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Text: These materials will be referenced during portions of today's call.
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.
This was an outstanding quarter.
We're extremely pleased with the company's performance and continued strong market conditions.
Third quarter pre-tax core operating earnings and AFG's Property and Casualty Insurance segment were 60% higher than the comparable prior year period, and each of our Specialty Property and Casualty groups reported healthy growth and excellent underwriting margins.
Results in our portfolio of alternative investments continue to exceed our expectations and produced strong investment returns in the quarter.
This year, market conditions in the Property and Casualty business remain among the best I've seen in my 40 plus year career.
We believe that our disciplined, yet opportunistic operating philosophy, a lower net catastrophe exposure than our peers and a continued economic recovery contributed to these outstanding results.
I'll now turn the discussion over to Craig to walk us through AFG's third quarter results, investment performance and our overall financial position at September 30th.
As you'll see on Slide 3, AFG reported core net operating earnings of $2.71 per share, an impressive 96% increase year-over-year.
The increase was primarily the result of substantially higher underwriting profit in our Specialty P&C insurance operations and significantly higher P&C net investment income due to the continued strong performance of AFG's $1.7 billion and alternative investments.
Annualized core operating return on equity in the third quarter was nearly 18%.
Turning to Slide 4, you'll see the third quarter 2021 net earnings per share of $2.56 included non-core after-tax realized losses on securities of $0.15 per share, most of which pertain to fair value adjustments on securities that we continue to hold at the end of the 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 $16.4 billion investment portfolio are presented on Slides 5 and 6.
Pre-tax unrealized gains on AFG's fixed maturity portfolio were $225 million at the end of the third quarter.
For the nine months ended September 30, 2021, P&C net investment income was approximately 66% higher than the comparable 2020 period and included significantly higher earnings from alternative investments.
We're especially pleased with the performance of our alternative investments during the quarter.
Earnings from these investments may vary from quarter-to-quarter based on 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 third quarter of 2021 was a very strong 20.3%.
The average annual return on these investments over the past five calendar years was approximately 10%.
Alternative investments with underlying real estate exposures have been a key contributor to the performance of this portfolio.
We view our investments in real estate and real estate related entities is 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 and desirable communities where we continue to achieve very strong occupancy and collection rates and steady rate increases.
These multifamily properties represented over half of our alternative investment portfolio on September 30, 2021.
Due to the significant portion of our alternative assets that are tied to real estate relative to our peers, we also believe that this portfolio of investments has a lower correlation to broader market performance and has the potential to produce more consistent returns over time.
Excluding the impact of alternative investments, P&C net investment income for the nine months ended September 30, 2021 decreased by 8% year-over-year, reflecting lower market interest rates.
As you can see on Slide 6, our investment portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade and 97% of our P&C group fixed maturities portfolio with an NAIC designation of 1 or 2, its highest two categories.
Our excess capital was approximately $3 billion at September 30, 2021.
This number included parent company cash and investments of approximately $2.7 billion.
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.
Year-to-date, AFG has declared $24 per share and special dividends.
While all AFG's excess capital is available for internal growth and acquisitions, approximately $180 million of excess capital can be used for share repurchases and additional special dividends while staying within our most restrictive debt to capital guideline.
This figure is in addition to our regular quarterly dividend and a $4 per share special dividend declared and accrued in September and paid at the beginning of October, and the $4 per share special dividend declared yesterday.
We expect to continue to have significant excess capital and liquidity through the end of the year and beyond.
Our excess capital 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.
Annualized growth and book value per share plus dividends was an outstanding 37% in the first nine months of 2021.
Book value per share excluding unrealized gains related to fixed maturities was $59.70 at September 30, 2021 compared to $63.61 per share.
At the end of 2020 and reflects the $21.5 per share and dividends declared during the first nine months of 2021.
Results during the quarter were excellent as you'll see on the overview on Slide 8.
Third quarter pre-tax core operating earnings in AFG's Property and Casualty Insurance segment establish another record for the third time this year at $329 million.
Specialty Property and Casualty Insurance operations generated an underwriting profit of $169 million in the 2021 third quarter, an impressive 63% increase year-over-year, driven primarily by higher year-over-year underwriting profit in our Specialty Casualty Group and to a lesser extent our Specialty Financial Group.
Despite the impact of Hurricane Ida and other natural disasters during the quarter, our catastrophe losses were very manageable at $31 million.
Each of our Specialty Property and Casualty Groups reported strong premium growth, underwriting margins across our portfolio of businesses were excellent, and overall Specialty P&C combined ratio of 89%.
The third quarter 2021 combined ratio improved 3.1 points from the 92.1% reported in the comparable prior year period and included 2 points of catastrophe losses and 5.4 points of favorable prior year reserve development.
Turning to pricing, we continue to see strong renewal rate momentum and we're continuing to achieve strong renewal rate increases in the vast majority of our businesses with exceptionally strong renewal pricing in our longer tail liability businesses outside of workers' comp.
Average renewal pricing across our entire Property and Casualty group was up approximately 11% for the quarter.
Excluding our workers' comp business, renewal pricing was up approximately 13% in the third quarter.
Both measures are an improvement over the rate increases reported in the second quarter of 2021.
This quarter marked our 21st consecutive quarter of overall Specialty Property and Casualty rate increases, which continue to be meaning -- meaningful and excess of perspective estimated loss ratio trends.
Gross and net written premiums for the third quarter of 2021 were up 19% and 16% respectively when compared to the third quarter of last year.
The drivers of growth vary considerably across our portfolio of specialty property and casualty businesses.
Overall, in the aggregate, year-over-year growth in gross written premium during the first nine months of 2021 excluding crop insurance was fairly evenly split, but just over half attributable to net net growth and change in exposures and just under half attributable to rate increases.
Property and Transportation Group reported an underwriting profit of $45 million in the third quarter of '21 compared to $47 million in the third quarter of 2020.
Higher underwriting profits in our crop business in Singapore branch were more than offset by lower underwriting profit in our transportation, property and inland marine and non-crop agricultural businesses.
We continue to be pleased with the performance of our portfolio of transportation businesses, which has served us very well over time.
The diversity within this book, which includes specialty transportation niches like rigging and crane and ambulance and paratransit, home delivery, moving and storage, coverage for owner operators and workers' comp solutions tailored to the wheels industry has helped us deliver attractive margins and strong returns in this group of businesses.
Knowing what we know at this point, we also expect to have an above average crop year from both the profitability and a growth standpoint with net written premiums projected to be up approximately 32% for this year.
Yields throughout much of the corn belt are average to well above average, offsetting below average drought related yields from the North Central States, freeze-related losses in Texas and drought-related losses in the Western United States.
About 40% of our MPCI corn and soybean business is in the eastern corn belt, where growing conditions were more favorable.
The month of October serves as the discovery period for the majority of our corn and all of our soybean business.
Corn and soybean harvest pricing settled at 17% percent and 4% higher respectively than spring discovery pricing, and was comfortably within desired ranges of volatility.
The third quarter 2021 gross and net written premiums in this group were 26% and 22% higher respectively than the comparable prior year period, with growth reported in all businesses in this group.
The growth came primarily from our crop insurance business, primarily a result of the impact of higher commodity futures pricing and projected volatility on rates.
And also our transportation businesses, primarily the result of new accounts combined with strong renewals.
Overall, renewal rates in the Property and Transportation Group increased 5% on average for the third quarter of '21.
The Specialty Casualty Group reported an underwriting profit of $110 million in the 2021 third quarter compared to $53 million last year.
Higher profitability in our workers' compensation excess and surplus lines, excess liability and general liability businesses were key drivers of these results.
This Group reported a very strong 82 calendar year combined ratio for the third quarter, an impressive improvement of 8.7 points from the comparable period in 2020.
Underwriting profitability in our workers' comp businesses overall continues to be excellent.
Our workers' compensation book is another area where the strength and diversity of our stand-alone worker's comp businesses has served us well.
Gross and net written premiums for the Specialty Casualty Group increased 15% and 14% respectively when compared to the same prior year period.
Nearly all of the businesses in this group achieved strong renewal pricing and reported premium growth during the third quarter.
Significant renewal rate increases and new business opportunities contributed to higher premiums in our excess and surplus lines business.
Renewal rate increases, strong account retention and new business opportunities contributed to higher premiums in our targeted markets business.
And our mergers and acquisitions liability and executive liability businesses also contributed meaningfully to the year-over-year growth.
Renewal pricing for this group was up 13% in the third quarter and excluding workers' compensation businesses, renewal rates in this group were up approximately 18%.
Both measures are improvements from the rate increases achieved in the second quarter of 2021.
Now the Specialty Financial Group reported an underwriting profit of $26 million in the third quarter of 2021 compared to an underwriting profit of $13 million in the third quarter of 2020.
Improved results in our surety and financial institutions businesses contributed to the higher year-over-year underwriting profitability.
This group continued to achieve excellent underwriting margins and reported an 84.2 combined ratio for the third quarter.
Gross and net written premiums increased by 9% and 8% respectively in the 2021 third quarter when compared to the prior year period and nearly all businesses in this group reported growth, including our surety, fidelity and crime and lender services businesses.
Renewal pricing in this group was up approximately 8% for the quarter, consistent with the results in the second quarter of 2021.
Although the largest business in the special financial group is our financial institution services division, which generates about half of the group's gross written premium.
This group also includes a compelling mix of Specialty Property and Casualty businesses, offering coverages such as fidelity and crime, surety, trade credit and coverages tailored to lending and leasing institutions.
For more than 10 years, the average overall combined ratio of this group has consistently been below 90.
Now turning to A&E reserves.
During the third quarter of 2021, we did complete our annual ground-up review of our asbestos and environmental exposures relating to the run-off operations within the Property and Casualty group.
This was undertaken internally and reviewed all open accounts and considered any trends observed.
Good news is we have identified no new trends and activity was within our expectations and consistent with the expectations from our 2020 external study.
As a result, the review resulted in no net change to the property and casualty group's A&E reserves.
We do continue to enjoy robust survival ratios, which are well above industry averages in which our one measure of the strength of our A&E reserves.
Based on a relatively moderate payment patterns and the pace of new filings, we'll most likely continue to assess our reserves utilizing in-house resources next year.
We have also assessed the adequacy of our asbestos and environmental reserves for historic railroad and manufacturing operations.
Asbestos liabilities continue to be adequate, though we are making a small adjustment to our environmental liabilities based on slightly revised projections at three environmental sites.
Based on results for the first nine months of the year, we now expect AFG's core net operating earnings in 2021 to be in the range of $10.10 to $10.70, up significantly from our previous range of $8.40 to $9.20 per share.
We're obviously pleased once again to increase our 2021 core earnings per share guidance in a meaningful way.
This guidance reflects an assumed annualized return of approximately 10% on alternative investments in the fourth quarter of 2021, which would produce a return of approximately 20% on our $1.7 billion of alternative investments for the full year in 2021.
As we consider the outlook for our Specialty Property and Casualty operations based on results to the first nine months, we strengthened our guidance across the board, indicating higher expected 2021 net repayments and stronger underwriting profit.
We now expect the 2021 combined ratio for the Specialty Property and Casualty Group overall between 86% and 88%, an improvement of 2 points at the midpoint of the range of our previous estimate.
Net written premiums are now expected to be 11% to 14% higher than the $5 billion reported last year.
Growth in net written premiums excluding workers' comp is now expected to be in the range of 13% to 17%, an increase from the range of 12% to 16% estimated previously.
And then looking at each sub segment.
We now expect the Property and Transportation group combined ratio to be in a range of 86% to 88%.
Our guidance assumes above average crop earnings for the year and we continue to 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 85% to 87%.
Our guidance assumes continued strong renewal pricing in our E&S excess liability and several of our other longer-tail liability businesses.
We have raised our projection for growth in net written premiums to a range of 8% to 12% higher than 2020 results.
Premium growth will be tempered by rate decreases in our workers' compensation book, which are result of favorable loss experience in this line of business.
Excluding workers' comp, we now expect 2021 premiums in the Specialty and Casualty Group to grow in a range of 15% to 19%, an increase of 5 percentage points from the midpoint of our previous guidance.
And we now expect the Specialty Financial Group combined ratio to be in a range of 84% to 86%, reflecting strong underwriting results for the first nine months of the year.
We continue to expect growth in net written premiums for this group to be between 10% and 14% based on projected premium growth in our fidelity and crime and surety businesses.
And our expectations for overall renewal pricing are unchanged from last quarter, remaining in the range of 9% to 11% overall.
And excluding workers' comp, we expect renewal rate increases to be in the range of 11% to 13%.
Craig and are very pleased to report these exceptionally strong results and a significant increase in our earnings expectations for the full year.
We believe that our entrepreneurial opportunistic culture, combined with our strong balance sheet and financial flexibility position us very well as we close out the year and we look forward to the opportunities in 2022.
We'll now open the lines for the Q&A portion of today's call, and we'd all be happy to respond to any questions.

user
q3 core operating earnings per share $2.71.
q3 earnings per share $2.56.
american financial- sees fy 2021 core net operating earnings $10.10 - $10.70 per share, an increase from previous guidance of $8.40 - $9.20 per share.

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