American Financial Group, Inc. 2026 Q2 Earnings Call

Welcome to American Financial Group's second 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 CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on slide two 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, in our remarks or in responses to questions. A reconciliation of net earnings to core net operating earnings is included in our earnings release. 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. I am pleased to turn the call over to Carl to discuss our results.

Well, good morning. Before we begin our commentary about the quarter, I want to take a moment to express our deepest condolences to the Berkley family. Bill was an icon in our industry, a respected competitor, and most importantly, our good friend. He leaves an incredible legacy and will be sorely missed. Turning our focus to AFG's second quarter, I'll share a few highlights, 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. I am pleased to report that we've set a new second quarter record for pre-tax property and casualty operating income driven by strong underwriting margins, healthy premium growth, and higher net investment income.

I believe our compelling and diversified mix of specialty insurance businesses, our entrepreneurial culture, our disciplined operating philosophy, and an 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 turn the discussion over to Craig to walk us through some of these details.

Thanks, Carl. Please turn to slides three and four for a summary of earnings information for the quarter. Here you will see AFG reported core net operating earnings of $2.82 per share in the 2026 second quarter, a 32% increase from the prior year period. This level of performance resulted in an annualized core operating return on equity of 19.2%. 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 details surrounding our $17.1 billion investment portfolio are presented on slides five and six. Net investment income at our property and casualty insurance operations for the three months ended June 30, 2026, increased 23% year-over-year and established a new second quarter record for AFG and was driven by improved returns from alternative investments.

As you'll see on slide six, approximately two-thirds of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.5%. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 3.1 years at June 30, 2026. The annualized return on alternative investments was approximately 7.1% for the 2026 second quarter compared to 1.2% 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 annualized returns averaging 10% or better. In April of 2026, AFG reached definitive agreements to sell the Charleston Harbor Resort & Marina. Subject to receipt of necessary third-party approvals and satisfaction of customary closing conditions, the transaction is expected to close in the third quarter of 2026.

AFG currently expects to recognize a pre-tax core operating gain of approximately $125 million, or $1.20 per share on the sale. The property is owned equally by the P&C operations and AFG parent. The gain on sale will be reported as net investment income and split equally between the two entities. This transaction was not contemplated in AFG's original business plan assumptions. Please turn to slide seven, where you'll find a summary of AFG's financial position at June 30, 2026. During the quarter, we returned nearly $100 million to our shareholders, including $26 million in share repurchases and $0.88 per share regular quarterly dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2026, which provides ample opportunity for acquisitions, special dividends or share repurchases. We evaluate the best alternatives 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 three months ended June 30, 2026, AFG's growth in book value per share, excluding AOCI plus dividends, was 5%. I'll now turn the call over to Carl to discuss the results of our P&C operations.

Thank you, Craig. Please turn to slides eight and nine of the webcast, which include an overview of our second quarter results. I'm very pleased with the strong performance of our specialty property and casualty businesses. We achieved a 44% increase in underwriting profit in the first six months of the year while executing on opportunities to grow, with approximately three-fourths of our businesses reporting higher year-over-year premiums through June 30th. In addition, we're doing this while consistently achieving renewal rate increases, excluding workers' comp, which have been around 5% the past four quarters. These results showcase the diversification across our 36 businesses, the underwriting discipline and opportunistic culture that have allowed us to produce strong results that outperform peers over the long run. These same attributes give us confidence that those results can continue despite softening in certain parts of the overall property and casualty market.

Now, looking at a few details. You'll see on slide eight that our specialty property and casualty insurance businesses produced a 91.5 combined ratio in the second quarter of 2026, an improvement of 1.6 points from the 93.1 reported in the second quarter of last year. Second quarter 2026 results benefited from 3.4 points of favorable prior year reserve development, compared to 0.7 points in the second quarter of 2025. Catastrophe losses added 1.8 points in the second quarter of 2026 compared to 2.3 points in the second quarter of last year. Second quarter 2026 gross and net written premiums were 7% and 6% higher, respectively, than the comparable period in 2025. As I noted earlier, average renewal rates across our property and casualty group, excluding workers' comp, were up approximately 5% for the quarter. Average renewal rates, including workers' compensation, were up approximately 4% overall.

That was about a point higher than the previous quarter. We have reported overall renewal rate increases for 40 consecutive quarters. We believe we're achieving overall renewal rate increases that enabled us to meet or exceed targeted returns. Now I'd like to turn to slide nine to 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 90.3 calendar year combined ratio overall in the second quarter of 2026, an improvement of 4.9 points from the 95.2 reported in the comparable 2025 period. Higher year-over-year underwriting profits in our transportation and agricultural businesses were the primary drivers of these very strong results.

In second quarter of 2026, gross and net written premiums in this group were 8% and 5% higher than the comparable prior year period. The increase is primarily attributable to growth in crop insurance products, with higher premium sessions, along with new business opportunities, higher exposures, and a favorable rate environment in several of our transportation businesses. Overall, renewal rates in this group increased approximately 8% on average in the second quarter of 2026, two points higher than the pricing achieved in this group for the first quarter of 2026. We reported a small underwriting profit in commercial auto liability, I'm pleased to say, for the second quarter in a row, and we're continuing to make progress there. Renewal rates in commercial auto liability were up 15% during the quarter.

In terms of our crop business, commodity futures pricing remains in acceptable ranges relative to spring discovery prices, and the most recent crop progress reports indicate that the crop year is off to a solid start. Although timely rainfall has improved soil moisture conditions across much of our footprint, moisture levels through August and early September remain important. Our crop results for 2026 will depend on the harvest yields and prices in the second half of this year. As a reminder, our third quarter results reflect an element of seasonality, as most of our crop insurance premiums are earned in AFG's third quarter, but booked at a more conservative loss ratio until the fourth quarter, when 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 businesses.