American Financial : Q2 2022 Earnings Release Transcript | MarketScreener

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REFINITIV STREETEVENTS

EDITED TRANSCRIPT

AFG.N – Q2 2022 American Financial Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 04, 2022 / 3:30PM GMT

OVERVIEW:

AFG reported 2Q22 core net operating EPS of $2.85 and expects full-year 2022 core net operating EPS to be $10.75-11.75.

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AUGUST 04, 2022 / 3:30PM, AFG.N – Q2 2022 American Financial Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brian S. Hertzman American Financial Group, Inc. – Senior VP & CFO

Carl Henry Lindner American Financial Group, Inc. – Co-President,Co-CEO & Director

Diane P. Weidner American Financial Group, Inc. – VP of IR

Stephen Craig Lindner American Financial Group, Inc. – Co-President,Co-CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Charles Gregory Peters Raymond James & Associates, Inc., Research Division – Equity Analyst

Charles William Lederer Wolfe Research, LLC – Research Analyst

Meyer Shields Keefe, Bruyette, & Woods, Inc., Research Division – MD

Michael Wayne Phillips Morgan Stanley, Research Division – Equity Analyst

Paul Newsome Piper Sandler & Co., Research Division – MD & Senior Research Analyst

Rudy R. Miller The Miller Group – Chairman, CEO, and President

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to American Financial Group’s Second Quarter 2022 Results Conference Call. (Operator Instructions) Please be advised that today’s conference may be recorded.

I would now like to hand the conference over to your speaker host, Diane Weidner, Vice President of Investor Relations. Please go ahead.

Diane P. Weidner – American Financial Group, Inc. – VP of IR

Good morning, and welcome to American Financial Group’s Second Quarter 2022 Earnings Results Conference Call. We released our 2022 second 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 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 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 attributable to shareholders 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.

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AUGUST 04, 2022 / 3:30PM, AFG.N – Q2 2022 American Financial Group Inc Earnings Call

Carl Henry Lindner – American Financial Group, Inc. – Co-President,Co-CEO & Director

Good morning. We’re pleased to share highlights of AFG’s 2022 second quarter results, after which Craig, Brian and I will be glad to respond to your questions.

AFG’s financial performance during the second quarter was outstanding. We’re pleased to report an annualized core operating return of nearly 21% in the quarter, including record second quarter underwriting profit alongside double-digit premium growth. Strategic positioning of our investment portfolio enabled us to invest opportunistically, and the returns in our alternative investment portfolio continued to exceed our expectations.

Our entrepreneurial, opportunistic culture and disciplined operating philosophy have positioned us well in this increasing interest rate environment and favorable Property and Casualty market.

Craig and I thank God, our talented management team, and all of our employees for helping us to achieve these exceptionally strong results.

I’ll now turn the discussion over to Craig to walk us through AFG’s second quarter results, investment performance and our overall financial position at June 30.

Stephen Craig Lindner – American Financial Group, Inc. – Co-President,Co-CEO & Director

Thank you, Carl. Please turn to Slides 3 and 4 for summary earnings information for the quarter. AFG reported core net operating earnings of $2.85 per share, compared to $2.39 per share in the second quarter of 2021. The increase was primarily the result of significantly higher underwriting profit in our Specialty P&C insurance operations. As Carl mentioned, annualized core operating return on equity in the second quarter was a very strong 20.7%.

On Slide 4, you’ll see that net earnings included after tax non-core realized losses on securities of $73 million, or $0.86 per share, in the quarter. Included in this number is $65 million, or $0.76 per share in after tax losses from the mark-to-market of equity securities that we continued to own at June 30.

Now I’d like to discuss the performance of AFG’s investment portfolio, financial position and share a few comments about AFG’s capital and liquidity. During the second quarter, we continued to act on the opportunities presented by the increasing interest rate environment and increased the duration of our P&C fixed maturity portfolio, including cash and cash equivalents, from approximately 2 years at December 31, 2021, to approximately 2.7 years at June 30, 2022.

Our fixed maturity reinvestment rate is approximately 4.5% and compares favorably to the fixed maturity portfolio book yield of approximately 3.3% at the end of the second quarter. In addition, our portfolio of floating rate securities, most of which are tied to one-month or three-month indices, continue to benefit from rising interest rates.

For the three months ended June 30, 2022, net investment income was slightly higher than the comparable 2021 period as both periods included very strong results from alternative investments. The annualized return on alternative investments in the second quarter of 2022 was approximately 12.4% compared to 21.1% for the 2021 quarter.

The $62 million in pretax earnings from our portfolio of alternative assets in the 2022 quarter included $38 million in earnings from the sale of certain multi-family housing investments in a very favorable market. We held these investments for 4 to 5 years and achieved an average annual return in excess of 25% over that period.

Excluding the impact of alternative investments, net investment income in our Property and Casualty insurance operations for the three months ended June 30, 2022 increased 18% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets.

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AUGUST 04, 2022 / 3:30PM, AFG.N – Q2 2022 American Financial Group Inc Earnings Call

Carl will come back to drivers of our overall increased guidance for 2022, but I’m going to take a few minutes now to talk about the investment income assumptions embedded in our updated guidance.

First of all, we’ll continue to benefit from the higher interest rate environment, both from our floating-rate fixed maturities and reinvestment opportunities. With regards to alternative investments, our guidance assumes an overall annual yield of 10% to 12% on alternative investments for the full year, based on the strong performance of this portfolio in the first half of 2022. Our guidance reflects minimal income from alternative investments in the second half of 2022, as we assume that the continued strong performance of multi-family housing investments will offset weaker performance of traditional private equity investments, which may be under pressure from macro-economic environment.

As a reminder, investments tied to…