Q3 2023 American Financial Group Inc Earnings Call
Okay.
Good day and thank you for standby welcome to the American Financial Group third quarter 2023 results Conference call.
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I would now like to hand, the conference over to your Speaker day, Diane Weidner, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to American Financial group's third quarter, 2023 result Conference call earnings results Conference call. We released our 2023 third quarter results yesterday afternoon, Our press release Investor supplement and webcast presentation are posted on Afg's website under the Investor Relations section these mature.
Sales 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 piece.
Forward looking statements involve certain risks and uncertainties that could cause our actual results and or our financial condition to differ materially from these statements.
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. 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'll begin my remarks by sharing a few highlights from Afg's 2023 third quarter, after which Craig and I will walk through more details well then open it up for Q&A, where Craig Brian in hours.
Upon your questions I'm pleased to report strong underwriting results during the quarter, despite elevated catastrophe losses.
Higher interest rates contributed to meaningfully higher year over year investment income, culminating in a very strong annualized third quarter core operating return on equity of 18, 3%.
Our entrepreneurial opportunistic culture and disciplined operating philosophy continue to serve us well in a favorable property and casualty market at a dynamic economic environment. These factors coupled with a commitment to effective capital management enable us to continue to create long term value for our shareholders, Greg and I.
Thank God, our talented management team and our great employees for helping us to achieve these results and I will turn the discussion over to Craig to walk us through a achieved third quarter results investment performance and then discuss our overall financial position at September 30.
Thanks Carl.
Please turn to slides three and four for a summary of earnings information for the quarter.
AFG reported core net operating earnings of $2.45 per share.
And the 2023rd quarter.
Higher year over year net investment income was partially offset by lower underwriting profit in our specialty property and casualty insurance operations.
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.
Yeah.
The details surrounding or $14 8 billion, daughter investment portfolio are presented on slides five and six.
The higher interest rate environment contributed to significantly higher year over year investment income.
Looking at results for the third quarter property and casualty net investment income was 17% higher than the comparable 2022 period.
Excluding the impact of alternative investments net investment income in our P&C insurance operations for the three months ended September 32023 increased 33% year over year.
As Youll see on slide six approximately 68% of our portfolio is invested in fixed maturities.
In the current interest rate environment, we're able to invest in high quality medium duration fixed maturity securities at yields of approximately 6%.
Current reinvestment rates compare favorably to the 4.68% yield earned on fixed maturities, yet our P&C portfolio during the third quarter of 2023, and 3.63% <unk> for the full year in 2022.
We have a long standing commitment to quantity with 93% of this portfolio rated investment grade and 96% of the P&C portfolio weighted any I see one or two and have strategically manage duration to take advantage of market opportunities.
We expect to Yoder her daughter, a P&C fixed maturity portfolio to increase by about 10 basis points in the fourth quarter of 2023 compared to the 468% earned in the third quarter of 2023.
Yes.
Our third quarter 2023, P&C net investment income includes an annualized return on alternative investments.
Four 2% compared to a seven 1% return for the 2022 third quarter.
Third quarter 2023 alternative investment returns were lower in both the multifamily and private equity components of this portfolio.
The average annual return on Afg's alternative investments over the five years ended December 31, 2022 was approximately 14%.
Our guidance for 2023 continues to reflect a return of approximately 9% at our $2 4 billion dollar portfolio of alternative investments.
Please turn to slide seven where you will find a summary of Afg's financial position at September 32023.
Our excess capital was approximately $660 million at the end of the third quarter.
This number included parent company cash and investments of approximately $364 million.
During the quarter, we returned to $138 million to our shareholders through the payment of our regular <unk> 63 per share quarterly dividend and $86 million in share repurchases.
As part of our earnings release, we declared a special cash dividend of $1.50 per share payable on November 22023 to shareholders of record on November 13th 2023.
The aggregate amount of this special dividend will be approximately $126 million.
This special dividend is in addition to the company's regular quarterly cash dividend of 71 per share, which was recently increased 12, 5% over the previously declared rate and paid on October 25 2023.
With this special dividend the company has declared $5 50 per share in special dividends in 2023.
Looking at longer term horizon.
AFG has declared a <unk> $43.50 per share in special dividends since the end of 2020.
Representing $3 $7 billion returned to shareholders.
Carl when I consider these special dividends, an important component of total shareholder return.
In addition, we paid nearly $600 million in regular dividends and repurchased approximately $500 million in common shares over this period.
We expect our operations to continue to generate significant excess capital throughout the remainder of 2022 23, and enter 2024, which provides ample opportunity for additional share repurchases or special dividends over the next year.
For the three months ended September 32023, Afg's growth in book value per share plus dividends was one 9% and year to date growth in book value per share plus dividends was 11, 9%.
Excluding unrealized losses related to fixed maturities, we achieved growth in adjusted book value per share plus dividends of three 1% during the third quarter and 11, 3% year to date.
I'll now turn the call back over to Carl to discuss the results of our P&C operations and our expectations for the remainder of 2023.
Thanks, Craig Please turn to slides eight and nine of the webcast, which include an overview of our third quarter results.
As Youll see on slide eight third quarter, 2023 property and casualty operating earnings increased 3% year over year.
Underwriting margins continue to be strong and are generating desired returns in nearly all of our specialty property and casualty businesses and we're growing our specialty property and casualty businesses through increasing exposures, new opportunities and a continued favorable pricing environment. The.
Our specialty property and casualty insurance operations generated an underwriting profit of $143 million compared to $158 million in the third quarter of 2022, 9% decrease.
Year over year underwriting profit in our property and transportation and specialty financial groups was more than offset by lower underwriting profit in our specialty casualty group.
The third quarter 2023, combined ratio was a strong 92, 2% one one points higher than the 91, one reported in the comparable prior year period.
Results for the 2023 third quarter include three points in catastrophe losses, a half point higher than last year's third quarter and two three points of favorable prior year Reserve development eight tenths of a point lower than the comparable period.
Gross written premiums were flat and net written premiums were up 4% when compared to the third quarter of 2022.
As we discussed last quarter earlier, plannings of corn and soybeans pushed some crop insurance premium and a 2023 second quarter versus third.
Our 2023 crop premiums also reflect the impact of less favorable spring commodity futures pricing and related volatility in 2023 compared to 2022.
Excluding the crop business gross and net written premiums grew by a healthy, 7% and 10% respectively when compared to the prior year period.
Average renewal pricing across our property and casualty group, excluding workers' comp was up approximately 7% for the quarter two points higher than the previous quarter.
Including workers' comp renewal rates were up approximately 5% or one point higher than renewal increases reported in the prior quarter. This is our 29th consecutive quarter to report overall renewal rate increases and we're achieving renewal rate increases in excess of perspective loss ratio trends to me.
Meet or exceed targeted returns.
Now I'd like to turn to slide nine to review a few highlights from each of our specialty property and casualty business groups.
Improved underwriting results in our property and transportation group were the result of higher underwriting profit in our transportation property and inland Marine and Ocean Marine businesses, which was partially offset by lower profitability in our agricultural business.
Third quarter 2023, gross and net written premiums in this group were 8% and 6% lower respectively than the comparable prior year period, because of the earlier plantings of corn and soybeans and the impact of spring commodity futures pricing and related volatility on premiums in our crop insurance business as I discussed earlier.
Excluding our crop business gross and net written premiums grew by 2% and 4%, respectively, when compared to the 2022 quarter third quarter.
Most of the remaining businesses in this group reported growth in gross and net written premiums during the quarter as a result of higher rates, new business opportunities and organic growth.
We continue to stay focused on rate adequacy, particularly in our property business just as important this rate we're closely monitoring insured values to ensure that premiums appropriately reflect inflationary considerations overall renewal rates in this group increased 6% on average in the third quarter.
2023, consistent with the pricing achieved in this group for the second quarter of 2023.
I'm pleased we're continuing to achieve rate increases in niches write commercial auto liability, which are in the high single digits.
The month of October as the discovery period for the majority of our corn and all of our soybean business harvest pricing for corn, and soybeans settled 17% and 7% lower than spring discovery prices respectively.
Prop maturity is ahead of last year and harvest and the harvest is underway with approximately 71% and 85% of corn and soybean crops harvested respectively.
They're ahead of five year averages.
Variability will be important to our final results based on what we know about harvest pricing coupled with the impact from hail damage throughout the western corn belt over the past couple of months that impacted our private products. We're now expecting a below average crop year.
Specialty casualty group reported lower year over year underwriting profit, reflecting lower levels of favorable prior year reserve development in our workers comp businesses higher catastrophe losses, and lower underwriting profit in our targeted markets business, which was impacted by a large property loss in our programs.
<unk>.
The businesses in the specialty casualty group.
Achieved a strong 89, 4% calendar year combined ratio overall in the third quarter.
Six eight points higher than the exceptionally strong results achieved in the comparable prior year period.
Underwriting margins at this level produce returns in the mid twenties for this group and we continue to be very pleased with these results.
Third quarter 2023, gross and net written premiums increased 4% and 7% respectively when compared to the same prior year period.
Factors contributing to the year over year growth included payroll growth in our workers comp businesses, along with new business opportunities strong policy retention and rate increases in several of our targeted market businesses as well as new opportunities and higher policy renewals in our excess and surplus lines business.
This growth was partially offset by lower year over year premiums in our mergers and acquisitions liability.
And executive liability businesses.
Renewal pricing for this group, excluding our workers' comp businesses was up approximately 8% in the third quarter.
Rates were up 5%, including workers' comp.
Both measures reflect a two point improvement over the renewal pricing in the previous quarter.
Especially praised with continued strong rate increases achieved in our public entity excess liability and social services businesses.
Now the specialty financial group reported higher year over year underwriting profit in the third quarter, primarily the result of lower catastrophe losses within our financial institutions business.
This group reported a strong combined ratio of 87, 6% for the third quarter of 2023, an improvement of three seven points over the prior year period.
Third quarter 2023, gross and net written premiums were up 39%, 48%, respectively, when compared to the prior year period.
By nearly all businesses in this group reported year over year growth our financial institutions business was the primary driver of the higher premiums, which resulted from growth in the mortgage protection and residential investor businesses.
The growth in this business as an example of where we are acting on opportunities presented by the tightening property market and improving policy terms.
<unk> renewal rates in this group were up about 5% for the third quarter.
Turning to our A&E reserves during the third quarter of 2023, we completed our annual ground up review of our asbestos and environmental exposures related to the run off operations within the property and casualty group.
No new trends, we identified in claims activity was generally consistent with our expectations. As a result, there was no no net change to.
The property and casualty group's A&D reserves, we continue to enjoy robust survival ratios, which are well above the industry averages and which are one measure of the strength of our A&E reserves.
We also assess the adequacy of our asbestos environmental reserves for our historic Railroad and manufacturing operations. As a result of this study AFG recorded as special noncore any charge to increase its liabilities for environmental exposures by $15 million or $12 million after tax due to the change.
Primarily to the changes in the scope and cost of investigation and an increase in estimated remediation costs in a number of sites.
Now pleased to turn turn to slide 10, where you will see a full page summary of our 2023 outlook.
Overall, we continue to expect an ongoing favorable property and casualty market with growth arising from new business opportunities continued rate increases and increasing exposures.
Based on our results report reported in the first nine months of the year and expectations for the remainder of the year. We continue to estimate Afg's 2023 core net operating earnings to be in the range of $10 15 to $11 15 per share.
Our guidance reflects our updated expectations of a below average crop year.
Offset by higher than previously expected net investment income.
At the midpoint our guidance suggests a strong full year 2023 core return on equity of about 20%.
As Craig noted we continue to assume a return on alternative investments for the full year of 2023 of approximately 9%.
Compared to 13, 2% earned on these investments in 2022.
We now expect a 2023 combined ratio for the specialty property and casualty group overall between 90, and 92% revised upward one point at the midpoint from our previous guidance due to our updated expectation of a lower than average crop year.
Our guidance for growth in our specialty property and casualty net written premiums is now estimated to be slightly higher and in the range of 6% to 8%. Excluding crop. We now expect 2023 year over year growth in the range of 7% to 10%.
Now looking at each sub segment.
Based on our results through the third quarter in expectation of a of a below average crop.
Year, we now expect a combined ratio in the range of 92% to 95% in our property and transportation group. We continue to expect net written premiums for this group to be in a range of flat to up 2%.
As noted last quarter growth for the year will be tempered by the non renewal of about $50 million in premiums related to underperforming transportation accounts.
And growth in our alternative risk transfer business, which has higher premiums sessions, along with the lower crop premiums due to the impact of lower spring commodity prices and related volatility on cap rates.
We continue to expect our specialty casualty group to produce a combined ratio in the range of $85 to 88%.
Our guidance continues to assume strong profitability in our workers comp businesses overall, but at a higher calendar year combined ratio when compared to the exceptional results reported in the prior year. We continue to expect net written premiums to be 5% to 9% higher than 2022 results.
And we now estimate the specialty financial groups combined ratio to be in the range of 88% to 91% an improvement from the previous range of 89% to 93% we've increased our.
Our guidance for growth in net written premiums for this group to be in the range of 28% to 32%.
Up five points from our previous guidance, primarily as a result of market opportunities and our financial institutions business.
Based on our results through first nine months of the year, we continue to expect renewal rates to increase between three and 5%.
Overall, excluding workers' comp, we now expect renewal rates increases to be in the range of 5% to 7%.
Craig and I are proud of our proven track record of long term value creation, we believe that our strong balance sheet financial flexibility position us very well as we close out 2023 and look forward to 2024 are.
We'll now open the lines for the Q&A portion of today's call on Craig and Brian and I will be happy to respond to your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Meyer Shields with <unk>. Your line is now open.
Alright.
Good morning, Sameer. Thank you for taking my question.
My first question would be on just curious on that.
Hey, Andy Reserve charge is that the one time only for this quarter.
This is Brian A&D, we monitor our A&D exposures, both in our property and casualty operations and in our runoff railroad and manufacturing operations.
Every quarter and then on an annual basis, we do an in depth review of those reserves. So this charge in this quarter as it related to that annual.
Deep review of the exposures in the runoff railroad manufacturing operations.
So.
As the first charge of that size that we had in a number of years, but we do monitor it all the times there is always the possibility.
<unk>.
<unk> expense there, but this is coming out of that annual once a year deeper view.
Got you.
I think.
For next year would it be similar charges.
Just curious.
We don't know of anything right now thats not recorded but those can change over time and we have have had charges in other years. The reason, we do the annual review as to sort of catching anything that might be out there, but it's impossible to predict what might happen in future periods.
Got it thank you.
My second question is on <unk>.
New uprising.
Let's start with Trinity.
Rob.
And the breakdown.
The way our rates thanks Bouygues.
Hi, This is Brian and so when we talk about renewal pricing, we're giving you just the pricing increase not the not the exposure to increase so the exposure increases would would help to increase premium growth beyond what we are.
Giving you just for rates. So we're giving you for rate is just the price component.
Sorry about that okay. Thank you.
Thank you our next.
Question comes from the line of Michael Zaremski with BMO. Your line is now open.
Hey.
Good afternoon.
I, just just curious I heard the commentary on <unk>.
<unk> kind of profitability.
Be that likely won't be.
As as profitable, but still very profitable last year is that is that something new or is that just is.
Is that what <unk> been what you reminded us last quarter and I think you've made some revisions.
Maybe just on work comp is.
Yes.
If pricing is anything changed pricing wise since.
Since last quarter, obviously higher interest rates are a great tailwind.
To you all in that line.
And with some of your peers too long winded question.
<unk> said that there are not really seeing any change in medical.
Trend, but.
Keeping a close eye on it.
Yes, I think my commentary is pretty consistent throughout the year.
<unk>.
As of last quarter and.
In this quarter is just a reminder that that.
We have excellent workers' comp results.
They're just not going to.
Be at the same levels as 2022.
And that.
Lower prior year favorable development.
The significant factor there on the loss ratio trend side, Yes, I think we're seeing the same as others you know theres not big changes there.
And that overall.
They seem to be.
Reasonable perspective loss ratio trend I mean, our.
Or are we still think that our overall perspective loss ratio trend is.
Probably down what the exposure change about 4% down maybe 2% or so.
So those seem to be.
Reasonable.
Our California business is the Republic is the only business that's performing at an underwriting loss today.
And at the.
The other businesses.
Summit strategic comp National Interstate's Workers' comp business all have.
Excellent results and that we.
We feel good about our reserve position and.
Workers' comp remains a very competitive market with.
With the results in the industry.
Pricing not pricing is down about.
4% year to date, when you look at our overall workers' comp business.
Not sure Thats much different.
Then.
The previous couple of quarters.
I hope that's helpful.
Yes.
Helpful.
Maybe switching gears, a little bit too casualty ex.
Workers comp.
I think last quarter, you talked about not just you all others as well have been talking about a bit of a.
Higher trend lining Sheridan lawsuit.
Thanks Mary lines.
Public entity commercial auto.
Sure.
I know you've changed your expectations here a bit.
Just curious.
The only been one quarter, but.
Anything changed.
We can see pricing seems to be actually moving in the right direction I don't know if you want to call out a few guys and trying to add let's say sorry.
Yes.
Yes, I think the positive essay SA a heavy public entity renewal period.
<unk>.
I think the good news is it reflects what I've.
What I talked about on the last call about the changes that we've been putting into place on that particular.
Business in that and.
And seeing the.
Strong strong price increases.
Particularly strong double digit and.
In the period.
And that.
But thats as well as.
Decreasing.
<unk>.
Raising retentions.
And being.
Really appropriate in being involved in.
Halfway Yang on with mock trials and monitoring council on being heavily involved in active claims. So we're doing quite a few things, but yes.
Third quarter is very pleased in particular.
With with a strong public entity price increase there and which drove the overall.
Segment up.
Okay.
Just lastly.
With the inclusion of <unk>.
The crop acquisition I know, you've given guidance on it too, but just curious now that you've.
Maybe learned a little bit more.
When we think about not this year, but next year in outer years as a normal crop year.
Is that.
<unk> due to the acquisition or just maybe other other variables.
Well, yes, I mean the.
The dollar amount will change just because theres going to be a lot more business, but.
Sorry.
Yes, the profit margins I know I think our criteria are probably be pretty much the same.
Thank you.
Thank you.
Our next question comes from the line of Andrew Anderson with Jefferies. Your line is open.
Hey, good afternoon, just looking at reserves in the quarter and reserve development can you kind of help us think about how social inflation impacted movements. This quarter has your view of social inflation change.
Hi, This is Brian so we're still being very mindful of social inflation and think that it is something that the industry as a whole is going to be monitoring for a long time. So when you look at our casualty segment.
The reduction to the lower levels of overall favorable development reflect two things one is the lower levels of favorable government coming out of workers comp that we talked about earlier and then also we're not seeing favorable development in the social inflation expenses that we might have seen in previous periods. So I would say there is an app.
Since a favorable development there are ins and outs.
Some units have had some unfavorable development, but but overall I would say social inflation is is reducing our.
Favorable development as much as it would be increasing any adverse development.
Okay and on the workers comp business can you kind of help US you mentioned the loss ratio trend and some of the pricing in the calendar year view, but how should we think about where you are booking workers' comp accident year picks compared to last year.
So.
Couple of things are going on there one is as Carl mentioned there are rate decreases happening in workers' comp so that puts some pressure on the accident year and then even though we haven't been experiencing medical cost inflation, we're mindful of that and being being <unk>.
Careful to consider that as we said current year accident picks of the accident year loss ratio and workers' comp would be a little bit higher for those two things but still.
Producing those row.
When you look at the business overall that Carl mentioned earlier.
Okay. Thank you.
Thank you.
Our next question comes from the line of Gregory Peters with Raymond James Your line is now open.
Well good afternoon, everyone.
Thought.
I'll start with my first question going back to Craig.
Presentation on the investment portfolio and the performance.
And.
I think Craig you mentioned that the <unk>.
First income yields are now up to around 6%, which is a nice lift from where it was a year ago.
Can you maybe step back and give us some perspective on how because of the higher yield environment, you might be altering allocations, where you have new money going into.
Whether it is industry group per sector type.
And also.
Investments come up and mature how youre allocating those inside the portfolio.
Okay.
Sure, Greg I wouldn't say that.
We are significantly altering our allocations I'd say.
Certainly fixed fixed income is more attractive than it's been at a long time, so probably a bit heavier waiting too.
Medium term.
Fixed maturity investments versus.
Certain of our other asset classes.
But I wouldn't expect us to.
Change the allocations.
A very significant way.
We do think.
On the real estate side as an example, they're going to be some really interesting opportunities over the next couple of years and time will tell whether.
Whether we're right on how things are going to evolve there but.
We do think that there's going to be an opportunity to get some extraordinary returns.
In our real estate market.
I don't I don't think you should expect to see a significant change though.
And the allocation in the investment portfolio.
Okay fair enough if it makes sense.
And then.
I guess pivot back to Carl.
And let's focus on.
Yes.
The property business.
Property and transportation business ex crop.
I think you called out in your comments and underperforming book of transportation business, maybe $50 million a year.
The underwriting can you give us some perspective within Europe.
Property and transportation business of how big.
The competitive landscape is do you do you feel like Theres more pressure.
From competition at this juncture or do you feel like it's status quo any updated perspective would be helpful.
Are you asking me to focus on commercial auto in particular is that.
Yes.
Yes, commercial auto would be one topic, but inside property transportation. There are other businesses on top of just commercial auto outside of crops. So just the I'm just focused on ex crop business inside property transportation.
Yes, I mean, there's a number of different businesses, our transportation business is a significant part.
I think there it's a mixed picture within the transportation business there are.
Some parts of the business that seemed to be more competitive others that seem to be tightening.
With competitors.
Some competitors right nationwide and in others, leaving.
Leaving part of the space.
<unk>.
Our business continues to perform well.
And and has for.
For years.
That said on the commercial auto liability part, it's not where we want it to be it's probably 101 ish or so and through nine months and.
For that reason, we're continuing to take strong commercial liability commercial auto liability rate increases of about 10% year to date.
We can versus perspective loss ratio trend of about 7% or so.
And that.
We have.
And when you put our businesses together in that space mid single digit net written premium growth through nine months.
And that so.
That's kind of that part of the business.
Business parts of the business so.
Our non standard aviation, our property and inland marine or Ocean Marine.
There is.
Seems to continue to be opportunities.
In those areas.
For for growth and we continue to have good results.
Those businesses in that so.
I think that speaks to some of the larger businesses within our property and transportation excluding.
Excluding comp.
Great. Thanks.
Thanks for the detail.
Sure.
Thank you as a reminder to ask a question at this time. Please press star one one are you touched on the telephone.
Our next question comes from the line of Paul Newsome of Piper Sandler Your line is now open.
Paul Newsome. Your line is open please check your mute button.
And I'm currently showing no other questions at this time I would like to turn the call back over to Diane Weidner for closing remarks.
Thank you and thank you all for joining us today as we walk through our third quarter 2023 results. If you have any other questions feel free to reach out to our IR Department and we look forward to talking with you next quarter. This concludes our call for today. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
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Okay.