American Financial Group, Inc. (AFG) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to American Financial Group 2026 Third Quarter Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Diane Weidner, Vice President of Investor Relations. Please go ahead

Good morning. and welcome to American Financial Group's Third Quarter 2026 Earnings Results Conference Call. We released our 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. Joining me this morning are 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 our 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 and our remarks were in responses to questions. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you're 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 to discuss our results.

Well, good morning. I'll begin by sharing a few highlights of AFG's 2026 Third Quarter 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 your questions. We are pleased to report excellent quarterly core net operating earnings, our highest ever for a third quarter. strong underwriting margins, healthy premium growth and higher quarterly property and casualty net investment income contributed to a new third quarter record for pretax property and casualty operating income. Our compelling and diversified mix of specialty insurance businesses or entrepreneurial culture, disciplined operating philosophy and our astute team of in-house investment professionals continue to position us to create value for our shareholders through a variety of insurance market conditions. Craig and I thank God, our talented management team and our great employees for helping us to achieve these results. I'll now turn the discussion over to Craig to walk us through some of the details.

Thank you, Carl. Please turn to Slides 3 and 4 for a summary of earnings information for the quarter. Here, you'll see that AFG reported core net operating earnings of $3.97 per share in the 2026 third quarter, a 48% increase from the prior year period. This level of performance resulted in an impressive annualized core operating return on equity of 26%. I'll start with an overview of AFG's investment performance and financial position and share a few comments about AFG's capital and liquidity. The detail is surrounding our $17.4 billion investment portfolio are presented on Slides 5 and 6. Net investment income at our Property and Casualty insurance operations for the 3 months ended September 30, 2026, increased 41% year-over-year, had established a new third quarter record for AFG. The increase was primarily attributable to income from the sale of the Charleston Harbor Resort and Marina. Property & Casualty net investment income, excluding the income from the sale of Charleston Harbor Resort and Marina increased 10% when compared to the 2025 quarter. Consistent with what we previously communicated, the August 2026 sale of Charleston Harbor Resort and Marina generated $126 million in pretax net investment income. Since the P&C companies and AFG parent each owned half of the property, the earnings were split evenly between the operating results of the P&C insurance segments and holding company investment income. The sale contributed $1.21 per share of core net operating earnings for the 3 months ended September 30, 2026. Third quarter core net operating income represented a record even when excluding the income from the sale of Charleston Harbor Resort and Marina. As you'll see on Slide 6, approximately 2/3 of our portfolio is invested in fixed maturities. In response to the higher interest rate environment experienced during the third quarter, we invested a significant amount of cash and fixed maturity investments totaling approximately $1.5 billion. For context, the $1.5 billion invested in the most recent quarter is equal to the amount invested during the entire first half of the year. These purchases, combined with interest rate swaps executed during the third quarter increase the duration of our P&C fixed maturity portfolio, including cash and cash equivalents to 3.6 years at September 30, 2026, from 3.1 years at June 30, 2026. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 6%. The annualized return on alternative investments was approximately 6.7% for the 2026 third quarter compared to 6.2% for the prior year quarter. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annual returns averaging 10% or better. Please turn to Slide 7, where you'll find a summary of AFG's financial position at September 30, 2026. During the third quarter, we returned nearly $100 million to our shareholders, including $26 million in share repurchases and the payment of our regular quarterly dividend. In October, we increased AFG's regular quarterly dividend by 10.2% over the previously declared rate of $0.97 per share and paid on October 23, 2026. In conjunction with our earnings release, we declared a special cash dividend of $3.50 per share, payable on November 25, 2026, to shareholders of record on November 16, 2026. The aggregate amount of the special dividend will be approximately $290 million. With this special dividend, the company has declared $59 per share or nearly $5 billion in special dividends since the beginning of 2021. Carl and I consider these special dividends to be an important component of total shareholder return. We expect our operations to continue to generate significant excess capital throughout the remainder of 2026 and into 2027, which provides ample opportunity for our acquisitions, special dividends or share over the next year. We evaluate the best alternative for capital deployment on a regular basis. We continue to view total value creation as measured by growth in book value per share plus dividends as an important measure of performance over the long term. For the 9 months ended September 30, 2026, and AFG's growth in book value per share, excluding AOCI, plus dividends, was 13.8%. I'll now turn the call over to Carl to discuss the results of our P&C operations.

Thank you, Craig. If you turn to Slides 8 and 9 of the webcast, which include an overview of our third quarter results. Our Specialty Property and Casualty businesses performed very well in the third quarter. establishing a new record for third quarter pretax property and case operating income. We continue to execute on opportunities to grow while achieving favorable renewal rate increases, underwriting discipline and an opportunistic business model have been essential to helping us outperform peers over the long run and ensure that we're meeting or exceeding overall targeted returns. Third quarter 2026 gross and net written premiums were 8% and 9% higher, respectively, than the comparable period in 2025, as you'll see on Slide 8. Average renewal rates across our Property and Casualty Group, excluding workers' comp, were up approximately 6% for the quarter. That was about 1 point higher than the previous quarter. Average renewal rates, including workers' comp, were up approximately 5% overall, also about 1 point higher than the previous quarter. We have reported overall renewal rate increases for 41 consecutive quarters and we believe we're achieving overall renewal rate increases that enable us to meet or exceed our targeted returns. Our Specialty Property and Casualty insurance businesses produced a 93.8% combined ratio in the third quarter of 2026, 0.8 point higher than the 93 reported in the third quarter of 2025. Third quarter 2026 results benefited from 1.5 points of favorable prior year reserve development compared to 1.2 points in the third quarter of 2025. Catastrophe losses added 1 point in the third quarter of 2026 compared to 1.2 points in the third quarter of 2025. Now if you turn to Slide 9, we'll 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 93.4% calendar year combined ratio overall in the third quarter of 2026, an improvement of 0.7 point from the 94.1% reported in the comparable 2025 period. Third quarter 2026 gross and net written premiums in this group were 12% and 14% higher than the comparable prior year period. The increase is primarily attributable to growth in certain crop insurance products, along with new business opportunities and a favorable rate environment in several of our transportation businesses. Overall renewal rates in this group increased approximately 7% on average in the third quarter of 2026, slightly below pricing achieved in this group for the second quarter of this year. For the third consecutive quarter, we did make an underwriting profit in commercial auto liability and continue to be enthusiastic about the progress there. Renewal rates in commercial auto liability we're up about 15% during the quarter and for year-to-date 9 months. In our crop business, harvest pricing for corn and soybeans settled 3% and 14% higher, respectively, than the spring discovery pricing, which is well within acceptable ranges. Recent overall weather conditions are more likely to affect harvest timing and final yield outcomes. Corn harvest progress remains behind average parts of the Western corn belt while soybean harvest is generally advancing at a faster pace. Recent freezes effectively entered the growing season across northern production areas, but are not expected to meaningful effect mature corn and soybean crops. Based on all these factors, we continue to anticipate an average crop year. As is our standard practice, we record the majority of our calendar year crop profitability in the fourth quarter, wherein we have better visibility into actual yields and claims activity in our MPCI business and a clear indication of the performance of our private product business. The businesses in our Specialty Casualty Group achieved a solid 94.9% calendar year combined ratio overall in the third quarter of 2026, an improvement of nearly a point from the 95.8% reported in the comparable period in 2025. We continue to be mindful of social inflation and remain cautious in our initial loss picks for the lines of business written by the businesses in this group. Third quarter 2026 gross written premiums in this group increased less than 1% and net written premiums increased 2% when compared to the same prior year period. new business opportunities, strong policy retention and higher rates contributed to growth in several of our Specialty Casualty businesses, particularly our excess and surplus and workers' comp businesses. Although this growth was partially offset by nonrenewals of underperforming accounts and certain of our targeted market businesses, including actions to decrease our casualty footprint in California. Excluding our workers' comp businesses, renewal rates for this group were up approximately 6% in the third quarter. Pricing in this group, including workers' comp was up about 4%, both measures are an improvement of about 2 points over pricing achieved in the second quarter. Specialty Financial Group reported an underwriting profit of $23 million in the third quarter of 2026, compared to $51 million in the third quarter of 2025. The decrease reflects an isolated large loss in our European operations and lower overall levels of favorable prior year development. Gross and net written premiums in this segment were both up 14% in this group when compared to the prior year period, primarily due to growth across our lender services businesses. Renewal pricing in this group was up approximately 4% in the third quarter. Craig and I are proud of our proven track record of innovation, long-term value creation and a forward-thinking mindset AFG is well positioned to continue to build long-term value for our shareholders for the remainder of 2026 and beyond. I will now 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 Instructions]. Our first question will be coming from the line of Hristian Getsov of Wells Fargo.

My first question is on workers' comp. We've heard from a fewer comp players that there's some increase in frequency of given the expiration of the ACA subsidies and overall affordability challenges. Can you talk about the loss trends you're seeing in your comp book? And anything incremental you're seeing in recent quarters away from the cumulative trauma dynamic you've pointed to in recent calls in your California comp book.

Yes. Overall, we're really continuing to see flat to slightly down frequency in our workers' comp business. The exception is California, as you mentioned, pretty much driven by the cumulative trauma claims that is pushing frequency up, some both in our our Republic book in our strategic comp, higher deductible business that's written in California. We continue to be very pleased with our overall workers' comp underwriting results. They continue to be strong on a calendar year and accident year basis in the third quarter and year-to-date 2026. We're also growing the business in that third quarter, the business was probably up a high single-digit increase in mid-single digit year-to-date. So we think the loss ratio trends continue to be pretty favorable. Obviously be...

You can finish your thoughts, sir.

Yes. When you look at the -- when you pretty much all parts of our workers' comp business, excluding Republic and California are doing well. California would be the exception where we have a moderate underwriting loss there.

Got it. And then as we think about competition widening into casualty lines away from just property and you obviously continue to see very strong growth across your portfolio. How should we think about growth trending from here? Are there still enough opportunities to maintain a mid-single digit or better top line growth number?

In casualty or overall as a company.

Just overall?

Yes. I think that's -- I think we're showing that in our quarter's growth and in our year-to-date growth. I think that's one of the benefits of having 35 specialty businesses. Not all the business is correlated to the general property and casualty cycle, there's businesses like crop that have double-digit growth or commercial auto, where others are still struggling with fixing the underwriting results, and we're in good shape and are finding opportunities to grow. We're kind of our excess liability business in Specialty Casualty and workers' comp are growing. And that's so we continue to find good opportunities for growth in that, really, the majority of our businesses of those 35 have are showing some growth.

Got it. And one more, if I may. The nonrenewals in the California casualty book, is there any size we can get with that? And are you expecting any other nonrenewal actions as we kind of think about the Q4 and 2027?

I think I really mentioned over the past year, we -- in businesses like SHS or nonprofit business that we've been more defensive there. So that gets to be kind of an account-by-account basis, quarter-by-quarter and what we decide to do. And our public sector business, I think we're also being more careful about our -- and really kind of reducing our California exposures there.

Our next question will be coming from the line of Andrew Andersen of Jefferies.

Specialty Casualties accident, your loss ratio increased to about 65% from 63.5% in the first half of the year. Could you just talk about what drove the increase? Should we think of that as normal volatility business mix? Or was there a change in underlying loss trend there.

So you're looking at Specialty Casualty, accident year loss ratio ex cats?

Yes.

So for the quarter, we're seeing some improvement there coming out of our E&S businesses in particular. So if you look at the third quarter of 2026 versus the third quarter we're seeing better results out of our excess and surplus lines from lower severity there overall a bit higher compared to the beginning of the year? to some of that -- that would just be -- if you're looking at 2 quarters before that, a lot of that would just be more a mix of business there throughout the year. When you look at the 9 months, we're fairly consistent at the loss ratio ex cats at right around 64%.

Got it. And as we think of the Specialty Financial segment, it had pretty strong growth despite pricing being more moderate compared to a few years ago. But could you just talk about what's driving that strong growth in Lender Services and how sustainable you think that is into next year?

Yes. We continue to be optimistic about our ability to grow the business. The number of different businesses within the group and that, and Specialty Equipment Services is a business we don't talk about that much, but we're seeing nice growth there. It's kind of an embedded product that's sold on the front end of capital goods as they're sales made. We do that in Europe and also the U.S. So -- and our basic vendor, so with our lender-placed property business continues to be healthy and growing. And so has the tendency to be a little bit lumpier.

Our next question will be coming from the line of Michael Zaremski of BMO.

On the Specialty Casualty segment, there was a little bit of reserve release. I know not a huge number, but nice to see in the biggest number in a while. I don't know if you want to provide any color there.

Sure. This is Brian. So what we're -- what you will see, as a reminder, we look at our reserves by business unit each quarter and make adjustments as needed. In some of the previous quarters, we've had things going both directions, which kind of always happens. But what we're really seeing here is the social inflation exposed businesses behaving better. So in that number, which is a net of some favorable and some adverse development, there's less adverse development. So it didn't come from excessive workers' comp releases or anything like that. It's really just good solid performance across the whole group of casualty businesses. We're especially pleased by the behavior of the semifinal inflation exposed businesses where on a net basis, they were favorable, which hasn't always been the case.

Got it. On the social inflationary business. And I think Carl made -- or Brian, you made a comment earlier, too, about seeing a little less loss trend on E&S and specialty casualty. But just kind of overall, has there been any change to the absolute loss trends? Like is loss trend is the slope changing? Or is it more AFG has been picking at its reserves at higher levels, so the loss trend relative to your expectations is coming in a bit better year-over-year. Does that make sense?

Yes. I mean, we react to bad news as quickly as we can. So we would strive to be on the conservative side of our accident year picks with the hope that we will be correct or that we are more likely to have favorable adverse development. So in areas like commercial auto liability, where we're seeing profit now. We're still keeping our initial loss picks higher. And the same thing would be true in the site inflation-exposed businesses in casualty, where we're being sensitive in our current year loss picks despite seeing flatter trends overall. So we're not really seeing a big change in frequency or severity overall satiation exposed lines. But obviously, we're not going to call victory on that, and we're going to be mindful of that as we reserve for our business and price our businesses for quite a while.

Yes. I continue to be enthusiastic about the pricing that we're getting in the social inflation exposed lines. I think I had mentioned my comments, commercial auto rates being up 15%. I didn't mention things like excess liability rates are still up 10% plus year-to-date, our nonprofit business. particularly as we increase rates tied to abuse. Overall, nonprofit rates are up some 7% year-to-date. So I mean, those are -- it's still strong are still strong pricing in those particular social inflation-exposed businesses.

That's helpful. And I guess just my follow-up would be on the pricing environment. I guess one of the beauties of your business model, you have a lot of diversification. But in terms of the sequential increase in -- so you can choose your spots. But in terms of sequential increase in pricing, is this more of a specific to American Financial Group, given your kind of business mix changes you're making it more intentionally? Or is this kind of the marketplace as well?

Well, I think it's always some of both. But again, quarter-by-quarter, they're going to be based off of what your mix is in a quarter. There will be slight changes in that. I'd say, well, with pricing point or we'll take it in the third quarter. That's pretty good along with the growth that we had. So I really like the -- as an organization, the balance of rate and growth opportunity that we have across our businesses right now.