American Financial Group, Inc.

Good day, ladies and gentlemen, and welcome to the American Financial Group fourth quarter 2018 results conference call. At this time, all participants are in a listen-only mode, so if anyone should require assistance during the call, please press star, then zero on your touchtone telephone to reach an operator. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Ms. Diane Widener, Assistant Vice President, Investor Relations. Ma'am, please go ahead.

Thank you, Liz. Good morning, and welcome to American Financial Group's fourth quarter 2018 earnings results conference call. I am joined this morning by Carl Lindner III and Craig Lindner, co-CEOs of American Financial Group, and Jeff Consolino, AFG's CFO. Our press release, investor supplement, and webcast presentation are posted on AFG's website. These materials will be referenced during portions of the call today. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on slide two of our webcast. Certain statements made during this call may be considered forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Investors should consider the risks and uncertainties that could cause actual results and or financial conditions to differ materially from these statements. A detailed description of these risks and uncertainties can be found on AFG's filings with the AFG Securities Exchange Commission filings, 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. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statement. Now, I am pleased to turn the call over to Carl Lindner III to discuss our results.

Carl Lindner III Good morning. We released our 2018 fourth quarter and four-year results yesterday afternoon. If you'd turn to slides three and four of the webcast slides for an overview. Craig and I were pleased to report record AFG core operating earnings of $8.40 per share for the full year of 2018, up 28 percent from last year, and generating a core return on equity in excess of 15 percent. 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 paid $397 million in dividends during the year, representing $130 million in regular common stock dividends and $267 million in special dividends. And our quarterly dividend was increased by 14 percent to an annual rate of $1.60 per share beginning in October of 2018. AFG's five-year total shareholder return representing growth in share price plus dividends was approximately 88 percent, exceeding the total return performance of the S&P 500, S&P Property and Casualty Index, and the S&P Life and Health Index over that same period. Turning to slide four, fourth quarter, Core net operating earnings were $1.75 per share compared to $2.20 per share in the year-ago quarter. The significant downturn in the financial markets in the fourth quarter tempered results in our annuity segment, and profitability in our property and casualty segment was lower year over year. These results were partially offset by the benefit of a lower corporate tax rate. Fourth quarter 2018, annualized core operating return on equity was 12.6%. A net loss of 33 cents per diluted share in the fourth quarter included $2.08 per share in realized losses on securities. Accounting rules require that all equity securities are reported at fair value, so it's important to note that $2 per share of this amount related to holding losses on securities that AFG continued to own at December 31st, 2018. Craig will discuss this in more detail later in the call. Craig and I thank God, our talented management team, and our great employees for their work in helping us to navigate the challenges of market volatility and a heightened level of natural disasters across the industry. We have established initial 2019 core operating earnings guidance for AFG, in the range of $8.35 to $8.85 per share. And Craig and I will discuss our guidance for each segment of our business in more detail later in the call. Now I'd like to turn our focus to our property and casualty operations. Please turn to slides five and six of the webcasts, which include an overview of fourth quarter results. As you'll see on slide five, gross and net written premiums in our specialty property and casualty insurance operations grew by 3 and 4 percent, respectively. A change in the timing of the renewal of two large transportation accounts from the third to fourth quarter impacted reported growth in the quarter. If you exclude the timing of those policy renewals, overall specialty property and casualty gross and net written premiums grew by 1 and 2 percent, respectively, from the year-ago quarter. Property and casualty operating earnings in the fourth quarter were 8% lower year-over-year, primarily related to higher catastrophes, which added three points to the combined ratio in the fourth quarter compared to 0.6 points in the prior year period. Overall renewal pricing in our specialty property and casualty group was up 2% during the fourth quarter and above our overall loss ratio trend, which is about 1.5%. Loss-cost trends remain stable. and we're keeping an eye on inflation and interest rates. Now, excluding our workers' comp businesses, overall renewal pricing was up approximately 4% during the quarter. We're getting rate increases in the businesses where we need them to achieve our targeted returns. Now, if you'd turn to slide six to review a few highlights from each of our specialty property and casualty groups. Property and transportation group. reported an underwriting profit of $64 million in the fourth quarter of 2018 compared to $84 million in the comparable prior year period. Higher underwriting profits in our transportation, property, and inland marine and ocean marine businesses were more than offset. Our crop insurance operations reported strong profitability during the 2018 fourth quarter. albeit at lower levels than the very strong results reported in the prior year fourth quarter. Strong yields in the eastern Corn Belt helped to mitigate the impact of commodity price declines. Catastrophe losses for this group had a favorable impact of $2 million in the fourth quarter of 2018, compared to a favorable impact of $3 million in the 2017 fourth quarter. With catastrophe losses reported, from the previous quarter, developing favorably in the fourth quarter of both those years. Fourth quarter 2018 gross and net written premiums in this group were 4 and 6 percent higher, respectively, than the comparable prior year period. The increase was largely the result of a change in the timing of the renewal of two large accounts mentioned previously. Excluding the impact of the timing of these policy renewals, both gross and net written premiums in this group We're up about 1% year-over-year. Lower year-over-year premiums in our crop insurance business and underwriting actions on underperforming accounts in our Singapore branch, both tempered fourth quarter premiums. Our overall renewal rates in this group increased 3% on average in both the 2018 fourth quarter and for the full year. Specialty Casualty Group reported an underwriting profit of $22 million in the fourth quarter compared to $58 million in the comparable 2017 period. Lower year-over-year underwriting profit within NEON was the primary driver of these results, specifically higher 2018 catastrophe losses and lower year-over-year favorable reserve development due to the fourth quarter 2017 NEON reinsurance to close transactions. Lower profitability in our workers' comp businesses contributed to a lesser extent. Despite lower year-over-year profits in our workers' comp operations, these businesses achieved excellent underwriting margins in the fourth quarter. Higher underwriting profit in our excess and surplus lines in targeted markets partially offset these results. Last quarter, we shared our plans to acquire ABA Insurance Services, a market-leading provider of D&O and other complementary insurance solutions for banks, small businesses, and nonprofit organizations, with a long track record of underwriting success and profitability. We're pleased that the transaction closed at the end of November, and we welcome this business to the AFG family. Results for this business for the month of December are reported within the specialty casualty group. Catastrophe losses for this group were $28 million in the fourth quarter of 2018 and $18 million in the comparable 2017 period. Gross and net written premiums increased 6 and 5 percent respectively for the fourth quarter of 2018 when compared to the same prior year period. Higher year-over-year premiums within NEON resulting from the growth of its portfolio and targeted classes of business. along with the growth in several other businesses and the addition of ABA insurance services, were partially offset by lower premiums in our workers' comp businesses. Renewal pricing for this group was flat in the fourth quarter and was down approximately 1 percent overall for the year. Excluding our workers' comp businesses, renewal rates in this group were up approximately 4 percent in the fourth quarter and 3 percent for the year. Now, the Specialty Financial Group reported an underwriting profit of $20 million in the fourth quarter of 2018, compared to $19 million in the fourth quarter of 2017. Lower year-over-year profitability in our financial institutions business, primarily the result of higher catastrophe losses, was partially offset by higher profitability within our fidelity crime and our equipment leasing businesses, and higher favorable reserve development in runoff businesses. All businesses in this group achieved excellent underwriting margins. Gross and net written premiums declined by 12 and 9 percent respectively in the 2018 fourth quarter when compared to the same 2017 period, primarily due to the timing of several new accounts in our lending and leasing businesses in the prior year. Renewal pricing in this group was up 5 percent during the fourth quarter and for the full year of 2018. Now, please turn to slide seven for a summary view of our 2019 outlook for the specialty property and casualty operations. We expect a 2019 combined ratio for the specialty property and casualty group overall between 92 and 94 percent. The specialty property and casualty groups calendar year gap combined ratio has been between 92% and 94% in each of the five preceding years. Our expectations remain consistent with our past results. Net written premiums are expected to be flat to up 3% for the year. Looking at each segment, we estimate a combined ratio in the range of 92% to 96% in our property and transportation group. Net written premiums in this group are estimated to be up 3% to 7% for the year. Our guidance assumes a normal level of crop earnings. We expect our specialty casualty group to produce a combined ratio in the range of 91% to 95%. Net written premiums are expected to be down 2% to up 2%. Net written premium guidance includes lower in our workers' comp businesses. And these items will be offset by a full year of premiums from ABA Insurance Services. Specialty financial group combined ratio is expected to be in the range of 86 to 90. Our projection for growth in net written premiums is in the range of 3 to 7 percent. We expect modest growth across all of the businesses in this group and continued strong results. Net investment income is expected to be flat to up 4% year over year. As noted earlier, 2018 results were exceptionally strong, primarily due to the strong performance of limited partnerships and similar investments, which we don't expect to continue. We expect overall property and casualty renewal pricing in 2019 to be flat to up 2%. A discussion over to Craig to review the results in our annuity segment and AFG's investment performance.