American Financial (AFG) - 2021 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - AFG reported core net operating earnings of $2.39 per share, a 257% increase year-over-year, driven by higher underwriting profit in Specialty Property and Casualty insurance operations and increased net investment income [7][10] - The annualized core operating return on equity for the second quarter was 14.7% [7] - Net earnings per share for Q2 2021 was $11.70, including after-tax noncore items totaling $9.31 per share [8] Business Line Data and Key Metrics Changes - The Property & Casualty Insurance segment achieved record pretax core operating earnings of $288 million, up $172 million from the prior year [10] - Specialty Property and Casualty operations generated an underwriting profit of $153 million, a 183% increase from the previous year, with a combined ratio of 87.9% [11][12] - The Property and Transportation Group reported an underwriting profit of $62 million, up from $33 million year-over-year, with a combined ratio of 86.6% [16] - Specialty Casualty Group's underwriting profit increased to $71 million from $27 million, with a combined ratio of 87% [18] - Specialty Financial Group reported an underwriting profit of $21 million, compared to a loss in the previous year, with a combined ratio of 86.4% [19] Market Data and Key Metrics Changes - Gross and net written premiums for Q2 2021 increased by 26% and 22% respectively compared to the same period in 2020 [14] - Average renewal pricing across the Property and Casualty Group was up approximately 9%, with a 12% increase excluding workers' compensation [13] - The company expects net written premiums for 2021 to be 10% to 13% higher than the $5 billion reported in 2020 [21] Company Strategy and Development Direction - The company plans to focus exclusively on the specialty P&C market following the sale of its Annuity business, which generated substantial cash and excess capital [28] - AFG aims to utilize its excess capital for opportunistic repurchases, special dividends, and growth through acquisitions and startups [30] - The company is enthusiastic about opportunities for both starting new businesses and making acquisitions over the next 12 to 24 months [43] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong performance of the commercial auto business and projected double-digit growth in that segment [40] - The company is actively managing inflationary trends and believes it is effectively addressing potential social inflation impacts [46][49] - AFG expects to maintain significant excess capital and liquidity throughout 2021 and beyond, with no debt maturities before 2026 [30] Other Important Information - AFG completed the sale of its Annuity business for $3.5 billion, recognizing an after-tax noncore gain of $697 million [25][28] - The company declared a special one-time cash dividend of $14 per share totaling $1.2 billion, followed by an additional $2 per share special dividend [28][30] Q&A Session Summary Question: About the Property and Transportation segment's core loss ratio - Management indicated that the increase in core loss ratio is due to a return to a more normal economic environment and that guidance reflects their actuarial reviews [32][33] Question: On the strong expense ratio improvement - The improvement is attributed to strong growth in written premiums and higher ceding commissions, benefiting from fixed underwriting expenses [34][35] Question: Competitive forces in the commercial auto business - Management is pleased with the performance and growth in the commercial auto segment, indicating ongoing opportunities for price increases and strong growth [40] Question: M&A market perspective - The company sees a steady stream of acquisition opportunities and remains selective, focusing on accretive acquisitions with long-term double-digit returns [42][43] Question: Impact of CPI inflation on insurance companies - Management discussed their proactive approach to managing inflation and how they adjust loss projections based on current and prospective trends [46][49] Question: Competitive environment for workers' compensation - Management noted a reasonable competitive environment, with expectations for pricing to stabilize and potentially increase in the future [51][52] Question: Employee return from COVID-19 - The company has implemented a staged return to work, with plans for a hybrid work schedule post-Labor Day, emphasizing employee safety and flexibility [60][61]