Q1 2022 American Financial Group Inc Earnings Call

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And thank you for standing by welcome to the American Financial Group 2020 to first quarter.

<unk> conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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Now hand, the conference over to your first speaker today, Diane Weidner, Vice President of Investor Relations Ma'am you may begin.

Thank you good morning, and welcome to American Financial group's first quarter 2022 result earnings results Conference call. We released our 2022 first quarter 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 Hartman, 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 of the 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 responses to questions.

A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

And finally, if you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy and as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.

Now I'm pleased to turn the call over to Carl Lindner, the third to discuss our results.

Good morning.

I'm pleased to share highlights of Afg's 2022 first quarter results, after which Craig Brian and I'll be glad to respond to your questions.

Afg's financial performance during the first quarter was outstanding.

We're very pleased with the underwriting margins produced by our specialty property and casualty businesses and strong investment income.

Our entrepreneurial opportunistic culture, and disciplined operating philosophy have positioned us well in a favorable property and casualty market and a dynamic economic environment.

Craig and I, Thank God, our talented management team.

And our great employees for helping us to achieve these exceptionally strong results I'll now turn the discussion over to Craig to walk us through Afg's first quarter results investment performance and our overall financial position at March 31.

Okay.

Thank you Carl.

Please turn to slides three and four for summary earnings information for the quarter.

Hey, you have cheap reported core net operating earnings of $3.56 per share an impressive 50% increase year over year.

The increase was primarily the result of significantly higher underwriting profit in our specialty property and casualty insurance operations and substantially higher P&C net investment income primarily due to the continued strong performance of Afg's 2 billion dollar alternative investment portfolio.

Annualized core operating return on equity in the first quarter was a strong 24, 6%.

Now I'd like to turn to an overview of Afg's investment performance financial position and share a few comments about afg's capital and liquidity.

The details surrounding our $15 $7 billion investment portfolio are presented on slides five and six.

Pretax unrealized losses on Afg's fixed maturity portfolio were $138 million at the end of the first quarter, reflecting the increase in market interest rates and widened credit spreads compared to year end 2021.

The yield on the five year treasury nearly doubled from $1 two 6% at the beginning of the year to 2.42% at March 31 2022.

As we entered 2022, our P&C fixed maturity portfolio.

Duration, including cash and cash equivalents was approximately two years the lowest it has been in recent history.

The strategic positioning of our portfolio reduce the impact of rising rates on the fair value of our existing fixed maturity portfolio.

And enabled us to invest approximately $2 billion in high quality fixed maturities and mortgages in response to increasing interest rates and widening credit spreads.

As a result, we lengthened our PNC fixed maturity portfolio duration, including cash and cash equivalents to approximately 2.5 years at March 31 2022.

Our current fixed maturity reinvestment rate is 4% to 4.5% and compares favorably.

So the fixed maturity portfolio book yield of 3% at the end of the first quarter.

For the three months ended March 31, 2022, P&C net investment income was approximately 40% higher than the comparable 2021 period and included significantly higher earnings from alternative investments.

The annualized return on alternative investments in the first quarter of 2022.

It was a very strong 29, 1%.

The $139 million in pre tax earnings from our portfolio of alternative assets included $41 million in earnings from the sale of certain multifamily housing investments at a very favorable market.

Excluding the impact of alternative investments P&C net investment income for the three months ended March 31, 2022 increased 2% year over year.

This increase was driven primarily by a higher balance of invested assets with rising interest rates contributing to a lesser extent.

The impact of rising rates will have a more significant impact beginning in the second quarter of 2022.

Our guidance for 2022 assumes continued interest rate increases throughout the year and an overall annual yield of approximately 12% on alternative investments with an average annualized yield of 6% achieved over the remaining three quarters of 2022.

Yeah.

Please turn to slide seven where you will find a summary of Afg's financial position at March 31 2022.

Our excess capital was approximately $2 billion at March 31, 2022.

The number included parent company cash and investments of approximately $1 $7 billion.

During the quarter, we returned $222 million to our shareholders through the payment of a regular 56 cent per share quarterly dividend of $2 per share special dividend and $5 million in share repurchases.

Growth in book value per share plus dividends was <unk>, 6% in the first quarter.

Excluding unrealized losses related to fixed maturities growth in adjusted book value per share plus dividends was a strong five 7% during the quarter.

Yesterday, we announced our plan to redeem all of the <unk> approximately $375 million and outstanding screen of 5% senior notes due in 2026 under a make whole call.

Based on today's rates the coal price is approximately 101% of the principal amount plus accrued interest in it.

And unpaid interest to the redemption date.

It is expected that the early redemption of the senior notes will result in an after tax non core loss in the second quarter of approximately $5 million were six <unk> per share loss related to the make whole premium and other related expenses.

Redemption of these senior notes creates additional capacity within our debt to cap ratio.

Commitments for the return of capital to our shareholders.

In conjunction with our first quarter earnings release, we announced a special dividend special cash dividend of $8 per share payable on may 27th 2022 to shareholders of record on May 20th 2022.

Year to date AFG has declared $10 per share in special dividends and has declared $36 per share in special dividends since the sale of its annuity operations in may of 2021.

Through a combination of these special dividends share repurchases and the redemption of the debt we've deployed almost all of the $3 $5 $7 billion in cash proceeds from the sale of our annuity business, while continuing to be in a strong excess capital position.

After adjusting for the debt redemption, and a special dividend pro forma excess capital at March 31, 2022 was approximately $1 billion.

While all of Afg's excess capital is available for internal growth and acquisitions.

Apart assumptions underlying afg's current guidance and with consideration to capital management actions announced yesterday, we still expect to have at least 400 million to $500 million of excess capital available for share repurchases and additional special dividends through the end of 2022.

While staying within our most restrictive debt to cap guideline.

Now ill now turn the call back to Carl.

To discuss the results of our P&C operations and to discuss our expectations for 2022.

Thank you Greg.

Please turn to slides eight and nine of the webcast, which include an overview of first quarter results as you'll see on slide eight the specialty property and casualty insurance operations generated an underwriting profit of $208 million compared to $134 million in the first quarter of 2021, an impressive 55% increase.

Year over year.

And these results set a new record for first quarter underwriting profit.

Each of our specialty property and casualty groups produced higher year over year underwriting profit and combined ratios in the eighties. The most significant increase was in our specialty casualty group.

The first quarter 2022, combined ratio was a very strong 84% improving four five points from the prior year period.

<unk> from the 2022 first quarter include 0.7 points in catastrophe losses, and six eight points of favorable prior year Reserve development.

Yesterday losses, net of reinsurance and including reinstatement premiums were $9 million in the first quarter of 2022 compared to $31 million in the prior year period.

Gross and net written premiums increased 20% and 14% respectively. In the 2022 first quarter compared to the prior year quarter.

Now premiums reported in the first quarter were favorably impacted by timing differences in the recording of premiums in our property and transportation group between the fourth quarter of 'twenty, one and the first quarter of 'twenty two.

When adjusting for those items gross and net written premiums were up 9% and 10% respectively for the first quarter of 2022.

The drivers of growth vary considerably across our portfolio of specialty property and casualty businesses in the aggregate year over year growth in gross written premium for the first quarter of 2022, excluding crop insurance was about two thirds attributed to growth and change in exposures and about one third attributable.

Well to rate increases.

Turning to pricing renewal rate momentum continues we achieved meaningful broad based pricing increases across the vast majority of our businesses with strong renewal pricing in our longer tailed liability businesses outside of workers' comp <unk>.

Average renewal pricing across our property and casualty group, excluding workers' comp was up approximately 8% for the quarter that was consistent with the fourth quarter of 2021 <unk>.

Overall renewal rates were up 5% in the quarter.

Renewal renewal rate increases continuing to and content continue to be meaningful way in excess of estimated perspective loss ratio trends, which are approximately 5% for our specialty property and casualty businesses, excluding workers' comp and approximately 3% overall.

By focusing on our prospective loss ratio trend, we're looking at loss costs adjusted for changes in the underlying premium exposure base that moves with inflation and incorporating our views on loss costs going forward in light of the current economic and legal environment.

All things considered we feel very good about the level of rate increases that we continue to achieve and that we've achieved over the last few years, which were meaningfully in excess of loss ratio trends and are expected to have a favorable impact on our results for the remainder of 2022 and into 2023.

Now I'd like to turn to slide nine to review a few highlights from each of our specialty property and casualty groups.

The property and transportation group.

Reported an underwriting profit of $62 million in the first quarter of 2022 compared to $56 million in the first quarter of 'twenty one.

Higher underwriting profit in our property and inland marine and crop businesses more than offset lower earnings in our transportation businesses, primarily as a result of lower favorable prior year Reserve development.

Catastrophe losses in this group net of reinsurance and inclusive of reinstatement premiums were $6 million in the first quarter of 2022 compared to $22 million in the comparable 'twenty one period.

The businesses in the property and transportation group.

Chief a strong 85.8.

Percent calendar year combined ratio overall in the first quarter.

Point to point 0.2.

Two points higher than the comparable period in 'twenty one.

Lower frequency in our transportation businesses related to the pandemic resulted in favorable prior year development and a lower than usual accident year loss ratio during the first quarter of 2021.

The accident year loss ratio, excluding cats increased slightly year over year in the first quarter of 2022.

First quarter 2022 gross and net written premiums in this group were 46% and 24% higher respectively.

When compared to the 2021 first quarter.

Both gross and net written premiums were impacted by the timing of premium recognition in our crop business and the timing of the renewal of a large account in our transportation businesses.

So excluding the impact of these items first quarter gross and net written premiums in this group grew 14%.

And 12% year over year, respectively.

Overall renewal rates in this group increased 6% on average for the first quarter of 2022, consistent with the rate increases reported in the fourth quarter of 2021.

Now as for our crop insurance industry estimates for 2022 planted acreage are unchanged to up slightly from last year's levels.

Planting progress is running slightly behind historical averages.

Generally speaking for the vast majority of our insured crops. The corn planting window runs from mid April through the end of May and the soybean planting window runs from late April to the end of June .

With current technology and equipment the majority of our Insureds.

Can't complete planning within a seven to 10 day window.

So it's early in the growing season, and we're hopeful growers will be successful getting their crops in the ground within these time frames.

Current commodity futures for corn, and soybeans are trading approximately 25% and 3% higher respectively than the 2022 spring discovery prices.

While the year over year increase in spring discovery pricing will favorably impact premiums written.

Our crop results for 2022 will depend on the harvest in the second half of the year.

Now the specialty casualty group reported an underwriting profit of $124 million in the 2022 first quarter compared to $56 million in the comparable 2021 period.

Higher year over year underwriting profit in our workers compensation excess and surplus lines and executive liability businesses were the drivers of these results.

The businesses in the specialty casualty group achieved exceptionally strong 86% calendar year combined ratio overall in the first quarter, an improvement of 9.6 points from the comparable period in 2021.

Underwriting profitability.

In our workers' compensation businesses overall continues to be excellent.

We have three standalone worker's compensation businesses with varying appetites and different niche focus areas. This strategy has served us very well in achieving very strong results in our workers' comp book.

First quarter 2022 gross and net written premiums increased 8% and 11% respectively when compared to the same prior year period.

Renewal pricing for this group, excluding our workers' comp businesses was up 10% in the first quarter.

Renewal rates in this group overall were up approximately 5%.

Especially.

Actually financial group reported an underwriting profit of $29 million in the first quarter of 2022 compared to an underwriting profit of $25 million in the first quarter of 2021.

Higher year over year underwriting profitability in our trade credit and surety businesses were the drivers of the increase.

In this group continued to achieve excellent underwriting margins and reported an 82% combined ratio for the first quarter of 2020.