Yahoo Finance American Financial Group, Inc. (NYSE:AFG) Q1 2024 Earnings Call Transcript
American Financial Group, Inc. (NYSE:AFG) Q1 2024 Earnings Call Transcript May 2, 2024
American Financial Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to American Financial Group's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the call over to Diane Weidner, Vice President, Investor Relations. Please go ahead.
Diane Weidner: Thank you. Good morning, and welcome to American Financial Group's first quarter 2024 earnings results conference call. We released our 2024 first 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 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 Lindner III to discuss our results.
Carl Lindner: Good morning. I'll begin my remarks by sharing a few highlights of AFG's 2024 first quarter, after which Craig and I will walk through more details. I will then open it up for Q&A, where Carl, Brian and I will respond to your questions. AFG's financial performance during the first quarter was excellent. In addition to producing an annualized first quarter operating return on equity of 20%, net written premiums grew by 8% year-over-year. Our compelling mix of specialty insurance businesses and entrepreneurial culture, disciplined operating philosophy and astute within in-house investment professionals, collectively have enabled us to outperform many of our peers over time. Craig and I thank God, our talented management team and our great employees for helping us to achieve these results. I'll now turn the discussion over to Craig to walk us through some of the details.
Craig Lindner: Thanks, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.76 per share in the 2024 first quarter. The year-over-year decrease reflects lower returns on AFG's alternative investment portfolio when compared to the very strong performance of this portfolio in the prior year period. Now I'd like to turn to an overview of AFG's investment performance, financial position, and share a few comments about AFG's capital and liquidity. The details surrounding our $15.3 billion investment portfolio are presented on Slides 5 and 6. Looking at results for the first quarter, Property & Casualty net investment income was approximately 1% lower than the comparable 2023 period.
Excluding the impact of alternative investments, net investment income and our P&C insurance operations for the three months ended March 31, 2024, increased by 16% year-over-year as a result of the impact of higher interest rates and higher balances of invested assets. As you'll see on Slide 6, approximately 68% 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 6%. Current reinvestment rates compared favorably to the nearly 5% yield earned on fixed maturities at our P&C portfolio during the first quarter of 2024. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at March 31, 2024.
We've strategically managed duration to take advantage of market opportunities as interest rates have increased from recent historic lows. The annualized return on alternative investments in our P&C portfolio was approximately 9% for the 2024 first quarter compared to 14.2% for the prior year quarter. Strong returns related to our traditional private equity portfolio were offset by lower returns on investments tied to multifamily housing, which represent about half of our alternative investment portfolio. And where we continue to experience headwinds from the impact of increased supply and the leveling out of rental rates on these investments. We expect these headwinds may continue throughout the remainder of 2024. Longer-term, we remain optimistic regarding the prospects of our investments in multi-family housing as these properties continue to generate strong net operating income and have desirable geographic positioning and high occupancy rates.
The average return -- average annual return on alternative investments over the five calendar years ended December 31, 2023 was approximately 13%. Please turn to Slide 7, where you will find a summary of AFG's financial position at March 31, 2024. During the quarter, we returned $269 million to our shareholders through the payment of our regular $0.71 per share quarterly dividend as well as a $2.5 per share special dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2024, which provides ample opportunity for additional special dividends or share repurchases over the next year. We continue to view total value creation as measured by growth in book value plus dividends is an important measure of performance over the long term.
For the three months ended March 31, 2024, AFG's growth in book value per share, excluding AOCI plus dividends was 5.1%. I'll now turn the call back over to Carl to discuss the results of our P&C operations.
Carl Lindner: Thank you, Craig. Please turn to Slides 8 and 9 of the webcast, which include an overview of our first quarter results. As you'll see on Slide 8, our Specialty Property & Casualty Insurance businesses generated a strong 90.1% combined ratio on the first quarter of '24, about a point higher than the 89.2% reported in the first quarter of last year. Results for the 2024 first quarter included 2.3 points of the catastrophe losses compared to 2.2 points in last year's first quarter, and 3.3 points of favorable prior year reserve development compared to 4.5 points in the first quarter of 2023. First quarter 2024 gross and net written premiums were both up 8% when compared to the same period last year. Year-over-year growth was reported within each of the Specialty Property and Casualty groups as a result of additional crop premiums from Crop Risk Services acquisition, new business opportunities, increased exposures and a good renewal rate environment.
Along those lines average renewal pricing across our Property & Casualty Group, excluding our Workers' Comp businesses was up 8% for the quarter, accelerating about 1% from the previous quarter. Including Workers' Compensation renewal rates were up 6% overall, in line with the previous quarter. This is our 31st consecutive quarter to report overall renewal rate increases, and we believe we're achieving overall renewal rate increases and excessive prospective loss ratio trends meet or exceed targeted returns. In addition to renewal pricing, we continue to focus on insured debt values in our property-related businesses to ensure that our premiums reflect inflationary considerations. Now I'd like to turn to Slide 9 to review a few highlights from each Specialty Property and Casualty business groups.
Details are included in our earnings release. So I'll focus on our summary results here. The businesses in the Property and Transportation Group achieved an 89% calendar year combined ratio overall in the first quarter of 2024, an improvement of 2 points from the 91% reported in the comparable 2023 period. First quarter 2024 gross and net written premiums in this group were 10% and 7% higher, respectively, than the comparable prior year period. Additional crop premium associated with the CRS acquisition, as well as new business opportunities, a favorable rate environment and strong account retentions in our commercial auto and Ocean Marine businesses were the primary drivers of the increase in premiums. Overall renewal rates in this group increased approximately 9% on average in the first quarter of 2024, an increase of about 2 points from the previous quarter.
I'm particularly pleased with renewal rates that need in our commercial auto liability line of business where rates were up 21%. The businesses in our Specialty Casualty Group achieved a strong 89.8% calendar year combined ratio in the first quarter of 2024, 2.3 points higher than the 87.5% reported in the comparable period last year. Cat losses added 2.2 points to the Specialty Casualty Group first quarter 2024 combined ratio and were the result of a winter storm that affected a large social services account in the northwestern part of the country. I'm particularly pleased with the continued very strong underwriting margins in our executive liability and Workers' Comp businesses. First quarter 2024 gross and net premiums increased 3% and 4%, respectively, when compared to the same prior year period.
While most of the businesses in this group reported premium growth during the first quarter, the higher year-over-year premiums resulted primarily from the growth in our excess and surplus lines and excess liability businesses, as a result of great increases in new business opportunities, higher rates, strong account retention and new business opportunities in several of our targeted markets businesses contributed to the year-over-year growth to a lesser extent. Now renewal pricing for this group, excluding our Workers' Comp businesses was up approximately 8% in the first quarter and was up about 5% overall with both measures up about 1% from the renewal pricing in the previous quarter. I'm particularly pleased that we achieved renewal rate increases in excess of 10% and several of our social inflation exposed businesses during the quarter, including our public entity, social services and excess liability businesses.
Specialty Financial group continued to achieve excellent underwriting margins and reported an 86.3% combined ratio for the first quarter of 2024, a slight improvement from the comparable period in 2023. First quarter 2024 gross and net written premiums were up 26% and 27%, respectively, when compared to the same 2023 period. While most businesses in this group reported year-over-year growth, our financial institutions business was the primary driver of the higher premiums, representing a continuation of the growth we reported in both of our lender-placed and residential investor business products in the second half of 2023. Renewal pricing in this group was up approximately 7% in the first quarter. Craig and I are pleased to report these strong results for the first quarter, and we're proud of our proven track record of long-term value creation.
Our insurance professionals have exercised their Specialty Property and Casualty knowledge and experience to skillfully navigate the marketplace. And our in-house investment team has been both strategic and opportunistic in the management of our $15 billion investment portfolio. 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. Craig and Brian and I would be happy to respond to your questions.
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