
Keep strong occupancy if anything what we have experienced is a decline in cap rates on.
Those types of multifamily properties given the decline on interest rate so that piece.
At least at this point in time, we would expect to hold up very very well.
So thats kind of gives you some idea of how I view, the major components of Mark to market.
On a go forward basis.
Great. Thanks, So I'll, let somebody else ask questions, but I appreciate the hill.
Thank you.
Reminded ladies and gentlemen, that's one asked a question.
Our next question comes from a lot of Great Peters with Raymond James Your line is open.
Good afternoon.
I wanted to switch back to the commentary that you provided Carl.
I am wondering focus on two things first the crop commentary and then.
The trade credit commentary.
When when you provided the guidance for the full year for property casualty business.
Did you assume that crop was can be better the same more lower than the previous year because in your comments certainly seems to suggest that you.
We have some degree of caution as it relates to your outlook there.
I think it was just the opposite frankly.
Greg.
In our guidance I think I always tell people that we kind of built in an average crop year and average mange and on average over time.
And that.
I think.
This year as I mentioned shaping up very nicely.
Crop conditions are real favorable.
There is when you look at the percent of corn and soybeans and good to excellent condition that really looks good I think the one thing that we're watching as the biggest part of government. The modal peril part of the book as revenue based.
Which is a function of yield and price.
We're keeping our eye on the corn corn prices in particular, I think as I'd mentioned in the past.
Our insurance chews up deductibles, there, they're kind of they take the first layer of losses, if there are losses on a revenue basis. So.
And on.
A lot I think the average deductibles farmers you know choose if somebody has a 15% deductible then they're taking the first.
15% of losses so.
We're keeping our eye on corn prices soybean prices are really in good shape at this point and.
You know appia prices on corn start to be above.
I'll get to the 20% level and yields aren't good that's when you kind of worry a little bit.
On that but right now I think our crop year shaping up very nicely.
Great. Thanks for clarifying that for me.
On the trade credit piece.
Just.
On very simple terms layout the nature of the losses there.
I suppose the logical follow up to that would be this the.
The effective covered and the dramatic.
Impact on the economy is obviously going to extend beyond the second quarter results and so just curious where our risks are for that business as we think about the balance of the year and certainly next year.
I think.
The cobot charge that we took in the second quarter I think fairly represents our feelings about the exposures there.
On that.
Today.
It's Mike.
A trade credit has to do with.
Whether if your mere ensuring the ability of.
Us export or to receive payment.
On the other side.
So.
It would be uncollectible types of issues around trade credit Union as Brian said, we thoroughly kind of gone through and reviewed.
That line of business in that and I think their reserve Weve put up for that line of business adequately reflects what we think the.
The exposures are today.
Great.
And then the question on on.
Capital and the annuity business and.
I appreciate your.
The increased disclosure around capital.
One of the one of the challenges I was struggling with last quarter was trying to identify.
Exactly how much capital as required.
In your annuity business to generate the to maintain that 375.
Percent RBC.
And I was coming up with a number of around three to 3.1 billion of capital.
But if you could provide any sort of additional color for us on how we should think about capital that's required on the annuity business and then if the alternatives to rebound.
Because of the changes in the market conditions in the second quarter.
What we see the capital levels increase.
Greg This is Craig search certainly a fee.
Alternatives rebound you will see an increase in capital yes.
So as Brian was explaining we target a and RBC level of.
375.
Which has actually well above would moodys expects of US Moody's has stated that they expect us to maintain and RBC level of.
350.
And they've indicated that if we would go below 325, then that would be possible.
Reason to.
Put us on negative watch or.
Possibility of a downgrade to to kind of size that for you. The Greg the difference between 375 and 325 RBC is something in the neighborhood of $425 million. So there is a huge cushion.
Between kind of.
With Moody's expects of us core.
Level at which we would need to to put more capital into the business.
The 375 is just provides a very sufficient very large cushion to what's expected by.
By Moody's, which is Brian said has the highest threshold for for capital for the annuity business.
Okay, and then thanks for that.
Correct.
I guess.
You bought back stock in the second quarter.
Maybe you can just give us an update on how much is remaining in your authorization.
We see the price of stock remains around the same level, where you are buying before so I guess, you're still in the market, but maybe you could give us some updated perspectives on that in the context of your comments around capital.
I don't I don't have the exact amount left on the authorization.
I don't maybe Diane can can find that for me I don't know how significant that is all we have to do is.
Get an authorization for additional shares Greg and that certainly would be our intention.
We think that the stock at these prices is.
Very attractive.
Use of our excess capital and.
So certainly it's our intention to continue to be a purchaser of of our shares.
If you have you bear.
We have a 2.8 million shares left under our current authorization as Craig said, it's it's as simple as a board approval to acquire more shares obviously, we're going to look at at all different ways to use our capital we're in a very strong capital position. So.
We're always looking at acquisitions.
And then also at returns to shareholders as ways to go about that we have plenty of room on our current authorization.
Got it alright, well thanks for the answers and thanks for the comments around your cost of funds and the comparison with the peer group. Its appreciate it.
Thank you.
Next question comes from the line of Ron can task.
Capital Your line is open.
Thank you good afternoon.
And Diane congratulations on your well deserved promotions.
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Two questions.
One on the life business, you've talked about a 12% or are we.
Stable in this environment looking out.
Is that when we think about that 12% to allocate 60% of the debt and 40% 40% of debt and 6% of the alternatives to get to that 12%.
Do I put a 10% return on the alternatives or zero.
Yes, Brian.
Yes, so so thats an unleveraged return.
And.
Our historic return has been.
On alternatives has been something in the neighborhood of 10% over a long period of time.
And so when we said we expect to in the future.
Be able to earn that 12% plus return after tax return on capital that's assuming a normal return on alternatives.
If you take a look at the the second quarter. If we had earned that 10% annualized rate on alternatives into second quarter. The return on the annuity business would have been 13% after tax.
Perfect. Thank you and just a question on on the property casualty side on rate increases a couple of companies have given us.
The amount of rate raising rates to to account for lower.
Interest rates lower net investment income think Swiss re uses two points ready to think Hartford's talked about two to three points I realize you don't want to give us Eni guide in the property casualty bids, but would you at least when a talk to how much rate you think you're putting in for the for future lower interest rates.
I don't have an answer.
On that right off the top my head we could probably.
Calculate that that Thats important to you and ill get back to you.
On that.
Bottom bottom line, you know add to in the quarter.
With a 9% increase overall.
When rates in.
Excluding comp 13%.
We love the momentum.
And that and.
Our underwriting result already is very strong so.
We're Lebanon.
Great. Thank you.
Thank you.
I'm showing no further questions at this time I would now like to turn the call back to Diane Weidner for closing.
Thank you to Wanda and thank you all for joining US. This morning. Please feel free to please feel free to reach out to the Investor Relations team should you have any additional questions and we hope you all have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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