American Financial : Q4 2020 Earnings Release Transcript

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EDITED TRANSCRIPT

AFG.N - Q4 2020 American Financial Group Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 04, 2021 / 4:30PM GMT

OVERVIEW:

Co. reported 4Q20 net EPS of $7.93. Expects 2021 initial non-GAAP core net operating EPS to be $6.25-7.25.

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FEBRUARY 04, 2021 / 4:30PM, AFG.N - Q4 2020 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

Meyer Shields Keefe, Bruyette, & Woods, Inc., Research Division - MD

Michael David Zaremski Crédit Suisse AG, Research Division - Research 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

Ladies and gentlemen, thank you for standing by, and welcome to the American Financial Group 2020 Fourth Quarter Results Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Diane Weidner, Vice President of 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 Fourth Quarter 2020 Earnings Results Conference Call. We released our 2020 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 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.

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FEBRUARY 04, 2021 / 4:30PM, AFG.N - Q4 2020 American Financial Group Inc Earnings Call

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

Good morning. We released our 2020 fourth quarter and full year results yesterday afternoon; and Craig and I are delighted to report a very strong finish to the year.

AFG's core net operating earnings were $8.44 per share for the full year of 2020, compared to $8.62 per share in '19. Fourth quarter 2020 core operating return on equity was in excess of 14%, as indicated on Slide 3. Capital management is one of our highest priorities. And 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. Craig and I are pleased that we returned $649 million to shareholders during the year. In addition to $313 million in share repurchases, we paid $336 million in dividends during the year, representing $163 million in regular common stock dividends and a $173 million special dividend. And our quarterly dividend was increased by 11.1% to an annual rate of $2.00 per share beginning in October of 2020.

We're also proud of our track record of value creation for shareholders. Growth in adjusted book value per share plus dividends was 13% in 2020. AFG's 10-year total shareholder return, representing growth in share price plus dividends, was approximately 287%, exceeding the total return performance of the S&P 500, the S&P Property and Casualty Index and the S&P Life & Health Index over the same time period.

Now turning to Slide 4 for a view of the 2020 fourth quarter. AFG reported record core net operating earnings of $3.09 per share, compared to $2.22 per share in the fourth quarter of 2019. Fourth quarter results included $0.84 per share in earnings from alternative investments that are marked-to-market through core earnings, compared to $0.32 per share in the fourth quarter of 2019. We're very pleased with the rebound in the performance of these assets, which were adversely impacted by the downturn in financial markets in the first half of 2020 as a result of the pandemic. Annualized core operating return on equity in the fourth quarter was an exceptionally strong 20.3%.

Now turning to Slide 5, you'll see that the fourth quarter net earnings per share of $7.93 included after-taxnon-core items aggregating to $4.84 per share. A significant component of these non-core items included realized gains on securities of $5.36 per share, the majority of which pertain to the transfer of investments in AFG's annuity block reinsurance transaction that was entered into in October, and the mark-to-market of equity securities that AFG continued to own at December 31, 2020.

We're extremely proud of AFG's fourth quarter and full year 2020 results, especially in a year fraught with challenges, including a global pandemic, the related economic disruption and a heightened level of natural disasters. None of us would have imagined the challenges 2020 would bring but we are extremely proud of these results and the resiliency, dedication and the creativity of our employees over the many months. 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.

Last week's announcement about the sale of our annuity business brings significant changes to the way AFG will report its results in 2021. Looking forward, we have established initial 2021 core net operating earnings guidance per share to be in the range of $6.25 to $7.25. There are several important assumptions underlying this guidance, including the expectation that earnings from our annuity business will be classified as discontinued and reported as non-core effective January 1, 2021. In addition, our guidance assumes no earnings on the cash proceeds from the sale, and an expectation that the AFG Parent will have $43 per share in cash and real estate-related investments following the close of the sale. Craig will talk more about the details, including pro forma financial results and expectations during his remarks, and I'll review detailed guidance for each of our property and casualty businesses later in the call.

Now I'd like to turn our focus to our Property and Casualty operations. If you'd please turn to Slide 7 and 8 of the webcast, which include an overview of our fourth quarter results. As you'll see on Slide 7, core operating earnings in AFG's Property and Casualty insurance operations were $274 million in the fourth quarter of 2020, a new quarterly record for AFG, and a 38% increase from the prior year period. Significantly higher year-over-year Property and Casualty underwriting profit and higher earnings from alternative investments were partially offset by lower other Property and Casualty net investment income, primarily the result of lower interest rates.

The Specialty Property and Casualty insurance operations generated an underwriting profit of $179 million in the 2020 fourth quarter, compared to $89 million in last year's fourth quarter. Higher underwriting profitability in our Property and Transportation and Specialty Casualty Groups were partially offset by lower year-over-year underwriting profit in our Specialty Financial Group.

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FEBRUARY 04, 2021 / 4:30PM, AFG.N - Q4 2020 American Financial Group Inc Earnings Call

Fourth quarter 2020 combined ratio of 86.2% improved 7.3 points from the 93.5% reported in the comparable prior year period. Results for the 2020 fourth quarter included 1.5 points in catastrophe losses and 2.4 points of favorable prior year reserve development. 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 didn't record any additional reserve charges for COVID-19 in the fourth quarter.

Given the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic, approximately 72% of AFG's COVID-19 related reserves from the $95 million in charges recorded in the first half of 2020 are held as incurred but not reported at year-end December 31, 2020. These reserves represent the Company's current best estimate of losses from the pandemic and related economic disruption. 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. Our average renewal rate increases are the highest we've achieved in over 15 years. Average renewal pricing across our entire Property and Casualty Group was up approximately 13% for the quarter. And if you exclude our workers' comp business, renewal pricing was up approximately 17% in the quarter.

We believe the current market conditions reflect a continuation of meaningful renewal pricing increases, which have been in response to the low interest rate environment, trends in social inflation, elevated loss, industry loss experience following heavy industry cat experience, higher reinsurance pricing, among other factors. We expect the market to remain firm throughout 2021, allowing us to achieve attractive renewal rate increases in excess of loss costs.

Now gross and net written premiums for the fourth quarter were down 2% and 7%, respectively, when compared to the fourth quarter of 2019, primarily the result of the run-off of Neon. If you exclude the impact of the Neon run-off, gross and net written premiums increased 6% and 2%, respectively, year-over-year.

Now I'd like to turn to Slide 8 to review a few highlights from each of our Specialty Property and Casualty Groups. The Property and Transportation Group reported an underwriting gain of $74 million in the fourth quarter, compared to an underwriting loss of $2 million in the comparable prior year period. Improved year-over-year results in our crop operations following 2019 losses from prevented planting, along with significantly improved accident year results in our aviation business and higher profitability in our transportation businesses, were the primary drivers of the improved results.

Fourth quarter 2020 gross written premiums in this group were up 3%. Net written premiums were down 2% when compared to the 2019 fourth quarter. Growth and new business opportunities in our property and inland marine and ocean marine businesses and higher gross written premiums in our crop operations were partially offset by lower premiums in our transportation business, primarily from reduced exposures as a result of COVID-19 and premium reductions in two large national accounts. Higher cessions of certain crop insurance products contributed to the year-over-year decrease in net written premiums in the 2020 fourth quarter. Overall renewal rates in this group increased 5% on average for the fourth quarter of 2020 with continued strong renewal rate momentum.

Now the Specialty Casualty Group reported an underwriting profit of $91 million in the fourth quarter compared to $69 million in the comparable '19 period. Higher year-over-year underwriting profit in our excess and surplus and excess liability businesses and improved year-over-year results in our general liability business were partially offset by lower favorable prior year reserve development in our workers' comp businesses. Though underwriting profitability in our workers' comp business overall continues to be excellent. This group reported an impressive 84% combined ratio for the fourth quarter and 90% for the full year. Improved market conditions in our excess and surplus lines and excess liability businesses have enabled us to achieve significant rate increases and act on new business opportunities as the market has hardened.

Gross and net written premiums in this group decreased 7% and 16%, respectively, for the fourth quarter of 2020 when compared to the prior year period, primarily due to the run-off of Neon. When you exclude the impact of Neon, gross and net written premiums increased 9% and 3%, respectively, in the fourth quarter of 2020 when compared to the same period in '19. Significant renewal rate increases and new business opportunities in our excess and surplus, excess liability and D&O businesses contributed to the growth.

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