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AMERICAN FINANCIAL GROUP, INC.

(AFG)
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American Financial : Q1 2021 Earnings Release Transcript

05/07/2021 | 04:14pm EDT

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N - Q1 2021 American Financial Group Inc Earnings Call

EVENT DATE/TIME: MAY 05, 2021 / 3:30PM GMT

OVERVIEW:

Co. reported 1Q21 net EPS of $4.84.

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MAY 05, 2021 / 3:30PM, AFG.N - Q1 2021 American Financial Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brian S. Hertzman American Financial Group, Inc. - Senior VP & CFO

Carl Henry Lindner American Financial Group, Inc. - Co-President,Co-CEO & Director

Diane P. Weidner American Financial Group, Inc. - VP of Investor & Media Relations

Stephen Craig Lindner American Financial Group, Inc. - Co-President,Co-CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Charles Gregory Peters Raymond James & Associates, Inc., Research Division - Equity Analyst

Paul Newsome Piper Sandler & Co., Research Division - MD & Senior Research Analyst

James Bach Keefe, Bruyette, & Woods, Inc., Research Division - Associate

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by. Welcome to the American Financial Group 2021 First Quarter Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to turn the conference over to your speaker today, Vice President, Investor Relations, Ms. Diane Weidner. Please go ahead.

Diane P. Weidner - American Financial Group, Inc. - VP of Investor & Media Relations

Thank you, Chino. Good morning, and welcome to American Financial Group's First Quarter 2021 Earnings Results Conference Call. We released our 2021 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 III; and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO.

Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 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 and/or 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 statements.

Now, I am pleased to turn the call over to Carl Lindner III to discuss our results.

Carl Henry Lindner - American Financial Group, Inc. - Co-President,Co-CEO & Director

Good morning. We released our 2021 first quarter results yesterday afternoon. Please turn to Slide 3 of the webcast slides for an overview. As previously announced, the results of our Annuity operations were reported as discontinued operations beginning in the first quarter of 2021, and prior periods have been adjusted accordingly to present results on a comparable basis. AFG reported core net operating earnings of $2.38 per share, an impressive 75% increase year-over-year. The increase was due to substantially higher underwriting profit in our Specialty Property and

2

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MAY 05, 2021 / 3:30PM, AFG.N - Q1 2021 American Financial Group Inc Earnings Call

Casualty insurance operations and higher Property and Casualty net investment income. Significantly improved results from the Company's $1.5 billion of alternative investments that are marked to market through core operating earnings were partially offset by lower other property and casualty net investment income, primarily due to lower short-term interest rates. Annualized core operating return on equity in the first quarter was a strong 14.7%.

Turning to Slide 4, you'll see that the first quarter 2021 net earnings per share of $4.84 included $0.70 per share in after-taxnon-core net realized gains on securities, and $1.76 per share in earnings from our discontinued annuity operations. Craig and I thank God, our talented management team and our employees for helping us to achieve these results and position our business for continued success.

Based on the strong results reported through the first quarter, we now expect AFG's core net operating earnings in 2021 to be in the range of $7.00 to $8.00 per share, an increase from our previous guidance of $6.25 to $7.25 per share. As you'll see on Slide 5, this guidance range excludes earnings from our discontinued annuity operations that will be sold to MassMutual, and continues to assume zero earnings on parent company cash, including the expected net cash proceeds from the sale of the annuity operations, as we continue to consider alternatives for deployment of the sales proceeds.

The year is off to a great start and we're pleased to increase our 2021 core earnings per share guidance in a meaningful way. This guidance excludes non-core items such as results of discontinued operations, realized gains and losses and other significant items that are not able to be estimated with reasonable precision, or that may not be indicative of ongoing operations. Furthermore, the above guidance reflects a normal crop year and an annualized return of approximately 8% on alternative investments over the remaining three quarters of 2021. Craig and I will discuss our guidance for each segment of our business in more detail later in the call.

Now I'd like to turn our focus to our Property and Casualty operations. Please turn to Slide 6 and 7 of the webcast, which includes an overview of the first quarter results. As you'll see on Slide 6, the Specialty Property and Casualty insurance operations generated an underwriting profit of $134 million in the 2021 first quarter, compared to $89 million in the first quarter of 2020, an increase of 51%. While each of our Specialty Property and Casualty Groups produced higher year-over-year underwriting profit, the increase was primarily due to higher underwriting profitability in our Property and Transportation Group.

The first quarter 2021 combined ratio was a very strong 88.5%, improving 3.7 points from the 92.2% reported in the comparable prior year period. Results for the 2021 first quarter include 1.7 points in catastrophe losses and 5.2 points of favorable prior year reserve development. Catastrophe losses, net of reinsurance and including reinstatement premiums, were $31 million in the first quarter of 2021, primarily the result of winter storms in Texas. By comparison, catastrophe losses were $9 million in the prior year period.

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 to a highly fluid, evolving situation. AFG recorded an additional $9 million in reserve charges related to COVID-19 in the first quarter of 2021, primarily related to our workers' compensation businesses, and we released approximately $6 million of accident year 2020 COVID-19 reserves based on loss experience.

Given the uncertainties surrounding the ultimate number and scope of claims relating to the pandemic, approximately 69% of the $98 million in AFG's COVID-19 related reserves are held as incurred but not reported at March 31, 2021. Our claims professionals and those 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-tail liability businesses outside of workers' comp. Average renewal pricing across our entire P&C Group, including workers' comp, was up approximately 12% for the quarter. Excluding our workers comp business, renewal pricing was up approximately 16% in the first quarter. We're pleased to see this continued strong renewal rate momentum, which is enabling us to achieve rate in excess of loss costs in nearly every one of our Specialty Property and Casualty businesses, with the exception of workers' compensation, and our overall increase is -- it's relatively unchanged from the rate increases achieved in the fourth quarter of 2020.

3

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MAY 05, 2021 / 3:30PM, AFG.N - Q1 2021 American Financial Group Inc Earnings Call

Gross and net written premiums for the first quarter of 2021 were up at 6% and 3% net written premiums, respectively, when compared to the first quarter of 2020, with healthy year-over-year growth reported within each of the Specialty Property and Casualty Groups. Excluding workers' comp, gross and net written premiums grew by 9% and 7%, respectively, year-over-year.

Now I'd like to turn to Slide 7 to review a few highlights from each of our Specialty Property and Casualty business groups. Property and Transportation Group reported an underwriting profit of $56 million in the first quarter of 2021, compared to $27 million in the first quarter of 2020. Higher underwriting profits in our transportation, property & inland marine and crop businesses were the drivers of the year-over-year increase. Catastrophe losses in this group, net of reinsurance and including reinstatement premiums, were $22 million in the first quarter of 2021, primarily the result of the winter storms in Texas.

First quarter 2021 gross and net written premiums in this group were 5% and 4% higher, respectively, than the comparable prior year period, with growth reported in nearly all the businesses in this group. Growth came primarily from our agricultural, property and inland marine and aviation businesses, primarily as a result of higher renewal rates. Overall renewal rates in this group increased 7% on average for the first quarter of 2021 with continued strong renewal rate momentum.

As for crop insurance, planting is underway, with industry estimates for 2021 planted acreage unchanged to up slightly from last year's levels. Current commodity futures prices for corn and soybeans are trading approximately 27% and 15% higher, respectively, than the 2021 spring discovery prices.

The Specialty Casualty Group reported an underwriting profit of $56 million in the 2021 first quarter, compared to $52 million in the comparable 2020 period. Higher profitability in our excess and surplus lines and excess liability businesses was partially offset by lower year-over-year prior period favorable reserve development in our workers' compensation businesses. Underwriting profitability in our workers' compensation businesses overall continues to be excellent. The Specialty Casualty Group reported a very strong 90.2% combined ratio for the first quarter. Gross written premiums increased 6% and net written premiums were flat when compared to the same prior year period. Excluding workers' compensation, gross and net written premiums grew by 13% and 8%, respectively, year-over-year.

With the exception of workers' compensation, nearly all the businesses in this group achieved strong renewal pricing and reported premium growth during the first quarter. Significant renewal rate increases and strong renewal retention contributed to higher premiums in our excess liability businesses, which have higher cessions than other businesses in this group. Our executive liability and mergers and acquisitions liability businesses also contributed meaningfully to the year-over-year growth. These increases were partially offset by lower year-over-year premiums in our workers' compensation businesses, which were primarily the result of lower renewal rates.

Catastrophe losses for this group were about $2 million in the first quarter of '21 and less than $1 million in last year's prior year period. Renewal pricing for this group was up 15% in the first quarter. And excluding our workers' compensation businesses, renewal rates in this group were up a very strong 25%.

The Specialty Financial Group reported an underwriting profit of $25 million in the first quarter of 2021, compared to $17 million in the first quarter of 2020. Higher year-over-year underwriting profit in our financial institutions business was the primary driver of the increase. This group continued to achieve excellent underwriting margins, and reported an 84.1% combined ratio for the first quarter of 2021. Catastrophe losses for this group, net of reinsurance and inclusive of reinstatement premiums, were $6 million in the first quarter of 2021, compared to $1 million in the prior year quarter. Gross and net written premiums increased by 5% and 8%, respectively, in the 2021 first quarter when compared to the prior year period. New business opportunities, coupled with growth in accounts with higher retentions within our lender services businesses, contributed to the increase in the quarter. Renewal pricing in this group was up approximately 8% for the quarter.

Now please turn to Slide 8 for a summary view of our 2021 outlook for the Specialty Property and Casualty operations. This year is off to a very strong start with the first quarter Specialty Property and Casualty combined ratio under 89% and we continue to expect a 2021 combined ratio for the Specialty Property and Casualty Group overall between 89% and 91% for the full year. Net written premiums are now expected to be 7% to 10% higher than the $5 billion reported in 2020, an improvement from the range of 5% to 9% estimated previously. Now growth in net written premiums excluding workers' comp is now expected to be in the range of 9% to 12%, an increase from the range of 6% to 10% estimated previously.

4

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MAY 05, 2021 / 3:30PM, AFG.N - Q1 2021 American Financial Group Inc Earnings Call

Looking at each segment, we continue to estimate a combined ratio in the range of 88% to 92% in our Property and Transportation Group. Our guidance assumes a normal level of crop earnings for the year. We now expect growth in net written premiums for this group in the range of 13% to 17%. Our net written premium guidance is based on projected strong growth in our crop operations as a result of higher spring commodity futures pricing and assumes double digit growth in our commercial auto businesses during the year.

We continue to expect our Specialty Casualty Group to produce a combined ratio in the range of 87% to 91% in 2021. Our guidance assumes continued strong renewal pricing in our E&S, excess liability and several of our other longer-tail liability businesses. We expect net written premiums to be 2% to 5% higher than the 2020 results. Premium growth will be tempered by rate decreases in our workers' compensation book, which are the result of favorable loss experience in this line of business. Though excluding workers' compensation, we expect 2021 premiums in this group to grow in the range of 5% to 9%.

Now the Specialty Financial Group combined ratio is now expected to be in the range of 86% to 90%. We expect net written premiums in 2021 to be 7% to 11% higher than 2020 results. The improved outlook is primarily the result of stronger underwriting results and stronger projected premium growth in our financial institutions business. With regard to pricing, we expect overall Property and Casualty renewal rates to be up 8% to 10%, and excluding comp, that would be in the range of 10% to 12%, as indicated by the continuing pricing momentum that we saw through the first quarter of 2021.

I'll now turn the discussion over to Craig to review AFG's investment performance and the impending sale of the annuity business.

Stephen Craig Lindner - American Financial Group, Inc. - Co-President,Co-CEO & Director

Thank you, Carl. The details surrounding our $13.9 billion investment portfolio for continuing operations are presented on Slides 9 and 10. AFG recorded first quarter 2021 net realized gains on securities of $61 million after tax. Approximately $53 million of the after-tax realized gains pertain to equity securities that AFG continued to own at March 31, 2021. Pretax unrealized gains on AFG's fixed maturity portfolio were $240 million at the end of the first quarter.

We're especially pleased with the performance of our alternative investments during the quarter. Earnings from alternative investments may vary from quarter to quarter based upon the reported results of the underlying investments, and generally are reported on a quarter lag. The annualized yield on alternative investments reported in core operating earnings in the first quarter of 2021 was 28.6%. The average annual return on these investments over the past five calendar years was approximately 10%.

We view our investments in real estate and real estate-related entities as a core competency. In addition to our portfolio of directly owned properties and mortgage loans, our real estate-related investments include real estate funds and real estate partnerships accounted for by the equity method. We've found great success in investing in multi-family properties in desirable communities, where we continue to achieve very strong occupancy and collection rates. As you can see on Slide 10, our investment portfolio continues to be high quality, with 87% of our fixed maturity portfolio rated investment grade. In addition, the percentage of fixed maturity investments rated non-investment grade by the NAIC remains at less than 3% of total fixed maturity investments at March 31, 2021.

We continue to make great progress toward the closing of the sale of our annuity businesses to MassMutual, the highlights of which are included on Slide 11. Under the terms of the agreement, the purchase price of $3.5 billion is subject to final closing adjustments to the extent that GAAP shareholders' equity excluding AOCI of the entities sold varies from $2.8 billion. GAAP shareholders' equity excluding AOCI of the entities to be sold was $3 billion at March 31, 2021. We now expect to recognize an after-tax gain on the sale of $680 million to $700 million or $7.85 to $8.10 per AFG share when the sale closes, which is expected to occur in the second quarter of 2021. In addition, prior to completion of the transaction, AFG's P&C Group will acquire approximately $460 million in real estate-related partnerships, and AFG parent will acquire approximately $100 million in directly owned real estate from Great American Life Insurance Company.

Updated pro forma financial information is provided on Slide 12, 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 March 31, 2021 was $3.8 billion, and excess capital increased from the $1.2 billion reported at March 31, 2021 to an estimated $4.5 billion. Approximately $2 billion of the estimated $4.5 billion of pro forma excess capital will be

5

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American Financial Group Inc. published this content on 07 May 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 07 May 2021 20:13:07 UTC.


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Stephen Craig Lindner Co-President, Co-CEO & Director
Carl Henry Lindner Co-President, Co-CEO & Director
Brian S. Hertzman Chief Financial Officer & Senior Vice President
Michelle A. Gillis Chief Administrative Officer & Senior VP
Terry S. Jacobs Independent Director
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