Ladies and gentlemen, thank you for standing by, and welcome to the American Financial Group 2020 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] It is now my pleasure to introduce Assistant Vice President, Investor Relations, Diane Weidner.

Good morning, and welcome to American Financial Group's first quarter 2020 earnings results conference call. We hope you and your loved ones are healthy and safe in these extraordinary times. We released our 2020 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 Jeff Consolino, 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 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 if you are 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.

Well, good morning. The past two months have been an exceptionally challenging time for all of us. COVID-19 pandemic has had profound implications across the globe requiring us to adjust to new ways of working and interacting with each other. Our thoughts and prayers remain with all those affected by the virus and the individuals caring for them. We are especially grateful for the guidance of health officials and government leaders at the local, state and federal levels. Their actions have been instrumental in protecting health and promoting safety in these unprecedented times. We are also very thankful to those serving and caring for others, including healthcare professionals, first responders, military and food service personnel and other essential workers. Our foremost priority during this time is to protect the wellbeing of our employees, while continuing to provide a secure, trusted service and support on which our agents and policyholders rely. We've invested a significant amount of time developing, testing and implementing our business continuity plans, which have proven effective in enabling us to successfully navigate these challenges and stay focused on our priorities. We entered the year in the strongest financial position in our company's history, and our liquidity and excess capital afford us the flexibility to effectively address and respond to the uncertainties presented by COVID-19. I will explore some of these uncertainties and considerations in more detail on today's call. So I'd like to start with a few summary comments about the implications of COVID-19 on our business overall. The macro impacts of COVID-19 will affect our insureds and impact our results. It will take some time to fully understand the implications of this pandemic to our business. Many of our policyholders are struggling to adapt to the economic headwinds that are impacting their operations. As the economy…

Thank you, Carl. In addition to your introductory comments expressing our gratitude for those on the front lines caring for others, I would like to thank our employees who continue to amaze us with their dedication and creativity. I'd also like to thank our distribution partners. Various state and local responses to the pandemic have created challenges for them, as they have traditionally placed a priority on face-to-face interaction with clients for sales and accounts servicing. While sales have decreased as a result of stay-at-home orders and other restrictions, our annuity distribution partners are developing new ways to interact with their clients to best serve them and to help them achieve their goals to plan for secure financial futures and retirement. To that end, we're supporting their e-commerce initiatives, offering new products and adding new features to existing products. These new features and products are designed to offer agents and consumers additional options to choose from in a volatile stock market environment, while still earning appropriate returns for American Financial Group. We have made adjustments to annuity credited rates to ensure that we achieve appropriate returns on new business and we are very pleased with the industry's current discipline in pricing. We have recently taken actions on renewal rates on in-force business near or after the end of the surrender charge period, which will have a positive impact on our core operating earnings. We are also acting on opportunities in our investment portfolio. I'll start with a review of our annuity results for the first quarter, beginning on Slide 9. Statutory annuity premiums were $1.2 billion in the first quarter of 2020 compared to $1.4 billion in the first quarter of 2019, a decrease of 13%. However, sales in the first quarter of 2020 represent a 6% increase over sales…

Thank you, Craig. Slide 15 summarizes AFG's first quarter consolidated core operating earnings. AFG reported core EPS of $1.88 in Q1 2020. Core net operating earnings in the quarter were $171 million. The year-over-year decrease in core earnings in the 2020 first quarter was primarily the result of negative adjustments to our $2.2 billion of investments that are mark-to-market through core operating earnings. We had given you an early indication of this in our April 15 pre-announcement, where we reported that the company now believes the return on mark-to-market investments in 2020 will be significantly lower than its previous expectations. AFG's limited partnerships and similar investments are accounted for using the equity method and reported on a one-quarter lag. The second quarter returns for these investments are going to reflect March 31, 2020 valuations provided by third-party sources and will incorporate the downturn in financial markets during the first quarter. Our first quarter 2020 results include approximately $10 million in claims and IBNR designated for estimated COVID-19 related losses. Different companies have taken different approaches to categorizing COVID-19 related items in their financial reporting. In terms of the geography of where we are recording the impact of COVID-19, we are not currently recording COVID-19 in cat losses and we will not exclude COVID-19 impacts from core operating earnings. Excluding the impact of mark-to-market investments, AFG's first quarter 2020 core net operating earnings increased $21 million or $0.23 per share year-over-year. Interest and other corporate expenses were $6 million year-over-year. Our parent company interest expense increased by $1 million from Q1 2019. On April 2, 2020, AFG issued $300 million of 5.25% senior notes due in April 2030, issued to increase liquidity and provide flexibility at the parent holding company level. The net proceeds of the offering will be held for…

Thank you. [Operator Instructions] And our first question comes from the line of Greg Peters with Raymond James.

Good afternoon. I want to first of all acknowledge that indeed you guys are providing a lot of color and guidance around expectations, which is a stand-out relative to so many of the other companies we follow, and it's appreciated. There is a lot to unpack in your comments. And I thought for the purposes, first to Carl, can you give us a sense of which lines in your property casualty business where you are more concerned about potential headwinds from the COVID-19 crisis and evolving disaster in the economy? That will be the first question.

Yes, Greg. First of all, we're very happy with our operating margins right now, particularly proud of the 92% or so combined ratio and with us continuing with guidance out there with 92% to 94%, particularly in an arena where there are a lot of crashes right now with other companies' results. So I think probably my bottom line perspective is reflected in our guidance of 92% to 94% combined ratio, which really as Jeff mentioned, we kind of have gone through painstakingly business-by-business and really kind of included a range of what we thought potential loss, where the facts that we have today are in our projected profitability. I mentioned workers' compensation. The premiums, I think probably the biggest premium impact when we take a look at things probably is in the area of workers' compensation or passenger transportation and commercial auto, when you look at the percentage changes in that, probably our financial institutions business as I mentioned because of the moratoria on canceling or mortgage loans or putting a moratoria on allowing more time for mortgage payments, that type of thing. So the premium impacts are probably larger in some of the lines like that. That said, when you reflect on our premium guidance, it impacts each of our different businesses in each of our segments. So I mean, overall, the biggest impact has been on the asset or the balance sheet side of things on our equity portfolio and some of our mark-to-market investments in that. So I think I said what our perspective, the majority or the vast majority of our property policies have pandemic virus exclusions in that. And workers' comp, where I think I mentioned percentages on – in workers' comp, less than one half of 1% of our business' first responders and less than around 6.5% if you include healthcare workers, first responders and nursing homes combined as far as impact to our workers' comp business and particularly changed presumptions in a number of states that relate to that part of our business. So I mean, those are probably the – right now the areas of our business that where maybe the impact is the greatest.

Thank you for that answer. I'd like to pivot to Craig. And I was just looking at Slide 11 of your investor Slide deck, where you disclose the net interest spread and the core operating net spread. And I was trying to reconcile the comments and the realities of, I guess, the mark-to-market, some of the mark-to-market adjustments coming back through April. And I guess what I'm looking for is just some ideas on how you think that spread, either the net interest spread or the core operating spread is going to move around through the balance of the year considering the volatility of the marketplace?

Sure. And Greg, when I referred to recovery of asset values on mark-to-market, I was specifically speaking of common stock investments that we mange and, to a larger extent, I was speaking to the fixed income securities in our portfolio. I was not addressing the mark-to-market, which is – which you see on this line, on the spread line, the investments mark-to-market. Those are typically private equity, a lot of things that are managed by others that are mark-to-market and flow through the investment income as opposed to the realized gain line. So we have not gotten any marks on – 86% of our mark-to-market investments that flow through investment income are reported on a one-quarter lag and we have gotten very few marks on first quarter valuations. So it's impossible for me to give you guidance on that. I think given that the stock market was down by 20% in the first quarter, I would – my expectation would be a negative number on mark-to-market that we report on this segment that actually flows through investment income, but I really can't give you an accurate projection of that, given that we have very few marks. There are certain parts of the portfolio that are – of that portfolio that are holding up very well. We have a significant investment in multi-family, as an example. That's one of the bigger segments of investments in that category and that has held up very well. The collections last month were in excess of 97%. And right now, this month we're trending at a similar type levels. So those valuations, the returns on those investments are holding up very well. Hard for me to predict what the value on more traditional private equity investments will look like because we've – we just haven't…

That's excellent color, Craig. I appreciate that [indiscernible] reconcile your annuity operations with some of the other publicly traded peers. And on Page 14 of your supplement, it looks like the cost of funds is running higher. I see this [$252 million] mark. And I'm just wondering, if you're putting your hedging and other factors into other liability costs, I'm wondering why it's running a little bit higher?

It's running a little bit higher because we have not made any significant changes to the in-force, you're going to that change going forward as we are more aggressive Greg in adjusting the credited rates on business that has been on the books for five years or more.

Got it. That makes sense. Okay, thank you for the answer. And just the final question, and again, I realize you provide a lot of comments in the call. I really appreciate the detail in the supplement regarding the additional detail around the investment portfolio. I was wondering, just for the purpose of this call, if you could highlight some of the areas in the investment portfolio as we're sitting here in early May, where you continue to see some elevated risk due to market volatility, and you've already addressed the private equity stuff, which is reported on a quarter lag. So maybe you could talk about your sector exposures to energy or retail or something like that, any additional color there would be helpful. Thank you.

Happy to do that. As you know, we did give some detail on that in the supplement. We tried to expand detail to help you analyze that. But let's talk energy since you mentioned that specifically. AFG's fixed-income energy exposure is $1.5 billion, which is approximately 3% of investments. 89% of the total exposure is investment-grade-rated NAIC 1 or 2 and 92% of the high-yield exposure is rated BB or NAIC 3. 70% – 72% of our exposure is in the more stable midstream sub-sector and well capitalized integrated sub-sector. The AFG portfolio is modestly under-weighed to energy compared to the bond indices, but that clearly is an area that we're keeping an eye on today with energy prices being as volatile as they are.

Are there any other areas of the portfolio you'd like to call out? I called out, I guess, energy, but is there anything – as I look across the cross-section, is there any other area that you want to highlight a scenario that you're watching closely?

Well, certainly…

And certainly, I understand you're watching all areas closely, so...?

Yes. Yes, Greg, certainly aviation is something that we're keeping an eye on. We are, we think, pretty well positioned there, given the collateral that we have and the very senior ranking in tranches that we've invested in, but we're certainly keeping an eye on aviation exposures. Our exposure today is $615 million, about 1% of total investments consisting of $298 million of corporate bonds and $317 million of aircraft asset-backed securities. Looking at the corporate bond piece, 94% are investment-grade, primarily with North American carriers and approximately 60% are comprised of senior securities that are collateralized by aircraft. Then when you take a look at the asset-backed securities, 98% are in the senior most position with 97% rated NAIC 1. So we feel pretty good about our positioning there, but we certainly are keeping an eye on that – yes, that group of investments.

I have taken up enough time. Thank you for your answers.

Sure.

Thank you. And our next question comes from the line of Paul Newsome with Piper Sandler.

Just a couple of questions, one is that when we're looking at your guidance for net written premium, how should we think if there is really going to be difference in how that translates into earned premium, given that this is really a function of probably premium audits and stuffs, does that – decreases essentially hit the earned premium faster than it would ordinarily do, and if it wasn't because of the audits?

Paul, this is Jeff. I guess, as a first matter, we've heard of some companies when there is reduced premium or premium givebacks, booking that as loss expense rather than lower premium. Just want to confirm that our approach is going to be to record this in premium income. We would expect that it's possible the exposure base will go down. And as a result, premiums written and premiums earned will come down and what we're looking at in our guidance is consistent with that. So we'll have to see how it plays out quarter-by-quarter.

Great. On the annuity side of the house, I would imagine that we're going to have another rewrite of what happened with the performance for the indexed products after the financial crisis which were relatively very, very good. Do you recall how quickly those sales came back because of the better performance after the financial crisis? Why would this be, in your opinion, any different or the same as it was back then from a sales perspective?

Yes. Paul, this is Craig. There are a lot of similarities to the 2008, 2009 period and what we're seeing today. I think when the distribution partners are able to kind of get back into action and kind of resume meetings with customers and so forth, my own opinion is there is a real pent-up demand. Now it is going to require the ability to have some face-to-face meetings, even though they are really changing their sales methods, it really is evolving and they're using technology and Zoom and FaceTime and so forth in a lot greater way than they did before. But I think that there is tremendous pent-up demand. I think the indexed annuity product is an excellent product. I think the volatility of the stock market frankly is going to cause people who are in retirement or close to retirement to really appreciate the fact that in a given year, you can't go below zero on an indexed annuity. I think they're going to be very willing to give up some of the upside of the stock market to have kind of no downside below zero in a given year. I also think that we're going to see the same thing that we saw in 2008, 2009. I think that there are some companies that are going to be very much capital constrained as a result of this environment and we've already seen some companies withdraw a number of products or drop credited rates to a level where they're basically sending a message, they are not interested in writing new business. I think it's going to create tremendous opportunities for companies that are well capitalized and able to write business. Frankly, the opportunities on the investment side are the best that we've seen since that 2008 through 2010 period. And as I look back over a long history of our annuity business, those types of environments are the times when we really thrive and create the most value. So I can't tell you which quarter is going to be the quarter when things open up again and our distribution partners are unleashed and go do their thing, but I think the strong companies with strong, good business models and excess capital are going to – I think they're going to create a lot of value in this environment.

Great. Now going to the property casualty side of the house, my personal opinion is hard markets are driven – the real hard markets are driven by the change in the perception of risk, which translates into underwriters doing something different than they did before. Is there something yet that's emerged in your book on how you're doing business, where you're changing the way you're actually doing the underwriting either not willing to write something or need to change terms and conditions or simply calculating the risk [differently]. Is there anything that's changed yet in there? And that's it from me. Thanks.

Well, I guess when you take a look at the change in pricing, our pricing trend – the result from the fourth quarter to the first quarter and then in our premium – in our pricing guidance, I'd say that's pretty substantial change in pricing and there's substantial changes in terms also that are kind of going along side-by-side with those pricing trends in that, which would be different business-by-business in that. Obviously, businesses that have the greatest exposure to COVID, every company is changing their new business outlook or guidelines in that to businesses that are exposed to a live virus in that in any fashion. So clearly, that's a driver. But you almost need to go business-by-business. And yes, I believe between pricing and in term changes, there's quite a bit of significant change that's going on in lots of our businesses.

Paul, this is Jeff. I just wanted to add on to what Carl said. When you talk about a hard market requiring people to do something differently, we're different than a lot of companies in terms of the continuity we have from the leaders in our various business units. A lot of these people are veterans of multiple market cycles in their particular market niche, whereas with a lot of companies, you don't have people in the underwriting seats that have any experience in how to write into a hard market. And the places where we're seeing the most outstanding rate opportunities and the biggest rate change and our leadership there knows what they can push for and know how to navigate the asking for rate increases and changing the terms and conditions. So I think that we know the playbook and we got not only the right people in place with the right experience with the right incentives for them to take the most out of what the market is giving them.

I think COVID-19 just adds to I think a tightening momentum that already existed, COVID-19 can only increase that from my perspective.

Thank you.

Thanks so much.

And our next question comes from the line of Larry Greenberg with Janney.

Good morning – well, good afternoon, sorry – and thank you. So I'm wondering if you could just elaborate a bit more on the workers' comp environment. And you talked about having received some COVID related claims, but also seeing fewer, what I would call, traditional claims in comp. And I'm just wondering if some of these proposals to implement the presumptions were to come to fruition, whether that would change your thinking about the outlook for your workers' comp business or do you think that the quite low percentage of business that's in healthcare and first responders would really kind of mitigate any potential adverse impact from that?

I'm still very positive about our workers' comp business, it performed well in the first quarter, and I think our perspective, workers' comp business was about 18% of our overall gross written premium last year. 2019, we had very good results. For the whole year, clearly probably expect underwriting margins to be lower, but I think even with COVID-19, I think we still have the opportunity to make a small accident year underwriting profit on our overall workers' comp business and a solid calendar year underwriting profit. Now that assumes that every state doesn't open up – create a presumption of workers' comp coverage for COVID for all business or something. I mean, I don't think that's likely to happen, but that's assuming there isn't some dramatic change there. Probably expect net written premiums to be down about 12% for 2020 because of lower rates, lower payrolls, mid-term adjustments from the COVID-19 impact. Pricing is going to be down mid single-digits, although I think the COVID-19 industry claims clearly could help reverse the downward trend on workers' comp rates potentially going forward. We feel our reserve position is strong. When we look at our current loss trends in that our loss ratio trend overall is pretty flat. I think we'll know better in the second quarter and third quarter what – and maybe be better able to answer your question as we kind of experience the second quarter and the third quarter results in that. But I'm still optimistic about our workers' comp business. California, this – California I think is – [recovers] I think 15% of our workers' comp business. We have a modest underwriting loss that we're projecting in California right now. So what happens in California around COVID and they've gone to a broader presumption there. Things like somebody has to use sick leave before a worker's paid any workers' comp and they still most test positive or being diagnosed for instance as a positive by a position within 14 days of the last day worked outside of home. So I'm not – I think that even could be – may not be – it's very difficult right now, say, in California to really gauge the impact of that. But certainly if we're already projecting a modest underwriting loss on an accident year in a calendar year basis for California workers' comp, COVID-19 losses aren't going to help there.

Thank you.

Is that helpful?

It is. Thank you. And then in the first quarter, you did have a loss in your mark-to-markets for your CLO portfolio and I imagine that's all recorded on a as quarter basis. Can you give us an indication perhaps on how that portfolio performed in April?

I do not have updated numbers for April, Larry. I mean, the underlying loans would have performed better. I mean, you certainly had spread narrowing. Having said that, I don't know that there are a lot of buyers for CLO equity over the most subordinated tranches right now. So my expectation isn't that you're going to see a big turn there anytime soon on the CLOs, just kind of given the lack of buyers today in that asset class. There has been a fairly meaningful tightening in the higher rated tranches, which is where we have by far the largest investment. You can see the detailed ratings on our CLO securities and there has been a fairly significant tightening of spreads on the higher rated portions, which is where we have our – the vast majority of our investments.

Larry, we did start by saying on April 15th and on the call that we wanted to get away from providing guidance with respect to investments mark-to-market through the income statement. So, I hope you appreciate sign of how much we enjoyed our dialogue with you that we're speculating about that.

I absolutely appreciate that. Thank you.

Thank you. I will now turn the call back over to Diane Weidner for closing remarks.

Thank you, everyone, for your time and attention this morning as we've shared our first quarter 2020 results and we look forward to talking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you can now disconnect.