Earnings Call Transcript - AFG Q3 2024

Diane Weidner, Vice President of Investor Relations

Thank you. Good morning. And welcome to American Financial Group's third quarter 2024 earnings results conference call. We released our 2024 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 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 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. 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 over to Carl Lindner III to discuss our results.

Carl Lindner, Co-CEO

Good morning. I'll begin my remarks by sharing a few highlights of AFG's 2024 third quarter, after which Craig and I will walk through more details. We’ll then open it up for Q&A where Craig, Brian, and I’d be happy to respond to your questions. I'm pleased to report an annualized third quarter core operating return on equity of 16%. Underwriting margins in our Specialty Property and Casualty Insurance businesses held up nicely despite elevated catastrophe losses, particularly from Hurricane Helene during the quarter. And higher interest rates increased Property and Casualty net investment income by 15% year-over-year. Craig and I thank God, our talented management team, and our great employees for helping us to achieve results. I'll now turn the discussion over to Craig to walk us through some of the details.

Craig Lindner, Co-CEO

Thank you, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.31 per share in the 2024 third quarter. Higher year-over-year catastrophe losses related primarily to Hurricane Helene and lower favorable prior year reserve development in the P&C insurance operations were partially offset by higher investment income. Now I'd like to turn to 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 $15.7 billion investment portfolio are presented on Slides 5 and 6. Looking at results for the third quarter, Property and Casualty net investment income was approximately 15% higher than the comparable 2023 period, reflecting the impact of rising interest rates, higher balances of invested assets and higher returns on alternative investments. As you'll see on Slide 6, approximately 67% 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%. Current reinvestment rates compare favorably to the 5% yield earned on fixed maturities in our P&C portfolio during the third quarter of 2024. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents was 2.9 years at September 30, 2024. The annualized return on alternative investments at our P&C portfolio was approximately 5.4% for the 2024 third quarter compared to 4.2% for the prior year quarter. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our alternative investments with an expectation of annual returns averaging 10% or better. Please turn to Slide 7, where you'll find a summary of AFG's financial position at September 30, 2024. During the quarter, we returned $59 million to our shareholders through the payment of our regular quarterly dividend. In conjunction with our earnings release, we declared a special dividend of $4 per share payable on November 26, 2024, to shareholders of record on November 15, 2024. The aggregate amount of the special dividend will be approximately $335 million. This special dividend is in addition to the company's regular quarterly cash dividend of $0.80 per share, which was recently increased by 12.7% over the previously declared rate and paid on October 25, 2024. With this special dividend, the company has declared $50 per share or $4.2 billion in special dividends since the beginning of 2021, including $6.50 per share in 2024. Carl and I consider these special dividends to be an important component of our total shareholder return. We expect our operations to continue to generate significant excess capital throughout the remainder of 2024 and into 2025, which provides ample opportunity for acquisitions, special dividends, or share repurchases over the next year. For the three and nine months ended September 30, 2024, AFG's growth and book value per share, excluding AOCI plus dividends was 4% and 13.9%, respectively. Our strong operating results, coupled with effective capital management and our entrepreneurial opportunistic culture and disciplined operating philosophy enable us to continue to create value for our shareholders. I'll now turn the call back over to Carl to discuss the results of our P&C operations.

Carl Lindner, Co-CEO

Thanks, Craig. Please turn to Slides 8 and 9 of the webcast, which include an overview of our third quarter results. As you'll see on Slide 8, our Specialty Property and Casualty Insurance business generated a 94.3% combined ratio in the third quarter of 2024, 2.1 points higher than what we reported in the third quarter of 2023. Results for the 2024 third quarter included 4.4 points of catastrophe losses compared to 3 points in the third quarter last year. Losses from Hurricane Helene represented about two-thirds of our catastrophe losses in the third quarter. No named storm exceeded our corporate property cat retention of $70 million during the quarter, and we believe our careful management of coastal exposures has served us well over many years. The losses we incurred from Hurricane Helene were not driven by coastal exposure with the vast majority of these losses coming from non-coastal areas in Georgia and the Carolinas. Although our remarks are focused on third quarter results today, I'd like to comment on estimated losses from Hurricane Milton, which made landfall in Florida on October 9th. We currently estimate that pretax losses from Hurricane Milton will be about $30 million and will be reflected in our fourth quarter results. Results in the third quarter benefited from 0.8 points of favorable prior year reserve development compared to 2.3 points in the third quarter of 2023. Prior year reserve development continued to be favorable within each of our Specialty Property and Casualty groups during the third quarter. Favorable prior year reserve development in our workers' compensation businesses, along with several other businesses more than offset some adverse development in selected social inflation exposed casualty businesses. Third quarter 2024 gross and net written premiums were up 19% and 14% respectively when compared to the third quarter of 2023, driven primarily by additional premiums from the Crop Risk Services acquisition. Gross and net written premiums, excluding crop insurance, each grew 7% year-over-year. We continue to achieve year-over-year premium growth as a result of a combination of new business opportunities, increased exposures, and a favorable renewal rate environment. Average renewal pricing across our Property and Casualty Group, excluding our workers' comp businesses, was up approximately 8% in the third quarter and up approximately 7% overall. Third quarter average overall renewal pricing was about 1% higher than pricing increases achieved in the second quarter. We've reported overall renewal rate increases for 33 consecutive quarters and we believe we are achieving overall renewal rate increases in excess of prospective loss ratio trends to meet or exceed targeted returns. Now I'd like to turn to Slide 9 to 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 96.5% calendar year combined ratio overall in the third quarter of 2024, 1.7 points higher than the 94.8% reported in the comparable '23 period. Higher year-over-year underwriting profit in our agricultural businesses was more than offset by higher catastrophe losses, primarily from Hurricane Helene. Third quarter 2024 gross and net written premiums in this group were 32% and 26% higher respectively than the comparable prior year. The primary drivers of the growth include additional premiums from the Crop Risk Services acquisition and, to a lesser extent, later reporting of crop acreage, which shifted the timing of reporting of some crop premium from the second quarter to the third quarter of 2024. Excluding crop premiums, third quarter gross and net written premiums each grew 11% year-over-year in this group, which is attributable primarily to new business opportunities, a favorable rate environment, and increased exposures in our commercial auto, property, inland marine, and ocean marine businesses. Crop insurance premiums represented about half of the net earned premiums in this group for the third quarter of 2024, reflecting the seasonality of the crop business and growth from the CRS acquisition. Consistent with historical practice, we record results in the current year to a combined ratio in the high 90s, which particularly in the third quarter, elevates our overall combined ratio to some extent until we had better visibility into our full-year crop results. The majority of the calendar year crop profitability is generally reflected in our fourth quarter financial statements. As we think about crop profitability for the current crop year, it's important to remember that most of our crop insurance is revenue protection where both the harvest price of the crops and yields impact claims. Harvest pricing for corn and soybeans, which was determined in October, settled 11% and 13% lower than the spring discovery prices respectively. The harvest of corn and soybean crops is running ahead of five-year averages. Yield variability will be important to our final results. Noting that the average farmer deductible is a little over 20% and considering harvest pricing, we're optimistic about an above-average crop year. Some property and transportation and overall renewal rates in this group increased 7% on average in the third quarter of 2024, about a point lower than the pricing achieved in the group for the second quarter of 2024. I'm particularly pleased with the renewal rates achieved in our commercial auto liability line of business where rates were up 12% in the third quarter. This is our 13th year of rate increases in this line. So the businesses in our Specialty Casualty Group achieved a strong 90% calendar year combined ratio overall in the third quarter. Higher underwriting profit in our target markets businesses was more than offset by lower year-over-year underwriting profit in our excess and surplus businesses and, to a lesser extent, our workers' comp and executive liability businesses. Underwriting profitability in our workers' compensation and executive liability businesses continues to be excellent. Third quarter 2024 gross and net written premiums increased 6% and 4% respectively when compared to the same prior year period. Primary drivers of growth were new business opportunities and favorable renewal pricing in several of our targeted market businesses and our excess liability business. Our mergers and acquisitions business also benefited from an increase in M&A activity. This growth was tempered by slightly lower workers' compensation premiums. Excluding workers' compensation, third quarter gross and net written premiums in this group both grew 8% year-over-year. Excluding our workers' compensation businesses, renewal rates for this group were up approximately 10% in the third quarter and up 8% including workers' comp. Both measures improved about 3 points from the renewal pricing in the previous quarter. And I continue to be pleased that we continue to achieve renewal rate increases of 10% or better during the quarter in several of our social inflation exposed businesses, including our social services, excess liability, and public entity businesses. Specialty Financial Group continued to achieve excellent underwriting margins and reported a 91.9% combined ratio for the third quarter of 2024, 4.3 points higher than the prior year period. Cat losses contributed 14.4 points to the third quarter '24 combined ratio compared to 9.3 points in the prior year third quarter. Improved results in our lender services business were more than offset by lower profitability in our surety and fidelity businesses. Third quarter 2024 gross and net written premiums were up 7% and 9% respectively when compared to the prior year period due primarily to the growth in our financial institutions business. Renewal pricing in this group was up 6% for the quarter, consistent with the previous quarter. To conclude, we're pleased with the results in the third quarter and year-to-date. Through the first nine months of 2024, our annualized core operating return on equity is excellent at 18%. The calendar year combined ratio in our Specialty Property and Casualty business is 91.9%, six-tenths of a point above where we were last year at this time. In addition, we're selectively growing our specialty businesses at a healthy rate, pricing is exceeding expectations, and investment performance continues to be strong. We're well positioned to continue to build long-term value for our shareholders for the remainder of 2024 and beyond. We'll now open the lines for the Q&A portion of today's call, and Craig, Brian, and I will be happy to respond to your questions. Thank you.

Operator, Operator

Our first question comes from Michael Zaremski of BMO.

Michael Zaremski, Analyst

The first question pertains to the loss ratio. Several companies have been actively sharing that they have increased their IBNR reserves, particularly as trends have shown an upward movement, especially regarding social inflation. Could you share if American Financial Group has also been adding to this reserve bucket as a percentage of historical levels?

Brian Hertzman, CFO

So when you look at our businesses, it's really a business unit by business unit. In addition to looking for rate increases in the social inflation exposure businesses and getting them there, we also have changed some terms and conditions. So it can be a little tricky to analyze the IBNR win. For example, in excess business, maybe the attachment point is different than it was before. So it's not exactly the same product as what you might have seen in previous years. But we look at each business unit, the reserve position of each business unit every quarter, and react to new information very quickly, particularly negative news. That process can result in favorable or adverse development for any business in any quarter. We've just been fortunate to have more favorable than adverse development in those periods. This particular quarter, we did see some elevated large losses in our umbrella and excess liability businesses and reacted to that, and to the best that we can we would reflect new information into all of our accident year PICC, so that can cause us to elevate our PICCs and then book some IBNR. But I think in looking at the IBNR versus case reserves, there's lots of factors going into it that you can't just really give a number.

Michael Zaremski, Analyst

Yes, I understand there are many complexities involved. Shifting focus a bit, Craig, I recall you mentioned in your prepared remarks that you believe the alternative investment portfolio can eventually achieve returns above 10%, but please correct me if I'm mistaken. I'm curious if the market is normalizing regarding real estate fundamentals and whether you are feeling increasingly confident that you will reach your target returns in the upcoming quarters.

Craig Lindner, Co-CEO

Let me start by sharing my perspective on traditional private equity investments. While it's difficult to forecast returns, a strong stock market is likely to benefit mergers in this area. Now, turning to multifamily investments, which make up nearly half of our alternative investments, the operations have been stable. We anticipate that our net operating income for the year will remain flat compared to last year, despite new supply entering the market. We have experienced some negative mergers, as our general partners assess the properties we have invested in quarterly. Due to rising cap rates influenced by higher interest rates, we recorded some negative mergers in the first nine months of the year. However, we benefit from attractively priced fixed-rate debt on 54 of our 58 properties, with the average loan rate around 4% or slightly above. This gives us some protection compared to others in the market. Regarding the multifamily sector, current construction starts are at a 10 or 11-year low, following a period of significant new development over the past few years. We are likely seeing the peak of multifamily completions in the third and fourth quarters. With new starts at a low level, I believe there will be a point toward the end of next year when the new supply will be absorbed, restoring strong pricing power. It may take 9 to 12 months to fully absorb the incoming supply. By the end of next year, with minimal new supply, we expect pricing power to strengthen again. Recently, there has been a notable resurgence of interest in multifamily properties, which has shifted in the past few months. We’ve just signed a deal to sell a property in Colorado at a 4.60% cap rate based on the trailing 12 months of NOI, which we find appealing. We are starting to see transactions occurring for the first time in a while. This summarizes my outlook on multifamily and our expectations for the upcoming year.

Michael Zaremski, Analyst

And just lastly, pivoting back to the Property and Casualty Insurance operations and specifically kind of the competitive environment on pricing. So in the Specialty Casualty, it feels like we see that your pricing sequentially kind of accelerated fairly meaningfully. I'm going to assume that that's kind of coming from the social inflationary exposed lines, and I feel like we've been seeing data points from that from your peers. I don't know if you have any comments on that. On property and transportation, I don't know if you might have given us an update. I know your commercial auto rate increases have been running well in excess of, I think, the market in recent quarters. If you can kind of remind us how that's trending? I see that pricing was down a little bit sequentially there too. But just curious on the pricing environment for the social inflationary exposed lines like commercial auto and some of the Specialty Casualty stuff?

Carl Lindner, Co-CEO

Yes, I think I mentioned earlier that I feel good about the continued favorable pricing environment, particularly with the social inflation exposed lines. Commercial auto liability, we got another 12% price increase in the third quarter. I believe that number is 16% year-to-date. So a good, favorable number. Things can vary quarter-by-quarter. And then in the businesses like excess liability lines, public sector, our nonprofit businesses that are some of the more social exposed businesses in that 10% plus, strong double-digit increases in those lines is what we continue to have, both in the third quarter. And when you look at year-to-date, it's pretty much the same. So I feel good about that and the continued favorable pricing environment that we're in.

Operator, Operator

Our next question comes from the line of Andrew Andersen at Jefferies.

Andrew Andersen, Analyst

You had mentioned some adverse development on social inflation lines. Could you please talk about what accident years that was from and maybe size of magnitude?

Brian Hertzman, CFO

I think when you look at our casualty businesses, I think the first thing to kind of incur is the results overall where our casualty group has a combined ratio of 90% for the third quarter and 88.4% for the first nine months. With those kinds of combined ratios, that's ROEs in the high 20s or better, so they're really good results overall for our casualty businesses. But if you just want to focus in on the favorable development there and still on that favorable development, as we noted, we did have continued good favorable development out of workers' comp, but we have that offset by some of the social inflation exposed businesses. And it is large loss activity over a number of years. So it's not just the older years, it is a little bit in some of the more recent years. We're talking about it because it is reducing our favorable development overall, but the results in general are very good. And we feel confident with what we know on now with our reserves, not that things can't happen, but we're really good with ROEs that come from business that's in the '90s in the long run.

Andrew Andersen, Analyst

And maybe sticking on just to the casualty segment. The underlying loss ratio had some pretty notable improvement year-over-year. Could you just maybe talk about some of the drivers there?

Brian Hertzman, CFO

So particularly in like our targeted markets business where we have things like public sector business or specialty human services business, ones where we have been getting significant rate, and ones where in some of the prior periods we had some adverse development, we're seeing improvements in the accident year results there as we have taken action in those books, both pricing-wise and terms and conditions-wise and appetite-wise, so that we're seeing much improved results out of those targeted markets and consistent results in the workers' comp.

Operator, Operator

Our next question comes from Meyer Shields of Keefe, Bruyette, & Woods.

Meyer Shields, Analyst

So one quick reserve question, if I can. Because Carl, you sounded very optimistic about commercial auto, I'm wondering whether that was a line that faced any social inflation requiring a reserve adjustment?

Craig Lindner, Co-CEO

Are you asking if any of the adverse development was related to commercial auto liability?

Meyer Shields, Analyst

Yes.

Craig Lindner, Co-CEO

So we didn't really have that in our transportation segment. What I would say in some of our businesses in casualty, there was a little bit of adverse development, but it wasn't the big driver of the numbers.

Meyer Shields, Analyst

In your second question, I don't want to imply that there's an overreaction, but when Carl mentioned the non-coastal exposure to Hurricane Helene, how do you view the reassessment of non-coastal exposure after an initial event like this?

Carl Lindner, Co-CEO

During my career, I have always found that each catastrophe event teaches us valuable lessons. Reflecting on past events like Hurricane Hugo and certain California earthquakes, I've noticed that there can be more loss inland than anticipated. It's important to learn from every incident and make improvements where possible. We can adjust prices for our lender-placed property or property inland marine insurance, and we have options to limit flood exposure if desired. There are various strategies we can implement to tailor our approach in the property sector. Each time we experience an event, we analyze the data and make informed changes to our strategies.

Meyer Shields, Analyst

And again, sort of one quick question for Craig. It looks like the market today is anticipating higher for longer interest rates, and I was wondering how should we think about the response in terms of asset allocation or portfolio duration throughout the investment portfolio?

Craig Lindner, Co-CEO

Meyer, we have deliberately kept our portfolio duration relatively short because we didn't see much value and didn't believe it was the right time to invest heavily in long-duration securities. We expect to benefit from a higher interest rate environment. On the conference call, I mentioned a reinvestment rate of 5.5% with current rate increases, and it could even exceed 5.5%, which is better compared to the 5% yield reported last quarter. We are well-positioned for a higher interest rate environment. While short-term rates may be decreasing, longer-term rates are stable, and we are satisfied with our short-duration portfolio. If rates shift significantly from this point, we will be in a good position to take advantage of that.

Operator, Operator

Our next question comes again from Andrew Andersen of Jefferies.

Andrew Andersen, Analyst

Just thinking about higher cats this year and then the comment about above average crop profitability. If we go back to the beginning of the year, you kind of had some underlying business plan assumptions, including $11 of EPS and a similar combined ratio relative to 90.3 in 2023. Do you still expect to achieve both of those metrics?

Carl Lindner, Co-CEO

Well, we're not changing our perspective on our business plan right now. I think you still can have more catastrophes in the fourth quarter. Our Milton projected losses seem to be reasonable and kind of within our model at this point. And then it kind of gets down to really through year-end just how good of a crop year we end up having in that. And now it's a matter of seeing what actual claims, the numbers of claims, kind of the average claims and that kind of thing through in that business through year-end and into January. I think we'll have a much better feel of our overall crop profitability and just how good it is the next time we report for sure.

Operator, Operator

At this time, I'm showing no further questions. I would now like to turn the call back to Diane Weidner, Vice President, Investor Relations for closing remarks.

Diane Weidner, Vice President of Investor Relations

Thank you. And I appreciate all the good questions today. And thanks for your time joining us this morning as we recapped our third quarter results. We look forward to talking with all of you again next quarter, and hope you have a great rest of your day.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.