American Financial Group 2026 2nd Quarter Results Conference Call

Good day, and thank you for standing by. Welcome to the American Financial Group 2026 Second Quarter Results Conference Call. At this time, all participants are in a listening-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you need to press star 11 on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Diane Wiedner, Vice President, Investor Relations. Diane, please go ahead.

Good morning, and welcome to American Financial Group's second quarter 2026 Earnings Results Conference call. We released our 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. Joining me this morning are 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 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 our 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 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 to discuss our results.

Well, good morning. Before we begin our commentary about the quarter, I want to take a moment to express our deepest condolences to the Berkeley family. Bill was an icon in our industry, a respected competitor, and most importantly, our good friend, and he leaves an incredible legacy and will be sorely missed. Turning our focus to AFG's second quarter, I'll share a few highlights, after which Craig and I will walk through more details. We'll then open it up for Q&A, where Craig, Brian, and I will respond to your questions. I am pleased to report that we set a new second quarter record for pre-tax property and casualty operating income, driven by strong underwriting margins, healthy premium growth and higher net investment income. I believe our compelling and diversified mix of specialty insurance businesses, our entrepreneurial culture, our disciplined operating philosophy, and an astute team of in-house investment professionals continue to position us to create value for our shareholders through a variety of insurance market conditions. Craig and I thank God, our talented management team, and our great employees for helping us to achieve these results. And I'll turn the discussion over to Craig to walk us through some of these details.

Thanks, Carl. Please turn to slides three and four for a summary of earnings information for the quarter. Here you will see AFG reported core net operating earnings of $2.82 per share in the 2026 second quarter, a 32% increase from the prior year period. This level of performance resulted in an annualized core operating return on equity of 19.2%. I'll start with an overview of AFG's investment performance and financial position and share a few comments about AFG's capital and liquidity. The details surrounding our $17.1 billion investment portfolio are presented on slides 5 and 6. Net investment income at our property and casualty insurance operations for the three months ended June 30, 2026, increased 23% year-over-year and established a new second-quarter record for AFG and was driven by improved returns from alternative investments. As you'll see on slide six, approximately two-thirds of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.5%. The duration of our PNC fixed maturity portfolio, including cash and cash equivalents, was 3.1 years at June 30, 2026. The annualized return on alternative investments was approximately 7.1% for the 2026 second quarter compared to 1.2% for the prior year quarter. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annualized returns averaging 10% or better. In April of 2026, AFG reached definitive agreements to sell the Charleston Harbor Resort and Marina. Subject to receipt of necessary third-party approvals and satisfaction of customary closing conditions, the transaction is expected to close in the third quarter of 2026. AFG currently expects to recognize a pre-tax core operating gain of approximately $125 million or $1.20 per share on the sale. The property is owned equally by the PNC Operations and AFG parent, so the gain on sale will be reported as net investment income and split equally between the two entities. This transaction was not contemplated in AFG's original business plan assumptions. Please turn to slide 7, where you'll find a summary of AFG's financial position at June 30, 2026. During the quarter, we returned nearly $100 million to our shareholders, including $26 million in share repurchases and $0.88 per share regular quarterly dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2026, which provides ample opportunity for acquisitions, special dividends, or share repurchases. We evaluate the best alternatives for capital deployment on a regular basis. We continue to view total value creation as measured by growth in book value per share plus dividends as an important measure of performance over the long term. For the three months ended June 30, 2026, AFG's growth in book value per share, excluding AOCI, plus dividends was 5%. I'll now turn to call over to Coral to discuss the results of her PNC operations.

Thank you, Craig. Please turn to slides 8 and 9 of the webcast, which include an overview of our second quarter results. I'm very pleased with the strong performance of our specialty property and casualty businesses. We achieved a 44% increase in underwriting profit in the first six months of the year while executing on opportunities to grow, with approximately three-fourths of our businesses reporting higher year-over-year premiums through June 30th. In addition, we're doing this while consistently achieving renewal rate increases, excluding workers' comp, which have been around 5% the past four quarters. These results showcase the diversification across our 36 businesses, the underwriting discipline and opportunistic culture that have allowed us to produce strong results that outperform peers over the long run. These same attributes give us confidence that those results can continue despite softening in certain parts of the overall property and casualty market. Now, looking at a few details, you'll see on slide eight that our specialty property and casualty insurance businesses produced a 91.5 combined ratio in the second quarter of 2026, an improvement of 1.6 points from the 93.1 reported in the second quarter of last year. Second quarter 2026 results benefited from 3.4 points of favorable prior reserve development compared to 0.7 points in the second quarter of 2025. Catastrophe losses added 1.8 points in the second quarter of 2026 compared to 2.3 points in the second quarter of last year. Second quarter 2026 gross and net written premiums were 7% and 6% higher, respectively, than the comparable period in 2025. As I noted earlier, average renewal rates across our property casualty group, excluding workers' comp, were up approximately 5% for the quarter. Average renewal rates, including workers' compensation, were up approximately 4% overall. That was about a point higher than the previous quarter. We have reported overall renewal rate increases for 40 consecutive quarters, and we believe we're achieving overall renewal rate increases that enabled us to meet or exceed targeted returns. Now I'd like to turn to slide nine and review a few highlights from each of our specialty property and casualty business groups. Details are included in our earnings release, so I'll focus on summary results here. The businesses in the property and Transportation Group achieved a 90.3 calendar year combined ratio overall in the second quarter of 2026, an improvement of 4.9 points from the 95.2 reported in a comparable 2025 period. Higher year-over-year underwriting profits in our transportation and agricultural businesses were the primary drivers of these very strong results. In second quarter, 2026 gross and net premiums in this group were 8% and 5% higher than the comparable prior year period. The increase is primarily attributable to growth in crop insurance products with higher premium sessions, along with new business opportunities, higher exposures, and a favorable rate environment in several of our transportation businesses. Overall, renewal rates in this group increased approximately eight percent on average in the second quarter of 2026, two points higher than the pricing achieved in this group for the first quarter of 2026. We reported a small underwriting profit in commercial auto liability, I'm pleased to say, for the second quarter in a row, and we're continuing to make progress there. Renewal rates in commercial auto liability were up 15 percent during the quarter. Now, in terms of our crop business, commodity futures pricing remains in acceptable ranges relative to spring discovery prices, and the most recent crop progress reports indicate that the crop year is off to a solid start. Although timely rainfall has improved soil moisture conditions across much of our footprint, moisture levels through August and early September remain important. Our crop results for 2026 will depend on the harvest yields and prices in the second half of this year. As a reminder, our third quarter results reflect an element of seasonality, as most of our crop insurance premiums are earned in AFG's third quarter, but booked at a more conservative loss ratio until the fourth quarter, when we have better visibility into actual yields and claims activity in our MPCI business, and a clear indication of the performance of our private product businesses. Consequently, we record the majority of our calendar year crop profitability in the fourth quarter. Now, the businesses in Specialty Casualty Group achieved a solid 94.5 calendar year combined ratio overall in the second quarter of 2026, 0.6 points higher than the 93.9 reported in the comparable period last year. We continue to be mindful of social inflation and remain conservative in our initial loss picks for the lines of business written by the businesses in this group. Second quarter, 2026 gross and net rent premiums in this group increased 5% and 6% respectively when compared to the same prior year period. New business opportunities, increased exposures, and higher rates drove the year-over-year increase in many of our specialty casualty businesses, including workers' comp, targeted markets, excess and surplus lines, energy, construction, environmental, and M&A liability. Excluding our workers' comp businesses, renewal rates for this group were up approximately 4% in the second quarter. Pricing in this group, including workers' comp, was up about 2 percent. Now, the specialty financial group continued to achieve excellent underwriting margins and reported an 85.6 calendar year combined ratio for the second quarter of 2026, an improvement of over half a point from the comparable period last year. Gross and net written premiums were both up 10% in this group when compared to the prior year period, primarily due to the growth on our financial institutions business. Renewal pricing in this group decreased less than 1% in the second quarter, reflecting the strong margins earned on these businesses overall. Craig and I are proud of our proven track record of innovation, long-term value creation, and a forward-thinking mindset. And we feel AFG is well-positioned to continue to build long-term value for shareholders for the remainder of 2026 and beyond. We'll 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. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first speaker is Hirsten Getzoff from Wells Fargo. Please go ahead, Hirsten.

Hi, good morning. Thank you for taking my question. My first question is on the uptick in the underlying loss ratios, particularly in specialty casualty and specialty financials, which it seems like it could be driven by mix and conservatism. But how should we think about the potential improvement on the expense side of the equation from the mix shift, just given like there's also productivity gains that maybe could be recognized on the expense side and just given the increased conservatism in those lines and rate continuing to be at or exceeding target margins, can we potentially also see higher PYD? Thank you.

Hi, this is Brian. I think it's important as you start to think about that answer is to start sort of at the beginning, which is that we're looking at our businesses. We're looking at things from a return on equity perspective overall and not just the combined ratio, not just the loss ratio. So we do have to keep in mind that when businesses in a longer tail like workers' comp grow that have a greater opportunity for investment in income, that we can have high teen ROEs even at higher combined ratios. Even after considering investment income, it can be tricky to analyze the components of the combined ratios separately, as some products like our successful lender-placed business have a higher under any expense ratio and a lower loss ratio compared to other businesses. When strong performing businesses like that grow, our expense ratio goes up, but so does our ROE. In fact, in our lender place business, where many of our products offer profit-based commissions, when that business goes well, our under any expenses go up. So in under any expenses in this quarter, you're seeing the impact of growth and continued success in under placed insurance driving up the expense ratio. When you switch over to the accident year loss ratio by segment, again, it's important to remember that we look at our reserves by business every quarter and use that information to not only set our loss picks, but also to inform our pricing and risk appetite. So we're very cautious around our reserve picks and we tend to react quicker to bad news and slower to good news. So we're being deliberately cautious around social inflation-exposed businesses, despite the improvements that we've seen in that area, particularly in places like commercial auto liability. I think in considering the adequacy of our current loss picks, AFG's history of consistent overall favorable development should be an indication of how prudent we tend to be and noting that nothing has changed here. Just practically, I'd rather be talking to you and to Carl and Craig about the reasons why we have favorable development versus adverse development. So we are, again, being slow to react to the good news that we're seeing there. When you start to look at it by segment, focusing on casualty and financial, in casualty, we're seeing good growth in workers' comp and in certain targeted markets. Results are very good, but those businesses do run at a higher loss ratio compared to the overall segment. Decisions on where we participate in excess policies can also impact the loss ratio for that segment. In financial, there were some minor tweaks to some of the smaller businesses outside of lender-placed insurance, but nothing we would call a trend. Mostly what you're seeing is the impact of intentional growth in businesses like our European operations that run at a higher loss in LE ratio, and from the change in mix of business where we're still growing in areas that meet our LE objectives but happen to have a higher loss ratio than the lender-placed business or the other businesses in the overall financial segment. So when you think about things from a longer point of view, as Carl said before, we're confident in our reserves and in our ability to produce strong returns through a variety of market cycles.

Got it. Thank you. And then for my follow up, just sticking with the AI component, I guess the potential benefits on the expense side of the margins is pretty well understood, but how do you think about potential improvements on the underlying loss ratio from the use of AI as underwriters get better access to better data and they could also digest the data quicker and more efficiently.

I think that's a work in progress. I think that fits under the category with us on AI-powered underwriting knowledge management. We're doing many pilots right now designed to enhance underwriting training, knowledge retrieval, and decision support in a number of our different businesses. So I think we're just on the front end of that. I think where a lot of our AI focus has been is on submission automation, document intelligence, claims workflow automation, AI-enabled recorded statements, which improves claims handling efficiency and customer experience through automated summarization and insights, and broad deployment of AI tools across the organization today. So like everyone else, you know, we're making a significant investment and we're encouraged by, you know, the productivity improvements that we're seeing in that. But on underwriting itself, building an underwriting knowledge management, I think we're probably on the early end of that, probably farther along in the use and the claim side.

Great. Thank you, and congrats on the quarter.

One moment for our next question. We have Michael Zerimski from BMO. Please go ahead, Michael.

Hey, thanks. Good morning. You know, maybe first question on the competitive environment and pricing, specifically renewal pricing. You know, I think from data points we've received from a lot of your peers, industry data over the last quarter or so, we've seen a, you know, a decel in a number of pockets. It's maybe you can kind of discuss what's doing AFG's pricing levels, maybe even a little bit of momentum in certain spots sequentially.

Yeah, I'm happy to give a little insight into that. I am pleased, as I think I mentioned in my comments, that in our release, three quarters of our businesses have some growth through six months. So it's, you know, that's pretty broad-based growth. I think our diversified portfolio, you know, of 36 businesses gives us a broad array of opportunities. I think predictive analytics on pricing, growing sophistication near business by business is helping us. I think one of the main things is we're kind of, as I mentioned in past quarterly conversations, that we're pretty much through the reset on the social inflation-exposed businesses. You know, we've talked about some re-underwriting certain classes, lowering, bringing, you know, limits down, social inflation-exposed businesses, raising retentions in some businesses like public sector. So I think we're able to play offense versus defense more today and grow some of these lines now. Now, commercial auto, the same thing. As I mentioned, second quarter in a row, we're in commercial auto liability itself that we're making a small underwriting profit. And commercial auto overall, we're earning solid underwriting profits and good ROEs. And we're having the ability to play more offense and find opportunities for some growth there. So I feel good about, for the rest of the year, you know, where we're at, very optimistic that we'll continue to have opportunities to grow our businesses in a fairly, you know, broad basis.

That's helpful, Carl. So maybe just honing in on specialty casualty, you know, the underlying loss ratio this year, which gets a lot of attention from investors, has been, you know, I guess on a first half of the year basis running in kind of the 63-plus range. And, you know, last year kind of ran in the 65 range for the full year. So I do, I guess, you know, to the previous question, you know, it was mentioned there was an uptick in the underlying loss ratio. Is there seasonality in there where I should be thinking about the first half of this year versus the first half of last year? Or is it better to compare the first half of 26 to the full year, 25, or maybe none of the above?

I would say in casualty, there's really not a lot of seasonality there. There's definitely seasonality when you look at the property and transportation numbers, just because of the crop business in particular can cause the loss ratio to vary quarter to quarter. In casualty, really what's driving those changes is a mix of business. And then even though we're seeing good improvements and results overall, we are still being conservative on the social inflation exposed areas, and most of that's in casualty. So as far as trends go, I think we're always going to adjust quarter to quarter by business. But I would say there really isn't a seasonality there that it's more mix of business that's changing it compared to last year.

Can I add one more comment on the growth side as I'm thinking about it. You know, other companies really weighed in heavily on riding more convective storm exposed and coastal property, you know, particularly in the E&S side than we did. They had a bigger appetite on that. By the same token, as the property pricing is caved on a lot of that business, it really has less impact on us versus, you know, our peers. So I do think that is also one differential.

That makes sense. And lastly, back to the kind of technology conversation that you opined on a moment ago. I guess there's some folks that have expressed that a company that operates a more decentralized business model with many different segments might on average not be able to kind of deploy AI technologies as swiftly versus a company that an insurer that they might have run kind of a more centralized operating model. Any thoughts about that remark?

I think in a one or two line business, a primary auto or homeowner's rider, maybe that could be the case. I might argue the opposite, that where you have more business units and more people that are enabled to use the tools, you might have greater success finding some applications when you have 36 different business groups deploying AI and that. So I think some of our businesses, our crop business, for instance, is using extensive of AI and getting extensive results, I think, you know, in a lot of different ways in its business and that. So I think that's an example of one business we'd be ahead of the pack, probably, in that. So I don't know. I think that would be my response to you.

Carl, I would just add to that, too, that even though we do have 36 different business units with a strong decentralized focus on underwriting and claims, things like AI, we do do a good job of having our business units talk to each other and work together over time. So if there's something that works for one business unit, you can be assured that that will be talked about and considered for the other business unit. So even though they have a lot of autonomy, they don't operate completely in a vacuum.

Thank you. One moment for our next question. Our next question comes from Andrew Anderson from Jefferies. Please go ahead, Andrew.

Hey, good morning. You had mentioned commercial auto produced a small underwriting profit for a second straight quarter. What is needed to move this from small profit towards targeted returns? Is that going to require pricing above the 15% that you're seeing recently?

Thanks for your question. I want to clarify things. We're making a very solid profit in commercial auto overall. all. My commentary had to do with the commercial auto liability piece of the commercial auto results, where on that piece, we're making a small underwriting profit for the second quarter in a row. But I think, you know, because of the environment that we're in, you know, we still have work to do, and we continue to be focused on achieving rate that exceeds loss ratio trends you know, for commercial auto liability. And I mentioned, you know, rates were still up 15 percent, I think, you know, for the second quarter. I think the good news is we're continuing to get good rate. We're having the ability to grow our commercial auto business and that. And overall, in commercial auto, we're at solid margins. So I feel very, very good about that. And then when, And, you know, for companies like National Interstate and that, when you add the workers' comp into that, the result's even better. So, yeah, my comments were more towards commercial auto liability. Commercial auto overall and workers' comp in our transportation businesses, you know, are doing very well. Thank you for that clarification.

And maybe sticking with workers' comp, could you quantify what 2Q pricing was there? And just given the benign loss trends, are you comfortable growing that book despite negative rate?

You know, the loss ratio trends continue to be very benign. And results, you know, we continue to have really strong results, both, you know, particularly on a calendar year basis and an accident year basis. then. Poor California underwriting results would be the exception. California is 14% of our workers' comp business, and we're not doing well there, like a lot of others. We've had continued favorable development in the second quarter in six months. We feel our reserve position strong. Second quarter pricing, you know, for the overall business is down about 2% and about 3% through six months. But again, that's on top of really great results and a strong reserve position in that. Um, you know, our workers comp results will probably be, uh, not as good, uh, you know, as we go forward, but, but continue to be, will continue to be very strong. Uh, and, and we're getting, we're growing that business, um, some. So, uh, I think, you know, we're, uh, through, uh, in the second quarter, I think we have mid single digit growth, you know, in our overall comp business, even with our California premiums being down.

Thank you.

Thank you. One moment for our next question. Our next question comes from Gregory Peters from Raymond James. Please go ahead, Gregory.

Hey, good afternoon. This is Mitch on for Greg. So we've been hearing about increased competition and casualty from MGAs and fronting back capital. With your comments on being through the social inflation reset, what are you seeing from pricing and submission flow standpoints?

Well, you know, we're continuing, I think, as I mentioned, in our social inflation-exposed businesses like excess liability and Umbrella, we're continuing to get around 10% or, you know, double-digit price increase there, high single-digit price increase in some businesses like nonprofits. So the businesses that we needed, I think we're continuing to, you know, get rate that helps, that kind of helps us meet or even exceed, you know, our targeted returns. Things like excess liability and umbrella, where we have seen MGA step in, it's certainly probably easy for them to write the business. It'll be really interesting to see how many of them burn up over the next two or three years in that. So I do think the MGAs are having some impact in some ends of the specialty casualty marketplace. Usually that doesn't turn out well when in longer tail specialty casualty lines where the incentives on growth and that's the way they build earnings, usually it doesn't turn out too well.

That's really helpful. I appreciate the color. Turning to specialty financial, where rates turned slightly negative in the quarter and premium was up around 10%, could you provide some insight on what areas of that market you're leaning into for growth?

Well, the lender place property business, I think I talked about we had entered into a quota share agreement uh starting last year that um you know had an impact on our business for about 12 months and that now we're we're kind of we've renewed that uh so really from the second quarter on you know we don't have the drag of um that quota share so i think we're back to more meaningful growth quarter by quarter uh in in our specialty finance in our lender place property business. But we have other businesses like Great American Europe that we're growing. We have a business specialty equipment services where insurance is placed at the front end of a purchase on capital goods equipment and that. And so we have a number of businesses that you know, are showing healthy growth, you know, in our specialty financial segment.

Thanks, and congrats on the quarter.

As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. I am showing no further questions at this time. I would like to turn it back to Diane Widener for closing remarks.

Thank you, James. And thank you all for joining us this morning and for your good questions. We look forward to chatting with you again next quarter. We hope you all have a great day.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.