Good day, ladies and gentlemen, and welcome to the American Financial Group 2018 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Diane Weidner. Ma'am, you may begin.

Thank you. Good morning, and welcome to American Financial Group Second Quarter 2018 Earnings Results Conference Call. I am joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Jeff Consolino, AFG's CFO. Our press release, investor supplement and webcast presentation are posted on AFG's website. These materials will be referenced during portions of today's call. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Certain statements made during this call may be considered forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Investors should consider the 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 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. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now, I am pleased to turn the call over to Carl Lindner III to discuss our results.

Good morning. We released our 2018 second quarter results yesterday afternoon. If you'd, please turn to Slide 3 of the webcast slides for an overview. Craig and I were pleased to report a new second quarter record for AFG's core operating earnings of $2.04 per share, up 27% from last year's second quarter. These results include excellent profitability in our Property and Casualty operations and outstanding results in our Annuity segment. Second quarter annualized core operating return on equity was a strong 15.1%. Net earnings per diluted share were $2.31 and included $0.27 per share in realized gains on securities. Craig and I thank God, our talented management team and our great employees for helping to achieve these results. Based on the results to the first six months of the year, we're increasing our 2018 core operating earnings guidance for AFG to be in the range of $8.10 to $8.60 per share, which is a $0.20 increase from our previous estimate of $7.90 to $8.40 per share. As with our initial guidance, we continued to assume an average crop year and a normalized level of catastrophe losses. We expect to have more clarity on these items when we report our third quarter results. Craig and I will each discuss our guidance for each segment of our business in more detail later in the call. Now I'd like to turn our focus to our Property and Casualty operations. So please turn with me to Slides 4 and 5 of the webcast, which include an overview of second quarter results. As you'll see on Slide 4, our Specialty Property and Casualty Insurance operations produced a very strong core operating earnings and healthy growth during the second quarter. Gross and net written premiums both increased 11% in the second quarter of 2018 when…

Thank you, Carl. I'll start with a review of our Annuity results for the second quarter beginning on Slide 7. Statutory Annuity premiums were $1.4 billion in the second quarter of 2018 compared to $1.3 billion in the second quarter of 2017, a new quarterly record for the Annuity. Significantly higher premiums in the retail and broker-dealer channels potentially offset by lower premiums in the financial institutions channel. Reduction in the retail and broker-dealers markets was particularly strong due to the launch of several new products in addition to an improving interest rate environment in the first half of 2018. Our indirect back channel premiums have softened due to certain competitors offering significantly higher credited rates. Pretax Annuity earnings were $99 million in the second quarter of 2018 compared to $85 million in the second quarter of 2017, an increase of 16%. As you can see on the slide, included in these results is a $27 million unlocking charge. We monitor the major actuarial assumptions underlying our Annuity operations throughout the year and conduct detailed reviews or unlocking of assumptions in the fourth quarter of each year. If changes in the economic environment or actual experience would cause material revisions to future estimates, AFG will unlock assumptions in an interim quarter. Due to continued higher FIA option costs, resulting primarily from higher-than-expected risk-free interest rates, we unlocked assumptions for option costs and interest rates in the second quarter of 2018, resulting in a net charge to earnings of $27 million. The unlocking charge takes into account the negative impact of higher option costs, partially offset by higher reinvestment rates. In addition, we've started adjusting FIA renewal caps to help mitigate the higher option costs. These actual and expected cap decreases were used in calculating the unlocking charge. We will continue…

Thank you, Craig. Slide 12 summarizes AFG's core operating earnings on a consolidated basis. The $2.04 core EPS is based on core net operating earnings in the quarter of $185 million. The increase in earnings in the second quarter was primarily the result of strong operating earnings in our insurance businesses, bolstered by a lower effective tax rate of 20% in the quarter as compared to 29% in the year-ago quarter. Property and Casualty pretax operating earnings were 10% higher year-over-year. P&C underwriting profit was virtually unchanged from the very strong results in the year-ago second quarter. P&C net investment income grew $19 million or 20% year-over-year. This is primarily the result of unusually high returns on certain investments, including limited partnerships and similar investments. The sale of real estate in the 2017 second quarter partially offset other expenses in that period, making the second quarter 2018 P&C other expenses higher by comparison. Pretax earnings for our Annuities segment increased 16% year-over-year, parent company interest expense decreased by $7 million year-over-year as a result of our 2017 debt refinancings. Other corporate expenses increased by $11 million starting with Q1 this year. This includes income and expenses related to AFG's previously reported run-off lines of business. Slide 13 provides a reconciliation of core net operating earnings to net earnings. As noted last quarter, AFG adopted ASU 2016-01 [indiscernible] refers to 2018, which requires holding gains or losses on equity securities to be recognized through earnings. The impact to our income statement will vary each quarter, depending on the level of volatility and the performance of the securities held in our equity portfolio and the overall market. In the second quarter of 2018, AFG recognized $25 million or $0.27 per share in net after tax as gains. As indicated on Slide 14,…

[Operator Instructions] Our first question comes from Amit Kumar with Buckingham Research. Your line is now open.

Thanks and good morning, good afternoon sorry. Just a few questions and I want to make a quick comment. The audio of the call was cutting in and out a bit. So maybe when the transcript comes out, someone can take a quick look at it because I checked with other people and they're also facing the same issue for all the presenters. The first question is on the guidance, and if I look at the Specialty Casualty segment and then I look at the underlying numbers for the Specialty Casualty segment, if I look at the loss PICs and even the guidance for the forward, is it assuming a higher inflation or is that conservatism? Why is the number unchanged going forward?

We try to take into account what we see in current trends and where - what our reported results are year-to-date and our reserve position in that segment, as we set our guidance. So we try to do the best we can every quarter. I mean, we're one of the few companies that gives pretty detailed guidance overall and by segment and that. I'd just say, generally, outside of some big event like some big property cat or those kinds of things, we've been pretty accurate.

I guess what I was trying to ask is, the Specialty Casualty guidance is unchanged. And that's what I was trying to figure out. Are you noticing something in the trends at the end of H1or is it just inflation or is there any new sort of thought process?

Amit, I hope that the audio is coming through for you. So I, for one, am struggling a little bit with your question. Through six months, our Specialty Casualty combined ratio is 94.0%. Our guidance brackets that plus or minus two percentage points and with the caveat that Carl offered about the potential for catastrophe events in the balance of the year being a wildcard, basically that guidance is straight down in the middle of our results year-to-date. We haven't changed that guidance for the segment combined ratio over the course of the quarter because we haven't seen anything that would cause us to modify or back-off of it. So are you looking at something -

Yes, you answered my question. I didn't - probably I didn't phrase it properly, but you just answered it. The second question was on the discussion of the agriculture book. Can you, sort of, talk about are RPP and FCIC and this $12 billion package, and how should we all as outsiders think about where this thing will end up? I know I think the numbers are squared up in Q3, Q4, maybe just help us understand because this is a bit of a one-off thing for us?

Are you talking about my comments about the crop year?

Yes, and the tariffs especially. With the tariffs coming in and then you have a $12 billion aid package and then the Midwest farmers will have an RPP policy. So I'm just trying to sort of add all of this and figure out how will the ultimate numbers look? And will they end up looking different with all of these moving parts or should I - am I too worried about it too soon?

Yes. I think we're still trying to get our arms around exactly what it means. But our bottom line is, is we don't think it really impacts the program itself much. Best we can figure out is that farmers aren't going to - we don't think farmers are going to benefit doubly in that. Anything - any payments made to them would be figured in payments that we would make. That's the best that we can figure at this point. We think it's a neutral impact to our crop business. And again, we think our crop [indiscernible] shaping up very nicely. Commodity prices on corn and soybeans are 4% and 11% lower, I think, as of yesterday. Probably the bigger impact on the tariff have been kind of a little bit more volatility around soybean prices. The point they were down, I think, 15% and they backed off to 11%. So we're keeping our eye on that. That seems to be more of the impact that we've noted. The growing conditions are very favorable at this point. You always look out for early frost or any kind of late, lack of rainfall. That doesn't seem to be too much of the case right now in that. But we're very optimistic right now about our crop year and the way it's shaping up. And I don't - we don't really see the government having any negative impact on that.

Got it, the final question and I will re-queue. Just going back to the discussion on capital management and the discussion on excess capital and thinking of your guidance and the thought process for the second half of 2018, how should we be thinking about another special dividend here for the remainder of the year?

Good question. We generally, as we go into the third quarter of the year and that, we kind of get an idea of what we have on our plate with regards to any acquisitions that we think that we have a good [indiscernible] on. And then, we look at excess capital as its projected to [indiscernible] we make up our minds. We've already paid one special dividend. I think in our commentary that we've said that depending on what we have on our plate and what needs we have through year-end, keeping some excess that we definitely would be considering another special dividend towards the end of the year.

Got it, okay. I'll stop here and re-queue. I do have a few more follow ups. Thank you.

Our next question comes from Greg Peters with Raymond James. Your line is now open.

Good afternoon. I'll echo Amit's comments regarding the interruptions on your presentation. I don't know if it's faulty conference call equipment or what, but there were some interruptions. I wanted to just focus on some big-picture issues. First of all, I was wondering if you could comment on how, by segment, there's been any change in the renewal ratios or if your retention ratios continue to be consistent with where they were a year or two ago? I'm particularly interested in that in the context of the Workers' Comp business where you talked about pricing challenges.

Greg thanks for your question. We generally don't issue detailed renewal retention type of data. We have so many - we have some 33 different businesses, segments that - and the businesses are so different. Generally, overall though, gosh I mean, we were growing 11% in the quarter, and we're seeing good growth in each of the segments. I'm very pleased, in general, business by business. That has to mean that we're taking advantage opportunistically for new business opportunities as well as having renewal - our renewals have to be in good shape also. So very pleased with the premium growth that we have, particularly, in this kind of a market. And I do think probably our use of predictive analytics helps us become - and getting - excluding comp, we're getting the strongest price increase we've gotten in quite [indiscernible] years. I think that makes us comfortable with that growth even within this market.

That's a good answer, Craig. I was struck by your comment about analytics. Could you spend 30 seconds and give us a peek into what you're doing on that side of the equation?

We really have a - we have a [indiscernible] group here at [indiscernible] that's focused on really using predictive analytics throughout our organization, particularly in the businesses where we think it can have the biggest impact. We use it extensively within compensation, in businesses - our other businesses and with a goal of really expanding the use of it across our businesses. So - and that not only includes underwriting pricing, but we're trying to expand the use of that on the claims side also. For instance, our California Workers' Comp business, Republic, they're initiate - they've been initiating predictive analytics in a claim side, which we think will bear a lot long term. So those would be [indiscernible] maybe a little bit of color around that.

Thank you. I wanted to take my next question to Craig around the Annuity business. Now, I noted your comments at the beginning about new products really helping boost the retail result. One of the other players in the marketplace has - there's some speculation on whether it's going to remain independent or merge. I'm wondering if you'd seen any fallouts? I know you don't like to comment on competitors, but I'm just wondering if you'd seen any fallout in the marketplace that has helped your retail sales on - as a result. And the second question on the Annuity business, given the strong growth, and I know you - from an overall corporate standpoint, you talked about being more than adequately capitalized. But I'm curious about the capital demands that you're having in your Annuity business considering the really strong growth results you're posting.

Greg, on the first question, it's really hard to know what impact having a major competitor kind of be in plays is having. I don't think that, that is - was a major driver of our premium growth, to be honest. I think that's - I think our premium growth is driven by a couple of things. Certainly, the resolution of the certainty that the Department of Labor Fiduciary Rule as proposed was not going to be implemented. That certainly has had a very positive impact on sales, particularly retail sales. The volatility of the stock market, higher interest rates and, frankly, the kind of consumer-centric nature of our model and products. We're selling shorter products, more value to the customer. That's all just played really well in this environment. So we are very pleased with the growth, and yes, expect it to continue. What was your second question, Greg?

Second question and thank you for that answer on the first part, the second question was just around - and it was the capital question. And I recognize your comments about adequate capital at the company overall. I'm curious about - within the Annuity business, considering the growth, what kind of demands you're seeing for capital as a result of the success, if any or maybe you could provide us a snapshot on what your RBC ratio is within that business? Just some - whatever you're willing to provide some additional color.

Sure. First of all, the tax reform, change in the tax rate cost us, I believe, it was about 30 points, 30% in the RBC. So that did have an impact on us. Because of the consumer-centric nature of the - number one, very low cost of putting business on the books from an operating standpoint and the fact that we are a lower-commissioned company. I think our commissions average 1.5 points or two points less than the industry. The capital strain for us when we put new business on the books is lower than most of our competitors. Obviously, when you're growing at a very [indiscernible] rate, it's going to consume more capital. Given the excess capital position at AFG and given the ability to do business significantly at attractive rates of return, we're happy to put some of the capital to work growing the business.

Great, thank you for your answers.

Sure.

Our next question comes from Paul Newsome with Sandler O'Neill. Your line is now open.

I was hoping you could hone in a little bit more on the Workers' Comp market and give us some sense of kind of where pricing is versus your view of claim cost trend? Just a sense, what the offset is to the other parts of the business, which seemed to be doing well from a sort of pricing versus claim cost perspective?

Sure, Paul. I would be happy to kind of give some color around that. Maybe the way to address that is just by a couple of the larger pieces of the business. And our Summit operations, which is our Southeastern operation and that. Obviously, we're very pleased with Summit's results with - they've had strong underwriting profitability every year since we acquired it. If you take a look at their business today, with the Florida January and June rate increases, I think we still feel we should make an overall small accident year underwriting profit and have a healthy return this year. Florida could end up being closer to breakeven on a - or a little higher combined ratio sign. Little early to [indiscernible]. So that would be our kind of things happening on the accident year. On the loss cost side, loss cost trend frequency is down 2%, severity is up 3%. When you - so an overall loss cost trend of about 1%. Then, when you look at the positive impact of inflation, payroll, that's actually a positive 2%. So really we consider our loss ratio trend for Summit to be down 0.7%, what we call our loss ratio and that. We feel they have [indiscernible] overall reserve position is strong, profitability is very solid. So we feel good that even though accident year margins may be a little bit less, but really strong returns in that, particularly on Workers' Comp. In California, we've had healthy underwriting [indiscernible] and double-digit returns the last five years or so. I think we probably project about an 11% price decline this year. We still expect to make a small accident year underwriting profit for 2018 in a double-digit return and that. Just to kind of give you an idea again, at…

That was awesome. And then, my other question was, I'd just like to hear a little bit about your views on the M&A pipeline. Whether things are still pretty expensive out there or what - just your general thoughts on M&A. And what you're seeing out there at the moment from your - obviously, from your perspective only?

Yes, I think we always see a pretty good pipeline. This year is no exception. I think we're getting some good opportunities to look at. So hopefully, we will be able to bring something over the finish line. Again, our sweet spots in kind of $50 million to $500 million range and that. Those are the kinds of things that we like to look at. We're not great in big auctions on big - bigger entities and that type of thing, we don't like to play that game. So we're seeing, I think, our share of opportunity. I'm hopeful we'll be able to accomplish a few things this year.

Fantastic, thank you.

[Operator Instructions] We have a follow-up question from Amit Kumar with Buckingham Research.

Thanks and good afternoon, a few quick follow-ups. The first question is, now that I have the numbers in front of me, going back to the Specialty Casualty segment, I guess, what I was trying to ask is, if I look at the current accident year ex cat loss, Page 9 of the supplement for Q2 shows 65.8%. For Q2 of 2017, the number was 63.6%. What I was trying to figure out is, what caused that delta or was there something unusual in Q2 2017?

So you're - and I apologize that you had flagged for us the quality of the audio. You broke up a little bit in your question to me. But I think what you're asking is looking at the supplement Specialty Casualty segment, on Page 9, when you look at the underlying combined ratio; it has gone up during the quarter versus the year-ago quarter?

Yes, yes, that's correct.

Okay, perfect. Thank you very much. So it's up about 2.5 points. And what we attribute that to - you break it into a couple of things. It's mainly just a higher accident year in some of our specialty Workers' Comp. So we have an increase across that of about two points. That constitutes the majority of the uptick in the Specialty Casualty sub-segment.

Got it, that was the answer I was looking for. I apologize of the way I phrased it, I think it wasn't clear previously. The second question, can you remind us, and I know it's been a while, for Republic's, for your Workers' Compensation book, what's the hazard classes you operate in? Was it more clerical, sort of in the retail, construction? Can you just quickly remind us, what was the biggest component of that book?

Manufacturing would be 45%, I think, looking historically, and the rest would be retail, wholesale, not a lot of large account business.

Got it, that's helpful. And the final question is on the guidance for the Annuity segment. If you sort of look at the ex unlocking earnings for Q2 and then you look at the guidance, unless I missed this comment in the opening remarks, is the second half earnings, it seemed to me lower than the first half earnings ex unlocking? Is that a fair assumption or did I misinterpret it? And if so, what would be the reason for the second half earnings lower in the Annuity segment?

Yes, what we're doing for the guidance for the second half of the year is we are normalizing the investment income related to mark-to-market assets. We had a very strong period in the quarter and the first six months. Our returns on our BA assets and some limited partnerships interest that we mark-to-market and flow through investment income were actually 19% for the quarter, and they were around 18% for the first six months of the year. So what we're doing, Amit, is assuming for the last two quarters, there is an 8% type return on those investments. So I think that's what is driving the numbers that we put in the guidance. I mean, hopefully, we'll do better. We just didn't think it was prudent to project that and put it into the guidance.

Got it, you answered my questions. Thank you so much for all the answers and good luck for the future.

Thank you.

At this time, I'm showing no further questions. I'd like to turn the call back over for closing remarks.