Q4 2022 American Financial Group Inc Earnings Call
Thank you for standing by and welcome to the American Financial Group 2022 fourth quarter and full year results conference call. At this time all participants are in a listen only mode. After.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your telephone.
As a reminder, today's conference call is being recorded.
I'm trying to come to your house with Diane Weidner, Vice President of Investor Relations. Please go ahead.
Thank you.
And welcome to American financial group's fourth quarter 2022 earnings results Conference call. We released our 2022 fourth 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 Hartman F. G 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 and 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.
Grips and 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.
Well good morning, we're pleased to share highlights of Afg's 2022, fourth quarter and full year results, after which Craig and Brian and I'll respond to your questions.
Afg's financial performance during the fourth quarter was excellent and <unk>.
Strong finish to an outstanding year.
Core operating return on equity topped 21% and nearly all of our property and casualty businesses grew during the year.
Establishing a record level of premium production for the company.
We were also very pleased to report record full year underwriting profit and investment income in our specialty property and casualty business.
A compelling mix of specialty insurance businesses, and entrepreneurial culture disciplined operating philosophy and astute team of in house investment professionals collective way of enabling us to outperform many of our peers over time.
Craig and I, Thank God, our talented management team and our employees for helping us to achieve these exceptionally strong results and I will turn the discussion over to Craig to walk us through Afg's fourth quarter results investment performance Center overall financial position.
At December 31.
Thanks Carl.
As Youll see on slide three Afg's core net operating earnings were $11 63 per share for the full year of 2022 generating a core operating return on equity of 21, 2%, which was even better than the excellent 18.6% core.
Or are we achieved in 2021.
The earnings power of our operations, coupled with efficient capital management allows right you have to you to produce returns on equity in excess of most of our peer property and casualty insurers.
Understanding that capital management is a critical component of delivering top tier our oes, we make capital management, one of our highest priorities.
Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in Afg's financial future.
Carl and I are pleased that we returned one point to $3 billion to shareholders during 2022, including just over $1 billion or $12 per share in special dividends and $197 million in regular common stock dividends.
Our quarterly dividend was increased by 12.5% to an annual rate of $2.52 per share beginning in October of 2022.
We're proud of our track record of value creation.
During 2021 and 2022, we've returned a total of $3 $9 billion in capital to shareholders in a form of dividends and share repurchases.
In addition to deploying the excess capital created from our sale of our annuity business, we've continued to generate and deploy excess capital through Afg's strong property and casualty operations.
Growth in adjusted book value per share plus dividends was an impressive 18, 5% in 2022.
Turning to slides four and five you'll see that the fourth quarter of 2020 to core net operating earnings per share of $2.99 produced an annualized fourth quarter core return on equity of 22, 3%.
Net earnings per share of $3.24.
Included after tax noncore realized gains on securities of <unk> 25 per share which include fair value changes on securities that we continued to hold at the end of the quarter.
Now I'd like to discuss the performance of Afg's investment portfolio financial position and share a few comments about afg's capital and liquidity.
The details surrounding our 14th half billion dollar investment portfolio are presented on slides six and seven.
Pretax unrealized losses on Afg's fixed maturity portfolio were $630 million at the end of the fourth quarter, reflecting the increase in market interest rates and widening credit spreads compared to year end 2021.
As we entered 2022 the duration in our fixed maturity portfolio was at its lowest in recent history.
Over the course of the year, we acted on opportunities presented by the increasing interest rate environment and extended the duration of our P&C fixed maturity portfolio, including cash and cash equivalents from approximately two years at December 31, 2021 to approximately three years.
December 31 2022.
And the current interest rate environment, we're able to invest in high quality medium duration fixed maturity securities at yields of approximately five 5%, which compare favorably to the 415% yield earned on fixed maturities at our P&C portfolio during the <unk>.
Fourth quarter of 2022.
In addition to the favorable impact of higher reinvestment rates as we look forward, we expect our portfolio of floating rate securities most of which are tied to one month or three month indices to benefit from additional increases in short term interest rates.
Altogether, we expect the yield earned on P&C fixed maturity portfolio.
To increase by 20 basis points by the fourth quarter of 2023 compared to 415% ARD for the fourth quarter of 2022.
Looking at the results for the quarter for.
For the three months ended December 31, 2022 property and casualty net investment income was 19% lower than the comparable 2021 period.
These results included an annualized return on alternative investments in the fourth quarter of 2022 of approximately five 3% compared to an exceptionally strong 26, 3% return for the fourth for the 2021 and fourth quarter.
The average annual return on Afg's alternative investments over the five calendar years ended December 31, 2022 was approximately 14%.
Excluding the impact of alternative investments net investment income at our property and casualty insurance operations for the three months ended December 31, 2022 increased 64% year over year as a result of the impact of rising interest rates enhanced by the strategic positioning of.
Our portfolio coming into 2022 and higher balances of invested assets.
For the 12 months ended December 31, 2022, P&C net investment income was approximately 3% higher than the comparable 2021 period and included a return on investments on alternative investments.
A 13, 2% for 2022 compared to the remarkably strong 25, 3%.
And on alternative alternative investments in 2021.
We're very pleased with the double digit return on alternative investments earned in 2022, and a challenging investment environment.
Excluding alternative investments net investment income at our property and casualty insurance operations for 2022 increased 29% year over year as a result of the impact of rising interest rates and higher balances of invested assets.
As we look forward to 2023.
Our guidance for the year reflects a return of approximately 7% on our $2 $1 billion portfolio of alternative investments.
Is it an assumed high single digit return on our multifamily housing related investments is anticipated to be partially offset by somewhat weaker performance of traditional private equity investments.
Please turn to slide eight where you'll find a summary of Afg's financial position at December 31, 2022.
Our excess capital was approximately $1 $4 billion at December 31, 2022.
This number included parent company cash and investments of approximately $876 million.
During the quarter, we returned $224 million to our shareholders through the payment of a $2 per share special dividend and our regular 63 per share quarterly dividend.
Yesterday, we announced a special dividend of $4 per share payable on February 28, 2023.
This special dividend is in addition to the company's regular quarterly cash dividend of 63 per share. Most recently paid on January 25th 2023.
Even with the $4 per share special dividend declared yesterday, we expect our operations to generate significant excess capital in 2023 to the point, where we could deploy in excess of $500 million of excess capital for share repurchases or additional special dividends.
Through the end of 2023.
As you may recall, the portion of our excess capital that we view as available for special dividends and share repurchases is limited by our internal total debt to cap target of 30% and that capital numbers impacted by unrealized gains and losses on fixed maturities. However.
However, it is important to note that each dollar of debt repurchased frees up approximately $2 of excess capital for distribution to shareholders.
For the three months ended December 31, 2022, Afg's growth in book value per share plus dividends was eight 7%.
For the 12 months ended December 31, 2022, Afg's book value per share plus dividends increased by four 8%, reflecting very strong earnings partially offset by the increased over last law unrealized losses on fixed maturities from the impact of rising interest rates and.
Widening credit spreads.
Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of six 3% during the fourth quarter and 18, 5% for the full year.
The short duration of our fixed maturity portfolio and somewhat limited exposure to publicly traded common stocks when compared to some peer companies helped our performance in 2022.
I will now turn the call back over to Carl to discuss the results of our P&C operations and their expectations for 2023. Thank you Craig Please turn to slides nine and 10 of the webcast, which include an overview of fourth quarter results.
Our specialty property and casualty businesses closed out 2022 on a strong note.
<unk> record full year underwriting profit and record full year pretax property and casualty core operating earnings I'm, especially.
Really pleased that each of our specialty property and casualty sub segments produced combined ratios of 90 or better for the first quarter, despite elevated industry catastrophe losses we.
We set new records for premium production in 2022 and are meeting or exceeding targeted returns and nearly all of our businesses.
When we look at year over year comparison of our property and casualty results for the fourth quarter.
Easy to lose sight of the strong fourth quarter results and 2022, especially noting the average crop results achieved in 2022. Following the extremely strong results reported in our crop business in the comparable prior year period.
See on slide nine.
Fourth quarter 2022, combined ratio was an excellent 86, six although five nine points higher than the exception or 87% reported in the comparable prior year period.
We put crop our crop business to the side, our combined ratio for the fourth quarter was comparable to the 2021 fourth quarter results.
Results for the 2022 fourth quarter include a modest nine points in catastrophe losses, despite elevated industry catastrophe losses during the quarter.
By comparison catastrophe losses.
In the 2021 fourth quarter added one eight points to the combined ratio.
Quarter 2022 results included three six points of favorable prior year reserve development compared to five points in the fourth quarter of 2021.
Gross and net written premiums increased 6% and 5% respectively. In the 2022 fourth quarter compared to the prior year quarter year over year growth risk reported within each of the specialty property and casualty groups during the fourth quarter.
As a result of a combination of new business opportunities increased exposures and a good renewal rate environment.
The drivers of growth vary considerably across our portfolio of specialty P&C businesses in the aggregate year over year growth in gross written premium for the full year in 2022, excluding crop insurance is about half attributable to new business opportunities and change in exposures and have that.
Tribute all to rate increases.
Average renewal pricing across our property and casualty group, excluding workers' comp.
It was up approximately 6% for the quarter.
Up approximately 5% overall in line with the neuro rate increases reported in the prior quarter.
Our renewal rate environment has remained relatively consistent throughout the year and has enabled us to meet or exceed targeted returns in nearly all of our specialty P&C businesses.
We've been focused on achieving adequate pricing for some time and have achieved overall rate increases across our entire specialty book for.
For 26 straight quarters.
We feel very good about the level of rate increases that we continue to achieve and importantly, the impact of cumulative rate increases over time, which have enabled us to stay ahead of perspective loss ratio trends and help us to feel even more confident in the adequacy of our reserves.
Given the focus on the reinsurance pricing and capacity.
I wanted to provide an update on our reinsurance renewals.
In January we successfully renewed our 2023 property cat and property per risk treaties within a challenging reinsurance market.
Our other divisional January one renewals have gone very well and were ex executed with terms similar to 2022.
Talking about our property cat our property cat coverage is traditionally attached at levels that are relatively low compared to similar sized peers.
Having long standing trusted relationships with reinsurance partners, who understand our underwriting discipline and risk appetite and an existing catastrophe bond attaching at a $125 million provided a solid foundation as we entered renewal discussions.
We placed $75 million of coverage in excess of a $50 million per event primary retention for the vast majority of our U S based operations.
This new structure provides for an increase in our per occurrence retention from $20 million to $50 million and collapses, our treaty tower to one layer of $75 million excess of $50 million, which covers us up to the attachment point of our catastrophe bond.
Our cat bond provides coverage of 94% up to $325 million for catastrophe losses in excess of our $125 million property Cat tower.
And expires in December 31, 2024.
Our management teams.
Please consider reinsurance costs and higher Retentions and ensure that these factors are reflected in the pricing of our primary property coverages.
The terms pricing and retentions of our reinsurance arrangements, including the higher per occurrence retention in our property cat coverage is factored into our 2023 guidance.
Now I'd like to turn to slide 10 to review a few highlights from each of our specialty property and casualty business groups.
Lower year over year underwriting profit in our property and transportation group was primary the result of average underwriting profitability in our crop insurance operations when compared to the exceptionally strong crop results reported last year.
Excluding crop the fourth quarter calendar year combined ratio in this group improved two eight points year over year, reflecting improved results in the majority of the businesses in this group.
Catastrophe losses in this group net of reinsurance and inclusive of reinstatement premiums were $7 million in the fourth quarter of 2022 compared to $15 million.
And the comparable last year period, and were primarily attributable to winter storm Elliot.
Fourth quarter 2022, gross and net written premiums in this group were up 8% and 1% respectively, when compared to the 2021 fourth quarter, primarily due to higher winter wheat commodity prices and new business opportunities attributed to crop products with higher sessions.
Overall renewal rates in this group increased 7% on average for the fourth quarter of 2022 accelerating from the 5% rate increase reported in the third quarter.
Pricing for the full year for this group was up 6% overall.
Now in our specialty casualty group higher year over year underwriting profits in our excess and surplus lines and excess liability businesses.
Were more than offset by lower underwriting profitability in our workers comp businesses.
So the underwriting profitability in our workers comp businesses continued.
Overall to be excellent.
The businesses in the specialty casualty group achieved an outstanding 81, three calendar year combined ratio overall in the fourth quarter three three points higher than the exceptionally strong 78% achieved in the comparable prior year period.
And fourth quarter 2022, gross and net written premiums both increased 4%.
When.
<unk> to the same prior year period, but the vast majority of businesses in this group reporting growth during the quarter.
Sure.
Factors contributing to year over year premium growth included new accounts and strong account retention and our social services business increased exposures from payroll growth and new business in our workers' comp businesses and additional business opportunities in our E&S operations.
The growth was partially offset by lower premiums in our mergers and acquisitions liability and executive liability businesses.
The majority of the businesses in this group achieved strong renewal pricing during the fourth quarter.
Renewal pricing for this group, excluding workers' comp was up 6% in the fourth quarter and was up 4% overall with both measures down about 1% from their renewal pricing in the previous quarter.
Average renewal rates in this group for the full year, excluding comp were up 7% and up 5% overall.
Now the finance specialty financial group continued to achieve excellent underwriting margins and reported an 83, one combined ratio for the fourth quarter of 2022, an improvement of two four points over the prior year period.
Higher year over year underwriting profit was primarily the result of favorable the favorable impact on underwriting results from lower than previously estimated reinstatement premiums related to hurricane Ian.
Catastrophe losses for this group net of reinsurance and inclusive of the adjusted reinstatement premiums from Ian had a favorable impact of $3 million in the fourth quarter compared to losses of $6 million in the prior year quarter.
Fourth quarter 2022, gross and net written premiums were up 12% and 15% respectively when compared to the prior year period, due primarily to the growth in our financial institutions and commercial equipment leasing business.
In addition, lower than previously estimated reinstatement premiums from hurricane and contributed to higher year over year net written premiums.
Renewal pricing in this group was up 4% for the fourth quarter consistent with rate increases in the previous quarter.
Renewal pricing in this group was up 5% for the full year of 2022.
Now if you'd please turn to slide 11.
Where you'll see a full page summary of our initial guidance for 2023.
Overall, we continue to expect an ongoing favorable property and casualty market with opportunities for growth arising from both continued rate increases and exposure growth.
We expect Afg's core net operating earnings in 2023 to be in the range of $11 to $12 per share, which produces a core return on equity of over 20% at the midpoint.
Our guidance reflects an average crop year and the expectations and assumptions regarding investment income, including an estimated return on alternative investments of 7% in 2023 compared to 13, 2% achieved last.
Last year.
Core net operating earnings at the midpoint of our 2023 guidance excluding income from alternative investments would increase 10% year over year from 2020 two's results on a similar measure.
As we consider the outlook for our specialty property and casualty operations.
We expect a 2023 combined ratio for the specialty property and casualty group overall between 86 and 88%.
Net written premiums for 2023 expected to be 3% to 5% higher than the $6 2 billion reported.
In 2022.
Excluding crop, we expect growth in the range of 4% to 6%.
What we expect to be a more challenging economic environment.
Yes.
Looking at each sub segment, we expect property and transportation group combined ratio to be in the range of 89% and 93%.
Again, our guidance our guidance assumes average crop earnings for the year.
We estimate growth in net written premiums for this group to be in the range of 1% to 3%.
Our premium growth guidance factors in the impact of commodity futures pricing and volatility on crop premiums, which at current levels would negatively impact premiums and related exposure year over year and our crop business.
Based on current commodities futures pricing, we expect net written premiums in our crop insurance business to be down 3% year over year.
Excluding crop growth in net written premiums in this group is expected to be in the range of 3% to 5%.
Specialty casualty group is expected to produce a combined ratio in the range of 80% to 84%.
Our guidance assumes continued calendar year profitability in our workers comp businesses overall.
And we're estimating growth in net written premiums in a range of 4% to 8%.
Premium growth will be tempered by rate decreases in our workers' comp book, which are the result of favorable loss experience in this line of business.
So excluding workers' comp, we expect premiums in this group to grow in the range of 6% to 10%.
Now, we expect the specialty financial groups combined ratio to be in the range of 83% to 87%.
With all businesses in this group projected to produce strong underwriting margins and we expect growth in net written premiums for this group to be in the range of 4% to 8% based on projected growth in nearly all the businesses across this group.
We expect renewal rates.
Overall to increase between two 2% and 4% in our specialty property and casualty operations overall, excluding comp we expect renewal rate increases to be in the range of 3% to 5%.
Craig and I are very pleased to report these exceptionally strong results for the fourth quarter and full year and we're proud of our proven track record of long term value creation Erin.
Our insurance and investment professionals have executed well in a dynamic insurance industry and uncertain economic environment.
But their work positions us very well as we began 2023.
I will now open the lines for the Q&A portion of today's call and Craig and Brian and I would be happy to respond to your questions.
Thank you.
Again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone again to ask a question. Please press star one won.
Our first question comes from Paul Newsome of Piper Sandler Your line is open.
Yes.
Good morning, Thanks for the call congratulations on the year.
You can just kind of.
Reassess a little bit the competitive environment for the variety of your specialty businesses.
Felt like it got a little bit more competitive in 2022 I don't know.
That's a fair thing as the year went by and.
<unk> seems like it's not really tailing off despite some of the well.
Volatility in inflation.
The new higher reinsurance price is that a fair assessment or.
Obviously, probably oversimplifying it.
Well we have.
33, or so specialty businesses.
I would say.
We felt that there was more competition.
And certain of our businesses for sure.
<unk> workers comp.
And a higher excess layers on national.
National excess liability types of risks.
On.
Clearly in the public.
Public DNO arena.
There seem to be particularly in those two areas last two areas I mentioned, there seem to be more more competitors that were in that market and certainly was more competitive in that.
And I think in <unk>.
Most of our other businesses, it's probably pretty status quo with maybe marginally more.
More more more competitive.
And that.
I think the.
Social inflation.
Increased.
Property cat pricing.
And.
A slowing economy and those factors I think have capped.
The majority of our business.
Yes.
In a reasonably competitive.
Environment.
Makes sense.
Maybe if your thoughts on sort of the.
The.
Talent pool.
Trying to grow it.
It doesn't seem like you've added a ton of new teams or new segments in a while.
Maybe a couple here and there.
Is this just a sign of.
How competitive it is.
Or is it philosophically you are trying to be.
A more careful and more conservative and how are you.
Are you thinking about.
New products and new businesses.
Well last year, we grew 11% so.
That.
Coming certainly during COVID-19 and coming out of Covid.
The talent market was tighter in all businesses pretty much ours was.
And any exception, but I think our <unk>.
<unk>.
Our department in our group.
An outstanding job in attracting the talent necessary to grow our business in that.
So I didn't see that as.
Too much of a limiting factor I think what we have going for us.
We're a very successful company and we've created a culture and values and incentives that people really like to work with them.
In our industry and we have a reputation for that so I don't see.
Talent is being a limiter.
On growth or eliminating what we wanted to do I think it's more.
I think we're always looking and have room to expand geographically in all of our businesses and in some sub niches.
It's always more difficult to find.
Right.
Additional opportunities in businesses to grow your business or to find acquisitions that are not only accretive but.
Our case, our our hurdle was we want to earn double digit returns on equity over time.
In the M&A side, so a piece of cake being accretive with interest rates as low as they've been in that but we're about adding businesses and investing capital at double digit returns.
Great I appreciate the help.
Thanks for the call.
Thank you.
One moment please.
Our next question comes from the line of Michael <unk> of BMO. Your line is open.
Hey, great. Good afternoon first question on the.
<unk>.
Outlook.
Terms of the diesel.
And average for mill rates outlook.
Sure.
Year over year.
I think.
Hearing some of the color in the prepared remarks, some of it might be coming from workers comp, but maybe you can kind of elaborate.
If theres any other lines of business you'd like to call out I mean, maybe even moving some moving higher so moving lower in terms of expectations.
Yes, Mike.
Good question.
I think certainly in workers' comp there continues to be.
Some rate.
I give up tied to positive results in that.
And then it's kind of a good news bad news.
In a prior year accident years for the industry and for US it's turned out better generally over the last couple of years than what was expected. So I do think that is.
As a factor.
That said.
I think in some of our comp businesses.
We're going to be growing.
And that in our comp businesses continue to have excellent results.
And our pricing guidance ex comp is 3% to 5%.
And when you look at <unk>.
Kind of the perspective loss ratio ratio trends.
Excluding comp.
Right around five so.
I think the where we're not quite getting.
To where we want to be on on our.
Our rate increases are in some of the lines I just mentioned.
Public DNO is.
More competitive than what it should be.
The higher excess liability.
Business, particularly among fortune 1000.
I think us as a business, we're not we're not going to get to the.
Two our perspective.
Loss ratio trend.
So I do think and I'm going to be careful because.
I do think that.
In our case, we've had really strong cumulative multiyear increases in our book.
We are running at an 87%.
Percent the combined ratio this year and.
Some of our businesses are higher than that some of our businesses are better than that and in our case.
We look at each one of the businesses.
And what.
What the strategy should be and each one so.
Anyhow that and that would be my perspective on things.
Okay.
That's helpful.
I'll have to reread, the transcripts a bit on the reinsurance.
Reinsurance.
Renewal.
Color, but I think I heard that retention went up materially and if that is correct.
It will be just thinking about anything in our models in terms of.
Seasonality now our cat load or something.
I think what we've tried hard to do every year, when we give guidance as to.
Bake.
Bake everything into our guidance and I think.
We've tried to reflect that.
One thing in our case.
I think.
Yeah. Our retention went from 20 to 50, we probably should have been at 50 anyhow because when you look at the the rate online we had to pay in the amount of.
The amount of premiums that we had to pay for for that lower layer.
You could argue that we probably should have kept it anyhow.
So you have it's not $30 million of extra exposure, it's really 30, I would guess, we probably paid $15 million or something like that so.
It's not really the full amount of the retention that really impacts us if you understand what I'm, saying.
Okay.
No.
Put it in context okay.
And then maybe.
Appreciate if there's lots of different lines of business, but theres been a lot of the discussion on some of your competitors calls about.
Loss trend.
Maybe creeping up a bit for some.
Particularly not just on the property side, but a bit on the casualty side. Some have talked about the transportation segment you guys have.
One of the most profitable.
Transportation segments.
Traded charged but any any changes that you'd like to call out you are seeing.
On the margins on loss trend.
I don't I don't think so I think in past calls.
I've kind of mentioned when we look at perspective loss ratio trends and the numbers that we're using for those they yes, I think we've been.
Pretty pretty conservative.
<unk> tried to stay with what the trends are for instance in <unk>.
I've talked about commercial auto liability not being where we want it to be probably at around breakeven underwriting profit.
And we took about 9% and rate and our prospective loss ratio trend for that we're using about 7%. We think that's pretty good I think I mentioned in the past how on some of the.
Excess liability.
That part of our business, how we are using a <unk>.
Depending on what what the business is.
<unk>.
Most 14% in perspective loss ratio trend as we.
<unk> set our pricing as we look at our reserving and.
So.
And I think Thats very change I think we've kind of been in that mode.
Much of the year.
Okay, and then lastly, just switching gears on the investment portfolio and if this was already answered but in terms of the.
Alternative guide.
Seven does that imply weaker.
<unk> 23 or are just it's been a great run.
And.
Trying to bake in some maybe some more lower.
Lower returns given the.
The macro environment, although interest rates are up and I'm, just kind of how to think about that thanks.
Yes. This is Craig I'll.
I'll tell you how we arrived at the 7% number.
As you know about 60% of the alternatives are invested in multifamily.
We've had just an incredible run in multifamily.
Returns the last couple of years as I recall were something in the neighborhood of 20% we were able to push the renewal rates at.
At extraordinary levels.
And we also had some some sales of properties.
So I'd say our view is that we're back to a more normal environment now, we still really like the asset class, we still like our our positioning there.
But we're back to a more normal environment instead of getting the double digit type increases in rental rates.
Now, we would guess that this year it'll be somewhere between three and 5% increases in the in the rental rates.
So that will drive the <unk>.
Why.
We think that the marks on the portfolio are reasons.
Reasonably conservative.
The average cap rate at the year end.
Mark value was right around 5%.
The strong growth markets that we're in we're not seeing transactions above 5%. So.
We like our.
Positioning there.
We don't see.
The really large increases in mark to market and we don't see ourselves.
Selling properties like we have the last couple of years so.
Anyway looking for a high single digit return on the multifamily piece that real estate piece, which is about 60% of the portfolio.
The balance of the alternative is the 40% that is in more traditional private equity is the piece that's much tougher for us to value.
Last year, we substantially outperformed the market I think the S&P was down.
Some 18% and our private equity was up.
I believe around 6% or so.
As you know private equity marks typically are done on a on a lag basis. So we're just being a little more cautious on our outlook for the.
That traditional private equity piece.
That's the piece, though that's much harder for us to value I hope it comes and given the strength of the market.
Early in the year I hope that the returns on that piece are stronger than what we're assuming.
But that's that's how we arrived at the 7% number on the $2 $1 billion of alternatives.
Very helpful. Thank you.
Thank you.
Again, ladies and gentlemen, if you'd like to ask a question. Please press star one one when you touch tone telephone again to ask a question. Please press star one one.
Our next question comes from Meyer Shields of <unk>. Your line is open.
Thanks.
Yes.
Quick question I guess.
With I think it's more of a modeling question and then a reality question, but the other specialty segments.
Adverse reserve development in every quarter in 2022, I was hoping you could talk about what's going through that.
Sure sure. This is Brian so the other specialty is primarily our internal reinsurance facilities and Thats, where we take on more of our business corporately than we do in the individual business units.
What we're seeing there is adverse development in some of the social inflation exposed lines.
Access.
Liability type of lines, where we have participated in the reinsurance above the business unit. So social inflation is driving the number there.
We obviously are as you know were conservative in our reserving so where are.
We feel like we're in a good place now, but thats, what thats whats driving the $13 million in the quarter and the $40 million for the year as adverse development coming out of the social inflation exposure that would be part of our specialty casualty segment.
Going into that reinsurance facility.
Okay. That's helpful.
Then one other question can you give us a sense as to the macroeconomic growth that underpins.
Your net written premium growth expectations for 2023.
Im not sure we really.
It really.
Versus more of each of our businesses are so different than the other with kind of their own mini.
Economic environments and that whether its equine mortality or workers comp in that.
But clearly.
We.
We've couched our premium guidance.
In a economy that slope is slowed down or slowing down in some cases.
Whether it's.
Impact on payroll or sales or things that premiums are based off in different businesses.
That definitely has an impact.
And that.
Okay understood.
So it's a question that the delta between pricing.
1%.
Fairly conservative.
As I mentioned before we try to.
The crop business is going to have.
Fairly.
And.
We're projecting that to be down 3%, we won't know for sure until the average of <unk>.
<unk> been in corns future prices for the month of for.
For the month of February .
So.
We'll know more at the end of February exactly what that is I think that has an impact and then you mentioned earlier on the call.
Some of the competition that doesn't make any sense and then things like public DNO.
And in high excess liability, where I think new entrants have jumped and trying to establish a position.
That will come back to haunt.
At some point, particularly.
Those are two businesses that have social inflation exposure.
And that so I have no doubt about that.
Yes.
On that one.
And with that thank you very much.
Thank you.
Showing no further questions at this Thomas turn the call back over to Diane Weidner for any closing remarks.
Thank you all for joining us. This morning. This concludes our prepared remarks, and Q&A session and we look forward to talking with you all again next quarter. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].