Ladies and gentlemen, thank you for standing by, and welcome to American Financial Group's 2020 Second Quarter Results. At this time, all participants are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. [Operator Instructions] I will now like to hand the conference over to your speaker for today, Diane Weidner, Vice President, Investor Relations. You may begin.

Thank you, Towanda [ph]. Good morning, and welcome to American Financial Group's second quarter 2020 earnings results conference call. We hope you and your loved ones are healthy and safe as we continue to navigate the challenges of the pandemic. We released our 2020 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 Vice President and Controller. 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 these matters to be discussed today are forward-looking. These forward-looking statements involve 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. 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 am pleased to turn the call over to Carl Lindner III to discuss our results.

Good morning. We're pleased to share highlights of AFG's 2020 second quarter results and respond to your questions. Since we reported our first quarter results in May, we have had the opportunity to more thoroughly understand the impact of the COVID-19 pandemic on our business, our insurance industry, the financial markets and the global economy. Our thoughts and prayers remain with all those affected by the virus and the individuals caring for them. These exceptionally challenging circumstances have highlighted the resiliency and commitment of our AFG employees who are the foundation of our success. Our comprehensive business continuity plans, coupled with flexible and effective workplace policies and practices have enabled us to focus on providing the secure, trusted service and support on which our agents and policyholders rely, while keeping the well-being of our employees as our top priority. Craig and I continue to be pleased with AFG's strong financial position. We have the liquidity and excess capital that afford us the flexibility to effectively address and respond to the uncertainties presented by COVID-19 as well as the ability to act on business opportunities. Now, I'd like to turn to an overview of our second quarter results on Slide 4 of our webcast. AFG reported second quarter core net operating earnings, excluding losses from alternative investments, of $1.53 per share, a decrease of $0.13 per share from the comparable period in 2019. Core net operating earnings were $1.05 per share in the second quarter and included a $44 million loss or $0.48 per share on AFG's $2.2 billion portfolio of alternative investments, which are marked-to-market through core operating earnings. This compares to $41 million in earnings or $0.46 per share in the 2019 second quarter. The returns on these investments reflect the widespread financial and economic impacts of the COVID-19…

Thank you, Carl. I'll start with a review of our annuity results for the second quarter beginning on Slide 9. The gross statutory annuity premiums were $687 million in the second quarter of 2020 compared to $1.35 billion in the second quarter of 2019, a decrease of 49%. Annuity sales were lower in all channels in the 2020 second quarter as a result of stay-at-home orders and other factors related to the COVID-19 pandemic that significantly impacted our access to distribution partners as well as their access to current and prospective clients. Turning to Slide 10. You'll see the components of pretax annuity core operating earnings. Second quarter 2020 pretax annuity core operating earnings, excluding alternative investments, increased by 12% year-over-year. There were several factors contributing to the improved results, including growth in annuity assets, higher-than-expected persistency, lower-than-expected expenses related to guaranteed benefits, a strong market and a reduction in the cost of funds. These favorable items, which include items that may not necessarily recur were partially offset by a decline in investment returns. We believe these results demonstrate the strong fundamentals of our Annuity business. The financial and economic implications of COVID-19 adversely impacted the returns on the Annuity segment's $1.3 billion of alternative investments during the second quarter of 2020. Although the return on these investments was a negative 3% in 2020, the cumulative return on these investments over the past five calendar years has been nearly 10%. Turning to Slide 11. You'll see AFG's quarterly average annuity investments and reserves grew approximately 7% and 6%, respectively, year-over-year. On the bottom half of the slide, you'll see information about our annuity spreads, starting with our net interest spread, which takes into account our cost of funds. In the second quarter of 2020, our cost of funds and other…

Thank you, Craig. Please turn to Slide 16. Here at AFG, we define excess capital as a sum of holding company cash, excess capital within our insurance subsidiaries and borrowing capacity up to a 22% debt to total adjusted capital ratio. For purposes of this calculation, subordinated or hybrid debt, which has preferred stock type features is excluded from debt and our debt-to-capital calculation. In calculating insurance company excess capital we use the most stringent rating agency capital model among Moody's, which is based on the NAIC's model, Standard & Poor's and A.M. Best. For our Property and Casualty business, the most stringent model is S&P. Here, we measure capital in excess of what is required to maintain an A+ S&P rating. For our Annuity business, excess capital is based on the Moody's or NAIC capital requirements. Here, we measure capital in excess of what's required for a 375% risk-based capital ratio. This target is based on Moody's indication that a ratio at this level or higher is a factor that could lead to an upgrade for our annuity companies. It also provides a sizable cushion over Moody's indication that RBC ratio of less than 325% could lead to a downgrade. RBC targets vary by annuity company. Our RBC threshold takes into account several favorable factors cited by Moody's, including the Annuity segment's efficient expense structure, our ability to lower our cost of funds and our relatively simple product designs that also provides surrender protection. Because we use the most stringent capital models, the capital levels that we target in our excess capital calculation result in statutory capital, well in excess of what is expected by the other less stringent rating agencies for AFG's Property & Casualty and Annuity segment ratings. Our management team reviews all opportunities for deployment of capital on a regular basis. I will now turn the discussion over to Craig for concluding remarks.

Thank you, Brian. We've included a single page presentation of our updated 2020 core earnings guidance on Slide 17. Our guidance assumes an effective tax rate of approximately 20% on core pretax operating earnings. AFG's expected 2020 core operating results exclude noncore items such as realized gains and losses, annuity noncore earnings and losses and other significant items that may not be indicative of ongoing operations. In conclusion, I'd like to add that Carl and I are very pleased with our financial results over the last six months as we have faced unprecedented challenges. We are financially strong and well positioned to respond to the challenges and opportunities presented by COVID-19 and to produce excellent financial results in the second half of 2020 and beyond. We will now open the lines for any questions.

[Operator Instructions] Our first question comes from the line of Paul Newsome with Piper Sandler. Your line is open.

Good morning and thanks for the call. I was hoping to get a little bit more detail on the pandemic-related charges. I know you said it was primarily an IBNR increase. But one of the things that we've been discussing about amongst the investment community is whether or not this is an ongoing potential claims issue, given that some of these stay-at-home issues have continued. And it seems to be some differences in how people are accounting across the industry. So maybe you could address those issues.

Paul, this is…

I think, just overall, I'll let Brian run through the breakdown of the $85 million that we've posted. But overall, based off of the facts and the knowledge that we have today, that's kind of our best estimate in that, 90% IBNR and that. But conditions can change, the world can change, things can get better, things could go longer; so -- I don't -- in some ways, I don't know how anybody running an insurance company can talk about what the ultimate loss is. But Brian, why don't you walk through or...

Sure. So for AFG, like all insurance companies, it is a difficult calculation to make. As Carl mentioned, 90% of our reserves are for IBNR at this point. We took a very hard look at each individual line of business. Looking at our exposures, basing everything we know through June 30 and booked our best estimate of what that number would be. So it's not a pay as you go or anything like that. But on the other hand, it's not a number that we just put out of the air. So for us, we hope that it is a number that covers everything that we have, and it definitely is what we believe is a prudent number for what we know through the end of the second quarter. So I would say it's a fully-baked number for everything that we know through this date.

Fantastic. Turning to the alternative investments, which are obviously the hot topic of last quarter, should we expect a full rebound in some of these losses given that they had a pretty substantial rebound in the equity markets or something less? Or any indications about what could happen with that those performance bonds investments prospectively would be great.

Sure. Paul, this is Craig. I think the first thing people need to understand is kind of the makeup or breakdown of the marked-to-market assets. Let me run through that with you. So the marked-to-market assets total around $2.2 billion. 7% of that number is in CLOs, both debt and equity that we marked-to-market. 40% is in real estate investments, where our focus is pretty much on multi-family, which has held up extremely well. 40% is in more traditional private equity funds, 9% in private debt funds, and then kind of miscellaneous for the balance. By the way, around 85% of our mark-to-market assets are recorded with a one quarter lag. So as I look at the various components, certainly, the traditional private equity returns are somewhat related to the stock market. Typically, the private equity firms don't mark investments up as much as the overall stock market and a strong period. And so typically, in a weaker period, they don't also don't rate them down as much as the stock market. Our real estate investments, as I mentioned, 40% of the total exposure is really focused on multifamily. It has held up extremely well. Both the occupancy and collection rates are very similar to what we experienced prior to the pandemic. We're in excellent markets, frankly, in quite a few markets that are kind of benefiting from people fleeing certain urban areas. Our biggest markets in multifamily are: Denver and Colorado Springs; Florida; Phoenix, Arizona; Dallas, Texas; Atlanta, Georgia. They've held up extremely well. We have not had to give any rate reductions to keep strong occupancy. If anything, what we have experienced is a decline in cap rates on those types of multifamily properties, given the decline in interest rates. So that piece, at least at this point in time, we would expect to hold up very, very well. So that kind of gives you some idea of how I view the major components of marked-to-market on a go-forward basis.

Great, thanks. Thanks. So may also ask questions. But I appreciate the help.

Thank you. [Operator Instructions] Our next question comes from the line of Greg Peters with Raymond James. Your line is open.

Good afternoon. I wanted to switch back to the commentary that you provided, Carl. I wanted to focus on two things: first, the crop commentary; and then the trade credit commentary. When you provided the guidance for the full year for the Property Casualty business, did you assume that crop was going to be better, the same or lower than the previous year? Because in your comments, it certainly seemed to suggest that you had some degree of caution, as it relates to your outlook there.

I think it was just the opposite, frankly, Greg. In our guidance, I think I always tell people that we kind of build in an average crop year and average means an average over time in that. I think this year, as I mentioned, shaping up very nicely. Crop conditions are real favorable. There's when you look at the percent of corn and soybeans in good excellent condition, that really looks good. I think the one thing that we're watching as the biggest part of the modal apparel part of the book is revenue based, which is a function of yield and price. We're keeping our eye on the corn prices, in particular. I think as I had mentioned in the past, our insurers choose up deductibles. They're kind of they take the first layer of losses if there are losses on a revenue basis. So, I think the average deductibles farmers choose if somebody has a 15% deductible, then they're taking the first 15% of losses. So we're keeping our eye on corn prices. Soybean prices are really in good shape at this point. And if the prices on corn start to be above, you get to the 20% level and yields aren't good, that's when you kind of worry a little bit in that. But right now, I think our crop here is shaping up very nicely.

Great. On the trade credit piece, can you just on very simple terms lay out the nature of the losses there. I suppose the logical follow-up to that would be the effect of COVID and the dramatic impact on the economy is obviously going to extend beyond the second quarter results. And so just curious where our risks are for that business as we think about the balance of the year and certainly next year?

I think the COVID charge that we took in the second quarter, I think, fairly represents our feelings about the exposures there and that today. It's trade credit has to do with whether if you're ensuring the ability of a U.S. exporter to receive payment on the other side. So it would be uncollectible types of issues around trade credit. And as Brian said, we thoroughly kind of gone through and reviewed that line of business in that. And I think the reserve we've put up for that line of business adequately reflects what we think the exposures are today.

Great. And then, the question on capital and the Annuity business, and I appreciate your increased disclosure around capital. One of the challenges I was struggling with last quarter was trying to identify exactly how much capital is required in your Annuity business to generate the -- to maintain that 375% RBC. And I was coming up with a number of around $3 billion to $3.1 billion of capital. But if you could provide any sort of additional color for us on how we should think about the capital that's required on the Annuity business. And then if the alternatives do rebound because of the changes in the market conditions in the second quarter, will we see the capital levels increase?

Greg, this is Craig. Certainly, if the alternatives rebound, you will see an increase in capital? Yes. So as Brian was explaining, we target an RBC level of 375%, which is actually well above what Moody's expects of us. Moody's has stated that they expect us to maintain an RBC level of 350% and they've indicated that if we would go below 325%, then that would be a possible reason to put us on a negative watch or have a possibility of a downgrade. To kind of size that for you, though, Greg, the difference between 375% and 325% RBC is something in the neighborhood of $425 million. So there is a huge cushion between kind of what Moody's expects of us for a level at which we would need to put more capital into the business. The 375% is just provides a very sufficient, very large cushion to what's expected by Moody's, which, as Brian said, has the highest threshold for capital for the Annuity business.

Okay. I guess, you bought back stock in the second quarter. Maybe you can just give us an update on how much is remaining in your authorization. Obviously, the price of stock remains at around the same level where you're buying before. So I guess you're still in the market. But maybe you could give us some updated perspectives on that in the context of your comments around capital?

I don't have the exact amount left on the authorization. I don't maybe Diane can find that for me. I don't know how significant that is. All we have to do is get an authorization for additional shares, Greg, and that certainly would be our intention. We think that the stock at these prices is a very attractive use of our excess capital. And so certainly, it's our intention to continue to be a purchaser of our shares.

If we have 2.8 million shares left under our current authorization. As Craig said, it's as simple as a Board approval to acquire more shares. Obviously, we're going to look at all different ways to use our capital. We're in a very strong capital position. So we're always looking at acquisitions and then also at returns to shareholders as ways to go about. That's plenty of room under our current authorization.

Got it. All right. Well, thanks for the comments around your cost of funds and the comparison with the peer group. It's appreciated.

Thank you. Our next question comes from the line of Ron McIntosh with Lomas Capital. Your line is open.

Thank you. Good afternoon. Diane, congratulations on your well-deserved promotion. two questions. One on the life business. You talked about a 12% ROE sustainable in this environment looking out. Does that when we think about that 12%, do I allocate 60% of the debt and 40% of the debt and 60% of the alternatives to get to that 12%? And do I put a 10% return on the alternatives or 0?

Yes, Ron, so that's an unleveraged return. And our historical return has been our alternatives has been something in the neighborhood of 10% over a long period of time. And so yes, when we said we expect to, in the future, be able to earn that 12% plus return after-tax return on capital, that's assuming a normal return on alternatives. If you take a look at the second quarter, if we had earned that 10% annualized rate on alternatives in the second quarter, the return on the Annuity business would have been 13% after tax.

Perfect. And just a question on the property casualty side and rate increases. A couple of companies have given us the amount of rate, the raising rates to account for lower interest rates, lower net investment income. I think Swiss Re uses two points rate. I think Hartford has talked about two to three points. I realize you don't want to give us NII guide in the property casualty biz, but would you at least want to talk to how much rate you think you're putting in for the for future lower interest rates?

I don't have an answer on that right off the top of my head. We could probably calculate that if that's important to you and get back to you on that. Bottom line at in the quarter, with a 9% increase overall in rates and excluding comp, 13%, we love the momentum in that. And our underwriting result already is very strong; so we're loving it.

Okay, thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Diane Weidner for closing remarks.

Thank you, Towanda [ph]. And thank you all for joining us this morning. Please feel free to reach out to the Investor Relations team should you have any additional questions. And we hope you all have a great rest of your day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participation. You may now disconnect.