Good day, and thank you for standing by. Welcome to the American Financial Group 2022 first quarter results conference call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now hand the conference over to your first speaker today, Diane Weidner, Vice President of Investor Relations. Ma'am, you may begin.
Thank you. Good morning, and welcome to American Financial Group's first quarter 2022 earnings results conference call. We released our 2022 first quarter 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. I'm joined this morning by 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 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 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 responses to questions. A reconciliation of net earnings attributable to shareholders 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. Now, I'm pleased to turn the call over to Carl Lindner III to discuss our results.
Good morning. We're pleased to share highlights of AFG's 2022 first quarter results, after which Craig, Brian, and I'll be glad to respond to your questions. AFG's financial performance during the first quarter was outstanding. We're very pleased with the underwriting margins produced by our Specialty P roperty and Casualty businesses and strong investment income. Our entrepreneurial, opportunistic culture and disciplined operating philosophy have positioned us well in a favorable property and casualty market and a dynamic economic environment. Craig and I thank God, our talented management team, and our great employees for helping us to achieve these exceptionally strong results. I now turn the discussion over to Craig to walk us through AFG's first quarter results, investment performance, and our overall financial position at March 31st.
Thank you, Carl. Please turn to slides three and four for summary earnings information for the quarter. AFG reported core net operating earnings of $3.56 per share, an impressive 50% increase year-over-year. The increase was primarily the result of significantly higher underwriting profit at our Specialty Property and C asualty insurance operations and substantially higher P&C net investment income, primarily due to the continued strong performance of AFG's $2 billion alternative investment portfolio. Annualized core operating return on equity in the first quarter was a strong 24.6%. 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 $15.7 billion investment portfolio are presented on slides five and six .
Pre-tax unrealized losses on AFG's fixed maturity portfolio were $138 million at the end of the first quarter, reflecting the increase in market interest rates and widened credit spreads compared to year-end 2021. The yield on the five-year Treasury nearly doubled from 1.26% at the beginning of the year to 2.42% at March 31, 2022. As we entered 2022, our P&C fixed maturity portfolio duration, including cash and cash equivalents, was approximately two years, the lowest it has been in recent history. The strategic positioning of our portfolio reduced the impact of rising rates on the fair value of our existing fixed maturity portfolio and enabled us to invest approximately $2 billion in high quality fixed maturities and mortgages in response to increasing interest rates and widening credit spreads.
As a result, we lengthened our P&C fixed maturity portfolio duration, including cash and cash equivalents, to approximately 2.5 years at March 31, 2022. Our current fixed maturity reinvestment rate is 4%-4.5% and compares favorably to the fixed maturity portfolio book yield of 3% at the end of the first quarter. For the three months ended March 31, 2022, P&C net investment income was approximately 40% higher than the comparable 2021 period and included significantly higher earnings from alternative investments. The annualized return on alternative investments in the first quarter of 2022 was a very strong 29.1%.
The $139 million in pre-tax earnings from our portfolio of alternative assets included $41 million in earnings from the sale of certain multifamily housing investments at a very favorable market. Excluding the impact of alternative investments, P&C net investment income for the three months ended March 31, 2022 increased 2% year-over-year. This increase was driven primarily by a higher balance of invested assets, with rising interest rates contributing to a lesser extent. The impact of rising rates will have a more significant impact beginning in the second quarter of 2022. Our guidance for 2022 assumes continued interest rate increases throughout the year and an overall annual yield of approximately 12% on alternative investments, with an average annualized yield of 6% achieved over the remaining three quarters of 2022.
Please turn to slide seven, where you'll find a summary of AFG's financial position at March 31, 2022. Our excess capital was approximately $2 billion at March 31, 2022. The number included parent company cash and investments of approximately $1.7 billion. During the quarter, we returned $222 million to our shareholders through the payment of our regular $0.56 per share quarterly dividend, a $2 per share special dividend, and $5 million in share repurchases. Growth in book value per share plus dividends was 0.6% in the first quarter. Excluding unrealized losses related to fixed maturities, growth in adjusted book value per share plus dividends was a strong 5.7% during the quarter.
Yesterday, we announced our plan to redeem all of AFG's approximately $375 million in outstanding 3.5% senior notes due in 2026 under a make-whole call. Based on today's rates, the call price is approximately 101% of the principal amount, plus accrued interest and unpaid interest to the redemption date. It's expected that the early redemption of the senior notes will result in an after-tax non-core loss in the second quarter of approximately $5 million, which is a $0.06 per share loss related to the make-whole premium and other related expenses. Redemption of these senior notes creates additional capacity within our debt-to-cap ratio, commitments for the return of capital to our shareholders.
In conjunction with our first quarter earnings release, we announced a special cash dividend of $8 per share payable on May 27th, 2022 to shareholders of record on May 20th, 2022. Year-to-date, AFG has declared $10 per share in special dividends and has declared $36 per share in special dividends since the sale of its Annuity operations in May 2021. Through a combination of these special dividends, share repurchases, and the redemption of the debt, we've deployed almost all of the $3.57 billion in cash proceeds from the sale of our Annuity business while continuing to be in a strong excess capital position. After adjusting for the debt redemption and the special dividend, pro forma excess capital at March 31, 2022 was approximately $1 billion.
While all of AFG's excess capital is available for internal growth and acquisitions, based upon assumptions underlying AFG's current guidance and with consideration to capital management actions announced yesterday, we still expect to have at least $400 million-$500 million of excess capital available for share repurchases and additional special dividends through the end of 2022, while staying within our most restrictive debt-to-cap guideline. I'll now turn the call back to Carl to discuss the results of our P&C operations and to discuss our expectations for 2022.
Thank you, Craig. Please turn to slides eight and nine of the webcast, which include an overview of first quarter results. As you'll see on slide eight, the Specialty P roperty and C asualty insurance operations generated an underwriting profit of $208 million. Compared to $134 million in the first quarter of 2021, an impressive 55% increase year-over-year. These results set a new record for first quarter underwriting profit. While each of our Specialty P roperty and C asualty G roups produced higher year-over-year underwriting profit and combined ratios in the 80% range, the most significant increase was in our Specialty Casualty Group. The first quarter 2022 combined ratio was a very strong 84%, improving 4.5 percentage points from the prior year period. Results from the 2022 first quarter include 0.7 percentage points in catastrophe losses and 6.8 percentage points of favorable prior year reserve development.
Catastrophe losses, net of reinsurance and including reinstatement premiums, were $9 million in the first quarter of 2022, compared to $31 million in the prior year period. Gross and net written premiums increased 20% and 14% respectively in the 2022 first quarter compared to the prior year quarter. Now, premiums reported in the first quarter were favorably impacted by timing differences in the recording of premiums in our Property and Transportation Group between the fourth quarter of 2021 and the first quarter of 2022. When adjusting for those items, gross and net written premiums were up 9% and 10%, respectively, for the first quarter of 2022. The drivers of growth vary considerably across our portfolio of Specialty Property and Casualty businesses.
In the aggregate, year-over-year growth in gross written premium for the first quarter of 2022, excluding crop insurance, was about 2/3 attributed to growth and change in exposures and about 1/3 attributable to rate increases. Turning to pricing, renewal rate momentum continues. We achieved meaningful broad-based pricing increases across the vast majority of our businesses, with strong renewal pricing in our longer-tailed liability businesses outside of workers' comp. Average renewal pricing across our property and casualty group, excluding workers' comp, was up approximately 8% for the quarter. That was consistent with the fourth quarter of 2021. Overall renewal rates were up 5% in the quarter. Renewal rate increases continue to be meaningfully in excess of estimated prospective loss ratio trends, which are approximately 5% for our Specialty Property and Casualty businesses, excluding workers' comp, and approximately 3% overall.
By focusing on our prospective loss ratio trend, we're looking at loss costs adjusted for changes in the underlying premium exposure base that moves with inflation and incorporating our views on loss costs going forward in light of the current economic and legal environment. All things considered, we feel very good about the level of rate increases that we continue to achieve and that we've achieved over the last few years, which were meaningfully in excess of loss ratio trends and are expected to have a favorable impact on our results for the remainder of 2022 and into 2023. Now I'd like to turn to slide nine to review a few highlights from each of our Specialty Property and Casualty Groups.
The Property and Transportation Group reported an underwriting profit of $62 million in the first quarter of 2022, compared to $56 million in the first quarter of 2021. Higher underwriting profit in our property and inland marine and crop businesses more than offset lower earnings in our transportation businesses, primarily as a result of lower favorable prior year reserve development. Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums, were $6 million in the first quarter of 2022, compared to $22 million in the comparable 2021 period. The businesses in the Property and Transportation Group achieved a strong 85.8% calendar year combined ratio overall in the first quarter, 0.2 percentage points higher than the comparable period in 2021.
Lower frequency in our transportation businesses related to the pandemic resulted in favorable prior year development and a lower than usual accident year loss ratio during the first quarter of 2021. The accident year loss ratio, excluding cats, increased slightly year-over-year in the first quarter of 2022. First quarter 2022 gross and net written premiums in this group were 46% and 24% higher, respectively, when compared to the 2021 first quarter. Both gross and net written premiums were impacted by the timing of premium recognition in our crop business and the timing of the renewal of a large account in our transportation businesses. Though excluding the impact of these items, first quarter gross and net written premiums in this group grew 14% and 12% year-over-year, respectively.
Overall renewal rates in this group increased 6% on average for the first quarter of 2022, consistent with the rate increases reported in the fourth quarter of 2021. Now as for crop insurance, industry estimates for 2022 planted acreage are unchanged to up slightly from last year's levels. Planting progress is running slightly behind historical averages. Generally speaking, for the vast majority of our insured crops, the corn planting window runs from mid-April through the end of May, and the soybean planting window runs from late April to the end of June. With current technology and equipment, the majority of our insureds can complete planting within a seven to 10-day window. It's early in the growing season, and we're hopeful growers will be successful getting their crops in the ground within these time frames.
Current commodity futures for corn and soybeans are trading approximately 25% and 3% higher, respectively, than the 2022 spring discovery prices. While the year-over-year increase in spring discovery pricing will favorably impact premiums written, our crop results for 2022 will depend on the harvest in the second half of the year. Now, the Specialty Casualty Group reported an underwriting profit of $124 million in the 2022 first quarter compared to $56 million in the comparable 2021 period. Higher year-over-year underwriting profit in our workers' compensation, excess and surplus lines, and executive liability businesses were the drivers of these results. The businesses in the Specialty Casualty Group achieved an exceptionally strong 80.6% calendar year combined ratio overall in the first quarter, an improvement of 9.6 percentage points from the comparable period in 2021.
Underwriting profitability in our workers' compensation businesses overall continues to be excellent. We have three standalone workers' compensation businesses with varying appetites and different niche focus areas. This strategy has served us very well in achieving very strong results in our workers' comp book. First quarter of 2022 gross and net written premiums increased 8% and 11% respectively when compared to the same prior year period. Renewal pricing for this group, excluding our workers' comp businesses, was up 10% the first quarter. Renewal rates in this group overall were up approximately 5%. The Specialty Financial Group reported an underwriting profit of $29 million in the first quarter of 2022 compared to an underwriting profit of $25 million in the first quarter of 2021.
Higher year-over-year underwriting profitability in our trade credit and surety businesses were the drivers of the increase. This group continued to achieve excellent underwriting margins and reported an 82% combined ratio for the first quarter of 2022. Gross written premiums were up 4% in this group, and net written premiums were down by 1% when compared to the prior period, prior year period, due primarily to a shift in business mix and a change to a reinsurance program in a newer business in this group. Renewal pricing in this group was up 6% in the first quarter of 2022. Now please turn to slide 10 where you'll see a full-page summary of our 2022 outlook.
Overall, we continue to expect an ongoing favorable property and casualty market with opportunities for growth arising from both continued rate increases and exposure growth, as well as margin expansion as compounded rates well in excess of loss costs are earned through. Based on the strong results reported through the first quarter, we now expect AFG's core net operating earnings in 2022 to be in the range of $10.50-$11.50 per share, an increase of $0.75 per share at the midpoint of our previous guidance of $9.75-$10.75 per share.
Our revised guidance reflects higher than previously estimated net investment income and specifically the impact of deployment of cash in a rising interest rate environment, a higher return on AFG's cash and floating rate securities, and the strong performance of our alternative asset portfolio during the first quarter. Our updated 2022 guidance includes the impact of the capital management actions Craig spoke about earlier and reflects an average crop year. We continue to expect a 2022 combined ratio for the Specialty Property and Casualty Group overall between 85% and 87%. Our guidance for growth and net written premiums is also unchanged and in the range of 8%-12% higher than the $5.6 billion reported in 2021.
Looking at each subsegment, we continue to estimate a combined ratio in the range of 87%-91% in our Property and Transportation Group. Again, guidance assumes average crop years, crop earnings for the year. We now expect growth in net written premiums for this group to be in the range of 11%-15%, an improvement from the range of 8%-12% estimated previously due to higher than originally expected spring discovery pricing in our crop insurance business. We continue to expect our Specialty Casualty Group to produce a combined ratio in the range of 80%-84%. Our guidance assume continued strong renewal pricing in our E&S excess liability and several of our other longer-tail liability businesses and continued calendar year profitability in our workers' compensation businesses overall.
We expect net written premiums to be 6%-10% higher than 2021 results, consistent with our initial guidance. Premium growth will be tempered by rate decreases in our workers' compensation book, which are the result of favorable loss experience in this line of business. Excluding workers' comp, we continue to expect 2022 premiums in this group to grow in the range of 7%-11%. We continue to expect the Specialty Financial Group combined ratio to be in the range of 84%-88%, and direct net written premiums for this group are now expected to be between 4% and 8%, a decrease from previous expectations of growth in the range of 8%-12%, primarily as a result of lower projected premiums in our financial institutions business.
We continue to expect renewal rates to increase between 5% and 7% in our specialty P&C operations overall. Excluding workers' comp, we expect renewal rate increases to be in the range of 6%-8%, which is unchanged from our previous estimate. Craig and I are very pleased to report these exceptionally strong results for the first quarter. We're proud of our proven record of long-term value creation. We believe that our entrepreneurial, opportunistic culture, combined with our strong balance sheet and financial flexibility, position us very well for the remainder of 2022. 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. Thank you.
As a reminder, to ask a question, you will need to press star one on your telephone. Again, that is star, then the number one. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from Paul Newsome with Piper Sandler. Your line is open.
Good morning. Congratulations on the remarkable quarter, I think. I want to ask a little bit more on the investment portfolio. Maybe you could give us just a little bit more as to what you're investing in and if you think that, you know, prospectively, that duration could be extended out even more, given the current situation. I think you were incorporating just four 25 basis point rate hikes. I don't know if that has changed in your view as well. Some thoughts on investments would be great.
Sure, Paul, this is Craig. I can give you a little more color on that. In the first quarter, we put cash to work, bought paper that was a little longer duration than, you know, investments of the last couple of years. We invested principally in high-quality fixed maturities and mortgages, kind of similar to the existing portfolio, but we did, you know, buy some, you know, some paper that was a little bit longer in duration than the last couple of years. We're continuing to do that. At the end of the first quarter, we still had about $2.7 billion in cash and floating rate securities in the P&C Group.
We are going to continue to be a significant beneficiary of this higher interest rate environment and also, you know, spreads that have widened fairly significantly. In the latest guidance, Paul, we're assuming nine total 25 basis point rate hikes. Or to be specific, it's the 25 basis points that already happened in March, 50 basis point hikes in both May and June, and then 25 basis point hikes for the remaining four meetings, so July, September, November and December. If you want to look at it as, you know, how many equivalent of 25 basis point hikes, it would be an assumption of nine for the total year.
Great. That's helpful. The second question I'd like to ask you about the crop business. I've gotten quite a few questions about it. It sounds like you are incorporating a little bit of the higher, you know, prices that we have for crop commodities, but are you still essentially assuming an average kind of crop return year, or has that changed? If things stay as they are, would you wait until the sort of third quarter to make the changes, or would you in guidance, or would that come potentially earlier than that?
Yeah. You know, we always, it's really kind of into the third quarter before we really have a good fix on how the crop year is, you know, kind of playing out as, you know, you kind of see the what the crop conditions were, and how the harvest is kind of coming in. You know, we clearly know that you know, our premiums are gonna be up double digit again this year just based off of the spring discovery pricing that's already happened and that. As well as, you know, us writing some rainfall business, rainfall index business, and that. So premium, we already know the premium's gonna be very strong. Most, you know, the premium, big premium booking quarters are really the second and third quarter.
It's really the third and fourth quarter and even into the first, you know, more fourth quarter and probably first quarter of the following year, where most of the crop profit, you know, is booked. If things really are, you know, generally, if things are really playing out really well without, with very little risk, you know, we might, report some of the profit in the third quarter. Right now, you know, way too early. As I mentioned, you know, the planning progress is running a little bit, you know, some behind the historical averages, though there's plenty of time, you know, with the technology that's out there. You know, still a big window for, you know, farmers to get their crops in. You know, our perspective right now continues to be an average crop year.
Fantastic. I'll let some other folks ask questions, but I always always appreciate the help. Thank you, guys.
Your next question will come from Greg Peters with Raymond James. Your line is open.
Hello, good afternoon. This is actually Sid Schultz calling in for Greg. Just looking at the Specialty Property and Casualty expense ratio, it looks like it improved another 80 basis points year-over-year this quarter after 200 basis points in last year's quarter. I'm just curious, or outside the increase in premiums, is there anything driving the improvement in this?
One of the things that happens in some of our businesses is the ceding commissions that we receive from reinsurers can vary with the profitability of the business ceded. In the first quarter of 2022 relative to the first quarter of 2021, we had higher ceding commissions received from reinsurers related to our environmental business. Those higher ceding commissions have the effect of lowering the expense ratio.
Okay. Got it. Thanks for the answer.
Again, if you would like to ask a question, you may press star one on your telephone. Your next question will come from James Bach with KBW.
Hi, thank you. My first question, net to gross is down pretty significantly in Property and Transportation. It's also down in Specialty Financial. You mentioned some changes in reinsurance, but I was wondering if you could kind of comment on what's driving the increased cessions and kind of moving forward, how you expect that to impact expense ratios?
For the most part, it's a mix of a business change there in the Property and Transportation business. Some of it has to do with the timing differences and then so like in crop, for example, the timing difference that Carl mentioned between the fourth quarter and the first quarter in the crop business is reinsured at a much higher rate than the overall segment. With that shift from the fourth quarter to the first quarter, that had a bigger impact on gross written premiums than it did on net written premiums because of the reinsurance structure there.
In the Casualty segment, the difference there is really just lower cessions in our environmental and also in our excess and surplus and excess liability businesses, in those in the 2022 quarter compared to 2021.
All right. That makes sense. Moving back to investments, you talked about buying some longer duration paper, and I just kind of wanna get a sense of what the new money allocation priorities are moving forward.
Yeah. If I understand your question, you know, what are we looking to invest in going forward? I'd say, yeah, today, we're gonna continue to invest in high quality, fixed maturity investments at maturities of five to 10 years. We don't think that the spreads are wide enough, yet on non- investment-grade paper to make a significant commitment there. I don't know if that answers your question. Did that?
Yeah. That covers it.
Okay.
That's it for me.
Your next question will come from Rudy Miller with Miller Capital.
Gentlemen, once again, as a shareholder, great return of your capital, results to your shareholders. We appreciate it very much. You guys, as I've said before, you just keep doing it, and we're very pleased. Couple of my questions I have, what would you say your biggest challenge is over the next three quarters with the company?
I think probably on the Property and C asualty side, I'm encouraging our management group to take advantage full advantage of the opportunities you know to grow our business. I think you know we think that you know we've been in a sweet spot you know in the property and casualty marketplace and that. I think the good news is I don't see too many huge hurdles in that. I guess you could say changes in you know continued increase in social inflation you know as it impacts the loss costs and loss ratio trends in an unexpected way.
Though you know our trends have been pretty stable though you know slowly moving up in the more liability exposed lines of business. Those might be a few things you know around the Property and Casualty side. Again I can't be more excited about the leadership that we have in our group and the talent and how we're postured for great results and good growth this year.
Follow-up question, if I could, please. How about your staff? Are you back now to full-time with most people, or you are running a partial hybrid schedule? If so, how do you feel that is working out thus far?
I think we're doing really well. You know, pre-pandemic, I think we always had some people on a hybrid work schedule. I think maybe 65%-70%, not exactly sure what that number was, you know, people were in the office, in that. I think we're back to where we have a substantial, you know, number of, you know, majority of people back in the office. But clearly, there's going to be a, you know, a larger number, today and moving forward than in the past that will be in a hybrid mode. We're still kinda working our way through that and trying to figure out what the right strategy is. But in a company like ours, you know, our culture and our values are really important to us long term.
You know, our group values teamwork, relationships, and, you know, we wanna be very careful to continue to encourage that, you know, in our workplace.
Last follow-up question, and I appreciate your comments. Regarding your most recent new technological acquisition in insurance-related, how do you see that developing? Could you give me a little more updated color on that since you've made that acquisition recently? What's your feeling about future opportunities?
Yeah, I think you're talking about Verikai?
Yes, sir.
Yeah. You know, it's a little early to comment much on that. You know, we just acquired the business. We like the AI space. You know, we really like the management team that's there and developing their core business, you know, that they're doing. Then, it's gonna take us a good part of this year, using Verikai technology to launch our newest product, you know, in the medical stop- loss area. You know, I think probably be more towards the end of the year and early next year before, you know, we'll have much to report on with regards to the development of our, you know, our medical stop-loss business in that.
That gives me what I was looking for, and that is how it was coming along development-wise from that aspect and kinda what you saw out there in the near future on their development. I appreciate the updates, gentlemen, and great job, and just keep the tornadoes away from your building and your clients. God bless America.
Your next question will come from John Hanson. John, your line is open.
Thank you. I'm an individual investor. First, I would like to thank the Lindners for how they handled the sale of the Annuity Group to MassMutual. The employees appreciate it, and the city of Cincinnati appreciates it. Two quick questions. I was a little bit surprised at how low the unrealized gain change was this year, or this quarter. Was that due to the short duration, or was that due to the runoff of the Annuity business?
No, it well, certainly, the sale of the Annuity business would have changed the, you know, unrealized numbers, because, gosh, I think some 75% of the assets were in the Annuity business. The reason it was such a small percentage change is just the positioning of the portfolio in very short duration investments and a very large amount of cash and floating- rate notes, it was 1% of the portfolio.
Okay, thank you. A follow-up. You did make a call on the 3.5% senior notes. Are you looking at doing anything with the junior debentures that are at 4.5%-5 7/8%?
Yeah. At this time, we are not.
Okay, thank you.
You bet.
I'm showing no further questions at this time. I will now hand it back over to Diane Weidner for closing remarks.
Thank you all for joining us this morning as we shared our first quarter results with you, and we look forward to talking with you again next quarter. Hope you all have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.