American Financial Group, Inc. (NYSE:AFG) Q4 2023 Earnings Call Transcript February 7, 2024
American Financial Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the American Financial Group Fourth Quarter Full Year 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Diane Weidner, Vice President, Investor Relations. Please go ahead.
Diane Weidner: Thank you. Good morning and welcome to American Financial Group's Fourth Quarter 2023 Earnings Results Conference Call. We released our 2023 fourth quarter and full year 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 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 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 statements. Now I'm pleased to turn the call over to Carl Lindner III to discuss our results.
Carl Lindner: Good morning. I'll begin my remarks by sharing a few highlights from AFG's fourth quarter and full year results, after which Craig and I will walk through more details. We'll then open it up for Q&A where Craig, Brian, and I will respond to any questions. Fourth quarter was a strong ending to a great year for AFG. In addition to producing a core operating return on equity of nearly 20% in 2023, net written premiums grew by 8% during the year. And we continue to create value for our shareholders through effective capital management. Our compelling mix of special insurance businesses and entrepreneurial culture, disciplined operating philosophy, and an astute team of in-house investment professionals collectively have enabled us to outperform many of our peers over time.
Craig and I thank God, our talented management team, and our great employees for helping us to achieve these results. And I'll turn the discussion over to Craig to walk us through some of these details.
Craig Lindner: Thanks, Carl. As you'll see on slide 3, AFG's Core net operating earnings were $10.56 per share for the full year of 2023, generating a core operating return on equity of 19.8%. This ROE is calculated using an average of the five most recent quarter end balances of shareholders' equity, excluding AOCI. As Carl noted, capital management is one of our highest priorities. Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. We've returned $900 million to shareholders during 2023, including $466 million, or $5.50 per share in special dividends, $221 million in regular common stock dividends, and $213 million in share repurchases.
Dividend payments and share repurchases totaled $5.92 billion over the past five years, and our quarterly dividend was increased by 12.7% to an annual rate of $2.84 per share, beginning in October of 2023. Growth in adjusted book value per share plus dividends was an impressive 16.6% in 2023. We're proud of the value we've created for shareholders over time. Turning to slides 4 and 5, you'll see the fourth quarter 2023 core net operating earnings per share of $2.84 produced an annualized fourth quarter core return on equity of 20.9%. Net earnings per share of $3.13 included an after-tax non-core realized gain on securities of $0.29 per share, which include fair value changes on securities that we continue to hold at the end of the quarter. Now I'd like to turn to an overview of AFG's investment performance, financial position, and share a few comments about AFG's capital and liquidity.
The details surrounding our $15.3 billion investment portfolio are presented on slides 6 and 7. Looking at results for the fourth quarter, Property and Casualty net investment income was approximately 1% higher than the comparable 2022 period. Excluding the impact of alternative investments, net investment income and our P&C insurance operations for the three months ended December 31, 2023 increased by 19% year-over-year as a result of the impact of rising interest rates and higher balances of invested assets. For the 12 months ended December 31, 2023, P&C net investment income was $729 million, approximately 7% higher than 2022, and a new record for AFG. Excluding alternative investments, net investment income in our P&C insurance operations for 2023 increased 35% year-over-year.
As you'll see on slide 7, approximately 68% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.5%. Current reinvestment rates compare favorably to the approximately 5% yield earned on fixed maturities in our P&C portfolio during the fourth quarte of 2023. The duration of P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at December 31, 2023. We've strategically managed duration to take advantage of market opportunities as interest rates have increased from recent historic lows. The annualized return on alternative investments was approximately 0.8% in the 2023 fourth quarter compared to 5.3% for the prior year quarter.
Following several years of exceptionally strong returns on investments tied to multifamily housing, which averaged 15% over the past five years, we're seeing the impact of increased supply and the leveling out of rental rates on these investments, which represent about half of our alternative investment portfolio. We expect these headwinds to continue into 2024. Longer term, we remain very optimistic regarding the prospects of our investments in multifamily housing as these properties continue to generate strong net operating income and have desirable geographic positioning and high occupancy rates. The return on P&C alternative investments was 7% for 2023 compared to 13.2% in 2022. The average annual return on alternative investments over the past five calendar years into December 31, 2023 was approximately 13%.
Please turn to slide 8, where you'll find a summary of AFG's financial position at December 31, 2023. AFG had approximately $800 million of excess capital at the end of 2023. And reviewing our disclosures compared to peer companies and considering the diversity of practice in how companies calculate excess capital, we're likely to move away from providing a specific excess capital number in the future. Yesterday, we announced a special dividend of $2.50 per share, payable on February 28th, 2024. This special dividend is in addition to the company's regular quarterly cash dividend of $0.71 per share, most recently paid on January 25th, 2024. We expect our operations to continue to generate significant excess capital throughout the remainder of 2024, which provides ample opportunity for additional share repurchases or special dividends over the next year.
A hand holding a blank insurance policy, signifying the wide variety of coverages available.
We continue to view total value creation as measured by growth and book value per share plus dividends as an important measure of performance over the long term. For the 12-month ended December 31, 2023, AFG's book value per share plus dividends increased by 24.1%. AFG's adjusted book value per share plus dividends, which excludes unrealized losses related to fixed maturities, increased by 16.6% during 2023. Now I'll turn the call back over to Carl to discuss the results of our P&C operations.
Carl Lindner: Thank you, Craig. Now please turn to slides 9 and 10 of the webcast. I am pleased to report very strong underwriting profitability for the full year with an overall Specialty Property and Casualty combined ratio of 90.3%. We're proud of our consistent record of profitable underwriting results over many years. We're seeing opportunities to grow our Specialty Property and Casualty businesses through increasing exposures, new opportunities, and a continued favorable pricing environment. We set new records for premium production in 2023, and we're meeting or exceeding targeted returns in nearly all of our businesses. As you'll see on slide 9, our Specialty Property and Casualty businesses reported a strong fourth quarter, a nice finish to a successful year.
The Specialty Property and Casualty insurance operations generated an outstanding 87.7% combined ratio in the fourth quarter of 2023, about a point higher than the exceptional 86.6% reported in the prior year fourth quarter. Results for the 2023 fourth quarter include 1.4 points of catastrophe losses, about a half point higher than last year’s fourth quarter and 3.3 points of favorable prior year reserve development, compared to 3.6 points in the fourth quarter of 2022. Fourth quarter 2023 gross and net written premiums were both up 8% when compared to the same period in 2022, and gross and net written premiums increased 7% and 8% respectively for the full year in 2023. Average renewal pricing across our Property and Casualty group, excluding our workers' comp business, was up approximately 7% for the quarter, in line with renewal rates in the previous quarter.
Including workers' compensation, renewal rates were up approximately 6%, one point higher than the renewal increases reported in the prior quarter. This is our 30th consecutive quarter to report overall renewal rate increases, and we believe we are achieving overall rate renewal rate increases in excess of prospective loss ratio trends to meet or exceed targeted returns. In addition to renewal pricing, we are focusing on insured values in our property-related businesses to ensure that our premiums reflect inflationary considerations. Now I'd like to turn to slide 10 to review a few highlights from each of our Specialty Property and Casualty business groups. Details are included in our earnings release, so I'll focus on summary results here.
The businesses in the Property and Transportation group achieved a 90.3% calendar year combined ratio overall in the fourth quarter, in line with the 90% achieved in the comparable period last year. Excluding crop the fourth quarter calendar year combined ratio in this group improved three points year-over-year. Fourth quarter 2023 gross and net written premiums in this group were up 4% and 1% respectively when compared to the 2022 fourth quarter, due primarily to slightly higher crop premium related to the CRS acquisition, which was partially offset by the timing of renewals in several of our transportation businesses. Overall renewal rates in this group increased 7% on average in the fourth quarter of 2023, a point higher than the previous quarter.
Pricing for the full year for this group was up 6% overall. We continue to remain focused on rate adequacy, particularly in our commercial auto liability business. This is our 11th year of rate increases in this line of business gaining back to when we first identified an uptick in commercial auto loss severity in 2012. So we've been at it for a long time and we're pleased that our starting point for rate increases is different than some of our peers. Businesses in our Specialty Casualty group achieved an exceptionally strong 84.6% calendar year combined ratio overall in the fourth quarter, 3.3 points higher than 81.3% reported in the comparable prior year period. With combined ratios at these levels, the underwriting margins in these businesses are generating returns in the mid-20s.
Fourth quarter 2023 gross and net written premiums increased 6% and 7% respectively, when compared to the same prior year period. Renewal pricing for this group, excluding our workers’ comp business, was up 7% in the fourth quarter and was up 4% overall. With both measures down about a point from the renewal pricing in the previous quarter. Pricing for this group for the full year, excluding workers’ comp, was up 6% and up 4% overall. Specialty Financial group continued to achieve excellent underwriting margins and reported an outstanding 81.3% combined ratio for the fourth quarter of 2023, an improvement of 1.8 points over the prior year period. Fourth quarter 2023 gross and net written premiums were up 27% and 26% respectively when compared to the same 2022 period and 32% for the full year.
Renewal pricing in this group was up 9% in the fourth quarter, accelerating four points from the previous quarter. Renewal pricing in this group was up 5% for the full year of 2023. As noted in yesterday's earning release, for many years, AFG established a range of coordinate operating earnings per share guidance for the new year and provided various other guidance measures as a part of its fourth quarter earnings release. After reviewing industry and peer practices and following a number of discussions with analysts and shareholders, we have decided we'll no longer provide a range of core earnings per share guidance or other guidance measures beginning in 2024. As noted throughout this call, it's clear that our focus has always been on long-term shareholder value creation by generating strong returns on equity that grow book value per share.
We believe that historically providing a greater level of guidance metrics as compared to peer companies has created a distraction from our strong ROEs and a record of long-term value creation. As a result, we believe that this change aligns with that focus. In lieu of guidance, though, we have provided several key assumptions underlying our 2024 business plan, which you'll see summarized on slide 11. These assumptions for 2024 include growth in net written premiums of 8% compared to last year, a combined ratio similar to 90.3%, achieved in 2023, a reinvestment rate of approximately 5.5%, and a return of approximately 6% on our $2.4 billion portfolio of alternative investments. We expect that performance in line with the assumptions included in our business plan would result in core operating earnings per share of approximately $11 in 2024 and generate a core operating return on equity, excluding AOCI of approximately 20%.
We believe that our disclosures are sufficiently detailed and clear, and over the course of 2024, our discussions with investors will focus on the considerations that drive long-term shareholder value. Our IR team and our management team remain available to answer questions and look forward to continuing to educate investors about our business. Craig and I are pleased to report these exceptionally strong results for the fourth quarter and full year, and we're proud of our proven track record of long-term value creation. Our Insurance professionals have exercised their Specialty Property and Casualty knowledge and experience to skillfully navigate the marketplace, and our in-house investment team has been both strategic and opportunistic in the management of our $15 billion investment portfolio.
We're well positioned to continue to build long-term value for our shareholders in 2024 and beyond. Now we'll open the lines for the Q&A portion of today's call and Craig and Brian and I would be happy to respond to your questions.
Operator: [Operator Instructions] Our first question comes from the line of Charlie Lederer with Citi.
