Good day, and thank you for standing by. Welcome to the American Financial Group 2023 First 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Diane Weidner, who's Vice President of Investor Relations. Diane, you have the floor.

Good morning, and welcome to American Financial Group's first quarter 2023 earnings results conference call. We released our 2023 first quarter results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. I'm joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 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 III to discuss our results.

Good morning. We're pleased to share highlights of AFG's 2023 first quarter, after which Craig, Brian and I will respond to your questions. AFG's financial performance during the first quarter was excellent, with a core operating return on equity of 22%. Our Specialty Property & Casualty businesses produced strong underwriting margins, investment income benefited from a higher interest rate environment when compared to the 2022 first quarter, and we continued to be pleased with the performance of our alternative investment portfolio, where returns exceeded our expectations during the quarter. Our entrepreneurial opportunistic culture and disciplined operating philosophy continue to serve us well in a favorable property and casualty market in a dynamic economic environment. Craig and I thank God, our talented management team, our talented employees for helping us to achieve these exceptionally strong results. Shortly before we shared our first quarter earnings results, we announced a definitive agreement to acquire Crop Risk Services from AIG. This business is a great strategic fit with our existing crop insurance operations and will provide opportunities to continue to benefit from economies of scale in this business. We're delighted to welcome CRS's CEO, Brian Young, his leadership team and employees to Great American Insurance Group. I'll share a bit more about CRS later in the call. Now I'd like to turn the discussion over to Craig to walk us through AFG's first quarter results, investment performance and our overall financial position at March 31.

Thanks, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.89 per share in the 2023 first quarter. The year-over-year decrease was primarily due to lower returns on AFG's alternative investment portfolio when compared to the exceptionally strong performance of this portfolio in the prior-year period and lower year-over-year underwriting profit at our Specialty Property & Casualty insurance operations. Both of these items were partially offset by higher other net investment income. 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 $14.5 billion investment portfolio are presented on Slides 5 and 6. Pre-tax unrealized losses on AFG's fixed maturity portfolio were $523 million at the end of the first quarter compared to pre-tax unrealized losses of $630 million at the end of 2022, reflecting the decline in longer-term interest rates. We have acted on opportunities presented by a higher interest rate environment and extended the duration of our P&C fixed maturity portfolio, including cash and cash equivalents from, approximately two years at the end of 2021 to approximately three years at March 31, 2023. In the current interest rate environment, we're able to invest in high-quality, medium duration, fixed maturity securities at yields of approximately 5%, which compares favorably to the 4.4% yield earned on fixed maturities on our P&C portfolio during the first quarter of 2023. We expect the yield earned on our P&C fixed maturity portfolio to increase by about 10 to 20 basis points by the fourth quarter of 2023 compared to the 4.4% earned in the first quarter of 2023. This yield compares very favorably to the 3.63% earned for the full…

Thank you, Craig. Please turn to Slides 10 and 11 of the webcast, which include an overview of our first quarter results. As you'll see on Slide 10, the Specialty Property & Casualty insurance operations generated an underwriting profit of $155 million compared to $208 million in the first quarter of 2022, with each of our Specialty Property & Casualty groups producing lower year-over-year underwriting profit following the record first quarter results reported in the prior-year period. The first quarter 2023 combined ratio was a strong 89.2%, a 5.2 points higher than the prior-year period. Results for the first quarter in 2023 include 2.2 points in catastrophe losses and 4.5 points of favorable prior year reserve development. Catastrophe losses were $31 million in the first quarter of 2023 compared to $9 million in the prior-year period. Gross and net written premiums were both up 11% in the 2023 first quarter compared to the prior-year quarter. Year-over-year growth was reported within each of the Specialty Property & Casualty groups as a combination of new business opportunities, increased exposures and a good renewal rate environment. Average renewal pricing across our Property & Casualty group, excluding workers' comp, was up approximately 5% for the quarter and up approximately 4% overall. We've been focused on achieving adequate pricing for some time, and have achieved the overall rate increases across our entire specialty book for 27th straight quarters. When we compare pricing to prospective loss ratio trends, there are some areas where more rates needed, such as public D&O, commercial auto liability and excess liability, particularly where we're writing higher layers for Fortune 1000 accounts. While our overall pricing guidance, excluding workers' comp, is in line with our overall prospective loss ratio trends, excluding comp, it's essential that we book -- that we're looking at…

Thank you. [Operator Instructions] Our first question comes from Paul Newsome of Piper Sandler. Paul, go ahead with your question.

Good morning. I'm sorry to beat on the crop a little bit more, but could you remind us on the year-over-year comparison, what made it so exceptionally strong? And is that really the issue for sort of year-over-year comparison there, or is it something else in there that we're missing?

So, are you talking about the -- for the first quarter of 2023 versus the first quarter of 2022? In the first quarter of 2022, that would have been the remnants of the 2021 calendar year crop business that was very, very profitable. So we had exceptionally strong results in the first quarter of 2022 compared to a more normal result in the first quarter of 2023. Looking at underwriting expense ratios and loss ratios in Property & Transportation, particularly the current accident year loss ratio and the expense ratio, the real drivers there are the crop year-over-year, the higher level of profitability in the 2022 quarter.

In the Specialty Casualty area, you mentioned social inflation being an issue. Is that really just workers' comp book or is there other parts of that that is causing the margin change?

No, our workers' comp book continues to have excellent results. Our results of -- I think my point was that this year, they remain really good, but probably at a higher combined ratio than what they were in the prior year. I think that was one statement. The less, lower favorable development, we had some -- we had a -- in one of our Speciality Casualty businesses, we had some severity in the quarter. And I think our point was is, we're trying to have our picks reflect an environment of social inflation for -- in our Specialty Casualty business.

And then, if I could squeeze one more in. Your D&O book with the community banks is obviously a real topical issue of the day. Any thoughts on the results there? And what we might see if we continue to have some of the issues that we've seen in the banks?

Yeah. I mean, our ABIS unit is starting off the year with good results on both calendar year and an accident year standpoint. We're pleased with the progress that we've made. We write about -- last year, we wrote about almost $100 million of gross written premium. It's well diversified in terms of the geographic reach. Our book is hyper-focused on banks with less than $5 billion in assets. And generally, lower -- we use -- deploy lower policy limits, average net limits in that book and probably be $3.5 million. And our banks have a real diverse depositor base. That might be most important. I'm not aware of us being on any of the headliner risks that you read about in that. Generally, banks would have a much more diverse depositor base in that. Clearly, higher insured deposit ratios and a book that doesn't serve the tech industry or star-ups pretty much.

Great. Always appreciate the help very much. Thank you very much.

Standby for our next question. Our next question comes from Michael Zaremski with BMO. Michael, you have the floor.

Okay, great. The first question on the Specialty Casualty segment. Just -- maybe just, if we step back and appreciate that AFG's results are excellent on an absolute basis and I was looking back in the model over the last decade plus and the combined ratio is much lower currently than it has been historically on average. You can correct me if I'm wrong, but just -- what -- is pricing in that segment not moving much just because of the fact that results are excellent for the industry? And also maybe touching on that, did -- some of the comments, Carl, you made on social inflation exposed businesses, maybe you could just also elaborate more? Is loss cost inflation moving a bit higher too in some of the Specialty Casualty lines? Thanks.

Sure, happy to. We're continuing to get -- again, when you look at our pricing excluding workers' comp, we achieved about 5% in the quarter. That varies line-by-line. So, we're continuing to achieve price increase. I think, I mentioned in the call, the couple of areas that I'm not happy with on pricing keeping up of prospective loss ratio trends, public D&O. Like everybody else, we're seeing rate declines on our public D&O book. I think, one thing that's different about us is only about 22% of our D&O book is public D&O and probably 1% of the policy count. So, we have a real diversified D&O book. In our case, very pleased with -- we have excellent results in our D&O business and might even make a small underwriting profit in public D&O, when you look at '22 and '23. So, public D&O, I kind of mentioned, we're not growing a lot because of the competition and kind of particularly the higher excess liability area, particularly in Fortune 1000 accounts. There seems to be, now -- kind of like public D&O, a lot more competitors, as there are in public D&O. And we continue to get some price increase in that book, but we're just not growing because of the competition. So that would be an area that I would -- when you take a look at what we use on prospective loss ratio trends on our excess and our umbrella book, we're using 10% plus prospective loss ratio trend. So, if we're only getting low-single digit increases or mid-single digit overall increases on that book, I think that's long-term that doesn't work. In our case, again, our -- when you look at our results, our E&S and our umbrella excess liability results are outstanding. So I'm not too worried in the short-term. It would be more of over the long-term. My gut tells me that all the new competitors jumping in the public D&O and excess liability are going to get burned -- a lot of them are going to get burned. And this is more of a short-term phenomenon on rate being below prospective loss ratio trend. I think as some of the new capacity gets burnt, I think there's a chance you'll see our rates reenergize as -- in those two sectors as that happens.

Got it. That's helpful. I know I asked a long-winded question, but regarding your specific comments about -- I was listening more conservative loss costs estimates with regards to social inflation. I -- through the transcript, but did you -- sorry, are you saying specifically you are seeing a bit of an uptick in loss costs in certain lines or could -- it seems in most of the answer was just regarding there is just -- there is some excess competition on the pricing side in certain lines, but sorry...

Yeah, we review every business quarter-by-quarter on pricing and reserving and that, and we're making adjustments all the time. I think we're -- in the business -- in the particular businesses that we saw some more severity in that. Yes, we would adjust our loss picks as we feel necessary to try to stay up with or ahead of what those loss ratio trends are.

Got it. And as a follow-up on the crop insurance acquisition. Thanks for all the color. When we look at the statutory information on the portfolio that you're acquiring, there's some noise on crop on the expense ratio that may -- so maybe we're looking at bad data, and you can tell us, but that looks like that portfolio, under its current ownership, hasn't thrown off much in the ways of underwriting income. If that's correct, is the -- it is -- will AFG be able to kind of turn that portfolio into -- merge it into your portfolio, which is meaningfully more profitable? Is that kind of directionally you guys will be able to do things that the current owner hasn't been able to do?

Hi, Mike. This is Brian. I'll try to answer that for you. There's a couple of things going on. One is, under AIG's ownership, CRS has made some significant improvements in recent years to their private product business. So, the results in the more recent years are probably stronger than going back further than that. Beyond that, also, as we work to integrate CRS' book and AFG's book, a couple of things that are important to know. One is that, we're there in a lot of the same states and at the same type of focus on corn and soybeans as our existing business. So the business itself is fairly similar to Great American's business. As we transition at the Great American, we will be applying our economies of scale there and potentially reduce some of the overhead type of expenses that they had overtime compared to what AIG would have been charging them for those services. On top of that, we will put it through our similar reinsurance structure to what we have in our existing business, our retentions. Net retentions will be lower. If you look at our historical business, we retained about 40% of the gross written premiums. We'd expect the same thing on CRS beginning in 2024. And then also with our reinsurance structure, if things go well, there is a profit sharing component, which enhances the returns in good periods. So, we think overall, between applying our use of the federal reinsurance program and our reinsurance program, as well as the economies of scale, that the profitability will be enhanced beyond what CRS has already done on their own in the past couple of years.

Okay, great. That's helpful. And one last one and maybe, Brian, this might be for you. We get asked a lot about AFG's peer-leading return-on-equity profile. If we -- if you look at the company's ROE profile over a longer timeframe, which included Life, the ROE was lower. Would you say, I don't know, if you have any math that you guys know off at the top of your head, was most of the -- is the uplift from the ROE today mostly because Life Insurance has gone? Is there any quantification life was X amount of basis points drag? Or is it mostly just P&C is much more profitable today than it has been historically?

I think, as -- this is Carl. When you look at a one-year, a five-year, a 10-year and a 15-year period of time, we're -- outside of progressive, we're pretty much on the top on pre-tax Property & Casualty returns on that. So that's per [indiscernible] data, not ours. I do think, yeah, the sale of the annuity business, clearly impacts overall AFG. So that's why we -- in our investor decks, we really kind of point towards the property -- pre-tax Property & Casualty returns.

Okay. Thank you.

Our next question comes from Gregory Peters with Raymond James.

Afternoon, Carl, Craig, Brian, Diane. Just as a -- I guess a follow-up, Brian, to your answer before about the crops CRS and reinsurance. Can you step back and provide us just some perspective on reinsurance conditions, pricing conditions for crop? It seems like reinsurance pricing, the spill-over from the losses in property have hacked -- have hit multiple sectors. And I'm just curious if there has been some spill-over into crop with higher costs and/or higher retentions, things like that?

Our crop reinsurance program is a multi-year program and has been very profitable over a long period of time for both parties. So, we're not seeing significant increased costs or challenging terms and conditions changes on our crop reinsurance.

So if it's a multi-year program, does it automatically compensate for the increased premium with CRS? Or do you have to reset the contract with your reinsurance partners?

We have worked with our reinsurance partners to incorporate it on a very similar terms as it -- ultimately it's going to come into the same program. So, I would think of 2024 with CRS being the same terms as what we've had historically.

Great, thank you. Just pivoting to commercial auto. We've seen some companies report some uptick in the underlying loss ratio in commercial auto. And I know you provided some basic comments about it, Carl, in your prepared remarks, but perhaps you could give us some more color about how your commercial auto business is performing relative to expectations?

Yeah, happy to. Kind of put things in perspective, when I'm talking about commercial auto, it's primarily National Interstate, Vanliner, Great American Trucking and that. When you look at our commercial auto book, it's about 12% of direct written premiums last year. I'm pleased with the performance of our overall commercial auto in the first quarter of this year and last year. And with continued price increase in '23, we want to stay that way. The one part of commercial auto that I'm -- is still not where we want it to be is the commercial auto liability part of the coverage. We run in breakeven to -- my guess would be 102-ish in the first quarter and last year. So, we -- National Interstate and Vanliner, we continue to take strong commercial auto liability price increases, in fact, with the market is still struggling, I think we got 13% price increase in the first quarter versus a loss ratio trend of, we think it's around 7.5% on commercial auto liability in that. Overall, we're getting -- I think in the first quarter, we got National Interstate and Vanliner 7% and 6% price increases compared to overall about 6% prospective loss ratio trend for the overall book in that. We've seen claims frequency is definitely returned, but we think it's still less than pre-pandemic levels. Elevated severity, that's why we continue to -- on the commercial auto liability is, why we're continuing to take rate and where things aren't where we want them to be. That's impacted by social inflation and we're trying to continue to place an emphasis on early resolution of claims in order to try to settle matters more quickly. Clearly, it seems -- I think, in the first quarter, we've had kind of high-single digit growth. I think, probably will grow the business, low- to mid-single digit for the whole year as we're, again, emphasizing rate on commercial auto liability. So, hope that's helpful.

That was great color. Thank you. I guess the final question, I don't want to literally -- I'm kind of embarrassed to ask it, but you called out this large loss in Specialty Financial. And so I just wanted to get -- I don't want to focus on the loss itself. I just don't remember you calling out a large single loss in Specialty before. Is there something in the system that is bothersome to you or should we really just view this as a one-off event?

I'd probably view it as a more of a one-off kind of event.

Fair enough. Thanks for your answers.

Standby for our next question. Our next question comes from Jing Li of KBW.

[indiscernible] question. So just wondering on, you can add some color on the expense side. We see that expense ratio seems to have increased for this amount year-over-year. So, what do you expect going forward?

Are you asking about our expense ratio, overall?

Yes.

So, if you look at -- expense ratio can bounce quarter-to-quarter for us. One of the things in our business, not only can the mix of business change, but also many of our lines of business have profit-based ceding commissions from reinsurers. And when the reinsurer is profitable, they would pass a higher ceding commission than they otherwise would. So that can cause the numbers to bounce around from time-to-time. For example, in the first quarter of 2022, we had higher profit base ceding commissions in our crop business than we did in the first quarter of 2023. If you look across the full year, we would expect a slightly lower -- that slightly lower profit-sharing in crop than happened in the first quarter. We wouldn't expect that to be replaced in the later quarters. So that will impact the full year. We also -- both in the quarter and for the year, we do have several IT initiatives going on that are driving up expenses a little bit, that will ultimately benefit us in the long run. So, the expense ratio for the year could be a little elevated relative to last year and that would just be because of the lower profit-sharing in the crop business in the first quarter and then a bit of an impact from some of the IT initiatives.

Got it. Thanks. Also, can you talk about the -- any trends you're seeing in the D&O pricing? What's the current bank issues these days?

Yeah. On -- from a pricing standpoint, overall, we're getting about a 1% price increase in the first quarter in our overall D&O book. I think, as I mentioned earlier in the call though, public D&O, which is about 22% of our business, had a 15% price decline in the quarter. Public D&O, as I mentioned before, is one of the lines that's more competitive than what it should be and -- and that. Our D&O book, as I mentioned before, were continued to focus on small account lines, non-profit private company, EPL. We probably, as a company, have a much more cautious approach to large account public and private equity business than those. We would have written very -- probably, practically no specs over the past couple of years. So, our book is a little bit different than a lot of other companies. That's probably one reason why we're still getting some price increase.

Okay. Thank you for the color.

This concludes our Q&A portion. I would now like to turn it back over to Diane Weidner for closing remarks.

Thank you, all, for joining us this morning as we recapped our results for the first quarter. We look forward to speaking with you all again as we share our second quarter results. Take care, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.