Good day, and thank you for standing by. Welcome to the American Financial Group 2021 Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Diane Weidner, Vice President, Investor Relations. Please go ahead.

Good morning, and welcome to American Financial Group's Second Quarter 2021 Earnings Results Conference Call. We released our 2021 second quarter results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's Web site 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 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 Web site. 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'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'm pleased to turn the call over to Carl Lindner III to discuss our results.

Good morning, and we're pleased to share highlights of AFG's 2021 second quarter results and respond to your questions. I'd like to turn to an overview of our second quarter results on Slide 3 of the webcast. AFG reported core net operating earnings of $2.39 per share, an impressive 257% 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. Improved results from the company's $1.6 billion of alternative investments 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 second quarter was a strong 14.7%. Turning to Slide 4. You'll see that the second quarter 2021 net earnings per share of $11.70 included after-tax noncore items totaling $9.31 per share. These noncore items included earnings from our discontinued annuity operations inclusive of an after-tax gain on the sale of $8.14 per share. Second quarter 2021 noncore items also included $0.40 per share in after-tax noncore net realized gains on securities. Craig and I thank God, our talented management team and our great employees for helping us to achieve these exceptionally strong results and position our business for continued success. Based on results through the first half of the year, we now expect AFG's core net operating earnings in 2021 to be in the range of $8.40 to $9.20, up from our previous range of $7 to $8 per share, an increase of $1.30 per share at the midpoint of our guidance. As you'll see on Slide 5, this guidance range continues to assume zero earnings on AFG's $2.2 billion in parent company cash as we continue to consider alternatives for deployment of the remaining proceeds…

Thank you, Carl. The details surrounding our $16.1 billion investment portfolio are presented on Slides 9 and 10. AFG recorded second quarter 2021 net realized gains on securities of $34 million after tax. Approximately $29 million of the after-tax realized gains pertained to equity securities that AFG continued to own at June 30, 2021. Pretax unrealized gains on AFG's fixed maturity portfolio were $260 million at the end of the second 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 on the reported results and valuation of the underlying investments, and generally are reported on a quarter lag. The annualized return on alternative investments reported in core operating earnings in the second quarter of 2021 was 21.1%. 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 found great success in investing in multifamily properties and desirable communities where we continue to achieve very strong occupancy and collection rates. These properties represented approximately 55% of our alternative investment portfolio at June 30, 2021. As you can see on Slide 10, our investment portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade and 98% of our P&C group fixed maturities portfolio with an NAIC designation [Technical Difficulty] its two highest categories. On May 28, 2021, AFG completed the sale of our Annuity businesses to MassMutual, the highlights of which are included on Slide 11. Initial cash proceeds…

Thank you, Craig. Please turn to Slide 14 where you will find a summary of AFG's financial position at June 30, 2021. We repurchased $114 million of AFG common stock during the quarter at an average price per share of $116.13 when you adjust it for the special dividend. Share repurchases, especially when executed attractive valuations are an important and effective component of our capital management strategy. During the quarter, in addition to the share repurchases and the special dividend that Craig mentioned earlier, we returned $42 million to our shareholders through the payment of our regular $0.50 per share quarterly dividend. Returning excess capital to shareholders in the form of dividends is a key component of AFG's capital management strategy and reflects our strong financial position and our confidence in the company's financial future. With the gain on the Annuity sale, annualized growth and adjusted book value per share plus dividends was a strong 47% in the first six months of 2021. Our excess capital is approximately $3.2 billion at the end of June. This number included parent company cash and investments of approximately $3 billion. As of June 30th, AFG parent had invested approximately $500 million of the proceeds from the Annuity sale in high quality fixed maturity investments with an average life of less than a half year and a yield of approximately 1.2%. As a reminder, we define excess capital as a sum of holding company cash and investments, 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. While all of AFG's excess capital is available for internal growth or acquisitions, over $700 million of that excess capital can be used for share repurchases and special dividends above and beyond the nearly $1.5 billion distributed to shareholders through the $14 per share special dividend paid in June, the $2 special dividend paid Monday of this week and the $114 million in second quarter share repurchases, while still staying within our most restrictive debt to capital guideline. We expect to continue to have significant excess capital and liquidity throughout 2021 and beyond. Specifically, our P&C insurance subsidiaries 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. We will now open the lines for any questions.

[Operator Instructions] Our first question comes from the line of Derek Han from KBW.

I had a question about the Property and Transportation segment. It looks like the core loss ratio of 65.6% was up year-over-year and sequentially. Should we expect that to continue just given the normalizing frequency environment or were there some one-off items in there?

I think there are some aberrations between the second quarter of last year where you probably had abnormally lower frequency in that and back to a more normal year from an economic standpoint this year. I think our guidance, we try to bake in all of our knowledge in that from actuarial reviews to prospective loss cost trends and that. And so I think our guidance reflects our feelings. Again, we're probably one of the few companies that gives detailed guidance like this and we try to be very thoughtful. So, I would suggest you look to our guidance. I think that answers your question.

And then shifting gears a little bit. I had a question about the strong expense ratio improvement that you had of 190 bps, another strong quarter. Can you just talk about whether it's -- and how much of that is structural versus temporary? I know last quarter, you talked about kind of the benefits from ceding commissions in there, if you had any this quarter, too.

Yes, we do. A couple of things are going on there. One is with the strong growth in our written premiums, some of that is coming through earned premium and of course a portion of our underwriting expenses are fixed. So, we're benefiting from growth there. And then in some of the businesses that are growing, we also do receive ceding commissions, some of which are volume-based and some of which are profitability based, but we're seeing that across the business as well, higher ceding commissions this year versus last year. So, it's a combination of growth on the fixed expenses and the ceding commissions.

And if I could just squeeze in one more question. So, you lowered the combined ratio guide by 1%. How much of that is driven by the expense ratio improvement?

Overall, when we're looking at it, we're seeing growth being a big part of that, so that is contributing. We also are very pleased with our loss ratios.

Our next question comes from the line of Greg Peters from Raymond James.

So the first question I have, and I know you won't comment on specific competitors, but Progressive just hosted an investor call just a little bit ago today. And one of the strategic points they were making, they highlighted their acquisition of Protective and growing in the trucking business and their outlook for further growth. So, I wonder if you could just step back and not comment on what Progressive is doing, but just give us a sense given the strong profitability how you see the various competitive forces working through that business? Obviously, you reported strong growth. So you're doing fine, but maybe you can give us some perspective there.

I mean I can't be happier about how our commercial auto business is performing. I would just start with that, and that's 11% of our direct written premium last year, and we're achieving our combined ratio and return on equity targets, already been achieving them for years. And we're continuing to get rate there. And I still feel, as far as the overall market, market's still in correction mode, particularly on the larger accounts in commercial auto in that. And I think that that's continuing to offer opportunities for both price increases as there continues to be disruption in the market as well as strong growth. We had a very strong second quarter growth in commercial auto after a slow start in the first quarter. And as I mentioned earlier, we're projecting double digit growth in commercial auto in that. As far as Progressive, years ago we used to be the second largest shareholder in Progressive. So, we think very highly of Progressive as a competitor. I probably would be more -- I think, Progressive probably will do better than the insurtechs, it's what my perspective is in the whole market. And I think as far as the Protective transaction, I don't believe that that transaction is going to have an adverse impact on our ability to grow in the commercial auto marketplace, the marketplaces we serve. And I see it as kind of a neutral or as they're trying to correct some of the problems that Protective had, maybe even possibly in the short term it could be positive to the marketplace and to us, so that would be my perspective.

I agree with your perspective on Progressive versus insurtechs. Much better to be a domain expert than just a technology play. With the substantial capital, excess capital on your balance sheet and cash, can you spend a minute and just talk to us about the M&A market, specifically what you're seeing in property casualty? Is it a fairly robust pipeline that you're looking at? Would you characterize it as less robust? Would you characterize it -- you haven't done anything. So maybe the terms out in the market are just well in excess of what you guys are willing to consider, but just give us some flavor there.

I think it's pretty normal at this point in that. We see a steady stream of opportunities to acquire things. As you know, we're pretty picky and we like to buy things that not only can be accretive but can have double-digit returns long term in that, and we get a steady look at starting businesses. So, I think that's a normal state right now. We're enthusiastic about our opportunities to both start businesses and make some acquisitions over the next 12 to 24 months or so.

Our next question comes from the line of Paul Newsome from Piper Sandler.

So one of the big themes of the quarter has been companies looking at the CPI inflation or investors looking at the CPI inflation, and then struggling to interpret that with respect to how it impacts insurance companies, particularly companies like yours that have a large casualty component to it. Could you weigh in as to what you think and how you think we should think about the inflationary trends and maybe what do you think we should do -- how should we view the sort of the outside data as it applies to the inside data that you see?

I think clearly, each company addresses social inflation or the prospect of it in different effectiveness, if you understand what I mean. In our case, we have business weighters whose compensation directly -- their rewards and bonuses and long incentives are tied to underwriting profit. And we have regular quarterly reviews where our centrally located actuaries meet with each of the business leaders go through the most current trends in that, and make adjustments on our loss picks and projections based off of not only what the current loss trend is but what a prospective loss trend is. For instance, in our case, our actual overall loss ratio trend is 1.6% and 3.8% if you exclude comp in that. But as we approach -- when we look at our prospective loss trend as a company, instead of 1.6% that would be like 2.5%. And instead of almost 4% excluding comp that would look like 6%, excluding comp in how we prospectively look at things and how we manage the business in that. Now against those numbers, the prospective loss trends of 2.5% year-to-date, we're getting a 10% price increase. So obviously, we're getting price that exceeds our loss costs in that. And then when you look at excluding workers' comp on a prospective basis, I use that 6% number and we're achieving 13% price increase year-to-date excluding comps. So I think that each company needs to manage intelligently and effectively through that. I think in our case, other ways we mitigate our exposures or looking at the potentially policy limits in terms of the policies as things change. Excluding some exposures that potentially you would have included at different times. Purchasing -- having a reinsurance purchasing strategy helps insulate us from the impacts of social inflation. Recognizing kind of as we did in commercial auto years ago, I think because we're specialists in the passenger transportation and in commercial auto, I think we recognized some of the severity trends quicker than others. And as we talked about before, we're at about our eighth or ninth year of rate increase in that. So I think that's how we address it as a company. I think so far so good. I think we're addressing it effectively.

Maybe for a second question, a little bit color on the competitive environment for workers' comp. I think we've talked about some of the other bigger lines for American Financial Group. And are we close to a turn there finally? What do you see from a competitive perspective in workers' comp?

I think in those states, it's a reasonable competitive environment today. I think California is the one that kind of confuses me. When you look at the size of the rate declines there in that market over time and loss result, accident year combined ratios that are creeping up for everybody, that's probably the only place that I kind of question competitively what's going on. We like our workers' comp business. We continue to -- our overall results for the second quarter and six months continue to be excellent, although our combined ratio is higher than last year, as I've kind of been talking for the last year or two. But we expect good overall calendar year underwriting profit for 2021 and little higher than 2020 and probably even a small accident year underwriting profit in '21. I think I continue to be very enthusiastic. I do think -- yes, our overall comp premiums will probably be down low single digit, which might be a little bit better than the previous year. And pricing for the six months is down about 4%, probably expect the same for 2021. And I have to think going forward into '22 that you will see a different scenario than that, pricing flattening out and potentially increasing.

Our next question comes from the line of Rudy Miller from Miller Capital.

I'd like to commend an outstanding quarter. As a shareholder, we appreciate special dividends and think [Technical Difficulty] shareholders as well as our consumer clients. On the insurance side, I do have a couple of questions. One other comment I have, over the years, appreciated the smart money approach of the selective process that we've had excess of cash. You've made acquisitions. And I appreciate you hitting on that today from one of the other people that you've got the dollars here, you don't need to spend it in the next 24 hours or two months, you have to find the right process. And you had guys of both Carl and Craig of having the track record of making sophisticated intelligence and common sense acquisitions or investments. And kudos to that. I'm going to little bit of the farming and some questions I have for you with climate change being a former fireman and a helicopter pilot in military medic before I was in business. I'd like to get your comments a little bit about the changing weather patterns from the fires to the floods, and how the farming is going to be affected over the near term and long term, if you could give any color to that? And then one other follow-up question, I'll give you, what's a percentage of your employees have been back from CD19 have investments in a lot of companies throughout the century and their policy with their employees and how are you looking at the dollars you've saved previously last year with not having the travel compared to this year. That's about three buckets. But I usually wait about three or four calls before I comment. I usually just listen and I'm really very pleased with the results of the stock and the dividends, and that The Street appears to see to starting to recognize what you've been doing for a long time.

I wish I was on -- this is Carl. I wish I was an expert in climate change, but I would admit I'm not. So I may not be the best person to ask with regards to that whole arena. I think with regards to the Western drought, in particular, I think from a crop insurance standpoint, we have the ability within government mobile [payroll] program to choose up how much risk we want to take state-by-state each year. So inherent in the program, we have the ability as there are changes with respect to climate or drought and what our anticipation is, is we can take more or less risk within the choices we can make within the program. I think generally, we're lighter in our Western exposure in crop, for instance, than we are in the Eastern corn belt in some of the central states in that. As far as the wildfire goes, I think that in our case, we kind of think that wildfires are going to be more of a continual type of an event versus a sporadic event maybe in the past. And I think we've been adjusting in the other parts of our business whether it be things like nonprofit business or property and the marine, we've adjusted our appetite or our pricing, or terms to reflect an increased exposure there. As far as -- related to flood, as it relates to major storms, hurricanes and that, as a company right or wrong or otherwise, we've chosen up over 20 years to have a lower catastrophe volatility than our peers in that. We just don't think you can adequately price coastal property from a hurricane exposure standpoint over time. As Christians, we believe that God can do whatever wants, wherever he wants, however much he wants and that's a hard thing to estimate a price on over time. So just as a company, we have a lower catastrophe volatility than most. We do write coastal exposures but we do that carefully. And so I hope that gives you some insight on how we look at things.

And how about your staff returning from corona virus? I mean are you guys fully back and loaded at the office, or you still have more people out that's going to bring you in? And how is your cost ratio going forward with events? And what have you learned through the pandemic guys, I mean what have you learned about your operations that you didn't know? I know you've done a fantastic job but…

I think one thing -- yes. I mean one thing that we've learned is as a technology driven business with people as our most important assets, we did a lot of good planning over the last five years, disaster recovery planning to allow our people to seamlessly and really effectively manage our business with very few people in the office over the past 18 months. So I have to give the leadership and HR and our information technology folks, have to laud them a lot. I think we did a good job preparing for such an event. And our people have had the technology and the resources that they've needed to effectively run the business.

From an expense perspective, we've learned that Zoom meetings and conference calls can be an effective way to communicate with stakeholders. There's a lot of things that you can't replace face-to-face with. But I think going forward, we'll take a pause in looking at travel and make sure that it's something that has to occur versus something that could occur over a Zoom meeting or something like that. So we'll be mindful of our travel expenses knowing that we've been so successful over the past 18 months with remote. As far as return to work, so we started the staged return to work back in mid-May and the current plan is to welcome all of our employees back to the office after Labor Day. So while it's a staged return now, we'd look to being more normally staffed after Labor Day. But with that we're also going to offer most of our employees the opportunity to work a hybrid work schedule, including in-office and at-home schedules when they come back. So while we want to put over our employees to reconnect and collaborate in person, we also see the importance of offering flexible working arrangements that empower employees to succeed. Ultimately, the safety and well-being of our employees remain our top priority. So some things could change with our return-to-work schedule. And really since we've been so successful so far, it's not a must-have but really something that we just think will be good for us going forward, especially from a training perspective and working with our employees and maintaining our very strong corporate culture. At the moment, about half the people could be in the office on any day, but it will be after Labor Day before we have really the full staff back in.

Brian, as the CFO of the company, I want to thank you for doing a great job. Since you've been installed [Technical Difficulty] noted by the people out here and financial metrics.

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

Thank you, and thanks to all of you for joining us this morning as we share a recap of our second quarter results. We look forward to speaking with you again next quarter. Hope everyone has a great day.

This concludes today's conference call. Thanks for participating. You may now disconnect.