Ladies and gentlemen, thank you for standing by, and welcome to the American Financial Group 2020 Third Quarter Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Diane Weidner, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

Thank you. Good morning, and welcome to American Financial Group's Third Quarter 2020 Earnings Results Conference Call. We released our 2020 third 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 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 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 statements. Now I am pleased to turn the call over to Carl Lindner to discuss our results.

Good morning. Before we begin our remarks, Craig and I would like to take a moment to honor the passing of AFG Board member, Ken Anbrecht, who passed suddenly in September. Ken served on AFG's Board of Directors for 15 years. He was a tremendous resource to me and Craig for many years and will be remembered as a trusted advisor and friend. Well, we released our 2020 third quarter results yesterday afternoon, if you'd please turn to Slide 3 of the webcast slides for an overview, you can see that AFG reported core net operating earnings of $2.45 per share in the third quarter of 2020 compared to $2.25 per share in the third quarter of '19. Third quarter 2020 annualized core operating return on equity was in excess of 17%. Turning to Slide 4, you'll see that the third quarter 2020 net earnings per share of $1.86 included after-tax noncore items aggregating to a $0.59 per share loss. Last quarter, we provided full year 2020 core net operating earnings per share guidance, excluding earnings or losses from alternative investments due to the uncertainty of the implications of COVID-19 and the resulting volatility in the financial markets. Based on results through the first nine months of the year, AFG now expects its 2020 core net operating earnings per share, excluding alternative investments, to be in the range of $7 to $7.50, an increase of $0.25 a share from the midpoint of our previous guidance. Craig and I will each discuss our guidance for each segment of our business in more detail later in the call. We're very pleased with the performance of our core operating businesses during the third quarter amid the challenges presented by the COVID-19 pandemic. We believe our underlying results demonstrate the strength of our portfolio…

Thank you, Carl. Before I start with a review of our Annuity results for the third quarter, I'd like to highlight A.M. Best's announcement yesterday that it upgraded the financial strength ratings of our Annuity subsidiaries to A+ from A. These A+ ratings reflect the quality of our balance sheet, strong operating performance, appropriate enterprise risk management and a strong risk-adjusted capital position. We are very proud of the work of our Annuity associates, which has helped us to achieve these upgrades. Now please turn to Slide 9. Gross statutory Annuity premiums were $871 million in the third quarter of 2020 compared to $1.08 billion in the third quarter of 2019, a decrease of 19%. Annuity sales were lower in all channels in the 2020 third quarter due to factors related to the COVID-19 pandemic that has significantly impacted our access to distribution partners as well as their access to current and prospective clients. Although sales in the quarter declined from the comparable year ago period, 2020 third quarter sales were up 27% from the second quarter of 2020. And September sales in our financial institutions channel actually exceeded monthly sales in September of 2019. Overall, we're finding that competitor pricing is becoming more rational. We're encouraged by the trends that we are seeing. Turning to Slide 9, you'll see the components of pre-tax Annuity core operating earnings. Third quarter 2020 pre-tax Annuity core operating earnings before earnings or losses from alternative investments increased 8% year-over-year, reflecting growth in Annuity assets, higher onetime investment income and the impact of a strong stock market, lower expenses and a reduction in the cost of funds due to renewal rate actions we've taken. These favorable items, which may include items that may not necessarily recur, were offset by a decline in overall investment…

Thank you, Craig. Please turn to Slide 16, where you will find a summary of AFG's financial position at September 30, 2020. We repurchased $96 million of AFG common stock during the quarter at an average price of about $66 per share. Share repurchases, especially when executed at attractive valuations, are important and effective component of our capital management strategy. During the quarter, in addition to our share repurchases, we returned $40 million to our shareholders with the payment of our regular quarterly dividend. As you may recall, we recently increased our annual dividend by 11% effective with this past Monday's payment. This was also our 15th consecutive annual dividend increase. In September, we completed the issuance of $200 million and four 1/2% subordinated debentures due 2060. A portion of the proceeds from this offering will be used to redeem AFG's $150 million and 6% subordinated debentures due in 2055 at par in November. Even with the capital transactions in the third quarter, AFG had just over $1 billion of excess capital at September 30, 2020. This number includes parent company cash of approximately $580 million. We expect to have -- to continue to have significant excess capital and liquidity throughout 2020 and beyond. Specifically, our 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 required debt maturities before 2026. Slide 17 provides a view of the components of AFG's excess capital as well as details supporting the proforma impact of the October annuity block reinsurance agreement and the November 2020 scheduled redemption of AFG's 6% subordinated debentures. Excess capital on a proforma basis would have been $1.2 billion at September 30, 2020, with consideration of these two transactions. Our management team reviews all opportunities for deployment of capital on a regular basis. Slide 18 is a single-page presentation of our updated 2020 core earnings guidance. Our guidance assumes an effective tax rate of approximately 20% on core pre-tax 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. We will now open the lines for any questions.

[Operator Instructions] Your first question comes from the line of Mike Zaremski from Credit Suisse.

I guess, first got a question or two on the life reinsurance transaction. Maybe first, you can kind of help us understand, you expect core operating earnings to increase because of the deal. Are you able to kind of quantify how what the increased run rate is? And maybe explain to us how that's the case unless the portfolio is unprofitable. I know there's a lot of moving parts that you show us in the slides. It looks like you're taking some charges as well, which might be part of the answer of why it's going to lift profitability.

Mike, this is Craig. I'll start off by saying we are precluded or restricted from giving some details related to the transaction per our agreement with the reinsurance partner. But since we've been getting a lot of questions on the transaction, let me take a few minutes and kind of give you the history of the whole thing and a few more details that I think will help you understand the economics. So, when the pandemic hit, we were feeling very fortunate to be in the strong financial condition that we were in. But Carl and I met and explored a couple of different options to further bolster the excess capital position and the cash position of the parent, just for a couple of reasons, kind of given the uncertainties of the pandemic and also given what we consider to be tremendously undervalued stock price at American Financial Group. So, we decided to explore doing a block reinsurance transaction, which if completed successfully would accomplish our objectives of increasing the excess capital, increasing the cash in the parent and, frankly, also unlock some of the value in our Annuity business. So, starting about five months ago, we began discussions with four reinsurers to see if there was a transaction that would make sense to us and make sense to them. We ended up choosing Global Atlantic to kind of hopefully get to the finish line and do something that made sense for us and something that made sense for them. They were fantastic partners. They really helped us kind of custom-design a transaction that worked well for us and also worked for them. So Mike, we chose reserves that have a higher GMIR and a higher credited rate than the average of our total reserves. We also chose assets that…

If I based on my next question was going to be how we should potentially think about whether you would entertain future transactions. And I think you talked about two things. One was there was a lot of uncertainty during the onset of the pandemic. So, maybe that's one of the things we should think about whether you think there's as much uncertainty. And the other thing was the undervalued stock price, which you probably still think it's undervalued. Are those the two main to think about whether you would pursue additional deals? Are those the two main things we should think about?

Yes, Mike, they really are. I mean, we continue to think that our stock is tremendously undervalued. And as a management team, we have an obligation to look at all the different alternatives to maximize the long-term value creation for our shareholders.

And next question is sticking with the Annuity portfolio. In terms of the annual study resulting in the DAC unlocking charge. Thanks for the color. You brought the 10-year assumption down to -- I wrote it down somewhere to 2.7% from 3.5%. Is it -- so if I look at just what the capital markets say about the 10-year a bond in 10 years, I'm sure it's wrong, but the Bloomberg says it's 1.98%. So is it a linear direction, linear relationship if you were to -- had to assume that the 10-year went to -- only went up to 1.98%, would it be kind of double directionally the charge you took this quarter?

It is a linear projection, Mike, yes, it is. And I'm not sure that when you look at Bloomberg projections, or I'm not sure that when you get out past a couple of years that it's terribly meaningful. You would know better than I because you follow so many different insurance companies. But as I have reviewed companies that have reported so far this quarter and given details on their unlocking's, our assumptions are clearly among the more conservative of companies that have already reported.

Okay. Yes, definitely. Okay. And just lastly, just stepping back thinking more high level on the property and casualty operations. You're getting a lot more rate than the marketplace, and part of that is due to the business your business mix. But top line, even x Neon, I think, is still kind of shrinking a little bit is, are you seeing are your retention ratios falling a little bit? Or are they -- do you expect them to start improving or just kind of want to understand the competitive dynamics at a higher level?

Yes. I think when you compare us to some of our peers in that, we have a higher mix of commercial auto and workers' comp and lender-placed property and crop. And the pandemic has impacted the commercial auto lines on the premium side, things like school buses, passenger transportation in a way that's a bigger impact than other lines, and the same with workers' comp payrolls as workers are laid off and that. So, I think because our mix in those businesses is probably a bit higher, I think that's one reason why our premium's not as robust as some of my peers and that. I think if there's good news, I think, in the same way, as the economy recovers and you have a vaccine and you enter into a post-pandemic type of economy, my guess is the opposite starts to happen. And as the economy picks up, probably there's a little bit more tailwind behind commercial auto and workers' comp and lender-placed premiums, in particular. So I think that's my take. I don't -- we don't see any big things happening on lower retentions and renewal retentions of our businesses and that, in general, on an overall basis. I hope that helps.

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

And I have to say thank you for all the information in your slide deck. I find that quite helpful, especially as it relates to the background on the Annuity transaction. If we pivot to the investment side, you did provide some color there. And obviously, you would give us a lot of disclosure in your supplement. Some of your peers in the annuity business have identified or called out loans, values that are loans that are possibly in special servicing status or early forbearance. And I was wondering if you could take a moment and tell us about any areas of troubled investment performance you have within your portfolio?

Greg, this is Craig. We're generally very pleased with how our portfolio has held up. And I think the unrealized gain number is a pretty good indication of how things have held up. So let me look at -- let me see if I can put my hands on some stats here, Greg, on some areas that might be considered higher risk. So, we do have some commercial mortgage loans. We have $250 million of loans on office buildings, but we have leases with very strong tenants so that the largest of that $250 million is a $75 million loan on an office building with 100% of the building leased to ConEd. The second largest is a $42 million loan. It's 100% leased to Ancestry.com. The third biggest is $28 million to -- on an office building that is 100% leased to a subsidiary of Verisk Analytics. So we actually feel very good about the position that we're in on the office loans. We do have some hospitality loans, and we have given forbearance. Brian, do you have the numbers on forbearance on real estate loans?

[Indiscernible].

It's a fairly modest number, Greg, and we feel very good about the collateral that we have. We do have some loans on hotel properties, but they're great properties. The largest one is a property that we used to own. It's Chatham Bars Inn, and we have a loan. When the loan was made, it was probably a 55% or 60% loan-to-value. It's a great property. I think that our loan amount on that property is something like 60% of what we sold the property for some 10, 12 years ago. So we actually feel very good about the collateral position that we have in the hospitality loans that we have.

The number you're looking for, Craig. On the mortgage loans, there's $124 million that are under forbearance agreements, so not a large percentage of our $58 billion in investment.

Exactly. Immaterial, right, relative to your total portfolio?

Yes.

So I mean, I guess, I need to -- the questions before about consideration of other reinsurance transactions. One of your competitors is out there engaging in similar reinsurance transactions. And it seems like the ultimate goal is to turn the Annuity business model more into a fee-based structure more than anything else. And is there -- do you get a sense that the appetite in the reinsurance market for this for your deposits is growing? Or I'm just trying to understand why there's all this interest in the annuity market right now from a reinsurance standpoint?

Greg, there's no doubt about it. The interest has grown tremendously. I can't tell you the number of contacts that we've gotten since we announced our reinsurance deal of substantial companies that are asking us if we would consider them if we would decide to do another reinsurance transaction. The market is very, very robust. And I can tell you, we were incredibly pleased with the economics of the transaction that we just closed.

Right. It does look compelling. I wanted to pivot back to the property casualty operations. I guess, Carl, I'm always trying to get information -- more information about your crop business than you're willing to provide. And in your comments, you said you expect this year to be normal to slightly below normal. And then in the context when we think about last year, I think last year was a bad year. Does this mean that when we think about the earnings from crop for the first half of next year that you'll see a positive variance because of this year's results?

I can't predict that, but there's always a portion of the crop business that you until things like citrus or different types of products or and that you don't know what the answer is until you get into December, January, et cetera. So, there always is a piece. There always is some unknown on part of the crop year. So there's always a potential that an estimate could change upwards. It's the same I mean, the estimate can stay the same. So usually, we correct that for the accident year crop year in the first quarter, generally. But we don't have, we're generally more conservative in how we report. We never -- we take very little in a current crop accident year, take very little generally, well, almost usually nothing for the current crop year in the first half of a year. And then we look at the third quarter and then the fourth quarter is generally the main quarter that we report most of the crop income in.

Got it. And then I just -- I guess I wanted to try and get one question in around just the outlook. I know you provided the 2020 outlook for specialty PC. And I guess what I'm interested in is, does 2021 look to be from a revenue, a net written premium basis, does that look to be back to normal where you're actually growing the top line? Or do you expect some spillover effect across your businesses to linger in through the first quarter and possibly the second quarter next year? That's my last question.

Yes. I mean, Greg, we're currently into the fourth quarter. We generally give guidance early in the next year. I think part of that answer has to do with what you what each person thinks on what happens with the pandemic and when you get a vaccine and those types of questions, particularly as it relates to workers' comp or some of those lines. I can't be. Overall, from a big-picture standpoint, with the pricing trends we have and the growth that we're seeing in some businesses like excess liability and D&O and different pockets of our business, I'm very excited about how we're postured in that. I mean, as I said before, I think when you do get to a more normal non-pandemic type economy in the same way that workers' comp and commercial auto may have gotten hurt more than usual or lender-placed property, the opposite might happen at the point that you reach that. So, I'm very excited about how we're positioned, the businesses we're in, our prospects, the pricing. We're positioned very well to take advantage of the opportunities that will present themselves and have plenty of excess capital also. So --.

Our next question comes from the line of Paul Newsome from Piper. Our next question comes from the line of Meyer Shields from KBW.

Am I coming through?

Yes.

We can hear you.

Okay. Fantastic. So, I want to talk a little bit about loss trends. I saw the acceleration in expected pricing, which is, I think, a huge positive. How have your expectations for loss trends across the P&C portfolio changed over the course of the year? And I guess, maybe some particular focus on your discussion of general liability reserves strengthening in the third quarter.

Meyer, this is Carl. Amazingly, our overall loss ratio trend continues to be right around 1.7%. If you exclude comp, that moves up to about 3.2%, still a reasonable type of number. The loss, the areas where loss costs increases or loss ratio trends are above that are in the ones that you read about in the industry, in the commercial auto liability side or commercial auto, in parts of the public D&O, particularly in that part of our business. And because of the commercial auto claims bumping up into excess liability and umbrella, for that reason, the loss ratio trends would be a little over 4%. Or in our Great American custom business, which is more geared toward Fortune 1000, you see those loss ratio trends more in the 8% to 9%. So, kind of tracks with what our other peers have been saying as far as where the hot spots are and that. Now the good news in those areas where the loss ratio trends for us are higher than our average, they also have to be in areas that we're getting -- continue to get pretty significant rate. So, in commercial auto, the third quarter, commercial auto liability, we got a 10% rate increase in D&O -- lines like D&O. We got 16% increase in renewal rate price in the quarter. So, and then when you look at excess liability, we're getting really major pricing in those businesses and that. So, I think the good news is, is the areas we're seeing higher loss ratio trends were getting pretty significant rate. I think also, in our case, different than some of our competitors, we're already making great returns in our excess liability business. We're making solid returns in our D&O business, which has generally been more focused toward private and nonpublic and other than the public company type of sector and that. So, we're already earning good returns in some of the businesses where there's lots of activity. And for that reason, that means we're also growing in some of those businesses at a healthy rate, which I'm very excited about. As I mentioned before, commercial auto, we're meeting our return objectives in our commercial auto business. Commercial auto liability, we're making a small underwriting profit. We're continuing to take rate because we'd like to have that underwriting profit be larger, but we're really positioned well considering we're already making money. And I think with the rate and with the market conditions, I'm very excited about how we're positioned and the prospects as we look forward.

Okay. No, that's very thorough. That's very helpful. I have --.

In the quarter, with I think there's probably a record number of catastrophes that I saw in the quarter compared to any other time in my career. And with the COVID uncertainty, some of the social inflation, I can't tell you how excited that I was that we were able to have a 92% combined ratio for our group in a quarter that's pretty messy.

No. Absolutely, yes. I definitely put the same conclusion. I've got Ryan Kruger online. I thought you wanted to ask question or two on the Annuity side.

Yes, I just -- you talked about your current crediting rate strategy for the Annuity business and how that will play out over the next few quarters. I guess my question is, as we look beyond that, assuming interest rates remain very low, would you expect to continue to be pretty active lowering future crediting rates beyond the current program? And do you think you can maintain spread levels at that pretty constant rate going forward?

Yes. So, this is Craig. So because of our model, we have not needed to make significant adjustments to credited rate on in-force up until very recently with the huge drop in investment rates. And the result of that is the difference between our current credited rates and our GMIRs are very, very wide. If you look post-reinsurance deal that we just announced, we have a -- we could lower credited rates another 108 basis points on $25.9 billion of reserves. So, that gives us tremendous flexibility to make adjustments if needed. We want to be fair to our customers. And so my hope is that we don't need to make a lot of additional adjustments beyond what we have already started to implement. But it's going to be a function of what interest rates do. It's going to be a function of -- we have the ability to manage the credit rate on in-force to hit our targeted rate of return. So, it's a balancing act. We're in this for the long term. I think we get a lot of credit from our distribution partners for being very fair with our customers and not being overly aggressive in reducing credited rates. But we have the margin there, and we have the ability to continue to hit targeted rates of return even if we stay in a low interest rate environment for a prolonged period of time.

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 all for joining us this morning, and we look forward to talking with you again next quarter. Have a great day.

Ladies and gentlemen today’s conference is now over, you may all disconnect. Thank you.