Q4 2020 American Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the American Financial group 2024th quarter results Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder, today's program.
He is being recorded I would now like to introduce your host for today's program Diane Weidner, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to American Financial group's fourth quarter 2020 earnings results Conference call, We released our 2024th quarter and full year results yesterday afternoon, Our press release Investor supplement and webcast presentation are posted on Afg's website under the Investor Relations section.
These materials will be referenced during portions of today's call.
I'm joined this morning by Carl Lindner, the third and Craig Lindner Co Ceos of American Financial Group, and Brian Hurts Me Afg's 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 other matters to be discussed today are forward looking these forward looking statements involve certain risks.
And uncertainties that could cause actual results <unk> financial condition to differ materially from these statements.
A detailed description of these risks and uncertainties can be found in Afg's filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to core net operating earnings a non-GAAP financial measure in our remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
And finally, if you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy and as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statement.
Now I'm pleased to turn the call over to Carl Lindner, the third to discuss our results. Good morning, We released our 'twenty 'twenty fourth quarter and full year results yesterday afternoon, and Craig and I are delighted to report a very strong finish to the year.
Afg's core net operating earnings were $8.44 per share for the full year of 2020 compared to $8 on 62 cents per share in 19.
Fourth quarter 2020 core operating return on equity was in excess of 14% as indicated on slide three.
Well capital management, one of our highest priorities.
And returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in Afg's financial future.
Craig and I are pleased that we returned $649 million to shareholders during the year and.
In addition to $313 million in share repurchases, we paid 336 million on dividends during the year, representing a 163 million in regular common stock dividends and $173 million special dividend and our quarterly dividend was increased by 11, 1%.
On to an annual rate of $2 per share beginning in October of 2020.
We're also proud of our track record of value creation for shareholders our.
Growth in adjusted book value per share plus dividends was 13% in <unk> and 'twenty 'twenty.
Afg's 10 year total shareholder return representing growth in share price plus dividends was approximately 287% exceeding the total return performance of the S&P 500, the S&P property and casualty index and the S&P life and health index over the same time period.
Yeah.
Now turning to slide four.
For a review of the 'twenty 'twenty fourth quarter AFG reported record core net operating earnings of $3.09 per share compared to $2 22 per share in the fourth quarter of 2019.
Fourth quarter was our results included.
84 cents per share in earnings from alternative investments that are mark to market through core earnings compared to 32 cents per share in the fourth quarter of 2019.
We're very pleased with the rebound in the performance of these assets, which were adversely impacted by the downturn in financial markets in the first half of 'twenty 'twenty as a result of the pandemic.
Annualized core operating return on equity in the fourth quarter was an exceptionally strong 23%.
Now turning to slide five you'll see that the fourth quarter net earnings per share of $7.93 included after tax non core items aggregating to $4 84 per share a significant component of these non core items included realized gains on securities of $5 30.
Six cents per share the majority of which pertain to the transfer of investments and Afg's annuity block reinsurance transaction that was entered into on October <unk>.
And the Mark to market of equity Securities that AFG continued to one at December 31 2020.
We're extremely proud of <unk> fourth quarter, and full year 'twenty 'twenty results, especially in a year fraught with challenges, including a global pandemic related the related economic disruption and a heightened level of national disasters.
None of us would have imagined the challenges twenty-twenty would bring but we are extremely proud of these results and the resiliency dedication and creativity of our employees over the many months, Craig and I. Thank God, our talented management team and our employees for helping us to achieve these results and position our business for.
<unk> success.
Last week's announcement about the net.
The sale of our annuity business brings significant changes to the way AFG will report its results in 'twenty 'twenty one.
Looking forward, we've established initial 'twenty 'twenty, one core net operating earnings guidance per share to be in the range of $6.25 to $7 25.
There are several important assumptions underlying this guidance, including the expectation that earnings from our annuity business will be classified as discontinued and reported as non core effective January one 'twenty 'twenty one <unk>.
In addition, our guidance assumes no earnings on the cash proceeds from the sale and an expectation that the AFG parent well have $43 per share in cash and real estate related investments. Following the close of the sale Craig will talk more about the details including pro forma.
From a financial results and expectations. During his remarks now review detailed guidance for each of our property and casualty businesses wider in the call.
Now I'd like to turn our focus to our property and casualty operations. If you'd please turn to slide seven and eight on the webcast, which include an overview of port our fourth quarter results.
As you'll see on slide seven core operating earnings in Afg's property and casualty insurance operations were $274 million in the fourth quarter of 2020 on.
New quarterly record for AFG.
And a 38% increase from the prior year period.
Significantly higher year over year property, and casualty underwriting profit and higher earnings from alternative investments were partially offset by lower other property and casualty net investment income primarily the result of lower interest rates.
The specialty property and casualty insurance operations generated an underwriting profit of $179 million on the 'twenty 'twenty fourth quarter compared to $89 million.
And last year's fourth quarter.
Higher underwriting profitability in our property and transportation and specialty casualty groups were partially offset by lower year over year underwriting profit in our specialty financial group.
Fourth quarter 'twenty 'twenty combined ratio of 86, 2% improved 7.3 points from the 93.5% reported on the comparable prior year period.
Our results for the 'twenty 'twenty fourth quarter included.
One on a half points in catastrophe losses, and 2.4 points of favorable prior year Reserve development.
We continue to carefully monitor claims and loss trends related to the COVID-19 pandemic.
Numerous legislative and regulatory actions as well as the specifics of each claim contribute contribute to a highly fluid evolving situation.
F G Didnt record any additional reserve charges for COVID-19 in the fourth quarter.
Given the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic approximately 72% of Afg's COVID-19 related reserves from the $95 million in charges recorded in the first half of 'twenty 'twenty are held as incurred but not reported.
At year end to December 31st 2020. These.
These reserves represent the company's best current best estimate of losses from the pandemic and related economic disruption our claims professionals, who knows who support them are working tirelessly to review claims with the care and attention each deserves.
Now turning to pricing.
We continue to see strong renewal rate momentum and achieved broad based pricing increases in the quarter with exceptionally strong renewal pricing in our longer tailed liability businesses outside of workers' comp.
Our average renewal rate increases are the highest we've achieved in over 15 years.
Average renewal pricing across our entire property and casualty group was up approximately 13% per quarter.
And if you exclude our workers' comp business renewal pricing was up approximately 17% in the quarter.
We believe the current market conditions reflect a continuation of meaningful renewal pricing increases, which had been in response to the low interest rate environment trends in social inflation.
Elevated loss industry loss experience following heavy industry cat experience higher reinsurance pricing among other factors.
We expect the market to remain firm throughout 'twenty, 'twenty, one, allowing us to achieve attractive renewal rate increases in excess of loss costs.
Now gross and net written premiums for the fourth quarter were down, 2% and 7% respectively.
Our respectively.
When compared to the fourth quarter of 2019, primarily the result of the runoff of neon.
If you exclude the impact of the neon runoff gross and net written premiums increased 6% and 2% respectively year over year.
Now I'd like to turn to slide eight to review a few highlights from each of our specialty property and casualty groups.
Groups prop.
Property and transportation group reported an underwriting gain of $74 million in the fourth quarter compared to an underwriting loss of $2 million in the comparable prior year period.
Improved year over year results on our crop operations. Following two 2019 losses from prevented planning along with significantly improved accident year results in our aviation business and higher profitability in our transportation businesses were the primary drivers of the improved results.
Fourth quarter 'twenty 'twenty gross written premiums in this group were up 3% net written premiums were down 2% when compared to the 2019 fourth quarter.
Growth in new business opportunities in our property and inland Marine and Ocean Marine businesses and higher gross written premiums in our crop operations were partially offset by lower premiums in our transportation business, primarily from reduced exposures as a result of COVID-19, and premium reductions and two large <unk>.
National accounts.
Higher sessions of certain crop insurance products.
Contributed to the year over year decrease in net written premiums in the 'twenty 'twenty fourth quarter.
Overall renewal rates in this group increased 5% on average for the fourth quarter of 2020 with continued strong renewal rate momentum.
Now the specialty casualty group reported an underwriting profit of $91 million in the fourth quarter compared to $69 million in the comparable 19 period.
Higher year over year underwriting profit in our excess and surplus and excess liability businesses and improved year over year results in our general liability business were partially offset by lower favorable prior year reserve development in our workers' comp businesses.
Although underwriting profitability in our workers' comp business overall continues to be excellent.
This group reported an impressive 84% combined ratio for the fourth quarter and 90 per cent for the full year.
Improved market conditions in our excess and surplus lines and excess liability businesses have enabled us to achieve significant rate increases and act on new business opportunities as the market has hardened.
Gross written net gross and net written premiums in this group decreased 7% and 16% respectively for the fourth quarter 2020, when compared to the prior year period, primarily due to the runoff of neon.
When you exclude the impact of neon gross and net written premiums increased 9% and 3% respectively. In the fourth quarter of 2020, when compared to the same period in 19 significant renewal rate increases and new business opportunities in our excess and surplus excess liability and.
D&O businesses contributed to the growth.
The COVID-19 pandemic has resulted in reduced exposures in our workers comp businesses, which when coupled with renewal rate decreases in our workers' comp concession businesses contributed to lower year over year premiums, partially offsetting the growth in the other businesses within this group.
Renewal pricing for this group was up 19% in the fourth quarter, excluding work workers' comp renewal rates in this group were up approximately 29% much higher than their renewal rate increases achieved in the first three quarters of 'twenty 'twenty.
On the specialty financial group reported an underwriting profit of $20 million in the fourth quarter of 2020 compared to $32 million in the fourth quarter of last year or up 19.
Lower underwriting profit in our surety and trade credit businesses, along with higher year over year catastrophe losses in our financial institutions business were the primary drivers of the decrease nearly all businesses in this group continued to achieve excellent underwriting margins.
Gross and net written premiums increased by 2% and 4% respectively.
In the 'twenty 'twenty fourth quarter, when compared to the same 2019 period.
Due primarily to the growth on our lender services business, which was partially offset by COVID-19 related economic impacts in our surety business and tighter underwriting debt reduced new business in our trade credit business.
Renewal pricing.
In this group increased each quarter in 2020 and was up approximately 9% during the fourth quarter and 8% on average for the full year. This is the highest overall annual renewal rate increase we've achieved in this group since 2002.
These results were driven primarily by improved pricing and earned out lender placed mortgage property business and market tightening and our trade credit insurance operations.
Now if you'd please turn to slide nine for a summary view of our 'twenty 'twenty one outlook for the specialty property and casualty operations.
We expect a 'twenty 'twenty, one combined ratio for the specialty property and casualty group overall between 89 and 91%.
Net written premiums are expected to be 5% to 9% higher than the $5 billion reported in 2020 now.
Now looking at each segment we.
We estimate a combined ratio in the range of 88% to 92% and our property and transportation group.
Our guidance assumes a normal level of crop earnings for the year.
Net written premiums for this group are estimated to be 9% to 13% higher in 'twenty and 'twenty one.
We expect our specialty casualty group to produce a combined ratio on the range of 87% to 91% in 2021, our guidance assumes strong renewal pricing in our E&S excess liability and several of our other longer tail liability businesses, we expect.
Net written premiums for this group to be 3% to 7% higher than 'twenty, 'twenty results and 5% to 9% higher excluding workers' compensation.
The specialty financial group combined ratio is expected to be in the range of 88% to 92%.
We expect net written premiums to be in 'twenty, 'twenty, one to be 4% to 8% higher than 2020 results.
With regard to pricing, we expect overall property and casualty renewal rates in this year in 'twenty, one to be up 6% to 8%.
Excluding workers' comp.
We expect renewal rate increases to be in the range of 8% to 10% as indicated by the continued pricing momentum we saw through the end of the 2020.
We expect property and casualty investment income to be down 1% to up 3% when compared to results reported in 2020, primarily as a result of continued low continued low interest rate environment.
Now I'll turn the discussion over to Craig to review, the fourth quarter and full year results in our annuity segment.
The impending sale day annuity business and Afg's investment performance. Thank you.
Thank you Carl.
I'll start with a review of our annuity annuity results for the fourth quarter beginning on slide 10, where you will see the components of pretax annuity core operating earnings.
Fourth quarter 2020 pretax annuity core operating earnings increased 24% year over year, reflecting significantly higher earnings from the annuity segment's alternative investments.
Pre tax core operating earnings before alternative investments on the fourth quarter decreased by $7 million or 8% year over year, reflecting an unusually high amount of one time investment income earned in the fourth quarter of 2019, and the impact of lower interest rates on the annuity.
Segments investment portfolio, including the impact of significantly lower short term rates on the annuity segment's $5 billion of cash and floating rate investments.
In total the annuity segment achieved a core operating return on equity of nearly 15% in the fourth quarter of 2020 at approximately 11% for the full year.
The annuity segments GAAP return on equity, which includes all operating and non operating earnings and the block reinsurance transaction was an impressive 27% into 2024th quarter and 16% for the full year.
The results produced by our annuity business in the fourth quarter and full year demonstrates the strong fundamentals of our business our pricing discipline and the success of our operating model.
The annuity segment continued to have a very strong balance sheet at December 31, 2020, with unrealized gains in the annuity bond portfolio of $2.6 billion.
Risk based capital in excess of 400%.
And capital well in excess of the amounts indicated by ratings agencies to maintain our ratings.
Turning to slide 11, you'll see that Afg's quarterly average annuity investments and net reserves decreased approximately 10% and 11% respectively year over year as a result of the annuity block reinsurance transaction, which was effective October one 2020.
In the absence of the reinsurance transaction average annuity investments and reserves would have each grown by approximately 5% on a pro forma basis.
On the bottom half of the slide you'll see information about our annuity spreads starting with their core net interest spread which takes into account our net investment yield and our cost of funds.
Our core net interest spread was 228 basis points in the fourth quarter of 2020, an increase of 34 basis points over the comparable 2019 quarter.
This increase reflects significantly higher returns on the annuity segment's alternative investments as well as lower cost of funds, resulting from the company's renewal rate strategy.
These positive impacts on spreads were partially offset by the negative impact of lower interest rates.
Our core operating net spread earned in the fourth quarter of 2020 was 142 basis points compared to 107 basis points in the comparable 2019 quarter.
This 35 basis point increase reflects the same impacts mentioned previously.
We were pleased that returns on alternative investments in the third and fourth quarters of 2020 increased sharply from previous quarters, achieving annualized yields in those quarters of approximately 14% and 17% respectively.
As indicated on slide 12, gross statutory annuity premiums were $1.32 billion in the fourth quarter of 2020 compared to 1.14 billion in the fourth quarter of 2019, an increase of 16%.
This increase was driven by higher sales in our financial institutions channel as well as higher pension risk transfer premiums.
I'm extremely pleased that the sales in the fourth quarter of 2020 were nearly $200 million higher than the fourth quarter of 2019.
Please turn to slide 13 for a few highlights regarding our $52 $5 billion investment portfolio.
AFG recorded fourth quarter 2020, net realized gains on securities of $468 million after tax and after deferred acquisition costs. This compares to net realized gains on securities of $51 million in the fourth quarter of 2019.
Approximately $292 million of the realized gains recorded in the fourth quarter of 2020 related to the transfer of an investments in connection with the annuity block reinsurance transaction.
Had additional $123 million of after tax after DAC realized gains pertained to equity securities that AFG continued to one at December 31 2020.
As of December 31, 2020, pretax pre DAC unrealized gains on afg's fixed maturity portfolio for $2 $8 billion.
We believe our investment portfolio is appropriately positioned for this uncertain economic environment.
As you can see on slide 14, our portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade at.
In addition, the percentage of fixed maturity investments rated non investment grade by the NTIC remains of less than 3% of total fixed maturity investments at December 31, 2020.
I will now turn the discussion over to Brian who will discuss afg's financial position and share a few comments about capital and liquidity.
Thank you Greg Please turn to slide 15, where you will find a summary of <unk> financial position at December 31, 2020.
We repurchased $80 million of AFG common stock during the quarter at an average price of $74 98 per share.
Share repurchases, especially when executed at attractive valuations are important and effective component of our capital management strategy.
During the quarter. In addition to share repurchases, we returned $216 million to our shareholders through the payment of our regular 50 cents per share quarterly dividend and a $2 per share special dividend.
November AFG redeemed its $150 million in 6% subordinated debentures due 2055 at par value.
The redemption resulted in an after tax non core loss on retirement of debt in the fourth quarter of approximately $4 million or four cents per share.
Our excess capital was approximately $1 $2 billion at December 31, 2020.
This number includes parent company cash of approximately $215 million.
We expect to continue to have significant excess capital and liquidity throughout 'twenty 'twenty, one and beyond specifically our insurance subsidiaries are projected to have capital in excess of the levels expected by rating agencies in order to maintain their high current ratings and we have no debt maturities before 2026.
Before I turn the discussion back over to Craig to share a bit more color on the same on the annuity business I wanted to make a couple of comments about corporate overhead expenses going forward.
Historically, we have allocated overhead expenses to our P&C and annuity segments to the extent that those expenses directly benefit those operations. Consequently, there will be about $15 million on expenses currently allocated to the annuity segment like the expenses of our in house investment management that will not go away as part of this.
Zhao for other currently shared services like IP, there's an 18 months transition services agreement under which mass mutual will be reimbursing us for those costs the benefit of the annuity segment.
I mentioned the in House investment management is an example of an expense that won't go away with this out but I would be remiss if I didn't share with you. The fact that even post sale of the annuity segment, our investment management expenses at the current level or lower than what we would be required to pay an outside investment manager.
Another important note the impact of the $15 million in retained expenses following the sale of our fully loaded and the guidance that we've provided.
We feel like we run an efficient organization are excited about growth opportunities on our property and casualty operations.
Supporting prudent growth in property and casualty is the first place we would look to deploy any resource capacity created by the sale.
Yes.
I will now turn the discussion back over to Craig for some additional thoughts on the sale of the annuity business, including the significant liquidity and excess capital generated by the transaction and other financial impacts.
Yes.
Thank you Brian.
Before I turn to a discussion about the sale.
I'd like to start with a word of facts.
Our people culture products and business model have propelled afg's annuity business and enabled us to emerge as a market leader.
Carl and I are thankful for the many contributions of our annuity associates and AFG employees who've been on important part of the growth and profitability of our annuity business.
And we're pleased that our annuity group associates will have the opportunity to become part of a new beginning with a great company mass mutual.
One of the true joys of my business career has been working with our associates to build this company together.
And I'm thankful for their contributions to our success.
Now I'd like to turn to slide 16, which outlines a few highlights from last week's announcement about the sale of Afg's annuity business to mass mutual.
Under the terms of the agreement Afg's annuity businesses will be sold to mass mutual for $3 $5 billion in cash subject to final closing adjustments to the extent that GAAP shareholders' equity excluding a OCI of the entity sold varies from $2 $8 billion.
GAAP shareholders' equity excluding OCI of the entities to be sold was $2 $9 billion at December 31 2020.
AFG expects to recognize on after tax gain on the sale of $620 million to $690 million or $7.10 to $7.90 per share when the sale closes which is expected to occur in the second quarter of 2021.
In addition, prior to the completion of the transaction.
AFG parent will acquire approximately $500 million and real estate related partnerships and directly owned real estate from Gaelic.
Afg's 2021 earnings guidance ended December 31, 2020 pro forma financial information provided assumes that the $500 million on real estate related investments acquired from Gaelic will reside within the AFG parent.
We're continuing to evaluate the merits of including these assets within the P&C investment portfolio and we will provide additional details when we make a final decision.
This transaction will result in Afg's exit from the fixed and indexed annuity market.
We have long believed there was a compelling value on afg's business model with both the specialty P&C business.
And our market, leading fixed and indexed annuity business.
In today's environment, we believe afg's common shares have been undervalued.
Because the market is not fully recognized the value of our annuity business.
Afg's stock has been trading at a significant discount to the value. We believe is appropriate given the high quality of our insurance businesses.
We are always looking for ways to create long term value for our shareholders and in the fall of last year, we began and turtle discussions regarding the future of the annuity marketplace and whether we should consider a sale of afg's annuity business.
Key considerations beyond at appropriate valuation for the contingent employment of our employees.
Ensuring that our policyholders would be treated fairly.
Ensuring that our distribution partners would have an impeccable business partner.
And finding a buyer that would support the local the local community.
And achieving a sale price that represented the full value of Afg's market, leading annuity business. We saw it a buyer that would give appropriate consideration to the following.
Hey, Fg's high caliber annuity product portfolio high quality investment portfolio had a business model, which collectively enabled the company to effectively navigate multiple economic cycles.
The annuity segment strong brand recognition as a member as a member of the Great American insurance group.
In annuity business with industry leaderships in several important product lines and distribution channels, including indexed.
And the financial institutions channel AD and infrastructure comprised of high quality annuity professionals and systems.
Mass mutual commitment to establish a subsidiary in Cincinnati ensures that the agreement will have no impact on Gaelic relationships with and commitments to its annuity policyholders and distribution partners.
Importantly, we were very pleased that the transaction will provide compelling career opportunities for our annuity associates and allowed us annuity business to remain part of the greater Cincinnati community.
This transaction simplifies afg's business model by creating a standalone specialty property and casualty company that highlights Afg's long standing top performance as a specialty P&C franchise and a more transparent manner.
Pro forma financial information is provided on slides 17, and illustrates how the transaction will significantly enhance afg's excess capital and liquidity.
On a pro forma basis Afg's parent cash as of December 31, 2020 was $3 $2 billion in excess capital increased from the $1 $2 billion reported at December 31, 2020 to an estimated $4.4 billion.
As for use of proceeds the ultimate deployment of this capital has not been determined.
We are continuing to review options that provide the best opportunity to create long term value for our shareholders and we'll continue to evaluate opportunities for deploying afg's excess capital.
Alternatives include the potential for healthy profitable organic growth.
Expansion of our specialty property and casualty niche businesses through acquisitions and startups that meet our target return thresholds as well as share repurchases and special dividends. We will now open the lines for any questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes on the line of Mike Zaremski from Credit Suisse. Your question. Please.
Hey, good afternoon. Thanks.
Okay on a number of questions I guess.
Thanks for for for some other color.
Yes.
And rationale for the sale.
Yes, the biggest the number one question.
We're getting from investors is how to think about the use of proceeds.
A broad question.
But maybe you can you can touch on on you know whether how you think about M&A versus you did cite earlier, you'll feel the stock valuation I believe was.
Is inexpensive so you can touch on that first and then I have a follow up.
Sure.
We just signed the deal up chest.
Now in a share.
Current period of time ago. So.
I think.
Now we got a you know we're going to move towards closing the deal on.
I think as we have always over the years you know our use of capital excess capital is going to be what we consider to be the highest and best use and highest returning.
You know types of uses.
And if you look at us historically that mix a mix of organic growth that so we've done some acquisitions.
We've repurchased.
Our shares you know are our stock when we thought it was undervalued.
<unk>.
Where we are you know we continue to think.
You know our stock's undervalued.
Today and we've also.
<unk> done a combination along with stock purchases of extra ordinary dividends.
You know we've had we're proud of our track record of increasing our annual dividend. So you know I think.
We're working with a larger pool of excess capital than usual, so I think.
As we have in the past, Craig and I and our team all thought Hawaii and strategically moving forward from today.
Consider all those things and what makes sense again, you know.
We're very much aligned with shareholders you know our family and our management team on a big chunk of the stock and you know we think quite shareholders. We want to we want to continue to build.
You know significant shareholder value.
You know going forward, so we'll be thoughtful way <unk>.
Strategically thinking about that.
Now that we have that deal you know the mass mutual deal signed up and that Craig do you have any other thoughts.
Thank you I think you stated it very well.
I guess, Carl as a follow up to that you didn't mention.
Let me think about debt deleveraging.
On deleveraging is shabby.
Should I be reading into.
Until you, you're not saying that R. R.
Alright.
Cards too.
Brian do you want to do you have any color on that.
Sure so depending on how we want to use the proceeds.
We could use.
Up to $2 billion of the proceeds for example to buy back stock or pay special dividends without violating any of our debt covenants or commitments to rating agencies. So we have flexibility.
Ability there.
Without having to retire debt, we feel like we've positioned our debt at very attractive interest rates and to the extent, we can deploy that capital on our operations.
And at the moment, probably a better use than buying back debt. So not that we wouldn't consider it but it's not it's not one of the major <unk>.
Iterations.
Okay. That's helpful I'm going to switch gears to the the P&C operations on maybe re queue.
In terms of the top line growth expectations.
But he was 49.
For next for 2021.
That compares to.
Two I think 2% on an apples to apples basis, correct me, if I'm wrong for Q I know theres a lot going on but maybe you can kind of talk to your kind of.
Where you see some of the pluses and minuses are where that momentum is coming from in terms of the topline growth expectation.
Yeah, I you know I think the guidance, we put out there is a 5% to 9%.
Excluding comp as you know 6% to 10%.
And that.
Our best guess.
Obviously COVID-19 will have some impact you know early on and we're betting net you know the economy continues to gain strength and improve on that.
I think the good news in our cases.
You know we have we think we have some good broad based opportunities.
To grow our business.
This year.
In each other each of the different segments in that so.
We're very excited about the opportunity for national Interstate for instance, in our commercial auto oriented subs now that where May you know we're meeting our.
Return targets or combined ratio targets are you you know on commercial auto or you know even on commercial auto liability, we're meeting our targets though.
You know we think there are good opportunities in that part of our property and transportation businesses.
If you've been watching crop prices for instance.
Corn and soybean futures prices.
You know if that holds up through.
The month of February as you know, which kind of as you know.
The base prices are figured on you.
We could see that business grow 15, 20%.
You know at a double digit rate.
We're saying we've had some nice growth on our property inland Marine business, we think that'll continue.
Specialty casualty group.
Gosh, you know I think we're still going to see good opportunities to grow our excess and surplus lines business are our D&O business, our excess liability business our special.
Our human services.
Business.
Our public sector business.
You know pretty broad based opportunities there and you know on the fourth quarter I was pleased to see even.
You know in our specialty financial segment.
We're.
You know the pandemic and our you know the the the banks approach you know on a in the lender place property part of the business. We grew some of the fourth quarter. So you know I think next I think this year.
You know I think we'll begin to see some growth there and in businesses, maybe even you know trade credit.
As things have stabilized and surety as the economy improves our fidelity and crime you know, we're one of the top in market share one of the top players in that business and I think we'll.
Continue to have good momentum and good opportunities.
Net as our aviation business is you know improved dramatically and profitability going back to PMT I guess, you know aviation even in the property and transportation, we'd see some opportunities to grow so I think the good news that we see is as you know I think we have some pretty broad based.
Opportunity for organic growth.
Hope that gives you some color.
Yeah. That's helpful. Thank you.
The queue. Our next question comes from the line of Paul Newsome from Piper Sandler Your question. Please.
Good morning.
Thanks for answering the questions I wanted to ask about M&A focus.
Historically the firm has been very focused on sort of that $200 million.
Cash acquisition price I was wondering given the fact that you have a lot more cash than that does that change the sort of acquisition strategy.
It certainly does it open up.
For more opportunities or different opportunities.
Yes.
Good morning, Paul.
I think you know generate what I've said historically is our sweet spot is kind of $50 million to $500 million actually.
When you know when you look at the summit transaction you know that was a 400 million ish you know near the buy in of National Interstate that was in the same territory on all of that that seems to be our sweet spot.
As we have more excess capital.
You know if there was a really great opportunity you know debt.
For us to add to our existing great franchise sure we would look at something like that.
The difficulty is is.
You know when you look around and you look at our returns on equity on our property casualty business. There. They really arent you know I mean.
Repurchasing your own shares.
No and owning more of a you know an entity and a franchise that you know is already earning great returns you nuts.
Acquisitions had to compete with that so.
Again, it gets back to we think that we're pretty intelligent.
Managers and users of excess capital if you look at the blend over the years and.
So you know for us to do something larger would really have to be very attractive and we'd have to be very confident you know that it would be a great add to our franchise.
Fantastic Thanks, guys I appreciate it.
Congratulations on the quarter.
Thank you.
Thank you. Our next question comes on the line of Greg Peters from Raymond James Your question. Please.
Yes, good afternoon, everyone and.
Congratulations on just on monumental decision on behalf of the organization.
Listen I realize the Inc is still dry.
From the transaction and you know youre not willing to talk about what you're going to do with the capital yet.
One of the.
Considerations that crossed my mind is debt.
With the reduced earnings power of the company because of the sale.
Debt at some point down the road the payout ratio for your dividend might come under review.
And I was just wondering obviously, there's a lot of ground to cover between now and then but I'm just curious.
How you view the payout ratio in the context of the earnings power of the company going forward.
Yes.
Greg. This is this is Craig made the reality is.
We're not going to be running zero on the cash on to pair it forever.
So I wouldn't jump to the conclusion that the earnings power of the company as a greatly.
Greatly diminished we have to decide what we're going to do with the excess capital and cash on the parent but.
Certainly the.
Our ability to.
Pay the dividend in place today are contingent on our goal has always been to raise.
Raised the dividend each year at a double digit pace I think if anything this tranche transaction enhances that ability.
Okay.
On slide 16 of your presentation you provided.
I mean, another I mean.
I don't really understand.
The question too much to be honest, it's not very intuitive if we're saying we have a business that's growing in our core business is going to you know earned the range of earnings that we are and we pay a two dollar annual dividend.
That would say that.
There's no problem with that and we're generating excess.
Excess capital so.
I don't understand your question much sorry about that.
All right Craig.
Their response I just was looking at.
In your record on capital returns is among the best but you're you know at some point, you're the you're missing the annuity earnings and that was part of the blended consideration that went into a payout ratio, but let's I don't want to it's not it's not worth.
Okay.
Arguing about or discussing.
I wanted to.
The other question I had for you considering the strong results you posted in <unk>.
The property transportation casualty and financial businesses and you talk about.
The rate increases the casualty business I think you said your rates are up 19%.
And I'm just curious what your perspective is about the balance between getting all of that right.
On <unk>.
And actually growing your business more because when youre.
Guiding to combined ratios.
Hi, <unk> and low Ninety's it seems like your near or targeted return levels at least from a combined ratio perspective.
I think that's a good question.
It really does.
Differs tremendously line by line when it gets you know when.
When you when you look at things a word.
We're doing very well, we've always done very well in the excess liability arena.
Even even when rates were you know lower than what they should have been in the industry in that and as rates have increased the way. They have that business has grown tremendously. So we've really used it as an opportunity to grow a lot.
And DNO Arena you know we've.
As the technical rate for public D&O is looked more attractive you know for certain.
<unk> you know a risk by risk we've been writing more and our appetite went from zero for instance for public D&O hover over the past years.
Oh to having more of an appetite because the technical rate you know for certain risk looks pretty good.
You know Inc.
Strategically it really you know Greg kind of you know, it's it's business by business you know on that.
I think we're in a enviable position of already you know, having solid underwriting profits and.
Going into this year.
You know continuing to be able to make those decisions. So I buy line getting rate increase that exceeds loss cost.
And you know being able to choose line by line, whether we go more with growth or you know or what have more margin. So.
I hope that gives you a little bit of color.
It does thank you. The final question on page 16 of your slide deck you said.
GAAP shareholders' equity excluding <unk>.
Oh Ci of the entities to be sold was $2 9 billion at year end, what was the GAAP shareholders' equity, including a OCI of the entities to be sold at the end of December 31, 2020 did I Miss it somewhere in the press release.
It's another $1 billion or so of equity in the business.
Ultimately that that will go away with the sale.
It will be much less leveraged from an investment perspective on our <unk> balances will be smaller post transaction.
Got it thank you for the answers.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes on without Shields from.
<unk> your question please.
Great.
Two questions one on the deal.
Can we get a sense.
How much of the net corporate expenses are going to be a birth by mass neutral on a year over year on an annual basis.
I'm, sorry could you repeat the question I'm sorry.
Right.
Sort of what corporate.
Expenses look like after the deal and I understand that $15 million.
That had been allocated to annuities.
State with P&C, but there are some expenses apparently wear the message will be bearing those expenses I'm just wondering if that number is available.
So they're there.
Two I guess to clarify that a little bit so the annuity.
Does that math, which will be reimbursing, our expenses that are inside the annuity earnings they work, excluding everything annuity in our guidance so that won't really affect afg's ongoing results because they're just going to be sort of reimbursement is at cost for those services are the real change in expenses is pretty much as simple as.
Add $15 million to what we currently have.
As well would be our expectation going forward there won't be anything.
On a going away that 15 million sort of a net number.
Okay.
Perfect.
And then looking at potential M&A.
One of the.
So that would make sense.
Pricing per lot of specialty lines is getting better right now the only property that are available.
Need some significant turnaround effort I don't know if that.
Something that you would share was hoping you could talk about if it is your comfort in terms of buying something that you'd have to fix.
Gosh that would be so.
So acquisitions specific end.
If if we have in House Street Smart you know knowledge about a given business and understand it well and think we can you know turn things around you know we might do so that mean, the Atlas transaction was a little bit like that you know of.
You know a company that was.
In trouble.
And that and you know we manage to.
Take a piece of of the you know the para transit part of that business and some other risks and define what we know on what we're good at and what we think we could fix and do well and so you know we did that transaction when the big transaction, but.
We're writing I think where he ended up writing maybe a $40 million of premium at our prices and at at Great underwriting you know great returns so.
If theres something larger that are you know we feel that we have the expertise N.
You know.
It might give that try.
And that.
So really it's really.
You know entity specific end and whether we have the in house knowledge to tackle things.
And that main.
I mean, frankly right now we have such good opportunities I think organically and some of the new businesses, we've new lines, we've started in that.
I'm gonna be careful about getting our management team distracted by you now.
Taking on too much of a fixer upper if you understand what I'm, saying.
Thank you that was very helpful. Thank you so much.
Thank you. Our next question is a follow up from the line of Mike Zaremski from Credit Suisse. Your question. Please.
Yeah, just just one clarification debt $500 million of.
Real estate.
Net youre retaining.
That was.
Associated with the annuity deal.
Can you explain are you paying outright 500 billion for that and we deduct.
Debt from the sale price I, just I'm sure we can back into it looking at the math, but just wanted some clarification on what's going on there.
Sure. This is Craig the answer is yes, we are going to be purchasing around 500 million or a little over $500 million of real estate as part of the deal.
So if we end up deciding to hold the real estate and the parent debt.
And I think that you reduce the cash in the parent by $500 million and that is the way, we presented things and our pro forma is when you look at the pro forma cash on the parent it is as if we're going to hold debt 500 million plus of real estate and the parent is as I said.
On my comments, we are studying whether or not it makes sense to hold some or all of those real estate assets are in the property casualty company.
And if we do that we decided to do that then potentially there is an extra 500 million plus of cash in the parent versus the pro forma numbers that we presented to you today.
Let me let me take just a minute also and give you the logic behind that that was.
Our requirement of mine as part of the deal was to allow us to to buy those real estate assets at book value.
And the reason that I wanted to do that is the vast majority of the real estate assets are.
Multifamily investments and their investments, where we hold an 80% position that it's a limited partnership but what I would say is we're very active in selection of the properties very active in the decision to monetize those properties from time to time.
And with an 80% position you have a lot of influence even as a limited partner.
Those those properties those investments were jointly held between property casualty and annuity and to split the investment position and take our position from 80% to 40% would greatly diminish our influence they've been very very strong performing investments.
In excellent markets and and we expect that they will continue to perform well and with the smaller amount of directly owned real estate.
Same rationale was used if we owned 1% to 100% of our property to split it up and have mass mutual owned 50% and US owned 50% didn't make a whole lot of sense. So that was the rationale for AFG requiring as part of the deal.
That that.
We could purchase those those real estate asset.
Okay. That's helpful.
We can take this offline too. So you said, you're studying I think shifting them from the parent.
The.
The statutory entity or entities.
Is.
Is that something we should be thinking about the impact here.
<unk> or maybe any color there.
I made if we would do that obviously earnings would move from the parent into the property casualty company and we would have more cash up into parent.
Thank you very much.
Hmm.
Yeah. The deal you know this the signing of the deals you know so new week.
It's something that we want to stay we don't want to we want to make sure that we're comfortable with all the different rating agencies requirements. They are different and you know what the capital charges or we just haven't had time to study it and.
You know so it's something you know.
Strategically that we're looking at when you look at the.
Detail, we provided on the earnings guidance in their press release itself, you'll see that we identified 35 per share in 2021 expected earnings coming from that asset. So if we put them on the P&C group that earnings will be on the P&C group if not it will be at the holding company, but that's sort of the contribution we are expecting from those assets and our <unk>.
Current models.
Thank you.
Thank you. Our next question comes from the line of Rudy Miller from the Miller Group. Your question. Please.
Yes.
Miller Milagros Scottsdale, Arizona at 72 degrees every body Blue Sky.
Like to make a couple of comments first please.
I have been a shareholder.
Miller group.
Miller Capital Corp, Miller investments total management.
Business over 50 years and we.
We've been following them American financial for long time, and one of the things. We're most impressed about and we had the investor way back starting at $26 a share.
And we added to our position each year small institution that controlled.
By myself.
And.
Just thank you guys. It doesn't one of the best jobs insurance management are very artful.
Very thoughtful bright guys loved our return.
Times the analyst day.
My question Diehard I'm on.
On my dollar on my stock I don't work for those guys is still on the board of my firm that up.
I think sometimes the analyst I don't know why.
Sometimes get discounted by some on the analyst out there. That's my opinion, you analysts who are listening.
On the job you guys done managing multiple.
Paid.
From my calculation regarding what you bought this for compared to other insurance transactions and I have been in the industry on a public board and a major shareholder book pretty large insurance company along the way in my career in debt.
I think you guys do on the best job in her space and how you utilize your investment money is tremendous and.
I, just really think you do one of the best jobs instead of and quite frankly, the 80% of the question that were asked you I got the same information they did I don't have those analyze them.
Every week questions by some of those analysts to ask your questions couldn't figure it out since it's art and stuff you presented some color, yes correctly. So anyway I don't have any questions just keep doing what you're doing gentlemen.
E Bookers.
This is Craig I really appreciate your comments on I guess the way we look at it is we try to be as transparent as we can with giving information about our businesses.
And if analysts or the market.
It kind of gets it wrong in terms of the valuation of prospects that creates opportunities for us over the years there've been periods, where we've repurchased a very large number of our share. So I mean, we'd rather have the stock trade at on.
Reevaluation, but if it doesn't.
That creates opportunities for social yeah. Thank you Rudy. This cookbook. This is Carl Thank you appreciate your feedback and I have to tell you you know we have such a great deep bench of executive talent and management talent on our insurance businesses. We're just.
<unk>.
Very blessed to be able to work with such a talented group of people and that's a big part of the secret.
Well, we really are group. Thank you got you on a great job by all Jasmine voices vocal cord surgery recently, and I don't say a lot on don't normally go on the conference calls that might be tenants do it but I wanted to be on this and myself and.
I'll tell you what in March I was one of those buyers that debt $44 75. So every time I see it go down we just add to our position.
In fact, we just bought some when you.
Your release came out and we bought on the open it.
Last trade was at 80 741, so we monitor it pretty closely.
We don't have positions some people have but we do this we do real well with American financial we like your business and we like their management team you guys are smart and hardworking and your net.
I Love, what you said.
Your ownership.
Hugh.
Are out there for the stockholder.
We all participate.
And the gains and.
Look what you manage the pandemic I don't hear enough pause it sometimes it's always a negative eight once again, we will let you guys go thanks for the time and.
God Bless American let's go get them head on.
A G C K.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Diane Weidner for any further remarks.
Yeah.
Thank you all for joining us this morning, and we look forward to talking with you again as we share our first quarter 2021 without hope you have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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