Good day, ladies and gentlemen. Thank you for standing by, and welcome to American Financial Group's Second Quarter 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host, Diane Weidner, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to American Financial Group's Second Quarter 2022 Earnings Results Conference Call. We released our 2022 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's CFO. Before I turn the discussion over to Carl, I would 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 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. We're pleased to share highlights of AFG's 2022 second quarter results, after which Craig, Brian and I will be glad to respond to your questions. AFG's financial performance during the second quarter was outstanding. We're pleased to report an annualized core operating return of nearly 21% in the quarter, including record second quarter underwriting profit alongside double-digit premium growth. Strategic positioning of our investment portfolio enabled us to invest opportunistically, and the returns in our alternative investment portfolio continued to exceed our expectations. Our entrepreneurial, opportunistic culture and disciplined operating philosophy have positioned us well in this increasing interest rate environment and favorable Property and Casualty market. Craig and I thank God, our talented management team, and all of our employees for helping us to achieve these exceptionally strong results. I'll now turn the discussion over to Craig to walk us through AFG's second quarter results, investment performance and our overall financial position at June 30.

Thank you, Carl. Please turn to Slides 3 and 4 for summary earnings information for the quarter. AFG reported core net operating earnings of $2.85 per share, compared to $2.39 per share in the second quarter of 2021. The increase was primarily the result of significantly higher underwriting profit in our Specialty P&C insurance operations. As Carl mentioned, annualized core operating return on equity in the second quarter was a very strong 20.7%. On Slide 4, you'll see that net earnings included after tax non-core realized losses on securities of $73 million, or $0.86 per share, in the quarter. Included in this number is $65 million, or $0.76 per share in after tax losses from the mark-to-market of equity securities that we continued to own at June 30. Now I'd like to discuss the performance of AFG's investment portfolio, financial position and share a few comments about AFG's capital and liquidity. During the second quarter, we continued to act on the opportunities presented by the increasing interest rate environment and increased the duration of our P&C fixed maturity portfolio, including cash and cash equivalents, from approximately 2 years at December 31, 2021, to approximately 2.7 years at June 30, 2022. Our fixed maturity reinvestment rate is approximately 4.5% and compares favorably to the fixed maturity portfolio book yield of approximately 3.3% at the end of the second quarter. In addition, our portfolio of floating rate securities, most of which are tied to one-month or three-month indices, continue to benefit from rising interest rates. For the three months ended June 30, 2022, net investment income was slightly higher than the comparable 2021 period as both periods included very strong results from alternative investments. The annualized return on alternative investments in the second quarter of 2022 was approximately 12.4% compared to 21.1%…

Thanks, Craig. Please turn to Slides 8 and 9 of the webcast, which include an overview of the second quarter results. Operating earnings in our Property and Casualty segment established a new second quarter record for AFG, and I'm pleased that virtually all of our businesses are meeting or exceeding return on equity targets. As you'll see on Slide 8, the Specialty P&C insurance operations generated an underwriting profit of $197 million, compared to $153 million in the second quarter of 2021, a 29% increase year-over-year, also setting a new record for the second quarter underwriting profit. Higher year-over-year underwriting profit in our Specialty Casualty and Specialty Financial Groups was partially offset by lower underwriting profit in our Property and Transportation Group. The second quarter 2022 combined ratio was a very strong 85.8%, improving 2.1 points from the prior year period. Results in this quarter included 1.6 points in catastrophe losses and 6.3 points of favorable prior year reserve development. And gross and net written premiums increased 10%, 11%, respectively, in the 2022 second quarter compared to the prior year quarter. Year-over-year growth that was reported within each of the Specialty Property and Casualty Groups as a result of a combination of new business opportunities, increased exposures and a good renewal rate environment. The drivers of growth vary considerably across our portfolio of Specialty Property and Casualty businesses. In the aggregate, year-over-year growth in gross written premium for the second quarter of 2022, excluding crop, is about 65% attributable to new business opportunities and change in exposures and about 35% attributable to rate increases. Average renewal pricing across our P&C Group, excluding workers' comp, was up about 6% for the quarter, and up about 4% overall. Even though the pace of rate increases has slowed in some lines, renewal rate…

[Operator Instructions] And our first question coming from the line of Michael Phillips with Morgan Stanley.

Thank you. Good morning everybody. I was hoping you could kind of run through whatever detail you would like. I guess what segments of your business are kind of most exposed to recessionary environments? And as you highlight those, kind of what impacts you think it might have on those businesses?

I'm not sure if there's any one -- any part of our business that would be more exposed than others in that. In fact, I think something like lender, some of the businesses that don't correlate to the cycle like lender-placed property could be the opposite if things slow down and there are more foreclosures within the business. We're not huge in commercial multi-peril, for instance, which probably since we're not a big Main Street commercial package writer, I would think within the industry that, that would be an area of particularly small- to medium-sized commercial package type business that might get impacted maybe more than others. But we're in the non-profit package space pretty well and have some targeted package business. But overall, we're really pretty small in comparison in that area to others. So those would be my thoughts.

Okay, thank you. Then you gave -- what it sounds like pretty enthusiastic or positive comments on average or better crop year, but I think you said assuming rainfall in August. So I mean maybe if that doesn't happen, how much downside do you think there could be if the drought kind of continues for the next few weeks or months?

Well, like I said, commodity prices are in good shape. When you look at the crop conditions right now, I'm very optimistic at this point. And when you take a look at this week, it seems like starting in August, we're getting some rainfall across the country. So I'm very optimistic at this point, but we can tell you a whole lot more at the third quarter conference call.

Okay, fair enough. Thank you very much.

And our next question coming from the line of Paul Newsome with Piper Sandler.

Good morning, congrats on the quarter. Apologies, I got myself a little confused about -- with your rate versus inflation commentary. And it sounds like you are essentially excluding from claims inflation as well as rate inflation numbers, the effect of the exposure increases within your book of business. Is that a fair way of characterizing it or am I just getting myself confused?

So, what we were trying to clarify -- this is Brian, what we're trying to clarify in Carl's comments, when we look at the loss ratio trends, that loss ratio trend would be our loss cost offset by the favorable impact of exposure changes, sort of the automatic things where premiums go up because payroll goes up or property values go up. So when we were giving and have been giving sort of 5% as a loss ratio trend, built into that number is about 1.5% favorable from exposure changes. So Carl commented that when you take our overall loss ratio trend, excluding workers' comp of 5% and change it to just loss costs without the exposure change, it goes to 6.5%. So I guess, when we talk about loss ratio trend, that's where we adjust for exposure. When we talk about rate increases, we're talking about strictly renewal rate increases without an exposure.

Yes. There is some commentary out there from Evan and others. And I just want to make sure that our investors, we could kind of have a comparable number that we -- or a comparable number that we could put out there. I think one significant thing is we haven't changed that. We've kind of been -- those have been the prospective loss ratio or loss cost trends or loss ratio trends that we've been using since the beginning of the year. Tweaked a little bit from first to second quarter in the liability side. But we've been pretty much at that level of prospective loss cost trend or loss ratio trends since the beginning of the year.

Okay. So I mean because I think that -- I think it's very apt. My guess is that we're going to have prospective conversation about -- not just AFG -but everyone about the impact of exposure on loss trend versus the piece that is effectively rate. Do you have any particular opinions upon how much that would affect your books or what effectively an increase in exposure means from an effective amount of rate or --

I think Brian just kind of gave that to you.

So we will look at the exposure part on the loss ratio. So if you want -- without exposure changes, our prospective loss cost trend is 6.5%, that goes to 5% when you take into account exposure. So it's sort of 1.5 points on the loss ratio is the way I would say that the change in exposure is favorable on the loss ratio by about 1.5%.

Yes, excluding comp --

Is that -- so effectively that's assuming it's -- every point is all -- is equivalent to rate. Is that how I should be thinking about it?

I think, again, the way we run the business, we're trying to match rate or look at what rate is necessary to continue to exceed the loss ratio trends in that. So excluding comp, we got about 6% in rate in the second quarter, and the loss ratio trend -- versus a loss ratio trend of about 5%. So there are lines of business within our portfolio where it's, for instance, public D&O, which might be 22% of our D&O book, but the public D&O part of that, as has been reported in the industry, some of the industry, media, kind of was down a couple percent or something. That was the first time we've seen a price decline in public D&O. Again, we're more of an opportunistic player in public D&O. It's only about 22% of our D&O book. But -- so there are parts of our business where we're seeing rates that are below loss cost trends in that, but not many. And I think the other area that we -- when the D&O, when you add 10 to 15 competitors over a two-year period of time, and they're all focused on public D&O, you know what's going to happen. I think the other area in our whole book that I've seen that we see a lot more competition and major deceleration in rate is on kind of the Fortune 1000 excess liability, Fortune 500, Fortune 1000 excess liability. Those are the public D&O and that -- those would probably be the areas that we would see the biggest disconnect. Now I mean in our case, you saw what our Specialty Casualty combined ratio was. So if you're reporting Specialty Casualty overall combined ratio in the 80s or in the low 80s or whatever, you certainly have some room in that if you're -- if the trends change a little bit. So I continue to be very pleased. Again, the majority of our businesses continue to be at or exceeding our loss ratio trends. So I'm very happy with how we're positioned.

No that's great. Thank you. That's helpful to me. Sorry about my own confusion.

No problem.

Our next question coming from the line of C. Gregory Peters with Raymond James.

Good afternoon, everyone, and thanks for the answers. I guess just as a follow-up, Carl, you said -- you talked about the 10 to 15 new competitors in D&O, and you talked about the competition and excess liability. It's just -- when you look at the combined ratio results in Specialty Casualty and Specialty Financial, it just begs the question why there isn't more competition? I mean if your guidance for Specialty Casualty is 79. That's got to be like a record low in the company's history or a record result, right?

So it's a strong result. There's no doubt about it. Yes.

So outside of those two lines that you mentioned, you're not seeing any change in the really competitive landscape in the other businesses?

Greg, I think you have to look business by business. Those would be the two that kind of stick out where I think things have kind of gotten more competitive than I would have thought, particularly with social inflation with -- I think there's probably a backlog of SPAC type of claims in the D&O side. We're blessed in that not only are we light on public D&O, we just haven't written SPACs. We kind of -- one reason why our growth in D&O is a little less than others is because we didn't get into the SPAC market. So I think it's those two areas competitively that I've seen the biggest difference. And in FIS, there's -- it takes knowledge and specialization in things like lender-placed property or fidelity / crime, if you don't know what you're doing on things like casinos and armored cars and things that we specialize in, you can get your head handed to you real easy. So I feel very comfortable about our Specialty Financial businesses and our ability to differentiate ourselves and continue to have great results. We've had results in the 80s for as long as I can remember in the Specialty Financial segment in that. Specialty Casualty, as a company, we've been -- I think we have great expertise and particularly in the excess liability and in the D&O areas that we write. I think, different than others, we've made great returns and great underwriting results, particularly in the excess liability and umbrella area for many, many years. And had a few bumps here and there, but overall, have always done well. So I think our culture and the way we approach those businesses, I feel very comfortable, long term, we'll continue to have great results regardless of social inflation.

Okay. Thanks for the color. I don't want to make too much of this, but you did comment in Property and Transportation that there's a couple of losses. Is it just the anomalies of the business? Or is there anything underlying there that we should be thinking about?

Yeah, I think there were two things I mentioned. The level of catastrophe losses in the second quarter were higher than last year and there was some large loss activity. In the property business, as everybody knows, you can have some bumps quarter by quarter. Now the Property and Transportation segment is still through six months is reporting a combined ratio in the high 80s. So -- and I think our guidance speaks for itself on the combined ratio there. We're very optimistic and positive about that business. And to boot, if we -- as the crop year kind of take shape, most of our crop earnings are really booked in the fourth quarter in that. So that has an impact on the last half of the year when you look at the Property and Transportation combined ratio also.

Makes sense. For the alternative side for all of the insurance companies have come under some overview just because of what's going on in the market. And you talked about the 55% in multi-family that's done well. Can you speak to the 45% that's not multi-family, give us a sense of what the composition of that looks like?

Sure. And that is the piece that we kind of don't have great visibility on, Greg. We've got very good visibility on multi-family. And year-over-year, have very, very strong increases in the rental rates. The guidance that we gave, I believe, has some conservatism in it because we just don't have visibility on the 45% of the alternative portfolio that is in more traditional private equity. We are not big investors in tech, venture capital or those types of things. So my hope is that if the market stabilizes here for the balance of the year, we could do somewhat better. But it's a very diversified portfolio with very little investment in tech or venture capital.

Got it. Thank you for the detail and your time.

Sure.

[Operator Instructions] Our next question coming from the line of Meyer Shields with KBW.

Thanks. Two quick questions, if I can. First, when you look at your current geographic exposure for crop, any major changes from last year?

Not anything. Yeah, not anything significant.

Okay. Fair enough. Second question, just I was hoping you could update us on, I guess, pricing trends or the intensity of competition in transportation, specifically.

Meyer, could you repeat your question, please?

Yes. I'm just trying to get a sense of the rate competition in the transportation market. I know people are broadly nervous about commercial auto, but I don't know how that translates to the transportation market in National Interstate?

Yeah, I think the business has gotten marginally more competitive. I think the competition landscape is transitioning a little bit. I think as some markets have shown better results in commercial auto, but there's a lot of pockets in the overall commercial auto market also that are pretty hard in that. The bottom line, the commercial auto liability markets combined ratio improved in '20 and all that. But it's still -- even in our case, we're making, on the commercial auto liability side of our business, we're making a couple of points of underwriting profit. But the severity has just -- frequency is probably a little bit less than pre-pandemic levels, but the severity and the social inflation aspect of things still has us in a mode to be defensive and take rate. I think in the quarter, we still took 9% in commercial auto liability rate in that. So, yes, I hope the market doesn't get too enthusiastic because I think we're a company in National Interstate that probably had 9 or 10 years of rate increase. We've taken early underwriting actions in different areas. But I think the commercial auto liability is something that we and the market continue -- will continue to be hard and in need of rate. So I hope that gives you some perspective.

Oh it absolutely does. And then one last question, if I can. When we talk about excess capital, is that influenced more by GAAP or statutory accounting, specifically for the fixed maturity portfolio?

The question was about how excess capital -- what influences the excess capital or --

Yeah. In other words, when interest rates rise, but nothing else changes, and you've got a healthy fixed maturity portfolio, does that change that?

So yeah. So when we look at the debt to capital ratios that we mentioned having -- I think previously, we mentioned that our internal guideline is debt to total capital ratio of around 30%. And in those numbers, particularly with S&P, that capital number does include the unrealized gains or losses on fixed maturities. So when the unrealized loss increases, it does put pressure on that debt to capital ratio. All of the numbers that we've talked about as far as our expectations of excess capital that's available for distribution to shareholders, that piece is reflective of sort of where we think interest rates might be by the end of the year. If you think about our excess capital, just as an example of what can happen. If you think about our excess capital at the end of March, so that was a number that was over $2 billion. But when you pro forma that for the debt retirement and special dividend, then our pro forma number that we shared last quarter was a little over $1 billion, and now we're at $1.1 billion. And then during the quarter, sort of after the special dividend, you have $167 million of earnings, you have about $50 million in just our normal dividend and then kind of the rest of the change in the capital is from the unrealized. So you can see the biggest -- the bulk of the change is going from $1 billion to $1.1 billion is really just the earnings in excess of the dividend.

Okay. Perfect. That's very helpful. Thank you.

Now the next question coming from the line of Charles Lederer with Wolfe Research.

Just wondering if you could provide any color on the reserve releases in the quarter, whether by businesses or accident year, particularly within Specialty Casualty and how that compares to recent quarters?

Thanks, Charlie. This is Brian. In Specialty Casualty, the big driver of development continues to be out of our workers' comp business units in the quarter, and that's been fairly consistent in recent years. And that development ranges in accident years from -- mainly 2020 back to 2016. We still are seeing significant favorable development in other areas like our executive liability business that Carl talked about earlier as being a strong performer as well. And that's really the drivers in the quarter. That's pretty consistent with the past. I think if you look at that segment, the majority of our developments coming out of workers' comp. And then more recently, we're seeing good development coming out of the executive liability and some other areas as well.

Got it. Thank you. That's all I had.

And our next question coming from the line Rudy Miller with The Miller Group.

Thank you, ma'am. Gentlemen, just a couple of quick questions. As usual, I think management does a great job with the company. But I would like to ask two questions. One is more of a macro question is, what do you feel is your biggest challenge at this point of the year for American Financial Group going forward? What's your biggest challenge?

This is Carl. I think our biggest challenge is taking advantage of the market opportunities that are being offered to continue to grow our business double digit. And as almost all of our businesses are hitting the right returns on that, I just want to make, I think, with our 34 different business heads in that for them to really recognize that this is -- there's an unusual opportunity right now to grow double digit, take advantage of it.

Thank you. Follow-up question. How are you being affected by the increase in employee salaries, et cetera? And are you having -- are you still having the ability to maintain a good quality workforce or in today's environment as are happening in many clients that we're invested in and companies we're involved in, we're seeing hard to maintain employees, employees increases and turnover. How is AFG's historical turnover employee challenges of maintaining good employees. And if you could give me any color on that, I'd be appreciative.

This is Craig, Rudy. First of all, I'd say that we made a decision as a company that we should give increases in salaries this year that were somewhat above what we've done historically, given the environment, the inflation that existed and the importance of not seeing turnover pick up significantly. We've been extremely pleased with turnover rates. They're up a very small amount from historical levels but compared to other companies that we know about or other industries, we're extremely pleased that the turnover rates have stayed really very stable, and as I said, slightly above historical levels, but pretty comparable.

Well, that's an excellent point. I really appreciate you making that. And I'll just make one final comment. Once again, I think, under the current environment and what the company has accomplished for the shareholders and certainly, the dividend program, special dividends are much appreciated, and I think you guys are one of the best management teams in the insurance industry. Thank you, sir.

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 any closing remarks.

Thank you, and thank you all for joining us this morning as we discussed our second quarter results. We look forward to talking with you all again as we report out on third quarter. Hope you all have a great day.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.