Good day, and thank you for standing by. Welcome to the American Financial Group 2023 Second Quarter 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.

Good morning and welcome to American Financial Group's Second Quarter 2023 Earnings Results Conference Call. we released our 2023 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 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. 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.

Good morning. We're pleased to share highlights of AFG's 2023 second quarter, after which, Craig, Brian and I will be happy to respond to your questions. We reported an annualized second quarter core operating return on equity of 18%, which excludes accumulated other comprehensive income, alongside double-digit premium growth, a strong result in the quarter with elevated industry catastrophe activity. The higher interest rate environment contributed to meaningfully higher year-over-year investment income, and we continue 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 and a dynamic economic environment. Craig and I thank God, our talented management team and our employees for helping us to achieve these 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.

Thanks, Carl. As I begin my remarks, I'd like to recognize and congratulate John Berding, who was elected President of AFG in late June. John has been a trusted business adviser for over 35 years. His talents have been particularly valuable through his exceptional vision and management of the company's investment portfolio, which has significantly outperformed over time. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. AFG reported core net operating earnings of $2.38 per share in the 2023 second quarter. The year-over-year decrease was due primarily to the impact of elevated catastrophe losses and lower favorable prior year reserve development on underwriting profit in our Specialty Property and Casualty insurance operations when compared to the record P&C results reported in the second quarter of 2022. These items were partially offset by higher net investment income in the 2023 second 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 $14.5 billion investment portfolio are presented on Slides 5 and 6. Pretax unrealized losses on AFG's fixed maturity portfolio were $587 million at the end of the second quarter compared to pretax unrealized losses of $630 million at the end of 2022. In the current interest rate environment, we're able to invest in high-quality, medium duration fixed maturity securities at yields of approximately 5.5%, which compares favorably to the 4.62% yield earned on fixed maturities at our P&C portfolio during the second 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 4.62% earned in the second quarter of 2023. This…

Before turning to our Specialty Property and Casualty results, I'd like to officially welcome Brian Young and the Crop Risk Services team to AFG and the Great American Insurance Group family. This team's expertise and contributions will strengthen our ability to serve the unique needs of our crop policyholders. CRS is clearly a strategic fit within our crop division and solidifies Great American as the fifth largest provider of multi-peril crop insurance in the United States and the largest U.S.-owned participant in the United States multi-peril crop insurance program, and serves as an example of our nimbleness and efficiency in executing a transaction of this nature. Now if you'd please turn to Slides 8 and 9 of the webcast, which include an overview of our second quarter results. As you'll see on Slide 8, gross and net written premiums were up 12% and 10%, respectively, in the 2023 second quarter compared to the prior year quarter. Year-over-year premium growth 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. Second quarter 2023 combined ratio was 91.9%, 6.1 points higher than the exceptionally strong underwriting results reported in the prior year period. Catastrophe losses added 3.5 points to the 2023 second quarter combined ratio, an increase of 2 points from the prior year period. Favorable prior year reserve development in the second quarter of 2023 was 4 points, a decrease of about 2.2 points from the favorable impact of 6.2 points reported in the prior year quarter. Our catastrophe loss experience was consistent with overall industry experience, but losses arising from an increased frequency of storms during the quarter. Average renewal pricing across our Property and Casualty Group, excluding workers' comp, was…

[Operator Instructions] Our first question is from Paul Newsome with Piper Sandler.

I was hoping for a little bit more details on the Specialty Financial/financial institutions group growth? And maybe why -- well, first of all, I think that's force-placement insurance, right? That's what everyone else tells it. Please correct me if I'm wrong. And can you tell me why...

Yes. Lender-placed property.

Yes. So why is that an opportunity in today's market. Home insurance in general is pretty tough business right now. What makes that so attractive today?

Well, historically, our business has had great returns over a long period of time. And I think what's changed is rising foreclosure rates. And as you said, some of the opportunity to -- because of market disruption to write new accounts. So it's been a great business, high returning -- high return on equity business for us for forever. And note, we just had a lot of -- it was heavy -- had a heavy cat quarter. In the 6 months, the catastrophes were $17 million to $18 million higher than last year, for instance.

Do you have any thoughts on keeping up with claim cost inflation in that business, given the property in general has been a tough place to be to keep up with the underlying inflation issues? Are you doing things in there that might kind of offset those issues?

For sure. Not -- pricing is just one component. I think on that business, like we're focused on getting proper insured values. As inflation has taken values up, that's definitely part of our strategy.

Great. Maybe turning to the workers' comp business, obviously, historically a really good business. Can you talk about sort of what maybe happened from the trend change there that might have reduce the favorable reserve development? Are we just not getting as much frequency improvement as we've had in the last many years?

Yes. I mean the reality is, with rates -- I mean, to start with, our overall calendar year underwriting results through 6 months and last year, outstanding. And we expect 2023 to continue to be. It's just not going to -- we're not going to have combined ratios at the same exceptional levels as in the past. On an accident year basis, we're still projecting a good overall accident year underwriting profit. We had that last year. We're still projecting a healthy accident year underwriting profit through 6 months and for 2023. Again, just not -- the underwriting margins just won't be at the same outstanding levels as what they've been in the past when -- even though our loss costs continue to be pretty benign and loss ratio trends are in check with rates declining over time for us and the industry, there's just not going to be the same levels of underwriting margin there.

Right. I'm just wondering if there was a -- obviously, the guidance changed, so there must have been sort of some trend change, I guess, that was different than what you saw at the beginning of the year. That's what I was asking about.

Paul, this is Brian. So in recent years, we've just continued to see claims being settled at lower than our initial expectation and having lots of favorable development coming out of workers' comp. This year -- in the first half of this year, as we reacted to claims settlements, we're seeing things still come in better than our initial expectations, just not as much better as before. So it's still a very good result. It's just not -- it's not developing as favorably as it had in some of the more recent years. So still really good results. Just when we see that in the first half of the year knowing that we'd take a prudent approach to things, we have -- are reacting to that, settling closer to our established reserves and not releasing as much.

Our next question comes from Michael Zaremski with BMO.

Just as a -- firstly, as a follow-up to Paul's question and Brian's -- your answer, so is it -- on the work comp, is it just a small change in medical trend line, not on the indemnity side? Is that -- just to kind of put a period in that conversation.

This is Brian. On the medical cost side, we are watching for that. We haven't experienced a big uptick in expense, but we are mindful of that, and we are considering that as we look at setting our current accident year and looking at reserve releases. So while we haven't experienced a big uptick in medical costs, we know that, that may be coming.

Okay. Got it. And maybe just keeping on just loss cost inflation levels. And appreciate you guys have already given us a lot of good detail on the -- in the prepared remarks and in the earnings release, but maybe we can kind of further unpack the social inflation aspect that you've brought up. Is it touching more so commercial auto? Or -- it sounds like a number of lines were cited. And is it just kind of a small inching up versus mutations? Or is it -- I don't know if it's certain vintages you'd like to call out? Or just maybe we can unpack that conversation a bit more.

Sure. Commercial auto, the social inflation impacts, nothing new. We've been raising rates, particularly in the commercial auto liability side of commercial auto for 10 years or so. So clearly, social inflation continues to impact commercial auto. We haven't really changed the guidance for our Property and Transportation. We're happy. We're pleased with the underwriting performance of our overall commercial auto through 6 months in 2022. And with continued price increases that we're getting, we're trying to stay that way. That said, commercial auto liability is a focus where -- probably where a lot of the social inflation hits. It's not where we want it to be. We're probably still at 101%, 102% accident year combined ratio as we look at this year. So I mean we're continuing to take strong rate. Commercial auto year-to-date, I think we've taken another 10% in rate, just to give you a perspective because of the ongoing social inflation in that. And commercial auto, I don't think there's been any change. We're just continuing to be aggressive in how we take rate there. I think the adjustment in our guidance really kind of came in the Specialty Casualty part of our business. And in the quarter, we talked about public sector. And we saw from -- in the 2015 to, Brian, I think, 2019?

Yes, 2015 to 2019. So the public sector business, we started to see the impact of social inflation there about 5 years ago through higher valued awards, higher jury verdicts and other large settlements. That business is coming out of coverage -- of casualty coverages in excess of self-insured retentions for municipalities and school districts, other business -- other entities that serve the public. So we took rate action beginning a number of years ago. So we're really seeing the issues are in those 2015 to 2019 accident years, as Carl mentioned.

Yes. Some of the actions that we're taking is that we've cut capacity. We've tightened aggregates. We've been increasing rates, increasing attachment points. A lot of this business is excess of higher retentions or annual aggregate deductibles that are retained by our pool clients. Reinsurance policies soften our risk here and our layered approach to structuring the business has helped us achieve better pricing, particularly in California. So I mean those are some of the things that we're trying to, in our approach in the business, to get it to the kind of returns that we're most -- that we like.

That's helpful. And maybe just lastly, on the broader competitive environment and also just being cognizant that AFG's ROEs are at very high [absolute] levels and probably peer leading. But just -- we've seen pricing power for certain insurers and some of the indices to the broader indices kind of accelerate a bit quarter-over-quarter, whereas I believe the total company's -- or AFG's pricing has been a little bit more flattish despite some of the inflationary trends you've been educating us about. So is it -- any -- on the competitive environment, is it -- are there -- is it certain areas that are just still kind of maybe a bit hypercompetitive? Or maybe you're just not looking to -- you don't need to take as much rate in certain areas like kind of where profitability is still excellent?

Yes. The only area that we see has gotten a lot more competitive is the whole public D&O arena. That's where we see rates where there's been a big change in rates, with rates going down 15% to 20%. I mean that said, on the rest of our D&O book or small accounts, the pricing has been pretty stable in that. In the past, I thought there was more competition on the higher excess liability layers. Through 6 months, that seems to have tightened up a little bit. We're getting rate and one of the businesses is growing a little bit. So if anything, I think I've seen maybe a tightening in that area. So we like that.

So would you -- just as a last follow-up, would you say the industry is trying to push through the higher reinsurance costs to the insured ultimately? And is that taking place in as far as that kind of a muti-year process? Or maybe it just doesn't need to happen because of higher interest rates?

Are you talking about the increase in the property reinsurance -- catastrophe reinsurance?

Yes.

Sure. No. I think definitely, when you look at overall industry pricing, particularly on large national account, property accounts and coastal exposed there's large rate increases being taken and terms and conditions changes and business moving -- more business moving into the E&S side. Our -- we're seeing opportunities on the property side also, but we have less of an appetite for coastal property and earthquake exposed property than our peers. So we're just -- we're not making the same bets as what others are in the coastal areas and -- or the highly exposed conductive areas in them.

[Operator Instructions] Our next question comes from Meyer Shields from Keefe, Bruyette, & Woods.

Two, I think, fairly quick questions. First, you mentioned some losses within Surety & Fidelity in the quarter, and I'm wondering whether you're viewing that as sort of a trend in line with economic weakness or just these line's inherent randomness?

I don't think we're seeing it as a trend. It's just sort of the nature of the business. There can be bumps in the claims from time to time.

Okay. Perfect. And then just for understanding, given your expertise in transportation, what would lead you to decide to nonrenew a block of premium rather than remediate it?

I think there are some programs and some things that you do that you just don't think can be remediated with price and terms.

I'm not showing any further questions at this time. I'd like to now turn the conference back to Diane Weidner for closing remarks.

Thank you for joining us this morning. And of course, if there's any follow-up items, feel free to reach out to the IR department. We hope you all have a great rest of your day.

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