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Text: These materials will be referenced during portions of todays call.
A detailed description of these risks and uncertainties can be found in AFGs 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.
And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.
AFG reported core net operating earnings of $2.39 per share, an impressive 257% increase year-over-year.
The increase was due to substantially higher underwriting profit in our Specialty Property and Casualty insurance operations and higher Property and Casualty net investment income.
Improved results from the companys $1.6 billion of alternative investments were partially offset by lower other property and casualty net investment income, primarily due to lower short-term interest rates.
Annualized core operating return on equity in the second quarter was a strong 14.7%.
Turning to slide four.
Youll see that the second quarter 2021 net earnings per share of $11.70 included after-tax noncore items totaling $9.31 per share.
These noncore items included earnings from our discontinued Annuity operations, inclusive of an after-tax gain on the sale of $8.14 per share.
Second quarter 2021 noncore items also included $0.40 per share in after-tax noncore net realized gains on securities.
Based on results through the first half of the year, we now expect AFGs core net operating earnings in 2021 to be in the range of $8.40 to $9.20, up from our previous range of $7 to $8 per share, an increase of $1.30 per share at the midpoint of our guidance.
As youll see on slide five, this guidance range continues to assume 0 earnings on AFGs $2.2 billion in parent company cash as we continue to consider alternatives for deployment of the remaining proceeds from the sale of the Annuity business.
Were pleased to increase our 2021 core earnings per share guidance in such a meaningful way.
This guidance also excludes other noncore items such as realized gains and losses and other significant items that are not able to be estimated with reasonable precision or that may not be indicative of ongoing operations.
Furthermore, the above guidance reflects a normal crop year and an annualized return of approximately 8% on alternative investments over the remaining two quarters of 2021.
Craig and I will discuss our guidance for each segment of our business in more detail later in the call.
Now Id like to turn our focus to our property and casualty operations.
Results during the quarter were excellent.
Pretax core operating earnings in AFGs Property & Casualty Insurance segment were a record $288 million in the second quarter of 2021, an increase of $172 million from the comparable prior year period.
Im very pleased that all three of our property and casualty groups reported strong double-digit growth in net written premiums, which was primarily the result of the economic recovery, new business opportunities and healthy renewal pricing.
Underwriting margins across our portfolio of businesses were excellent with each property and casualty group reporting a combined ratio in the 80s.
The Specialty Property and Casualty insurance operations generated an underwriting profit of $153 million in the second quarter compared to $54 million in the second quarter of 2020, an increase of 183%.
Each of our Specialty Property and Casualty groups produced higher year-over-year underwriting profit.
The second quarter 2021 combined ratio was a very strong 87.9%, improving 7.3 points from the 95.2% reported in the comparable prior year period.
Second quarter 2021 results included 0.9 points in catastrophe losses and 5.4 points of favorable prior year reserve development.
Catastrophe losses, net of reinsurance and including reinstatement premiums, were $11 million in the second quarter of 2021 compared to $26 million in the prior year period.
Results for the 2021 second quarter include 0.2 points in COVID-19-related losses compared to 7.6 points in the 2020 second quarter.
We continue to carefully monitor claims and loss trends related to the COVID-19 pandemic.
Numerous legislative and regulatory actions as well the specifics of each claim contribute to a highly fluid evolving situation.
AFG recorded $2 million in losses related to COVID-19 in the second quarter of 2021, primarily related to the economic slowdown impacting our trade credit business.
And we recorded favorable reserve development of approximately $4 million related to accident year 2020 COVID-19 reserves based on loss experience.
Given the uncertainty surrounding the ultimate number and scope of claims relating to the pandemic, approximately 66% of the $96 million in AFGs cumulative COVID-19-related losses are held as incurred but not reported reserves at June 30, 2021.
Our claims professionals and those who support them are working tirelessly to review claims with the care and attention each deserves.
Now turning to pricing.
We continue to see strong renewal rate momentum and achieved broad-based pricing increases in the quarter with exceptionally strong renewal pricing in our longer-tailed liability businesses outside of workers comp.
Average renewal pricing across our entire Property and Casualty Group, including comp, was up approximately 9% for the quarter.
Excluding our workers comp business, renewal pricing was up approximately 12% in the second quarter.
With the exception of workers comp, were continuing to achieve strong renewal rate increases in the vast majority of our businesses.
In fact, this quarter marked our 20th consecutive quarter of overall Specialty Property and Casualty rate increases, which continue to be meaningfully in excess of prospective estimated loss ratio trends.
Gross and net written premiums for the second quarter of 2021 were up 26% and 22%, respectively, when compared to the second quarter of 2020.
Excluding workers comp, gross and net written premiums grew by 30% and 26%, respectively, year-over-year.
The drivers of growth vary considerably across the portfolio of our Specialty Property and Casualty businesses.
In the aggregate, year-over-year growth in gross written premium during the first six months of 21, excluding crop, was fairly evenly split with just over half of the overall growth attributable to rate and about half attributable to net growth and change in exposures.
Market conditions continue to be very favorable and are among the best I recall in my 40-plus years in the business.
Property and Transportation Group reported an underwriting profit of $62 million in the second quarter compared to $33 million in the second quarter of last year.
Higher underwriting profit in our crop, property and inland marine, transportation businesses were the drivers of the year-over-year increase.
The businesses in the Property and Transportation Group achieved a very strong 86.6% calendar year combined ratio overall in the second quarter, an improvement of 5.1 points from the comparable period in 2020.
Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums, were $7 million in the second quarter of 2021 compared to $15 million in the comparable 20 period.
Second quarter 2021 gross and net written premiums in this group were 39% and 32% higher, respectively, than the comparable prior year period, with growth reported in all the businesses in this group.
The growth came primarily from our transportation businesses, primarily the result of new accounts, combined with strong renewals and increased exposures in our alternative risk transfer business and our crop insurance business, primarily the result of higher commodity futures pricing and timing differences in the writing of premiums.
Overall renewal rates in this group increased 7% on average for the second quarter, consistent with the results in the first quarter this year.
Im pleased to see this continued rate momentum.
As far as crop, we expect a normal crop year.
Commodity futures for corn and soybeans are approximately 20% and 12% higher, respectively, than spring discovery prices, as I was looking at my monitor today.
Crop conditions vary by geography with industry reports of 62% of corn and 60% of soybean crops in good to excellent condition.
Generally, crops in the eastern Corn Belt are generally in good shape and crop conditions in the Central and Southern Plains and Southeast are above average.
Its the crop conditions in the Pacific Northwest through the Dakotas that are below average right now due to extreme drought conditions.
And corn and soybean national yield estimates are currently at or near their respective trend yields.
So the year seems to be shaping up fine.
Specialty Casualty Group reported an underwriting profit of $71 million in the 2021 second quarter compared to $27 million in the comparable 2020 period.
Higher profitability in our excess and surplus lines, excess liability, targeted markets and executive liability businesses were the key drivers.
Catastrophe losses for this group were approximately $2 million in the second quarter of 2021 compared to $6 million in the comparable prior year period.
Results in the second quarter of last year included $52 million of COVID-19-related losses, primarily in workers comp and executive liability businesses.
This group reported a very strong 87.9% combined ratio for the second quarter, an improvement of seven points from the comparable period in 2020.
Underwriting profitability in our workers comp businesses overall continues to be excellent.
Gross and net written premiums increased 19% and 16%, respectively, when compared to the same prior year period.
And excluding comp, gross and net written premiums grew by 26% and 25%, respectively, year-over-year.
Nearly all the businesses in this group achieved strong renewal pricing and strong premium growth during the second quarter.
Significant renewal rate increases and new business opportunities contributed to higher premiums in our excess liability businesses, which have higher cessions than other businesses in the group.
Higher renewal rates and increased exposures contributed to the premium growth in our excess and surplus lines business.
And our executive liability and mergers and acquisition liability businesses also contributed meaningfully to the year-over-year growth.
Renewal pricing in this group was up 11% for the second quarter.
And excluding workers comp, renewal rates in this group were up a very strong 17%.
Specialty Financial Group reported an underwriting profit of $21 million in the second quarter of 2021 compared to an underwriting loss of less than $1 million in last years second quarter.
Improved results in our trade credit business contributed to the higher year-over-year underwriting profitability.
And results last year included COVID-19-related losses of $30 million primarily related to trade credit insurance.
This group continued to achieve excellent underwriting margins and reported an 86.4% combined ratio for the second quarter of 2021.
And gross and net written premiums increased by 7% and 14%, respectively, in the 2021 second quarter when compared to the prior year period.
New business opportunities within our lender services, surety and fidelity and crime businesses contributed to the increase in the quarter.
Renewal pricing in this group was up 8% for the quarter, consistent with results in the first quarter of 2021.
Based on the results through the first six months, we have strengthened our guidance across the board, indicating higher expected 2021 net written premiums and stronger underwriting profit.
We now expect the 2021 combined ratio for the Specialty Property and Casualty Group overall between 88% and 90%.
Net written premiums are now expected to be 10% to 13% higher than the $5 billion reported in 2020, which is an increase of three percentage points from the midpoint of our previous estimate.
Growth in net written premiums, excluding workers comp, is now expected to be in the range of 12% to 16%, an increase from the range of 9% to 12% estimated previously.
And looking at each segment, we now expect the Property and Transportation Group combined ratio to be in the range of 87% to 90%.
Our guidance assumes a normal level of crop earnings for the year.
We now expect growth in net written premiums for this group to be in the range of 15% to 19%.
Our Specialty Casualty Group is now expected to produce a combined ratio in the range of 87% to 90%.
Our guidance assumes continued strong renewal pricing in our E&S, excess liability and several of our other longer-tail liability businesses.
Weve raised our projection for growth in net written premiums to a range of 5% to 9% higher than 2020 results, a change from the previous estimate of 2% to 5%.
Premium growth will be tempered by rate decreases in our workers comp book, which are a result of favorable experience in this line.
Excluding workers comp, we now expect 2021 premiums in this group to grow in the range of 10% to 14%, an increase of 5% from the midpoint of our previous guidance.
And we now expect the Specialty Financial Group combined ratio to be 84% to 87%.
We now expect growth in net written premiums for this group to be between 10% and 14%, reflecting stronger underwriting results for the first half of the year and projected premium growth in our fidelity and crime and surety businesses.
Based on the results through the end of June, we expect overall property and casualty renewal pricing in 2021 to be up 9% to 11%, an improvement from the range of 8% to 10% estimated previously.
And excluding comp, we expect renewal rate increases to be in the range of 11% to 13% as indicated by the continued pricing momentum we saw through the first half of 2021.
I now turn the discussion over to Craig to review AFGs investment performance and the successful completion of the sale of our Annuity business.
The details surrounding our $16.1 billion investment portfolio are presented on slides nine and 10.
AFG recorded second quarter 2021 net realized gains on securities of $34 million after tax.
Approximately $29 million of the after-tax realized gains pertained to equity securities that AFG continued to own at June 30, 2021.
Pretax unrealized gains on AFGs fixed maturity portfolio were $260 million at the end of the second quarter.
Were especially pleased with the performance of our alternative investments during the quarter.
Earnings from alternative investments may vary from quarter-to-quarter based on the reported results and valuation of the underlying investments and generally are reported on a quarter lag.
The annualized return on alternative investments reported in core operating earnings in the second quarter of 2021 was 21.1%.
The average annual return on these investments over the past five calendar years was approximately 10%.
We view our investments in real estate and real estate-related entities as a core competency.
In addition to our portfolio of directly owned properties and mortgage loans, our real estate-related investments include real estate funds and real estate partnerships accounted for by the equity method.
We found great success in investing in multifamily properties in desirable communities where we continue to achieve very strong occupancy and collection rates.
These properties represented approximately 55% of our alternative investment portfolio at June 30, 2021.
As you can see on slide 10, our investment portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade and 98% of our P&C group fixed maturities portfolio with an NAIC designation of one or 2, its two highest categories.
On May 28, 2021, AFG completed the sale of our Annuity businesses to MassMutual, the highlights of which are included on slide 11.
Initial cash proceeds from the sale based on the preliminary closing balance sheet were $3.5 billion.
AFG recognized an after-tax noncore gain on the sale of $697 million or $8.14 per AFG share upon closing.
Both the proceeds and the gain are subject to post-closing adjustments.
Prior to the completion of the transaction, AFGs Property and Casualty Group acquired approximately $480 million in real estate-related partnerships, and AFG parent acquired approximately $100 million in directly owned real estate from Great American Life Insurance Company.
Carl and I are extremely proud of the contributions the Annuity segment made to AFG over the years.
Over the last 10 years, this business generated an internal rate of return of approximately 16%, as shown on slide 12.
In an industry where reported net earnings often are significantly less than reported core operating earnings, were proud of the fact that our Annuity business has produced strong net earnings that demonstrate the discipline with which we operated this business and helped to generate strong overall returns for AFG.
As you will see on slide 13, for the 10-year period ended December 31, 2020, AFGs Annuity segment net earnings were 108% of Annuity core operating earnings compared to only 74% for the life insurance industry overall.
When we include the five months of Annuity earnings during 2021, Annuity net earnings as a percent of Annuity core operating earnings improved to 110%, demonstrating the quality of our earnings relative to the industry.
Im very grateful to our Annuity segment management team and associates for their efforts to bring this transaction to a successful close and wish them the best as they continue their careers with MassMutual.
The disposition of our Annuity business sharpens our focus exclusively on the specialty P&C market and generated substantial cash and excess capital for AFG.
In connection with the closing of this transaction, the company declared a special onetime cash dividend of $14 per share totaling $1.2 billion, which was paid in mid-June.
Earlier this week, we paid an additional $170 million in connection with an additional $2 per share special dividend declared in July.
Our excess capital remains at a significant level, which affords us the financial flexibility to make opportunistic repurchases, pay additional special dividends, grow our Specialty P&C niche businesses organically and through acquisitions and start-ups that meet our target return thresholds.
I now turn the discussion over to Brian, who will discuss AFGs financial position and share a few comments about AFGs capital and liquidity.
We repurchased $114 million of AFG common stock during the quarter at an average price per share of $116.13 when you adjust it for the special dividend.
Share repurchases, especially when executed at attractive valuations, are an important and effective component of our capital management strategy.
During the quarter, in addition to the share repurchases and the special dividend that Craig mentioned earlier, we returned $42 million to our shareholders through the payment of our regular $0.50 per share quarterly dividend.
Returning excess capital to shareholders in the form of dividends is a key component of AFGs capital management strategy and reflects our strong financial position and our confidence in the companys financial future.
With the gain on the Annuity sale, annualized growth in adjusted book value per share plus dividends was a strong 47% in the first six months of 2021.
Our excess capital is approximately $3.2 billion at the end of June.
This number included parent company cash and investments of approximately $3 billion.
As of June 30, AFG parent had invested approximately $500 million of the proceeds from the Annuity sale in high-quality fixed maturity investments with an average life of less than 0.5 year and a yield of approximately 1.2%.
As a reminder, we define excess capital as the sum of holding company cash and investments, excess capital within our insurance subsidiaries and borrowing capacity up to a debt to total adjusted capital ratio that ensures we maintain our commitments to rating agencies.
While all of AFGs excess capital is available for internal growth or acquisitions, over $700 million of that excess capital can be used for share repurchases and special dividends above and beyond the nearly $1.5 billion distributed to shareholders through the $14 per share special dividend paid in June, the $2 special dividend paid Monday of this week and the $114 million in second quarter share repurchases while still staying within our most restrictive debt to capital guideline.
We expect to continue to have significant excess capital and liquidity throughout 2021 and beyond.
Specifically, our P&C 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 debt maturities before 2026.
We will now open the lines for any questions.

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q2 core operating earnings per share $2.39.
q2 earnings per share $11.70.
full year 2021 core net operating earnings guidance increased to $8.40 - $9.20 per share.

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