Prepared remarks
Good day, and thank you for standing by. Welcome to the American Financial Group 2026 Second Quarter Results Conference Call. At this time, all participants are in a listening-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you need to press Star 11 on your telephone. You will hear an automated message that your hand is raised. To withdraw your question, please press Star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Diane Weidner, Vice President, Investor Relations. Diane, please go ahead.
Good morning, and 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 Henry Lindner III and Craig Lindner, co-CEOs of American Financial Group, and Brian S. 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, in our remarks or in responses to questions. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. As a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now 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 Berkeley 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 will share a few highlights after which Craig and I will walk through more details. We will then open it up for Q&A, where Craig, Brian and I will respond to your questions. I am pleased to report that we set a new second quarter record for pretax 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. And I will turn the discussion over to Craig to walk us through some of these details.
Thanks, Carl. Please turn to Slides 3 and 4 for a summary of earnings for the quarter. 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 will 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 5 and 6. Net investment income at our property and casualty operations for the three months ended 06/30/2026 increased 23% year over year and established a new second quarter record for AFG and was driven by improved returns from alternative investments. You will see on Slide 6, approximately two-thirds of our portfolio is invested in fixed maturities. In the current interest rate environment, we are 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 06/30/2026. 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 2026, AFG reached definitive agreements to sell the Charleston Harbor Resort and 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 pretax core operating gain of approximately $125 million or $1.20 per share on the sale. The property is owned equally by the PNC operations and AFG parent, so 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 7, where you will find a summary of AFG's financial position at 06/30/2026. During the quarter, we returned nearly $100 million to our shareholders, including $26 million in share repurchases, and a $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 06/30/2026, AFG's growth in book value per share, excluding AOCI, plus dividends was 5%. I will now turn the call over to Carl to discuss the results of our P&C operations.
Thank you, Craig. Please turn to Slides 8 and 9 of the webcast which include an overview of our second quarter results. I am 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-quarters of our businesses reporting higher year-over-year premiums through June 30. In addition, we are doing this while consistently achieving renewal rate increases. Excluding workers' comp, renewal rates 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 will see on Slide 8 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, which was about a point higher than the previous quarter. We have reported overall renewal rate increases for 40 consecutive quarters, and we believe we are achieving overall renewal rate increases that enable us to meet or exceed targeted returns. Now I would like to turn to Slide 9 to review a few highlights from each of our specialty property and casualty business groups. Details are included in our earnings release, so I will 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 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 cessions 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 am pleased to say, for the second quarter in a row, and we are continuing to make progress there. Renewal rates in auto liability were up 15% during the quarter. Now 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 helped 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. Consequently, we record the majority of our calendar-year crop profitability in the fourth quarter. Now the businesses in our Specialty Casualty Group achieved a solid 94.5% calendar-year combined ratio overall in the second quarter of 2026, 0.6 points higher than the 93.9 reported in the comparable period last year. We continue to be mindful of social inflation and remain conservative in our initial loss picks for the lines of business written by the businesses in this group. Second quarter 2026 gross and net written premiums in this group increased 5% and 6% respectively when compared to the same prior year period. New business opportunities, increased exposures, and higher rates drove the year-over-year increase in many of our specialty casualty businesses, including workers' comp, targeted markets, excess and surplus lines, energy, construction, environmental and M&A liability. Excluding our workers' comp businesses, renewal rates for this group were up approximately 4% in the second quarter. Pricing in this group, including workers' comp, was up about 2%. Now the Specialty Financial Group continued to achieve excellent underwriting margins and reported an 85.6 calendar-year combined ratio for the second quarter of 2026, an improvement of over 0.5 points from the comparable period last year. Gross and net written premiums were both up 10% in this group when compared to the prior year period, primarily due to growth in our financial institutions business. Renewal pricing in this group decreased less than 1% in the second quarter reflecting the strong margins earned on these businesses overall. Craig and I are proud of our proven track record of innovation, long-term value creation and a forward-thinking mindset, and we feel AFG is well positioned to continue to build long-term value for shareholders for the remainder of 2026 and beyond. We will now open the lines for the Q&A portion of today's call, and Craig, Brian and I would be happy to respond to your questions.
Questions and answers
Thank you. At this time, we will conduct a question-and-answer session. Please wait for your name to be announced. To withdraw your question, press Star 11 again. Our first speaker is Hristian Getsov from Wells Fargo. Please go ahead, Hristian.
Hi, good morning. Thank you for taking my question. My first question is on the uptick in the underlying loss ratios, particularly in Specialty Casualty and Specialty Financials, which it seems like it could be driven by mix. How should we think about the potential improvement on the expense side of the equation from the mix shift, given there may also be productivity gains that could be recognized on the expense side? And given the increased conservatism in those lines and rate continuing to be at or exceeding target margins, could we potentially also see higher prior year development (PYD)? Thank you.
Hi. This is Brian. I think it is important as you start to think about that answer to start at the beginning, which is we are looking at our businesses from a return-on-equity perspective overall and not just the combined ratio or the loss ratio. So we do have to keep in mind that when businesses are longer tail, like workers' comp, grow and have a greater opportunity for investment income, we can have high teen ROEs even at higher combined ratios. Even after considering investment income, it can be tricky to analyze the components of the combined ratios separately, as some products, like our successful lender-placed business, have a higher underwriting expense ratio and a lower loss ratio compared to other businesses. When strong performing businesses like that grow, our expense ratio goes up, but so does our ROE. In our lender-placed business, where many of our products offer profit-based commissions, when that business does well, our underwriting expenses go up. So in underwriting expenses in this quarter, you are seeing the impact of growth and continued success in lender-placed insurance, driving up the expense ratio. When you switch over to the accident year loss ratio by segment, again, it is important to remember that we look at our reserves by business every quarter and use that information to not only set our loss picks but also to inform our pricing and risk appetite. So we are very cautious around our reserve picks, and we tend to react quicker to bad news and slower to good news. We are being deliberately cautious around social inflation-exposed businesses despite the improvements that we have seen in that area, particularly in places like commercial auto liability. I think in considering the adequacy of our current loss picks, AFG's history of consistent overall favorable development should be an indication of how prudent we tend to be. Nothing has changed here. Practically, I would rather be talking to you and to Carl and Craig about the reasons why we have favorable development versus adverse development. So we are, again, being slow to react to the good news that we are seeing. When you start to look at it by segment, focusing on casualty and financial: in casualty, we are seeing good growth in workers' comp and in certain targeted markets. Results are very good, but those businesses do run at a higher loss ratio compared to the overall segment. Decisions on where we participate in excess policies can also impact the loss ratio for that segment. In financial, there were some minor tweaks to some of the smaller businesses outside of lender-placed insurance, but nothing we would call a trend. Mostly, what you are seeing is the impact of intentional growth in businesses like our European operations that run at a higher loss and LAE ratio, and from the change in mix of business, where we are still growing in areas that meet our ROE objectives but happen to have a higher loss ratio than the lender-placed business or the other businesses in the overall financial segment. So when you think about things from a longer point of view, Carl said before, we are confident in our reserves and in our ability to produce strong returns through a variety of market cycles.
Got it. Thank you. And then for my follow-up, just sticking with the AI component, the potential benefits on the expense side of the margins are pretty well understood, but how do you think about potential improvements on the underlying loss ratio from the use of AI as underwriters get better access to better data and they can also digest the data quicker and more efficiently?
I think that is a work in progress. It fits under the category of AI-powered underwriting knowledge management. We are doing many pilots right now designed to enhance underwriting training, knowledge retrieval, and decision support in a number of our different businesses. So I think we are just on the front end of that. I think where a lot of our AI focus has been is on submission automation, document intelligence, claims workflow automation, AI-enabled recorded statements, which improves claims handling efficiency and customer experience through automated summarization and insights, and broad deployment of AI tools across the organization today. Like everyone else, we are making a significant investment and we are encouraged by the productivity improvements that we are seeing. But on underwriting itself—building an underwriting knowledge management system—I think we are probably on the early end of that and probably farther along in the use on the claims side. Great.
Thank you and congrats on the quarter.
One moment for our next question. We have Michael Zaremski from BMO. Please go ahead, Michael.
Hey. Thanks. Good morning. Maybe first question on the competitive environment and pricing, specifically renewal pricing. From data points we have received from a lot of your peers and industry data over the last quarter or so, we have seen some easing in a number of pockets. Maybe you can discuss what's driving AFG's pricing levels, maybe even a little bit of momentum in certain spots sequentially?
Yeah. I'm happy to give a little insight into that. I'm pleased, as I think I mentioned in my comments and in our release, that three-quarters of our businesses have seen some growth through six months. That is pretty broad-based growth. I think our diversified portfolio of 36 businesses gives us a broad array of opportunities. Predictive analytics on pricing and growing sophistication business by business is helping us. One of the main things is we are pretty much through the reset on the social inflation-exposed businesses. We talked about re-underwriting certain classes, lowering limits, and raising retentions in some businesses like public sector. So I think we are able to play offense versus defense more today and grow some of these lines now. In commercial auto, the same thing: I mentioned that for the second quarter in a row, on commercial auto liability we are making a small underwriting profit. Overall, commercial auto is earning solid underwriting profits and good ROEs, and we are having the ability to play more offense and find opportunities for growth there. So I feel good about the rest of the year and am very optimistic that we will continue to have opportunities to grow our businesses on a fairly broad basis.
That is helpful, Carl. Maybe just honing in on specialty casualty. The underlying loss ratio this year, which gets a lot of attention from investors, has been on a first-half-of-the-year basis running in kind of the 63+ range; last year it ran in the mid-60s for the full year. So is there seasonality where I should be thinking about the first half of 2026 versus the first half of 2025? Or is it better to compare the first half of 2026 to the full year 2025? Or maybe none of the above?
I would say in casualty there is really not a lot of seasonality. There is definitely seasonality when you look at the property and transportation numbers because of the crop business in particular, which can cause the loss ratio to vary quarter to quarter. In casualty, really what is driving the changes is mix of business and our conservatism around social inflation-exposed areas, and most of that is in casualty. So as far as trends go, we will always adjust quarter to quarter by business, but I would say there really is not seasonality there; it is more mix of business that is changing it compared to last year.
Okay. I had one more comment on the growth side. Other companies have weighed in heavily on writing more convective storm‑exposed and coastal property, particularly in the E&S side, than we did and had a bigger appetite. By the same token, as the property pricing softened on a lot of that business, it has less impact on us versus our peers. So I do think that is another differential that makes sense.
And lastly, back to the technology conversation you touched on a moment ago: some folks have expressed that a company operating a more decentralized business model with many different segments might, on average, not be able to deploy AI technologies as swiftly versus an insurer that runs a more centralized operating model. Any thoughts about that remark?
I think in a one- or two-line business, like a primary auto or homeowners writer, that could be the case. I might argue the opposite: where you have more business units and more people enabled to use the tools, you might have greater success finding some applications. When you have 36 different business groups deploying AI, you can find more opportunities. For example, our crop business is using extensive AI and getting extensive results in a number of ways. So I think that is an example of one business where we would be ahead of the pack probably in that area.
I would add that even though we have 36 different business units with a decentralized focus on underwriting and claims, we do a good job of having our business units talk to each other and work together over time. So if something works for one business unit, you can be assured that it will be talked about and considered for the other business units. So even though they have a lot of autonomy, they do not operate completely in a vacuum.
Thank you.
One moment for our next question. Our next question comes from Andrew Andersen from Jefferies. Please go ahead, Andrew.
You had mentioned commercial auto produced a small underwriting profit for a second straight quarter. What is needed to move this from a small profit towards targeted returns? Is that going to require pricing above the 15% that you are seeing recently?
Yes, thanks for the question. I want to clarify: we are making a very solid profit in commercial auto overall. My commentary had to do with the commercial auto liability piece of the commercial auto results, where on that piece we are making a small underwriting profit for the second quarter in a row. Because of the environment we are in, we still have work to do, and we continue to be focused on achieving rate that exceeds loss ratio trends for commercial auto liability. Rates were up about 15% for the second quarter, and the good news is we are continuing to get good rate and have the ability to grow our commercial auto business. Overall, commercial auto and workers' comp in our transportation businesses are doing very well, and when you add the workers' comp results, the results are even better. My comments were more towards commercial auto liability; commercial auto overall is at solid margins.
And maybe sticking with workers' comp, could you quantify what Q2 pricing was there? And given the benign loss trends, are you comfortable growing that book despite negative rate?
The loss ratio trends continue to be very benign, and results on our books continue to be strong both on a calendar-year and accident-year basis. California would be the exception where our results have not been as good; California is about 14% of our workers' comp business and we are not doing well there like a lot of others. We have had continued favorable development in the second quarter and through six months, and we feel our reserve position is strong. Second quarter pricing for the overall business is down about 2% and about 3% through six months. Again, that is on top of really great results and a strong reserve position. Our workers' comp results will probably not be as good as we go forward, but will continue to be very strong, and we are growing that business somewhat. In the second quarter we had mid-single-digit growth in our overall comp business even with California premiums being down.
One moment for our next question. Our next question comes from Gregory Peters from Raymond James. Please go ahead, Gregory.
This is Mitch on for Greg. We have been hearing about increased competition in casualty from MGAs and fronting back capital. With your comments on being through the social inflation reset, what are you seeing from pricing and submission flow standpoints?
We are continuing, as I mentioned, in our social inflation-exposed businesses like excess liability and umbrella, to get around 10% or double-digit price increases in some areas, and high single-digit increases in others, like nonprofit. The businesses that we needed rate in, we are continuing to get rate that helps us meet or exceed our targeted returns. Where MGAs have stepped in—exiting areas like excess liability and umbrella—that certainly affects some portions of the specialty casualty marketplace. It will be interesting to see how many of them burn up over the next two to three years in longer-tail specialty casualty lines where incentives to grow can lead to poor long-term outcomes. So I do think the MGAs are having some impact in parts of the specialty casualty marketplace, but historically that does not always turn out well. On specialty financial, where rates turned slightly negative in the quarter and premium was up around 10%, we are leaning into growth in lender-placed property business—last year we entered into a quota share arrangement that had an impact on results for about 12 months and that has now been renewed, so from the second quarter on we do not have the drag of that quota share. We are seeing more meaningful growth quarter to quarter in lender-placed property. We also have other businesses like Great American Europe that we are growing, and specialty equipment services where insurance is placed at the front end of a purchase on capital goods equipment. So we have a number of businesses showing healthy growth in our Specialty Financial segment now.
Thanks, and congrats on the quarter.
As a reminder, to ask a question you need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. I am showing no further questions at this time. I would like to turn it back to Diane Weidner for closing remarks.
Thank you, James, and thank you all for joining us this morning and for your good questions. We look forward to chatting with you again next quarter. We hope you all have a great day.
Thank you for participating in today's conference. This does conclude the program. You may now disconnect.