American Financial Group Inc

NYSE:AFG

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the American Financial Group 2020 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded.

I would now like to introduce your host for today's program, Diane Weidner, Vice President of Investor Relations. Please go ahead.

[Diane Weidner, Assistant Vice President of Investor Relations]

Good morning and welcome to American Financial Group's fourth quarter 2020 earnings results conference call. We released our 2020 fourth quarter and full year 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 2 of our webcast. Some of these matters to be discussed today are forward-looking. These forward-looking statements involve 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 in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release. And 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 am pleased to turn the call over to Carl Lindner III to discuss our results.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Good morning. We released our 2020 fourth quarter and full-year results yesterday afternoon. And Craig and I are delighted to report a very strong finish to the year. AFG's core net operating earnings were $8.44 per share for the full year of 2020 compared to $8.62 per share in '19. Fourth quarter 2020 core operating return on equity was in excess of 14% as indicated on Slide 3. And while capital Management's, one of our highest priorities and 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.

Craig and I are pleased that we returned $649 million to shareholders during the year. In addition to $313 million in share repurchases, we paid $336 million in dividends during the year, representing a $163 million in regular common stock dividends and $173 million special dividend. And our quarterly dividend was increased by 11.1% to an annual rate of $2 per share beginning in October of 2020. We're also proud of our track record of value creation for shareholders.

Growth and adjusted book value per share plus dividends was 13% in 2020. AFG's 10-year total shareholder return, representing growth in share price plus dividends was approximately 287% exceeding the total return performance of the S&P 500, the S&P Property & Casualty index and the S&P Life & Health index over the same time period.

Now turning to Slide 4 for a review of the 2020 fourth quarter AFG reported record core net operating earnings of $3.09 per share compared to $2.22 per share in the fourth quarter of 2019. Fourth quarter results included $0.84 per share in earnings from alternative investments that are mark-to-market through core earnings, compared to $0.32 per share in the fourth quarter of 2019. We're very pleased with the rebound in the performance of these assets, which were adversely impacted by the downturn in financial markets in the first half of 2020 as a result of the pandemic. Annualized core operating return on equity in the fourth quarter was an exceptionally strong 20.3%.

Now turning to Slide 5, you'll see that the fourth quarter net earnings per share of $7.93 included after-tax non-core items aggregating to $4.84 per share, a significant component of these non-core items included realized gains on securities of $5.36 per share. The majority of which pertain to the transfer of investments in AFG's annuity block reinsurance transaction that was entered into in October. And the mark-to-market of equity securities that AFG continued to own at December 31, 2020.

We're extremely proud of AFG's fourth Quarter and full-year 2020 results, especially in a year fraught with the challenges, including a global pandemic, related - the related economic disruption and a heightened level of national disasters. None of us would have imagined the challenges 2020 would bring. But we are extremely proud of these results and the resiliency, dedication and the creativity of our employees over the many months. Craig and I thank God, our talented management team and our employees for helping us to achieve these results and position our business for continued success.

Last week's announcement about the sale of our annuity business brings significant changes to the way AFG will report its results in 2021. Looking forward, we have established initial 2021 core net operating earnings guidance per share to be in the range of $6.25 to $7.25. There are several important assumptions underlying this guidance, including the expectation that earnings from our annuity business will be classified as discontinued and reported as non-core effect of January 1, 2021.

In addition, our guidance assumes no earnings on the cash proceeds from the sale and an expectation that the AFG parent will have $43 per share in cash and real estate related investments following the close of the sale. Craig will talk more about the details including pro-forma financial results and expectations during his remarks. And I will review detailed guidance for each of our property and casualty businesses later in the call.

Now I'd like to turn our focus to our Property & Casualty operations. If you please turn to Slide 7 and 8 of the webcast, which include an overview of our fourth quarter results. As you'll see on Slide 7, core operating earnings in AFG's Property and Casualty Insurance operations were $274 million in the fourth quarter of 2020. A new quarterly record for AFG and a 38% increase from the prior year period. Significantly higher year-over-year, Property and Casualty underwriting profit and higher earnings from alternative investments were partially offset by lower other Property and Casualty net investment income, primarily the result of lower interest rates.

The Specialty Property & Casualty Insurance operations generated an underwriting profit of $179 million in the 2020 fourth quarter compared to $89 million in last year's fourth quarter. Higher underwriting profitability in our Property and Transportation and Specialty Casualty groups were partially offset by a lower year-over-year underwriting profit in our Specialty Financial Group. Fourth quarter 2020 combined ratio of 86.2% improved 7.3 points from the 93.5% reported in the comparable prior year period.

Results for the 2020 fourth quarter included 1.5 points in catastrophe losses and 2.4 points of favorable prior year reserve development. We continue to carefully monitor claims and loss trends related to the COVID-19 pandemic. Numerous legislative and regulatory actions as well as the specifics of each claim contribute to a highly fluid evolving situation.

AFG didn't record any additional reserve charges for COVID-19 in the fourth quarter. Given the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic approximately 72% of AFGs COVID-19 related reserves from the $95 million in charges recorded in the first half of 2020 are held as incurred, but not reported at year-end December 31, 2020. These reserves represent the company's best - current best estimate of losses from the pandemic and related economic disruption. Our claims professionals' on 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. Our average renewal rate increases are the highest we've achieved in over 15 years. Average renewal pricing across our entire Property & Casualty group was up approximately 13% for the quarter and if you exclude our workers' comp business renewal pricing was up approximately 17% in the quarter.

We believe that the current market conditions, reflect a continuation of meaningful renewal pricing increases, which had been in response to the low interest rate environment trends and social inflation, elevated loss - industry loss experience following heavy industry cap experience, higher reinsurance pricing among other factors. We expect the market to remain firm throughout 2021, allowing us to achieve attractive renewal rate increases and excess of loss costs. Now our gross and net written premiums for the fourth quarter were down 2% and 7%, respectively, when compared to the fourth quarter of 2019, primarily the result of the run-off of Neon. If you exclude the impact of the Neon run-off, gross and net written premiums increased 6% and 2%, respectively year-over-year.

I would like to turn to Slide 8 to review a few highlights from each of our Specialty Property & Casualty groups. Property and Transportation Group reported an underwriting gain of $74 million in the fourth quarter, compared to an underwriting loss of $2 million in the comparable prior year period. Improved year-over-year results in our crop operations following two - 2019 losses from prevented planning, along with significantly improved accident year results in our aviation business and higher profitability in our transportation businesses were the primary drivers of the improved results. Fourth quarter 2020 gross written premiums in this group were up 3%, net written premiums were down 2% when compared to the 2019, fourth quarter.

Growth in new business opportunities in our Property and Inland Marine and Ocean Marine businesses and higher gross written premiums in our Crop operations, were partially offset by lower premiums in our Transportation business.

Primarily, from reduced exposures, as a result of COVID-19 and premium reductions in two large national accounts. Higher sessions of certain crop insurance products contributed to the year-over-year decrease in net written premiums in the 2020 fourth quarter. Overall renewal rates in this group increased 5% on average for the fourth quarter of 2020, with continued strong renewal rate momentum.

Now the Specialty Casualty Group reported an underwriting profit of $91 million in the fourth quarter compared to $69 million in the comparable '19 period. Higher year-over-year underwriting profit in our excess and surplus and excess liability businesses and improved year-over-year results in our general liability business were partially offset by lower favorable prior year reserve development in our workers' comp businesses.

Though underwriting profitability in our workers' comp business overall continues to be excellent. This group reported an impressive 84% combined ratio for the fourth quarter and 90% for the full year. Improved market conditions and our excess and surplus lines and excess liability businesses have enabled us to achieve significant rate increases and act on new business opportunities, as the market has hardened.

Gross written net - net gross and net written premiums in this group decreased 7% and 16% respectively for the fourth quarter of 2020, when compared to the prior-year period, primarily due to the run-off on Neon. When you exclude the impact in Neon gross and net written premiums increased 9% and 3% respectively in the fourth quarter of 2020 when compared to the same period in '19. Significant renewal rate increases and new business opportunities in our excess and surplus, excess liability and D&O businesses contributed to the growth.

COVID-19 pandemic has resulted in reduced exposures in our workers' comp businesses, which when coupled with renewal rate decreases in our workers' comp concession businesses contributed to lower year-over-year premiums, partially offsetting the growth in the other businesses within this group. Renewal pricing for this group was up 19% in the fourth quarter, excluding workers' comp renewal rates in this group were up approximately 29%, much higher than the renewal rate increases achieved in the first three quarters of 2020.

And the Specialty Financial Group reported an underwriting profit of $20 million in the fourth quarter of 2020 compared to $32 million in the fourth quarter of last year or of '19. Lower underwriting profit and our surety and trade credit businesses along with higher year-over-year catastrophe losses in our financial institutions business were the primary drivers of the decrease.

Nearly all businesses in this group continue to achieve excellent underwriting margins. Gross and net written premiums increased by 2% and 4%, respectively in the 2020 fourth quarter when compared to the same 2019 period, due primarily to the growth in our lender services business, which was partially offset by related COVID related economic impacts in our surety business and tighter underwriting that reduced new business in our trade credit business.

Renewal pricing in this group increased each quarter in 2020 and was up approximately 9% during the fourth quarter and 8% on average for the full year. This is the highest overall annual renewal rate increase we've achieved in this group, since 2002. These results were driven primarily by improved pricing in our lender placed Mortgage Property business and market tightening in our trade credit insurance operations.

Now if you'd please turn to Slide 9 for a summary view of our 2021 outlook for the Specialty Property & Casualty operations. We expect the 2021 combined ratio for the Specialty Property & Casualty Group overall between 89% and 91%. Net written premiums are expected to be 5% to 9% higher than the $5 billion reported in 2020.

Now looking at each segment, we estimate a combined ratio in the range of 88% to 92% in our Property and Transportation Group. Our guidance assumes a normal level of crop earnings for the year. Net written premiums in this group are estimated to be 9% to 13% higher in 2021. We expect our Specialty Casualty Group to produce a combined ratio in the range of 87% to 91% in 2021. Our guidance assumes strong renewal pricing in our E&S excess liability and several of our other longer-tail liability businesses. We expect net written premiums for this group to be 3% to 7% higher than 2020 results and 5% to 9% higher excluding workers' compensation. Specialty Financial Group combined ratio is expected to be in the range of 88% to 92%. We expect net written premiums to be - in 2021 to be 4% to 8% higher than 2020 results.

With regard to pricing, we expect overall Property and Casualty renewal rates in this year, in '21 to be up 6% to 8% excluding workers' comp. We expect renewal rate increases to be in the range of 8% to 10% as indicated by the continued pricing momentum we saw through the end of the 2020. We expect Property & Casualty investment income to be down 1% to up 3% when compared to results reported in 2020, primarily as a result of continued low interest rate environment.

Now I'll turn the discussion over to Craig to review the fourth quarter and full year results in our Annuity segment. The impending sales in the annuity business and AFG's investment performance. Thank you.

[Craig Lindner, Co-President & Co-Chief Executive Officer]

Thank you, Carl. I'll start with a review of our annuity results for the fourth quarter, beginning on Slide 10, where you will see the components of pretax annuity core operating earnings. Fourth quarter 2020 pretax annuity core operating earnings increased 24% year-over-year, reflecting significantly higher earnings from the Annuity segment's alternative investments. Pretax core operating earnings before alternative investments in the fourth quarter decreased by $7 million or 8% year-over-year, reflecting an unusually high amount of one-time investment income earned in the fourth quarter of 2019 and the impact of lower interest rates on the Annuity segment's investment portfolio, including the impact of significantly lower short-term rates on the Annuity segment's $5 billion of cash and floating rate investments.

In total, the Annuity segment achieved a core operating return on equity of nearly 15% in the fourth quarter of 2020 and approximately 11% for the full year. The Annuity segment's GAAP return on equity, which includes all operating and non-operating earnings and the block reinsurance transaction was an impressive 27% in the 2020 fourth quarter and 16% for the full year.

The results produced by our annuity business in the fourth quarter and full year demonstrate the strong fundamentals of our business, our pricing discipline and the success of our operating model. The Annuity segment continue to have a very strong balance sheet at December 31, 2020 with unrealized gains and the Annuity bond portfolio of $2.6 billion. Risk-based capital in excess of 400% and capital well in excess of the amounts indicated by ratings agencies to maintain our ratings.

Turning to Slide 11, you will see that AFG's quarterly average annuity investments and net reserves decreased approximately 10% and 11%, respectively year-over-year as a result of the annuity block reinsurance transaction which was effective October 1, 2020. In the absence of the reinsurance transaction, average annuity investments and reserves would have each grown by approximately 5% on a pro forma basis.

On the bottom half of the slide, you'll see information about our annuity spreads starting with our core net interest spread, which takes into account, our net investment yield and our cost of funds. Our core net interest spread was 228 basis points in the fourth quarter of 2020, an increase of 34 basis points over the comparable 2019 quarter. This increase reflects significantly higher returns on the Annuity segment's alternative investments as well as lower cost of funds resulting from the company's renewal rate strategy.

These positive impacts on spreads were partially offset by the negative impact of lower interest rates. Our core operating net spread earned in the fourth quarter of 2020 was 142 basis points compared to 107 basis points in the comparable 2019 quarter. This 35 basis point increase reflects the same impacts mentioned previously. We were pleased with returns on alternative investments in the third and fourth quarters of 2020 increased sharply from previous quarters. Achieving annualized yields in those quarters of approximately 14% and 17%, respectively.

As indicated on Slide 12, gross statutory annuity premiums were $1.32 billion in the fourth quarter of 2020 compared to $1.14 billion in the fourth quarter of 2019, an increase of 16%. This increase was driven by higher sales in the financial institutions channels as well as higher pension risk transfer premiums. I'm extremely pleased that the sales in the fourth quarter of 2020 were nearly $200 million higher than the fourth quarter of 2019.

Please turn to Slide 13 for a few highlights regarding our $52.5 billion dollar investment portfolio. AFG recorded fourth quarter 2020 net realized gains on securities of $468 million after-tax and after-deferred acquisition costs. This compares to net realized gains on securities of $51 million in the fourth quarter of 2019. Approximately $292 million of the realized gains recorded in the fourth quarter of 2020 related to the transfer of investments in connection with the annuity block reinsurance transaction. An additional $123 million of after-tax realized gains pertaining to equity securities that AFG continued to own at December 31, 2020.

As of December 31, 2020 pre-tax, pre-DAC unrealized gains on AFG's fixed maturity portfolio were $2.8 billion. We believe our investment portfolio is appropriately positioned for this uncertain economic environment.

As you can see on Slide 14 our portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade. In addition, the percentage of fixed maturity investments rated non-investment grade by the NAIC remains of less than 3% of total fixed maturity investments at December 31, 2020.

I will now turn the discussion over to Brian, who will discuss AFG's financial position and share a few comments about capital and liquidity.

[Brian Hertzman, Vice President & Controller]

Thank you, Craig. Please turn to Slide 15 where you will find a summary of AFG's financial position at December 31, 2020. We've repurchased 80 million of AFG common stock during the quarter at an average price of $74.98 per share. Share repurchases, especially when executed attractive valuations are important and effective component of our capital management strategy.

During the quarter, in addition to share repurchases, we returned $216 million to our shareholders with the payment of our regular $0.50 per share quarterly dividend, and $2 per share special dividend. In November, AFG redeemed its $150 million in 6% Subordinated Debentures due 2055 at par value. The redemption resulted in after-tax non-core loss on retirement of debt in the fourth quarter of approximately $4 million or $0.04 per share.

Our excess capital is approximately $1.2 billion at December 31, 2020. This number includes parent company cash of approximately $215 million. We expect to continue to have significant excess capital and liquidity throughout 2021 and beyond. Specifically, our insurance subsidiaries are projected to have capital in excess of the levels expected by rating agencies in order to maintain their high current ratings. We have no debt maturities before 2026.

Before I turn the discussion back over to Craig to share a bit more color on the sale of the Annuity business. I wanted to make a couple of comments about corporate overhead expenses going forward. Historically, we have allocated overhead expense to our P&C and Annuity segments, to the extent that those expenses directly benefit those operations. Consequently, there will be about $15 million in expenses currently allocated to the Annuity segment like the expenses of our in-house investment management that will not go away as part of the sale. For other currently shared services like IT, there is an 18-month transition services agreement under which MassMutual will be reimbursing us for those costs that benefit the Annuity segment.

I mentioned the in-house investment management as an example of an expense that won't go away with the ways - but I would be a miss if I didn't share with you the fact that even post sale of the Annuity segment, our investment management expenses at the current level are lower than what we would be required to pay an outside investment manager. Another important note, the impact of the $15 million of retain expenses following the sale are fully loaded in the guidance that we've provided.

We feel like we run an efficient organization and are excited about growth opportunities in our Property and Casualty operations. Supporting prudent growth and Property and Casualty as the first place, we will look to deploy any resource capacity created by the sale.

I will now turn the discussion back over to Craig for some additional thoughts on the sale of the Annuity business, including the significant liquidity and excess capital generated by the transaction and other financial impacts.

[Craig Lindner, Co-President & Co-Chief Executive Officer]

Thank you, Brian. Before I turn over to a discussion about the sale, I'd like to start with a word of facts. Our people, culture, products and business model have propelled AFG's annuity business and enabled us to emerge as a market leader.

Carl and I are thankful for the many contributions of our annuity associates and AFG employees, who've been an important part of the growth and profitability of our annuity business and we're pleased that our annuity group associates will have the opportunity to become part of a new beginning with a great company MassMutual.

One of the true joys of my business career has been working with our associates to build this company together and I'm thankful for their contributions to our success. Now I'd like to turn to Slide 16, which outlines a few highlights from last week's announcement, about the sale of AFG's annuity business to MassMutual. Under the terms of the agreement AFG's annuity businesses will be sold the MassMutual for $3.5 billion in cash, subject to final closing adjustments to the extent that gap shareholders' equity excluding AOCI of the entity sold varies from $2.8 billion. GAAP shareholders' equity excluding AOCI of the entities to be sold was $2.9 billion at December the 31, 2020. AFG expects to recognize an after-tax gain on the sale of $620 million to $690 million or $7.10 to $7.90 per share, when the sale closes, which is expected to occur in the second quarter of 2021.

In addition, prior to the completion of the transaction, AFG Parent will acquire approximately $500 million in real estate related partnerships and directly owned real estate from GALIC. AFG's 2021 earnings guidance, ended December 31, 2020 proforma financial information provided assumes that the $500 million in real estate related investments acquired from GALIC, will reside within the AFG parents. We're continuing to evaluate the merits have including these assets within the P&C investment portfolio and will provide additional details when we make our final decision. This transaction will result in AFG's exit from the fixed and indexed annuity market.

We have long believed there was a compelling value and AFG's business model with both the Specialty P&C business and our market leading fixed and indexed annuity business. In today's environment, we believe AFGs common shares have been undervalued because the market has not fully recognized the value of our annuity business. AFG's stock has been trading at a significant discount to the value we believe is appropriate given the high quality of our insurance businesses.

We are always looking for ways to create long-term value for our shareholders. And in the fall of last year we began internal discussions regarding the future of the annuity marketplace and whether we should consider a sale of AFG's annuity business. Key considerations beyond at appropriate valuation, where the continued employment of our employees, ensuring that our policy holders would be treated fairly, ensuring that our distribution partners would have an impeccable business partner and finding a buyer that would support the local the local community.

And achieving a sale price that represented the full value of AFG's market leading annuity business, we sought a buyer that would give appropriate consideration to the following. AFG's high caliber annuity product portfolio, high quality investment portfolio and a business model, which collectively enabled the company to effectively navigate multiple economic cycles.

The Annuity segment strong brand recognition is a member of the Great American Insurance Group and annuity business with industry leaderships and several important product lines and distribution channels, including indexed and the financial institutions channel an infrastructure, comprised of high-quality annuity professionals and systems.

MassMutual's commitment to establish its subsidiary in Cincinnati, ensures that the agreement will have no impact on GALIC's relationships with and commitments to its annuity policyholders and distribution partners. Importantly, we are very pleased that the transaction will provide compelling career opportunities for our Annuity associates and allowed this annuity business to remain part of the Greater Cincinnati community.

This transaction simplifies AFG's business model by creating a standalone Specialty Property & Casualty Company that highlights AFG's longstanding top performance as a Specialty P&C franchise in a more transparent matter. Pro forma financial information is provided on Slide 17 and illustrates how the transaction will significantly enhance AFG's excess capital and liquidity. On a proforma basis AFG's parent cash as of December 31, 2020 was $3.2 billion and excess capital increased from the $1.2 billion reported at December 31, 2020 to an estimated $4.4 billion.

As for use of proceeds, the ultimate deployment of this capital is not been determined. We are continuing to review options that provide the best opportunity to create long-term value for our shareholders and we'll continue to evaluate opportunities for deploying AFG's excess capital. Alternatives include the potential for healthy, profitable organic growth, expansion of our Specialty Property & Casualty niche businesses, through acquisitions and start-ups that meet our target return thresholds as well as share repurchases and special dividends.

We will now open the lines for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mike Zaremski from Credit Suisse. Your question please.

[Michael Zaremski]

Hey, Good afternoon. Thanks. Okay. Number of questions - I guess, thanks for some of the color about the ration-- rationale for the sale. I guess the biggest, the number one question - we're getting from investors is how to think about the use of proceeds? So, and also a broad question - but maybe you can touch on whether - how you think about M&A versus - you did cite earlier, you feel the stock valuation - I believe was is inexpensive. So if you can touch on that first and then I have a follow-up.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Sure. We just signed a deal up. Just in a short period of time ago. I think now we got to - we're going to move towards closing the deal and I think as we have always over the years our use of capital - excess capital is going to be --- what we consider to be the highest and best use and the highest returning types of uses. And if you look at us historically that mix as a mix of organic growth, we've done some acquisitions, we've repurchased our shares - our stock when we thought it was undervalued. Clearly, we continue to think our stock's undervalued today. And we've also done a combination along with stock purchases of extraordinary dividends we've had. We're proud of our track record of increasing our annual dividend. So I think we're working with a larger pool of excess capital than usual. So I think as we have in the past, Craig and I and our team will thoughtfully and strategically moving forward from today, considered all those things and what makes sense.

Again, we're very much aligned with shareholders. Our family and our management team on a big chunk of the stock, and we think, like shareholders, we want to continue to build significant shareholder value going forward. So we'll be thoughtfully and strategically, thinking about that now that we have that deal the MassMutual deal signed up.

And now, Craig, do you have any other thoughts?

[Craig Lindner, Co-President & Co-Chief Executive Officer]

Carl, thank you. I think you stated it very well.

[Michael Zaremski]

I guess, Carl, as a follow-up to that, you didn't mention anything about deleveraging. Is - shall be reading into you're not seeing that or that's in the cards too?

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Brian, you want to - do you have any color on that?

[Brian Hertzman, Vice President & Controller]

Sure. So depending on how we want to use the proceeds, we could use up to $2 billion of the proceeds for example to buy back stock or pay special dividends without violating any of our debt covenants or commitments rating agencies. So we have flexibility there without having to retire debt. We feel like we've positioned our debt at a very attractive interest rates to the extent that we can deploy that capital on our operations. That's at the moment probably a better use than buying back that, so not that we wouldn't consider it, but it's not one of the major considerations.

[Michael Zaremski]

Okay, that's helpful. I'm going to switch gears to the P&C operations and maybe re-queue. In terms of the top-line growth expectations of - I believe it was 49 for next - for 2021. That compares to I think 2% on an apples-to-apples basis, if you - correct me if I'm wrong, in Q4. I know there's a lot going on, but maybe you can kind of talk to kind of where you see some of the pluses and minuses or where that momentum is coming from in terms of the top-line growth expectations.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Yeah, I think the guidance we put out there is 5% to 9% excluding comp is 6% to 10% in that our best guess, I think obviously COVID will have some impact early on. We're betting that the economy continues to gain strength and improve in that. I think the good news in our cases, we have - we think we have some good broad-based opportunities to grow our business this year. In each of the different segments in that. So we're very excited about the opportunity for National Interstate for instance in our commercial auto-oriented subs. Now that we're meeting our return targets or combined ratio targets, commercial auto or even on commercial auto liability we're meeting our target, so, we think there are good opportunities in that part of our Property and Transportation businesses. If you've been watching crop prices for instance, corn and soybean futures prices if that holds up through the month of February, which kind of this, the base prices are figured on. We could see that business grow 15%-20% at a double-digit rate. We're seeing - we've had some nice growth in our Property inland marine business, we think that'll continue. Specialty casualty gosh, I think we're still going to see good opportunities to grow our excess and surplus lines business, our D&O business, our excess liability business, special - our human services business, our public sector business, pretty broad-based opportunities there.

And in the fourth quarter, I was pleased to see even in our Specialty Financial segment where the pandemic and the bank's approach on - in the lender placed property part of the business. We grew some of the fourth quarter. So I think next - I think this year, I think we will begin to see some growth there and businesses maybe even trade credit as things have stabilized and surety, as the economy improves, fidelity in crime. We're one of the top in market share - one of the top players in that business. And I think we'll continue to have good momentum and good opportunities in that.

As our aviation businesses improved dramatically and profitability going back to P&C I guess aviation even in the Property and Transportation we'd see some opportunities to grow. So I think the good news is that we see is, I think we have some pretty broad-based opportunity for organic growth. Hope that gives you some color.

[Michael Zaremski]

Yeah. That's helpful. Thank you.

[Operator]

Thank you. Our next question comes from the line of Paul Newsome from Piper Sandler, your question please.

[Paul Newsome, Piper Sandler & Co.]

Good morning, thanks for the - Thanks for the questions, I wanted to ask about M&A focus. Historically the firm has been very focused on sort of that $200 million-ish acquisition price. I was wondering, given the fact that you will have a lot more cash than that, does that change the sort of acquisition strategy that you certainly had or does it open-up for more opportunities or different opportunities than you had in the past?

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Good morning, Paul. I think generally what I've said historically, our sweet spot is kind of $50 million to $500 million, actually. When you look at the summer transaction that was $400 million-ish and near the, buying a National Interstate that was in the same territory and all that, that seems to be our sweet spot. As we have more excess capital, if there was a really great opportunity for us to add to our existing great franchise. Sure, we would look at something like that. The difficulty is when you look around, and you look at our returns on equity in our Property and Casualty business. There really aren't - I mean repurchasing your own share is - and owning more of an entity in a franchise that is already earning great returns. Acquisitions have to compete with that. So, again it gets back to, we think that we're pretty intelligent managers and users of excess capital if you look at the blend over the years. For us to do something larger would really have to be very attractive and we'd have to be very confident that it would be a great add to our franchise.

[Paul Newsome, Piper Sandler & Co.]

Fantastic. Thanks guys appreciate it. Congratulations on the quarter.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Greg Peters from Raymond James, your question please.

[Gregory Peters, Raymond James & Associates, Inc.]

Good afternoon everyone and congratulations on just on monumental decision on behalf of the organization. Listen, I realize the ink is still drying out from the transaction and you're not going to talk about what you're going to do with the capital yet. One of the considerations that is cross my mind is that with the reduced earnings power of the company because of the sale that at some point down the road the payout ratio for your dividend might come under review. And I was just wondering, obviously there's a lot of ground that cover between now and then, but I'm just curious, how you view the payout ratio in the context of the earnings power of the company going forward?

[Craig Lindner, Co-President & Co-Chief Executive Officer]

This is - this is Craig. I mean the reality is we're not going to be running zero on the cash in the parent forever. So I wouldn't jump to the conclusion that the earnings power of the company is greatly diminished. We have to decide what we're going to do with the excess capital and cash in the parent, but certainly - the ability to pay the dividend in place today are continuing, our goal has always been to raise the dividend each year at a double-digit pace, I'd like if anything. This transaction enhances that ability.

[Gregory Peters, Raymond James & Associates, Inc.]

Okay- I know- on Slide 16 of your presentation, you provided...

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Another-- I mean - I don't really understand the question too much to be honest. It's not very intuitive - if we're saying we have a business is going - our core business is going to earn the range of earnings that we are and we pay a $2 annual dividend; that would say that, there is no problem with that and we're generating excess capital. So really don't understand your question much. Sorry about that.

[Craig Lindner, Co-President & Co-Chief Executive Officer]

That's all right. Craig, it's a fair response. I just was looking at - listen-- your record on capital returns is among the best, but you're at some point you're the-- you're missing the annuity earnings and that was part of the blended consideration that went into you payout ratio - but listen, I don't want to - it's not worth arguing about or discussing. I wanted - the other question I had for you - considering the strong results you've posted in your property transportation Casualty and financial businesses and you talk about the rate increases. Casualty business, I think you said your rates were up 19% and I'm just curious what your perspective is about the balance between getting all that rate and actually growing your business more because when you're guiding to combined ratios in the high '80s and low '90s, it seems like your near targeted return levels at least from a combined ratio perspective.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

I think that's a good question. I think it really differs tremendously line by line, when it gets when you look at things. We're doing very well, we've always done very well in the excess liability arena even when rates were lower than what they should have been in the industry in that and as rates have increase to where they have that businesses has grown tremendously. So we've really used it as an opportunity to grow. And D&O arena, we've, as the technical rate for public D&O is looked more attractive, for certain companies risk by risk. We've been riding more appetite went from zero, for instance, for public D&O, however, over the past years, to having more of an appetite because the technical rate, for certain risk looks pretty good.

So, strategically, it really, Greg, kind of its business by business in that-- I think we're in an enviable position of all - having solid underwriting profits and going into this year, continuing to be able to make those decisions line by line getting rate increase that exceeds loss costs and being able to choose line by line, whether we go more with growth or you know or what have more margin.

So I hope that gives you a little bit of color.

[Gregory Peters, Raymond James & Associates, Inc.]

It does. Thank you. The final question on Page 16 of your slide deck, you said GAAP shareholders' equity excluding AOCI of the entities to be sold was $2.9 billion at year-end. What was the GAAP shareholders' equity including AOCI of the entities to be sold, at the end of December 31, 2020? Did I miss it somewhere in the press release?

[Brian Hertzman, Vice President & Controller]

It's another $1 billion or so of equity in the business. Ultimately that will go away with the sale. We will be much less leveraged from an investment perspective and our AOCI balances will be smaller post transaction.

[Gregory Peters, Raymond James & Associates, Inc.]

Got it, thank you for the answers.

[Operator]

[Operator Instructions] Our next question comes from the line of Meyer Shields from KBW. Your question please.

[Meyer Shields, KBW]

Craig, two questions, one on the deal. Can we get a sense of how much of the net corporate expenses are going to be invested by MassMutual on a year-over-year on an annual basis?

[Brian Hertzman, Vice President & Controller]

I'm sorry could you - how much - could you repeat the question. I am sorry.

[Meyer Shields, KBW]

Right. So just trying to model sort of what corporate expenses look like after the deal and understand that $15 million, that had been allocated to annuities stays with P&C, but there is some expenses apparently where the MassMutual will be bearing those expenses. I was just wondering if that number is available?

[Brian Hertzman, Vice President & Controller]

So - just to do - I guess to clarify that a little bit. So the Annuity - the expenses that Mass Mutual, which will be reimbursing are expenses that are inside the annuity earnings that were excluding everything annuity in our guidance. So that won't really affect AFG's ongoing results because there's going to be sort of reimbursing us at cost for those services - so the real change in expenses is pretty much as simple as, add $15 million of what we currently have as what would be our expectation going forward. There won't be anything really going away, that $15 million sort of the net number.

[Meyer Shields, KBW]

Okay. No, that's perfect. And then looking at potential M&A - I guess one of the assumptions that I would make is that since pricing for a lot of Specialty Lines is getting better right now, the only properties that are available might need some significant turnaround efforts. I don't know if that sentiment is something that you would share. I was hoping you could talk about, if it is, your comfort - in terms of buying something that you'd have to fix.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Gosh, that would be so acquisition specific and if we have in-house street-smart knowledge about a given business and understand it well and think we can turn things around we might do so. I mean the Atlas transaction was a little bit like that, a company that was in trouble in that and we managed to take a piece of the paratransit part of that business and some other risks and define what we know and what we're good at and what we think we could fix and do well. And so we did that transaction weren't the big transaction, but we're writing - I think we ended up writing maybe $40 million of premium at our prices and add great underwriting at great returns.

So if there's something larger that you know, we feel that we have the expertise in might give that try. In that - so I realize it's really entity specific and whether we have, the in-house knowledge to tackle things in that I mean frankly right now, we have such good opportunities. So I think, organically and in some of the new businesses we've new lines, we started in that. I'm going to be careful about getting our Management's team distracted by taking on too much of a fixer upper. If you understand what I'm saying.

[Meyer Shields, KBW]

I do. That was very helpful, thank you so much.

[Operator]

Thank you. Our next question is a follow-up from the line of Mike Zaremski from Credit Suisse. Your question please.

[Michael Zaremski]

Yeah, just one clarification the $500 million of real estate that you're retaining. That was associated with the annuity deal is, can you explain are you paying outright $500 million and we shouldn't deduct that from the sale price. I just - I'm sure we could back into it look into math. But just wanted to get some clarification on what's going on there?

[Craig Lindner, Co-President & Co-Chief Executive Officer]

Sure. This is Craig. The answer is yes, we are going to be purchasing around $500 million, a little over $500 million of real estate is part of the deal. So if we end up deciding to hold the real estate in the parent, then I think that you reduce the cash in the parent by $500 million and that is the way we presented things in our pro forma, is when you look at the pro forma cash in the parent it is, as we're going to hold that $500 million plus of real estate in the parent is I said in my comments, we are studying whether or not it makes sense to hold some or all of those real estate assets in the property casualty company and if we do that - if we decide to do that then potentially there is an extra $500 million plus of cash in the parent versus the pro forma numbers that we presented to you today. Let me take just a minute or so and give you the logic behind that, that was a requirement of mine is part of the deal was to allow us to buy those real estate assets at book value and the reason that I wanted to do that is the vast majority of the real estate assets our multifamily investments and they are investments where we hold in 80% position. It's a limited partnership, but what I would say is we're very active in selection of the properties, very active in the decision to monetize those properties from time to time. And with that 80% position, you have a lot of influence even as a limited partner. Those properties - those investments were jointly held between Property Casualty and Annuity and to split the investment position and take our position from 80% to 40% would greatly diminish our influence. They've been very, very strong performing investments and excellent markets and we expect that they will continue to perform well with the smaller amount of directly owned real estate, kind of the same rationale was used to, if we owned a 100% of a property to split it up and have MassMutual owned 50% and us owned 50% didn't make a whole lot of sense. That was the rationale for AFG requiring as part of the deal that we could purchase those real estate asset.

[Michael Zaremski]

Okay, I got a tough one, we can take this offline too so you said you're studying I think shifting them from the parent to the statutory entity or entities. What - is that something we should be thinking about that will impact your financials or maybe any color there?

[Craig Lindner, Co-President & Co-Chief Executive Officer]

I mean if we would do that obviously earnings would move from the parent into the Property Casualty Company. And we would have more cash up in the parent.

[Michael Zaremski]

Thank you very much.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Yeah. The deal the signing of the deals is so new - we - it's something that we want to stay - we don't want to make sure that we're comfortable with all the different rating agencies requirements that are different and what the capital charges are. We just haven't had time to study it and so it's some things strategically that we're looking at.

[Brian Hertzman, Vice President & Controller]

When you look at the detail, we provided on the earnings guidance in the press release itself, you'll see that we identified $0.35 per share in 2021, expected earnings coming from that is assets, so if we put them in the P&C group that earnings will be in the P&C group if not it will be at the holding company, but that's sort of the contribution we're expecting from those assets in our current models.

[Michael Zaremski]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Rudy Miller from the Miller group. Your question please.

[Rudy Miller, Miller group]

Yes, it's Rudy Miller from Miller Group. Scottsdale, Arizona is 72 degrees everybody. Blue Sky. I like to make a couple of comments. First please have been a shareholder of through our firm Miller group, Miller Capital Corp, Miller investments. Miller Management and business is over 50 years and we've been following American Financial for a long time and one of the things we're most impressed about and we have the investor way back starting at $26 a share. And we've added to our position each year small institution 100% controlled by myself and just thank you, guys. and you have done one of the best jobs in insurance management, you're very artful and very thoughtful, bright guys, love that return think sometimes the Analyst - the questions I heard, I'm on my dollar, my stock I don't work for those guys, as board my firm that, I think sometimes the Analyst - I don't know why you guys sometimes get discounted by some of the analysts out there, that's my opinion of you Analyst, if you are listening. The job you guys done managing this, multiple that you paid from my calculation regarding what you bought this, compared to other insurance transactions and I have been in the industry on a public board and a major shareholder of a pretty large insurance company along the way in my career and I think you guys, do one of the best jobs in your space and how you utilize investment money is tremendous.

And I just really think you one of the best jobs instead of - and quite frankly 80% of the questions were asked to you. I got the same information they did. I don't have those analyzed out. I thought there were weak questions by some of those analysts that asked you questions. Couldn't figure out since all the stuff you presented. Some color, yes correctly. So anyway, I don't have any questions, just keep doing what you're doing and gentlemen.

[Craig Lindner, Co-President & Co-Chief Executive Officer]

This is Craig. I really appreciate your comments and I guess the way we look at it is we try to be as transparent as we can with giving information about our businesses and if analysts or the market kind of gets it wrong in terms of the valuation of prospects that creates opportunities for us. Over the years there have been periods where we've repurchased a very large number of our shares. So, I mean we'd rather have the stock trade an appropriate valuation but if it doesn't that creates opportunities for us also.

[Carl Lindner III, Co-President & Co-Chief Executive Officer]

Yeah. Thank you, Rudy. This is Carl. Thank you. I appreciate your feedback and I have to tell you we have such a great deep bench of executive talent and management talent in our insurance businesses. We are just very blessed to be able to work with such a talented group of people, and that's a big part of the secret.

[Rudy Miller, Miller group]

Well, we really are. Thank you, guys, doing a great job. I'll jazz voice, got some vocal cord surgery recently and I don't say a lot. I don't normally go into conference calls have my lieutenants to it, but I want to be on this and myself and I'll tell you what in March. I was one of those buyers at $44.75. So, every time I see it go down, we just add to our position and in fact, we just bought some when your release came out and we bought on the open it our last trade was it at $87.41. So we monitor pretty closely. We don't have the position some people have. But we do just - we do real well with American Financial, we like your business and we like your management team. You guys are smart and hardworking and I love what you said. Your ownership, you are out there for the stockholder and we all participate in the gains and looked the way you managed through the pandemic, I don't hear enough pauses, sometimes it's always a negative. Once again, I will let you guys go. Thanks for the time and God bless America and let's go get them a HECK, heck [ph].

[Brian Hertzman, Vice President & Controller]

Thank you.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Diane Weidner for any further remarks.

[Diane Weidner, Assistant Vice President of Investor Relations]

Thank you all for joining us this morning. We look forward to talking with you again if we share our first quarter 2021 results with all. Hope you have a great day.

[Operator]

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.