American Financial : Q2 2021 Earnings Release Transcript

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EDITED TRANSCRIPT

AFG.N - Q2 2021 American Financial Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 04, 2021 / 3:30PM GMT

OVERVIEW:

Co. reported 2Q21 net EPS of $11.70 and core net operating EPS of $2.39. Expects 2021 non-GAAP core net operating EPS to be $8.40-9.20.

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AUGUST 04, 2021 / 3:30PM, AFG.N - Q2 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

Dong Yoon Han Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

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

Rudy R. Miller The Miller Group - Chairman, CEO, and President

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 Second Quarter Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Diane Weidner, Vice President, Investor Relations. Please go ahead.

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

Good morning, and welcome to American Financial Group's Second Quarter 2021 Earnings Results Conference Call. We released our 2021 second 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're 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 III to discuss our results.

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

Good morning, and we're pleased to share highlights of AFG's 2021 second quarter results and respond to your questions. I'd like to turn to an overview of our second quarter results on Slide 3 of the webcast.

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AUGUST 04, 2021 / 3:30PM, AFG.N - Q2 2021 American Financial Group Inc Earnings Call

AFG reported core net operating earnings of $2.39 per share, an impressive 257% increase year-over-year. The increase was due to substantially higher underwriting profit in our Specialty Property and Casualty insurance operations and higher Property and Casualty net investment income. Improved results from the Company's $1.6 billion of alternative investments 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 second quarter was a strong 14.7%.

Turning to Slide 4, you'll see that the second quarter 2021 net earnings per share of $11.70 included after-taxnon-core items totaling $9.31 per share. These non-core items included earnings from our discontinued annuity operations, inclusive of an after-tax gain on the sale of $8.14 per share. Second quarter 2021 non-core items also included $0.40 per share in after-taxnon-core net realized gains on securities. Craig and I thank God, our talented management team and our great employees for helping us to achieve these exceptionally strong results and position our business for continued success.

Based on results through the first half of the year, we now expect AFG's core net operating earnings in 2021 to be in the range of $8.40 to $9.20, up from our previous range of $7.00 to $8.00 per share, an increase of $1.30 per share at the midpoint of our guidance. As you'll see on Slide 5, this guidance range continues to assume zero earnings on AFG's $2.2 billion in parent company cash, as we continue to consider alternatives for deployment of the remaining proceeds from the sale of the annuity business.

We're pleased to increase our 2021 core earnings per share guidance in such a meaningful way. This guidance also excludes other non-core items such as 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 two 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 go to Slide 6 of the webcast for an overview. Results during the quarter were excellent. Pretax core operating earnings in AFG's Property & Casualty Insurance Segment were a record $288 million in the second quarter of 2021, an increase of $172 million from the comparable prior year period. I'm very pleased that all three of our Property and Casualty Groups reported strong double-digit growth in net written premiums, which was primarily the result of the economic recovery, new business opportunities and healthy renewal pricing. Underwriting margins across our portfolio of businesses were excellent, with each Property and Casualty Group reporting a combined ratio in the 80's.

The Specialty Property and Casualty insurance operations generated an underwriting profit of $153 million in the second quarter, compared to $54 million in the second quarter of 2020, an increase of 183%. Each of our Specialty Property and Casualty groups produced higher year-over-year underwriting profit. The second quarter 2021 combined ratio was a very strong 87.9%, improving 7.3 points from the 95.2% reported in the comparable prior year period. Second quarter 2021 results included 0.9 points in catastrophe losses and 5.4 points of favorable prior year reserve development. Catastrophe losses, net of reinsurance and including reinstatement premiums, were $11 million in the second quarter of 2021, compared to $26 million in the prior year period.

Results for the 2021 second quarter include 0.2 points in COVID-19 related losses, compared to 7.6 points in the 2020 second quarter. 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 $2 million in losses related to COVID-19 in the second quarter of 2021, primarily related to the economic slowdown impacting our trade credit business, and we recorded favorable reserve development of approximately $4 million related to 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 66% of the $96 million in AFG's cumulative COVID-19 related losses are held as incurred but not reported reserves at June 30, 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-tailed liability businesses outside of workers' comp. Average renewal pricing across our entire Property and Casualty Group, including comp, was up approximately 9% for the quarter. Excluding our workers' comp business, renewal pricing

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AUGUST 04, 2021 / 3:30PM, AFG.N - Q2 2021 American Financial Group Inc Earnings Call

was up approximately 12% in the second quarter. With the exception of workers' comp, we're continuing to achieve strong renewal rate increases in the vast majority of our businesses. In fact, this quarter marked our 20th consecutive quarter of overall Specialty Property and Casualty rate increases, which continue to be meaningfully in excess of prospective estimated loss ratio trends.

Gross and net written premiums for the second quarter of 2021 were up 26% and 22%, respectively, when compared to the second quarter of 2020. Excluding workers' comp, gross and net written premiums grew by 30% and 26%, respectively, year-over-year. The drivers of growth vary considerably across the portfolio of our Specialty Property and Casualty businesses.

In the aggregate, year-over-year growth in gross written premium during the first six months of '21, excluding crop was fairly evenly split, with just over half of the overall growth attributable to rate and about half attributable to net growth and change in exposures. Market conditions continue to be very favorable and are among the best I recall in my 40-plus years in the business.

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 $62 million in the second quarter compared to $33 million in the second quarter of last year. Higher underwriting profit in our crop, property and inland marine and transportation businesses were the drivers of the year-over-year increase. The businesses in the Property and Transportation Group achieved a very strong 86.6% calendar year combined ratio overall in the second quarter, an improvement of 5.1 points from the comparable period in 2020. Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums, were $7 million in the second quarter of 2021, compared to $15 million in the comparable '20 period.

Second quarter 2021 gross and net written premiums in this group were 39% and 32% higher, respectively, than the comparable prior year period, with growth reported in all the businesses in this group. The growth came primarily from our transportation businesses, primarily the result of new accounts, combined with strong renewals and increased exposures in our alternative risk transfer business and our crop insurance business, primarily the result of higher commodity futures pricing and timing differences in the writing of premiums. Overall renewal rates in this group increased 7% on average for the second quarter, consistent with the results in the first quarter this year. I'm pleased to see this continued rate momentum.

As far as crop, we expect a normal crop year. Commodity futures for corn and soybeans are approximately 20% and 12% higher, respectively, than spring discovery prices, as I was looking at my monitor today. Crop conditions vary by geography, with industry reports of 62% of corn and 60% of soybean crops in good to excellent condition.

Generally, crops in the eastern Corn Belt are generally in good shape, and crop conditions in the Central and Southern Plains and Southeast are above average. It's the crop conditions in the Pacific Northwest through the Dakotas that are below average right now, due to extreme drought conditions. And corn and soybean national yield estimates are currently at or near their respective trend yields. So the year seems to be shaping up fine.

The Specialty Casualty Group reported an underwriting profit of $71 million in the 2021 second quarter, compared to $27 million in the comparable 2020 period. Higher profitability in our excess and surplus lines, excess liability, targeted markets and executive liability businesses were the key drivers. Catastrophe losses for this group were approximately $2 million in the second quarter of 2021, compared to $6 million in the comparable prior year period. Results in the second quarter of last year included $52 million of COVID-19 related losses, primarily in workers' comp and executive liability businesses.

This group reported a very strong 87.9% combined ratio for the second quarter, an improvement of 7 points from the comparable period in 2020. Underwriting profitability in our workers' comp businesses overall continues to be excellent. Gross and net written premiums increased 19% and 16%, respectively, when compared to the same prior year period. And excluding comp, gross and net written premiums grew by 26% and 25%, respectively, year-over-year.

Nearly all the businesses in this group achieved strong renewal pricing and strong premium growth during the second quarter. Significant renewal rate increases and new business opportunities contributed to higher premiums in our excess liability businesses, which have higher cessions than other businesses in the group. Higher renewal rates and increased exposures contributed to the premium growth in our excess and surplus lines business, and our executive liability and mergers and acquisitions liability businesses also contributed meaningfully to the year-over-year growth.

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AUGUST 04, 2021 / 3:30PM, AFG.N - Q2 2021 American Financial Group Inc Earnings Call

Renewal pricing in this group was up 11% for the second quarter. And excluding workers' comp, renewal rates in this group were up a very strong 17%.

The Specialty Financial Group reported an underwriting profit of $21 million in the second quarter of 2021, compared to an underwriting loss of less than $1 million in last year's second quarter. Improved results in our trade credit business contributed to the higher year-over-year underwriting profitability. And results last year included COVID-19 related losses of $30 million primarily related to trade credit insurance. This group continued to achieve excellent underwriting margins and reported an 86.4% combined ratio for the second quarter of 2021. And gross and net written premiums increased by 7% and 14%, respectively, in the 2021 second quarter when compared to the prior year period. New business opportunities within our lender services, surety and fidelity and crime businesses contributed to the increase in the quarter. Renewal pricing in this group was up 8% for the quarter, consistent with results in the first quarter of 2021.

Now please turn to Slide 8 for a summary view of our 2021 outlook for the Specialty Property and Casualty operations. Based on the results through the first six months, we have strengthened our guidance across the board, indicating higher expected 2021 net written premiums and stronger underwriting profit. We now expect a 2021 combined ratio for the Specialty Property and Casualty Group overall between 88% and 90%. Net written premiums are now expected to be 10% to 13% higher than the $5 billion reported in 2020, which is an increase of 3 percentage points from the midpoint of our previous estimate. Growth in net written premiums excluding workers' comp, is now expected to be in the range of 12% to 16%, an increase from the range of 9% to 12% estimated previously.

And looking at each segment, we now expect the Property and Transportation Group combined ratio to be in the range of 87% to 90%. Our guidance assumes a normal level of crop earnings for the year. We now expect growth in net written premiums for this group to be in the range of 15% to 19%. 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 transportation businesses during the year.

Our Specialty Casualty Group is now expected to produce a combined ratio in the range of 87% to 90%. Our guidance assumes continued strong renewal pricing in our E&S, excess liability and several of our other longer-tail liability businesses. We've raised our projection for growth in net written premiums to a range of 5% to 9% higher than 2020 results, a change from the previous estimate of 2% to 5%. Premium growth will be tempered by rate decreases in our workers' comp book, which are a result of favorable experience in this line. Excluding workers' comp, we now expect 2021 premiums in this group to grow in the range of 10% to 14%, an increase of 5% from the midpoint of our previous guidance.

And we now expect the Specialty Financial Group combined ratio to be 84% to 87%. We now expect growth in net written premiums for this group to be between 10% and 14%, reflecting stronger underwriting results through the first half of the year, and projected premium growth in our fidelity and crime and surety businesses.

Based on the results through the end of June, we expect overall property and casualty renewal pricing in 2021 to be up 9% to 11%, an improvement from the range of 8% to 10% estimated previously. And excluding comp, we expect renewal rate increases to be in the range of 11% to 13% as indicated by the continued pricing momentum we saw through the first half of 2021.

I will now turn the discussion over to Craig to review AFG's investment performance and the successful completion of the sale of our annuity business. Thank you.

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

Thank you, Carl.

The details surrounding our $16.1 billion investment portfolio are presented on Slides 9 and 10. AFG recorded second quarter 2021 net realized gains on securities of $34 million after tax. Approximately $29 million of the after-tax realized gains pertain to equity securities that AFG continued to own at June 30, 2021. Pretax unrealized gains on AFG's fixed maturity portfolio were $260 million at the end of the second quarter.

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