American Financial (AFG) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - AFG reported core net operating earnings of $2.24 per share, down from $2.71 per share in Q3 2021, primarily due to lower returns in the alternative investment portfolio [9][10] - Net earnings included after-tax non-core net realized losses on securities of $28 million, or $0.32 per share, with $21 million or $0.24 per share from mark-to-market losses on equity securities [9][10] - The annualized core operating return was over 17% for the quarter, despite elevated industry catastrophe losses [6][7] Business Line Data and Key Metrics Changes - Property & Casualty net investment income decreased by 12% year-over-year, while excluding alternative investments, net investment income increased by 35% due to rising interest rates [12][13] - Specialty P&C insurance operations generated an underwriting profit of $158 million, a 7% decrease from $169 million in Q3 2021, with a combined ratio of 91.1%, up from 89 in the prior year [18][19] - The Specialty Casualty Group reported an underwriting profit of $118 million, up from $110 million in the prior year, with a combined ratio of 82.6% [26][27] Market Data and Key Metrics Changes - Gross and net written premiums increased by 19% and 15% respectively in Q3 2022 compared to the prior year, driven by new business opportunities and favorable renewal rates [20][21] - Average renewal pricing across the P&C group, excluding workers' compensation, was up about 6% for the quarter [21][32] - The Specialty Financial Group reported a 91.3% combined ratio for Q3 2022, an increase of 7.1 points over the prior year [29] Company Strategy and Development Direction - The company continues to focus on returning capital to shareholders, announcing a special cash dividend of $2 per share, in addition to the regular quarterly dividend [7][8] - AFG's investment strategy remains disciplined yet opportunistic, with a focus on high-quality medium-duration fixed maturity securities [11][14] - The company expects continued favorable conditions in the property and casualty market, with opportunities for growth from rate increases and exposure growth [32][33] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to achieve continued price increases in 2023, despite competitive pressures in certain areas [40][41] - The company anticipates that the macro environment, including social inflation and rising reinsurance costs, will create opportunities for pricing adjustments [40][42] - AFG's guidance for core net operating earnings in 2022 has been narrowed to a range of $11 to $11.75 per share, reflecting strong performance in the first nine months [33] Other Important Information - AFG's book value per share plus dividends declined by approximately 2% in Q3 2022, reflecting unrealized losses on fixed maturities due to rising interest rates [17] - The company has declared $12 per share in special dividends in 2022, maintaining a strong excess capital position [17][8] Q&A Session Summary Question: Thoughts on pricing trends in P&C for next year - Management noted that higher levels of catastrophes and increased reinsurance pricing are expected to create opportunities for price increases in 2023 [40][41] Question: Concerns about inflation's impact on Specialty Casualty business - Management is adjusting pricing based on higher prospective loss ratio trends and remains confident in the profitability of their excess and umbrella liability businesses [44][45] Question: Outlook for the workers' compensation business - Management indicated that while the overall results are strong, the California subsidiary is projected to have an accident year underwriting loss, but overall profitability is expected to remain stable [51][52] Question: Impact of crop on underwriting ratios - Management clarified that crop does not significantly impact the pricing index for the Property and Transportation segment due to its unique nature [60][61] Question: Debt repurchase penalties - Management confirmed that they could buy back debt at a discount in the open market, with most debt having a make-whole call provision [62][63] Question: Investment portfolio and interest rate trajectory - Management believes inflation has peaked and is comfortable investing in intermediate-term high-grade paper while extending the duration of the portfolio [66]