Good day, and thank you for standing by. Welcome to the American Financial Group 2021 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Vice President, Investor Relations, Ms. Diane Weidner. Please go ahead.

Thank you, Chino. Good morning, and welcome to American Financial Group's First Quarter 2021 Earnings Results Conference Call. We released our 2021 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 Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide two 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 those 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 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 statement. Now I am pleased to turn the call over to Carl Lindner III to discuss our results.

Good morning. We released our 2021 first quarter results yesterday afternoon. Please turn to Slide three of the webcast slides for an overview. As previously announced, the results of our annuity operations were reported as discontinued operations beginning in the first quarter of 2021 and prior periods have been adjusted accordingly to present results on a comparable basis. AFG reported core net operating earnings of $2.38 per share, an impressive 75% increase year-over-year. The increase was due to substantially higher underwriting profit in our Specialty Property and Casualty insurance operations and higher Property and Casualty net investment income. Significantly improved results from the company's $1.5 billion of alternative investments that are mark-to-market through core operating earnings were partially offset by lower other Property and Casualty net investment income, primarily due to lower short-term interest rates. Annualized core operating return on equity in the first quarter was a strong 14.7%. Turning to Slide four, you'll see that the first quarter 2021 net earnings per share of $4.84, included $0.70 per share in after-tax noncore net realized gains on securities and $1.76 per share in earnings from our discontinued annuity operations. Craig and I thank God, our talented management team and our employees for helping us to achieve these results and position our business for continued success. Based on the strong results reported through the first quarter, we now expect AFG's core net operating earnings in 2021 to be in the range of $7 to $8 per share, an increase from our previous guidance of $6.25 to $7.25 per share. As you'll see on Slide five, this guidance range excludes earnings from our discontinued Annuity operations that will be sold to MassMutual and continues to assume 0 earnings on parent company cash, including the expected net cash proceeds from the sale of…

Thank you, Carl. The details surrounding our $13.9 billion investment portfolio for continuing operations are presented on Slides 9 and 10. AFG recorded first quarter 2021 net realized gains on securities of $61 million after tax. Approximately $53 million of the after-tax realized gains pertained to equity securities that AFG continued to own at March 31, 2021. Pretax unrealized gains on AFG's fixed maturity portfolio were $240 million at the end of the first quarter. We're especially pleased with the performance of our alternative investments during the quarter. Earnings from alternative investments may vary from quarter-to-quarter based upon the reported results of the underlying investments and generally are reported on a quarter lag. The annualized yield on alternative investments reported in core operating earnings in the first quarter of 2021 was 28.6%. The average annual return on these investments over the past five calendar years was approximately 10%. We view our investments in real estate and real estate-related entities as a core competency. In addition to our portfolio of directly owned properties and mortgage loans, our real estate-related investments include real estate funds and real estate partnerships accounted for by the equity method. We've found great success in investing in multifamily properties in desirable communities, where we continue to achieve very strong occupancy and collection rates. As you can see on Slide 10, our investment portfolio continues to be high-quality with 87% of our fixed maturity portfolio rated investment grade. In addition, the percentage of fixed maturity investments rated non-investment grade by the NAIC remains at less than 3% of total fixed maturity investments at March 31, 2021. We continue to make great progress toward the closing of the sale of our Annuity businesses to MassMutual, the highlights of which are included on Slide 11. Under the terms of the…

Thank you, Craig. Please turn to Slide 13, where you will find a summary of AFG's financial position at March 31, 2021. We repurchased $192 million of AFG common stock during the quarter at an average price per share of $108.98. Share repurchases, especially when executed at attractive valuations, are an important and effective component of our capital management strategy. During the quarter, in addition to the share repurchases, we returned $43 million to our shareholders through the payment of our regular $0.50 per share quarterly dividend. Annualized growth in adjusted book value per share plus dividends was a strong 23.8% during the first quarter. Our excess capital was approximately $1.2 billion at March 31. This number included parent company cash of approximately $200 million. As a reminder, we define excess capital as a sum of holding company cash, excess capital within our insurance subsidiaries and borrowing capacity up to a debt-to-total adjusted capital ratio that ensures we maintain our commitments to rating agencies. We expect to continue to have significant excess capital and liquidity throughout 2021 and beyond. Specifically, our Property and Casualty insurance companies are projected to have capital in excess of the levels expected by rating agencies in order to maintain their high current ratings, and we have no debt maturities before 2026. I would also like to take a minute to talk about holding company expenses which are impacted by changes in the liability for employee benefit plans that are tied to the stock market in both the first quarter of 2021 and 2020. The significant decline in the stock market, including AFG common stock in the first quarter of 2020, reduced our liabilities under these plans and favorably impacted holding company expenses by about $8.5 million. Conversely, very strong performance by our stock in the overall stock market in the first quarter of 2021 increased our liabilities under these plans and adversely impacted holding company expenses by about $9 million. In a more normalized stock market environment, these expenses are less volatile with an estimated run rate that is $5 million or so better than the current quarter. We will now open the line for questions.

[Operator Instructions] The first question comes from the line of Paul Newsome from Piper Sandler. You are now live.

Good morning and Congratulations on the quarter. I was hoping to maybe just to have you give us a little color on what's going on from a -- benefits of rate on the top line in the property casualty business versus some sort of sense of policy in force? Obviously, you have a lot of different products with a lot of different structures, but it's tough to tell if what's happening here is almost entirely rate? Or if there's some market share gains coming through as well? And maybe just kind of talk about sort of the pieces thereof as we look forward?

Yes. This is Carl. I think primarily in the first quarter, it's being driven by rate and renewal attention -- overall renewal retention on that. But we have 34 different businesses. So we do have businesses where we are picking up policy count or accounts in that. So we're very...

Just curious to see if we're going to -- there's a lot of activity in E&S and some of the lines that you're in, in terms of new folks trying to come in and others leaving, but it doesn't look like you sort of much of a net shift in the industry with respect to actual participation, is that fair? Or is it somehow different?

I don't really see -- I don't think the competitive environment today, with regards to new entrants is any different than any other year. I mean the markets, when you're operating in 34 different markets, the markets are fairly fluid. There is some consolidation within the industry. And when that happens, there's always some shakeout of accounts and agents and with agents and brokers and that type of thing. And you always have markets pulling back or moving out of some of those 34 markets. So I think I see it really kind of being neutral or really no change from the normal environment that we've operated in.

Alright. Thanks

So for the next question, we do have Greg Peters from Raymond James. You are live now.

Good afternoon and thank you for letting me ask questions. So if I look at the specialty Property and Casualty business, the expense ratio for the group improved pretty nicely last year. I think it was 30.4% versus 32.2% for the full year. And then if I look at the first quarter results, the expense ratio for the group improved again, $31.7 million versus 33.7% a year ago. So it's a 200 basis point improvement and on top of almost a 200 basis point improvement that you generated last year. So Carl, I was wondering if you could give us some ideas of what's going on the expense side? Are you -- what initiatives do you have in place to drive this type of improvement? Is this sustainable? And should we be thinking about these types of improvements going forward?

Hi Greg, this is Brian Hertzman. Thank you for the question. Looking at the first quarter of 2021 versus the first quarter of 2020, I'll kind of go through it by sub-segment. In the Property and Transportation sub-segment, we had higher profitability-based seating commissions from our reinsurers in the crop business. So that was a positive impact on the ratio. We also had some growth, higher premiums in the aviation business. So that was helpful as well. And especially Casualty sub-segment, we had growth in our excess liability in mergers and acquisitions businesses, those businesses also have a profitability-based ceding commissions, so we had higher ceding commissions in those businesses. And in Specialty Financial, we had higher premiums, particularly in our innovative markets business. And then -- so overall, we're just seeing impacts of growth and improved profitability. As far as going forward goes, we're always a prudent manager of our expenses and keep an eye on things. We know we're still getting some benefit of lower travel and entertainment, and we'll look to ways to keep that moving forward. And obviously, with the rate increases that we're getting and the growth in the businesses, the fixed portion of our expenses, we'll continue to benefit from that as long as we have that continued growth that we're expecting and the nice rate increases.

That's great color. And a follow-up to another, on one of the prepared comments. I think you said -- and I'm mistaken, if I got this wrong, you'll correct me, I'm sure. But I think you said, excluding workers' comp, pricing was up 10% to 12% across the book of business. And then I think you guided to ex-workers' comp for Specialty Property Casualty premium to be up 9% to 12%. So if I got those numbers wrong, I'm sorry. But what I'm driving at here is, I'm just curious about the balance between rates that you're getting and actually new business units or new policies. So I was just wondering for some perspective on that.

Well, first of all, in the first quarter, overall, excluding workers' comp, our prices were up 16%. And that's pretty much -- the fourth quarter was about 17%. So really, we're pleased really, wasn't much difference in that. In our guidance, we're guiding to 10% to 12% excluding comp, that moved up from our previous guidance. But the reason for the difference, we think, as I mentioned in our -- in the last earnings call, that I believe that when we get to second or third renewals on some of the business that's been achieving 20% to 50% rate increases, I don't think we're going to get the same 20% to 50% type of rate increase on top of what we've already gotten. So when that, and it's just -- I think the reality, or -- in our case, our overall rates are very adequate per our underwriting profitability. And I just don't think, once maybe the second half of the year hits, that we're going to get some of the same size of price increase that we've been getting before. So that's the difference. I think I already commented on where our growth is coming from as it relates to renewal pricing, strong retentions. And in some of our 34 businesses, we are growing policy count. But I almost have to go through business-by-business, and we don't really disclose that data.

Fair enough. Thank you for that answer. I guess the last question I have would be from Slide 11, on the sale of the Annuity business. And I know I asked this last quarter, and so I just -- pardon me, I'm just trying to work through the mechanics of the accounting. But what's the -- on the business that's being sold, what's the GAAP shareholders' equity, including AOCI? And when I look about that estimated after tax gain, is that ex-AOCI or including AOCI? I'm just trying to understand mechanics there.

So on the AOCI, the AOCI will go away as part of the transaction. So it's kind of -- it's more or less embedded in the gain. And so the gain is pretty much as straightforward as they're paying us $3.5 billion for shareholders' equity of $2.8 billion. The expenses and tax consequences related to the transaction are relatively small. If you -- if looking at the equity in the business, ex-AOCI is $3 billion, the AOCI in that business is mostly related to unrealized gains on fixed maturity securities that go away as part of the transaction, and that number is about $800 million. So it's declined -- the unrealized has declined -- the AOCI has declined because we unrealized by about $270 million since year-end, but that doesn't have any effect on the gain or on the proceeds or anything else. So from a total shareholders' equity perspective, it's pretty much more of a wash. But as we said last time we talked about this, yes, the I part really isn't affecting that, isn't really affecting the economics of the transaction for us from an income statement perspective or from a -- what we would consider our more real capital, especially with the leverage in the Annuity portfolio, that those unrealized numbers can move all over the place. And unless you're selling the securities outright, they don't necessarily matter that much and as you can see, a $270 million change in the AOCI balance didn't affect anything to do with the transaction or how we look at the business. So hopefully, that's helpful.

It is helpful Brian.

[Operator Instructions] Next question comes from the line of Kim Speck from KBW. You are now live.

Thank you, good afternoon. I had a quick question on the pace of recovery for the transportation business, particularly speaking to the reduced exposures last year.

I think when you look at our premium guidance for the Property and Transportation group, increasing 13% to 17%. And my comment about our commercial auto business growing double digit, I think it's -- kind of tracks with what we feel the economic recovery is going to be, as more vaccines, 60%, 70% of the country gets vaccinated by July, and things get back more to normal. We had a very strong premium month in March in our commercial auto business. And that caused us, along with the improving economy, to be very optimistic about our growth in our commercial auto business. So we've had excellent profitability for the last couple of years in the first quarter, in our commercial auto business and still getting a pretty significant rate as the loss cost, loss ratio trends in that part of our business continue to be higher than our average in that. But yes, very -- I'm very pleased with the prospects for both profit and growth.

And can you speak to the broader loss trend? And what changes you may be seeing going forward for the full -- the whole insurance business?

Sure. Our overall -- AFG's overall loss ratio trend is about 1.9%. Excluding workers' comp, that's 3.4% in that. And loss ratio trend is loss cost trend, plus any positive offsets for the growth in exposure units and that type of thing. The 1.9%, I would point you to the 12% in price increase that we got in the first quarter of 2021. So obviously, we're achieving above -- rate above our loss ratio trend. And I might point you to the 16% excluding workers' comp and price that we got in the first quarter as compared to the 3.4% loss ratio trend. Clearly, some of the social inflation impacted businesses like excess liability and exec in our D&O business and commercial auto liability, those would be the businesses where loss ratio, cost and loss ratio trends are higher within our book of business.

And just a final question. For workers' comps, you have -- just wanted to get a sense of the frequency expectations as the economy recovers.

On workers' comp, our current loss ratio trend is overall down, is overall down about 1%. Our frequency continues to be down roughly 1% or so. So our overall loss cost trend is kind of flat to 1%. So -- and so we continue to see pretty stable loss cost trends and loss ratio trends in that business.

Thank you. You covered it all for me.

And there are no further questions at this time. I will now turn the call over back to Ms. Diane Weidner for closing remarks.

Thank you all for joining us this morning to review our first quarter 2021 results. We look forward to talking with you again as we share highlights from our second quarter. Hope you all have a great day.

[Operator Closing Remarks]