Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- American Financial Group Inc (AFG, Financial) reported an annualized second quarter core operating return on equity of 18.5%.
- Underwriting margins in their specialty property and casualty insurance businesses were strong, with a combined ratio of 90.5%, an improvement from the previous year.
- Property and Casualty net investment income, excluding alternative investments, increased by 15% year-over-year.
- The company returned $59 million to shareholders through regular quarterly dividends and expects significant excess capital generation for potential special dividends or share repurchases.
- AFG's specialty financial group achieved an 89.7% combined ratio, showing a significant improvement from the previous year.
Negative Points
- Property and Casualty net investment income was approximately 1% lower than the comparable 2023 period.
- The alternative investment portfolio saw lower returns, with an annualized return of 5.1% compared to 9.6% in the prior year quarter.
- Second quarter gross and net written premiums were only up 2% and 1% respectively, indicating slower growth.
- The company faced adverse development in selected casualty businesses, particularly in the excess liability line.
- AFG had to take proactive measures to manage exposures in social inflation-exposed businesses, which tempered overall premium growth.
Q & A Highlights
Q: Can you provide more details on the decision to pull back in certain lines of business, especially those exposed to social inflation?
A: Carl Lindner, Co-CEO: The decision is based on a combination of factors, including quarterly reviews and actuarial assessments. We are continually adjusting our loss ratio trends and appetite for risk in certain lines. Despite achieving double-digit rate increases in social inflation-exposed lines, our appetite may be less aggressive than some competitors. This cautious approach has contributed to our long-term strong underwriting results and returns.
Q: What is the current trend in commercial auto pricing, and how is the portfolio performing?
A: Carl Lindner, Co-CEO: In the quarter, commercial auto liability rates increased by 16%, following a 21% increase in the first quarter. Year-to-date, our overall commercial auto results are breakeven to a small underwriting profit. We are focused on improving commercial auto liability results through double-digit price increases and other underwriting adjustments.
Q: Can you provide more color on the favorable development in the Property and Transportation Group, particularly in crop insurance?
A: Brian Hertzman, CFO: Profit emergence in crop insurance is heavily weighted to the fourth quarter when crops come out of the ground. This year, we saw higher favorable development in the second quarter compared to last year. Carl Lindner added that current commodity prices and crop conditions are favorable, and we remain optimistic about the crop year.
Q: What are the moving pieces of favorable development in the casualty and specialty finance businesses?
A: Brian Hertzman, CFO: In the casualty group, we have net favorable development overall, with workers' comp continuing to show favorable development. There were small amounts of adverse development in some social inflation-exposed businesses. In the financial segment, there were ins and outs, but nothing individually material.
Q: What does a bad year in the specialty financial segment look like, and what loss events should we be on the lookout for?
A: Carl Lindner, Co-CEO: A major hurricane would impact results, but we have sliding scale commission agreements in our lender-placed property business to soften the downside. This approach helps limit exposure during larger event years. The lender-placed property business is significant, with over $600 million in gross written premium.
Q: Can you provide more information on the use of facultative reinsurance in the excess liability business?
A: Carl Lindner, Co-CEO: We use facultative reinsurance to manage risk exposure on a case-by-case basis, particularly in businesses with heavy commercial auto liability exposures. We are also moving up the tower to reduce exposure to high-risk areas. This strategy, along with double-digit price increases, helps manage our excess liability business.
Q: What drove the improvement in the specialty casualty current accident year loss ratio, excluding catastrophes?
A: Brian Hertzman, CFO: The biggest driver was the targeted markets businesses, where we have been getting good rate increases and taking underwriting actions. In workers' comp, we are being cautious with accident year picks due to rate decreases in Florida and potential medical cost increases.
Q: Can you discuss the top-line headwinds in the specialty financial segment and the impact of pausing new IP-related coverages?
A: Brian Hertzman, CFO: The financial institutions business saw significant growth last year, which has now leveled off. The pause in new IP-related coverages affects a small part of our innovative markets business. Overall, the specialty financial segment is expected to remain flat due to these factors.
Q: How are you managing cat exposure in the lender-placed property business heading into peak wind season?
A: Carl Lindner, Co-CEO: We manage exposures through modeling and maintain a lower coastal exposure profile compared to the industry. Our cat cover and cat bond provide reasonable retention for the risks we write. Despite the growth in the lender-placed property business, we feel comfortable with our current cat exposure management.
Q: What are your thoughts on capital management, specifically regarding special dividends, buybacks, and M&A?
A: Craig Lindner, Co-CEO: We are constantly looking at potential acquisitions and have a significant amount of excess capital. We are considering share repurchases and additional special dividends, but will likely make final decisions after the hurricane season.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
