American Financial Group - Q1 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to American Financial Group's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Diane Weidner, Vice President, Investor Relations. Please go ahead.

Diane P. Weidner (VP of Investor Relations)

Thank you. Good morning, and welcome to American Financial Group's first quarter 2024 earnings results conference call. We released our 2024 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 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, and our remarks or responses to questions. A reconciliation of net earnings to Core Net Operating Earnings is included in our earnings release. Finally, if you're reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy, and as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now, I'm pleased to turn the call over to Carl Lindner III to discuss our results.

Carl Lindner III (CEO)

Good morning. I'll begin my remarks by sharing a few highlights of AFG's 2024 first quarter, after which Craig and I will walk through more details. I will then open it up for Q&A, where Craig, Brian, and I will respond to your questions. AFG's financial performance during the first quarter was excellent. In addition to producing an annualized first quarter operating return on equity of 20%, net written premiums grew by 8% year-over-year. Our compelling mix of specialty insurance businesses and entrepreneurial culture, disciplined operating philosophy, and an astute team of in-house investment professionals collectively have enabled us to outperform many of our peers over time. Craig and I thank God, our talented management team, and our great employees for helping us to achieve these results. I'll now turn the discussion over to Craig to walk us through some of the details.

Craig Lindner (Co-CEO)

Thanks, Carl. Please turn to slides three and four for a summary of earnings information for the quarter. AFG reported Core Net Operating Earnings of $2.76 per share in the 2024 first quarter. The year-over-year decrease reflects lower returns in AFG's alternative investment portfolio when compared to the very strong performance of this portfolio in the prior year period. 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 $15.3 billion investment portfolio are presented on slides five and six. Looking at results for the first quarter, property and casualty net investment income was approximately 1% lower than the comparable 2023 period.

Excluding the impact of alternative investments, net investment income in our P&C insurance operations for the three months ended March 31, 2024, increased by 16% year-over-year as a result of the impact of higher interest rates and higher balances of invested assets. As you'll see on slide 6, approximately 68% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 6%. Current reinvestment rates compare favorably to the nearly 5% yield earned on fixed maturities in our P&C portfolio during the first quarter of 2024. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at March 31, 2024. We've strategically managed duration to take advantage of market opportunities as interest rates have increased from recent historic lows.

The annualized return on alternative investments in our P&C portfolio was approximately 9% for the 2024 first quarter, compared to 14.2% for the prior year quarter. Strong returns related to our traditional private equity portfolio were offset by lower returns on investments tied to multifamily housing, which represent about half of our alternative investment portfolio, and where we continue to experience headwinds from the impact of increased supply and the leveling out of rental rates on these investments. We expect these headwinds may continue throughout the remainder of 2024. Longer term, we remain optimistic regarding the prospects of our investments in multifamily housing as these properties continue to generate strong net operating income and have desirable geographic positioning and high occupancy rates. The average annual return on alternative investments over the five calendar years ended December 31, 2023, was approximately 13%. Please turn to slide seven.

We will find a summary of AFG's financial position at March 31, 2024. During the quarter, we returned $269 million to our shareholders through the payment of our regular $0.71 per share quarterly dividend, as well as a $2.50 per share special dividend. We expect our operations to continue to generate significant excess capital throughout the remainder of 2024, which provides ample opportunity for additional special dividends or share repurchases over the next year. We continue to view total value creation as measured by growth in book value plus dividends as an important measure of performance over the long term. For the three months ended March 31, 2024, AFG's growth in book value per share, excluding AOCI plus dividends, was 5.1%. I'll now turn the call back over to Carl to discuss the results of our P&C operations.

Carl Lindner III (CEO)

Thank you, Craig. Please turn to slides 8 and 9 of the webcast, which include an overview of our first quarter results. As you'll see on slide 8, our specialty property and casualty insurance businesses generated a strong 90.1 combined ratio in the first quarter of 2024, about a point higher than the 89.2 reported in the first quarter of last year. Results for the 2024 first quarter included 2.3 points of catastrophe losses compared to 2.2 points in last year's first quarter, and 3.3 points of favorable prior year reserve development compared to 4.5 points in the first quarter of 2023. First quarter 2024 gross and net written premiums were both up 8% when compared to the same period last year.

Year-over-year growth was reported within each of the specialty property and casualty groups as a result of additional crop premiums from Crop Risk Services acquisition, new business opportunities, increased exposures, and a good renewal rate environment. Along those lines, average renewal pricing across our property and casualty group, excluding our workers' comp businesses, was up 8% for the quarter, accelerating about 1% from the previous quarter. Including workers' compensation, renewal rates were up 6% overall, in line with the previous quarter. This is our 31st consecutive quarter to report overall renewal rate increases, and we believe we're achieving overall renewal rate increases and excess of prospective loss ratio trends to meet or exceed targeted returns. In addition to renewal pricing, we continue to focus on insured values in our property-related businesses to ensure that our premiums reflect inflationary considerations.

Now I'd 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'll focus on our summary results here. The businesses in the Property and Transportation Group achieved an 89 calendar year combined ratio overall in the first quarter of 2024, an improvement of 2 points from the 91 reported in the comparable 2023 period. First quarter 2024 gross and net written premiums in this group were 10% and 7% higher, respectively, than the comparable prior year period. Additional crop premium associated with the CRS acquisition, as well as new business opportunities, a favorable rate environment, and strong account retentions in our commercial auto and ocean marine businesses were the primary drivers of the increase in premiums.

Overall renewal rates in this group increased approximately 9% on average in the first quarter of 2024, an increase of about two points from the previous quarter. I'm particularly pleased with renewal rates achieved in our commercial auto liability line of business, where rates were up 21%. The businesses in our Specialty Casualty Group achieved a strong 89.8 calendar year combined ratio in the first quarter of 2024, 2.3 points higher than the 87.5 reported in the comparable period last year. CAT losses added 2.2 points to the Specialty Casualty Group first quarter 2024 combined ratio and were the result of a winter storm that affected a large social services account in the northwestern part of the country. I'm particularly pleased with the continued very strong underwriting margins in our executive liability and workers' comp businesses.

First quarter 2024 gross and net written premiums increased 3% and 4%, respectively, when compared to the same prior year period. While most of the businesses in this group reported premium growth during the first quarter, the higher year-over-year premiums resulted primarily from the growth in our excess and surplus lines and excess liability businesses as a result of rate increases and new business opportunities. Higher rates, strong account retention, and new business opportunities in several of our targeted markets businesses contributed to the year-over-year growth to a lesser extent. Now, renewal pricing for this group, excluding our workers' comp businesses, was up approximately 8% in the first quarter and was up about 5% overall, with both measures up about 1% from the renewal pricing in the previous quarter.

I'm particularly pleased that we achieved renewal rate increases in excess of 10% in several of our social inflation-exposed businesses during the quarter, including our public entity, social services, and excess liability businesses. The Specialty Financial Group continued to achieve excellent underwriting margins and reported an 86.3 combined ratio for the first quarter of 2024, a slight improvement from the comparable period in 2023. First quarter 2024 gross and net written premiums were up 26% and 27%, respectively, when compared to the same 2023 period. While most businesses in this group reported year-over-year growth, our financial institutions business was the primary driver of the higher premiums, representing a continuation of the growth we reported in both of our lender-placed and residential investor business products in the second half of 2023. Renewal pricing in this group was up approximately 7% in the first quarter.

Well, Craig and I are pleased to report these strong results for the first quarter and we're proud of our proven track record of long-term value creation. Our insurance professionals have exercised their specialty property and casualty knowledge and experience to skillfully navigate the marketplace. Our in-house investment team has been both strategic and opportunistic in the management of our $15 billion investment portfolio. We're well positioned to continue to build long-term value for our shareholders for the remainder of 2024 and beyond. We'll 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.

Operator (participant)

Thank you. As a reminder to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Charlie Lederer of Citigroup. Your question, please, Charlie.

Charlie Lederer (VP of Equity Research)

Thank you. Good morning. Wondering if you guys can share more about the reserve development in the quarter, I guess specifically in specialty financial and specialty casualty, just kind of the moving pieces there. Thanks.

Brian Hertzman (CFO)

Hi, Charlie. This is Brian. So to talk about the casualty segment first, there's a few things going on there. First of all, we did continue to see favorable development coming out of our workers' comp business, as well as lower severity in our executive liability business. Offsetting that is some increased severity in our excess liability businesses and some increased severity in the social services businesses. When Carl mentioned the lower profitability in the social services businesses, that's coming through prior year development, and it's just on a number of few claims there. While we don't comment on specific claims, it is over a couple of the more recent accident years.

And then in the financial group, there's a small amount of adverse development there, and that's related to our Innovative Markets business, where we're seeing a little bit of increased severity there. The Innovative Markets business includes some coverages related to complex intellectual property.

Charlie Lederer (VP of Equity Research)

Got it. Okay. And I guess that's helpful. I guess just on the commercial auto liability pricing increase, if I heard that, that kind of jumped off the page at 21%. I guess what did that compare to in the fourth quarter, and how should we think about that earning through and impacting your underlying margins in property and transportation as the year goes on?

Brian Hertzman (CFO)

Well, I definitely think it's a very positive result. I believe for all of 2023, it was around 11%, but I believe the fourth quarter jumped up to around 15% or so. So I definitely like the trend. It's our goal. We have solid underwriting performance for our overall commercial auto business in the first quarter and last year, but the commercial auto liability part of the business isn't where we want it, with a small underwriting loss in that. So it's our objective to lower our overall commercial auto combined ratio, in particular on commercial auto liability. So achieving rate increases at that level is very welcome at this point.

Charlie Lederer (VP of Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Michael Zaremski of BMO. Please go ahead, Michael.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Great. Good afternoon. If we focus on the specialty casualty segment, the growth, the overall top-line growth has been decelerating, which I guess feels like it makes sense, right? Workers' comp pricing, as it should be, not great given how great profitability is. And then on the other hand, you have some of the other lines of business. Pricing power appears to be moving north as the industry's and AFG's reserve releases, or I guess kind of dissipate a bit.

So I guess does this just feel kind of like the cycle's playing out as it does? The pricing kind of in certain lines are non-comp are going in the right direction up because the industry is seeing that margins are missing a bit. And I guess just trying to get at it as a kind of, does this cycle feel like it's turning the right way, with comp obviously being the, I guess, also turning the right way, but downwards given profits?

Brian Hertzman (CFO)

Yeah. I think when you look at the addressable growth side, the workers' comp part of the business, first quarter premium is roughly flat to up just a little bit. So when you exclude workers' comp in the specialty casualty segment, we're growing about 6%. I've talked about in the past on the social inflation-exposed businesses, as I just mentioned, really glad to see that we're getting double-digit price increase on a number of those businesses, which is a real positive. But I think because of the claims environment, in a lot of those lines, our guys are trying to position us for continued success regardless of the social inflation that's going on.

I think I've talked in the past of in certain businesses like public sector, substantially increasing their retentions over which we're writing business in the municipal pools and increasing, moving up the towers some with smaller limits and some of our excess liability businesses and that. So our guys in those businesses, the excess liability businesses, have been very profitable for us, but our guys are trying to position us for continued success there going forward in this kind of environment and that. We continue to be very pleased with the overall workers' comp results in the first quarter. So that's a positive and that.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. That's helpful. Maybe a follow-up just to stay on workers' comp, given it's a good part of your business that's remained very profitable. Is there, when we look at your profitability? Yep, sorry.

Brian Hertzman (CFO)

Yeah. I might mention one other in the crop business, we're happy with right now. It's very early, but the crop year is starting out solid. Plantings of corn and soybeans are proceeding at a pace that exceeds the last five-year average. While the U.S. Drought Monitor, when you look at that, is better overall than April of last year. With reduced drought conditions across much of the western Corn Belt where some of the drought problems existed last year. Despite the rainfall, we also don't have significant concerns about floods or above-average preventative planting type of claims and that. Corn and soybean prices have been very stable, which is good. I'm being told that the winter wheat business seems to be performing much better, potentially much better than what it was last year. Extremely early, but like the way we're starting out there on a very significant business force.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

The winter wheat and I did have a follow-up on workers' comp. The winter wheat as a percentage of your portfolio, if you can remind us?

Brian Hertzman (CFO)

I think it's maybe 8% or something like that. I think all wheat is maybe 10% or something around that.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. And if I may, my follow-up was on workers' comp, which is a big and profitable business for you all. If we just and when we look at just overall industry trends versus American Financial Group last year, your workers' comp business was extremely profitable, but much less profitable year-over-year. And I'm looking at a combined ratio basis, and your reserve releases were still high, but just decelerated. And the industry actually kind of became more, showed an improvement, which was a surprise. But just curious, specific to your book, is there, when you reflect on what the actions you took in 2023, are some of those just due to the nature of your book maybe being more concentrated in certain states that your experience was very different than it has been relative to the industry?

Brian Hertzman (CFO)

I'm not sure there's that significant of a difference in that. We continue to have great results last year. Our first quarter results continue to be excellent for workers' comp. I think in our Summit business, our Strategic Comp business, our high-deductible business, and National Interstate's workers' comp are all performing very well. Our California business is the part of the business that has an underwriting loss, both last year and in the first quarter. So that's a relatively smaller part of our workers' comp business in that. But I suppose that could have some impact. So we're getting a good start, have excellent comp results in the first quarter. We do think that this year, that the profitability won't be as good as the previous year. One reason is the 15% rate decline in Florida, which is a significant state for one of our large comp subsidiaries' Summit.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

That's very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of C. Gregory Peters of Raymond James. Please go ahead.

C. Gregory Peters (Managing Director and Senior Stock Analyst)

Hey. Good morning. This is Sid Ahn for Greg. Just wanted to follow up on the growth in the specialty financial. I know in the prepared remarks, you highlighted the financial institutions, but curious if you could provide a little bit more information on what you're seeing as attractive in that area of your business. Feels like there's been a step-changing growth and just trying to get a sense if we should expect this to continue.

Brian Hertzman (CFO)

I think we expect solid growth this year. I think the first quarter was very strong in that. I think different companies talk about leaning into the property opportunities. This is a business that we've done very well over a long period of time with significant underwriting profitability, with pricing going up 9%, with an industry that's focused on getting the proper insured values. There are states like Florida and a number of other states that are moving to anybody doing this business, making sure that things are insured to replacement cost value, not just the principal balance. Replacement cost value could be appraised value, or it could be what's called last known coverage replacement cost, which would have been maybe somebody's last homeowner's policy in that that was written.

So both price and getting proper insured to value competitively, there have been a number of competitors that have faltered and that have allowed us to pick up significant accounts, one in particular last year that we're continuing to benefit from. We'll see, this is a lumpy business in that when you pick up an account or lose an account, it can have a decent impact on your overall. It comes in lumps. So we're hoping that we continue to have some opportunity to pick up maybe some additional accounts. By the same token, what our thoughts are on business that's too catastrophe-exposed. So if there are accounts that we don't think are performing or have too much catastrophe exposure, there may be—we may decide not to go forward with some.

Bottom line is we're pleased with how this business is starting out, very profitable, really good growth, love the price increase and insured-to-value momentum that we're getting. I think we're excited about the business.

C. Gregory Peters (Managing Director and Senior Stock Analyst)

Okay. Thanks. And then as my follow-up, in the press release, I believe you said the returns in the alternative investment portfolio exceeded expectations for the quarter. And I know you're not providing detailed guidance anymore, but just curious if the first quarter results change your view on the expected performance of the portfolio for this year or if the 6% annualized return is still the right bogey to use for 2024.

Craig Lindner (Co-CEO)

Sure. This is Craig. On our last conference call, when we talked about assumptions that went into our plan, we talked about a 6% assumption on total return on alternatives for the year. And that was made up of a low single-digit return on our multifamily properties, which account for about half of that portfolio, and a stronger return on the other investments. And what I would say is multifamily is performing pretty much in line with our expectations or pretty much in line with what we were kind of expecting to see when we guided to or said that we were using a low single-digit return on that piece. I don't think we changed our thoughts on that, kind of given the outlook for the balance of the year on multifamily. We got off to a very good start.

We had very good returns on the balance of the alternative portfolio. But as you know, that can be pretty lumpy. I think we did benefit from the very strong market in the fourth quarter of 2023 and the calendar year of 2023. We report the returns and marks on a quarter-delayed basis. And so I think in the first quarter, we benefited from the very strong market last year. It's early in the year, hard to predict what the market's going to do the balance of the year. So at this point in time, we would not change the assumed 6% return for the year.

C. Gregory Peters (Managing Director and Senior Stock Analyst)

Okay. Thanks for the answers.

Operator (participant)

Thank you. Our next question comes from the line of Andrew Andersen of Jefferies. Your question, please, Andrew.

Andrew Andersen (Equity Research Analyst)

Hey. Good morning. In the press release, you pointed to improved profitability on workers' comp. Am I correct in thinking that is due to stronger releases year-over-year and not due to the underlying loss ratio? And maybe with that, could you touch on the seasonality of perhaps how 2023's workers' comp developed on a quarterly basis?

Brian Hertzman (CFO)

So the combined ratio, I think your combined ratio was fairly similar in workers' comp in the quarter-over-quarter as well as the development. So there was a little bit of growth in workers' comp this year, but the underlying loss ratios were similar in that business. There can be some lumpiness in the development, but in the first quarter of 2024, it was similar to the first quarter of 2023.

Andrew Andersen (Equity Research Analyst)

Okay.

Brian Hertzman (CFO)

I don't think our press release said we had an increased margins there. I think it just said we did well. I think that's what my earlier comment was, is that we had a strong quarter.

Andrew Andersen (Equity Research Analyst)

Okay. Thank you. And then maybe looking at some Schedule P accident year picks for other liability, claims made seem to improve year-over-year, and occurrence was kind of flat year-over-year for accident year 2023. I guess I would have thought there'd be maybe a little bit more conservatism just given the loss trend environment. But can you kind of help us think through these picks here?

Brian Hertzman (CFO)

Sure. On the general liability occurrence, I think it's important to know that there can be changes in mix of business. We also have been getting significant rate increases there. Then in some of our excess businesses, we've also been looking at higher attachment points and higher deductibles. There's really a change in mix of business happening there that kind of mutes the impact on the loss pick changes. In the claims made, we tend to be conservative early on, and then that sets us up for more chances of favorable development there.

Andrew Andersen (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Meyer Shields of Keefe, Bruyette & Woods. Please go ahead, Meyer.

Meyer Shields (Managing Director and Senior Equity Research Analyst)

Great. Thanks. I think earlier, Carl, in your comments, you talked about 20%+ rate increases in commercial auto. And I'm wondering how we should think about that impacting demand for captive solutions as opposed to maintaining the same insurance programs that companies have had?

Brian Hertzman (CFO)

I don't think it probably has that big of an impact one way or the other. I mean, the whole marketplace is struggling with social inflation on the commercial auto liability side, and the market is allowing increases. Now, on specific captive accounts, if the experience is better, then it wouldn't be the 21%. There's probably some accounts and some businesses that got lower price increases and those that haven't had great results higher.

Meyer Shields (Managing Director and Senior Equity Research Analyst)

Okay. So then I guess where I'm going with this is to just infer that as those rate increases earn in, the improving underwriting profit should basically emerge in a typical fashion instead of being sort of offset by clients retaining significantly more risk.

Brian Hertzman (CFO)

Yeah. Again, it's our goal to improve the commercial auto liability combined ratios over the next year or two and hence having stronger overall commercial auto results. And as I mentioned in some of the specialty casualty lines, we're a very underwriting profit-driven company. I mean, in commercial auto, we're probably outperforming the market by 5 or 6 points at least. And we're serious about getting the right returns on that business. So if anything, on that part of the business, I'd say our guys are serious on getting the price and terms changes and the selection of business that achieves our goal of improving things over the next year or two. So definitely, our guys would be more focused on improving that result than growing a ton right now.

Meyer Shields (Managing Director and Senior Equity Research Analyst)

Okay. Perfect. If I can switch gears briefly, is the growth in specialty financial likely to impact the amount of reinsurance that you want to carry for the rest of the year?

Brian Hertzman (CFO)

Definitely. That's something that we, as that business has grown, that we definitely are monitoring. I think, in fact, I believe we're looking at purchasing some gap insurance to cover the gap between our underlying CAT tower and the catastrophe bond that we have.

Meyer Shields (Managing Director and Senior Equity Research Analyst)

Okay. Perfect. Thank you very much.

Operator (participant)

Thank you. Once again, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Our next question comes from the line of Charlie Lederer of Citigroup. Your question, please, Charlie.

Charlie Lederer (VP of Equity Research)

Hey. Thanks. Just one follow-up. You mentioned the alternative markets business a little bit. We've heard about certain specialty peers kind of scaling it back after experiencing losses there. I know it's relatively small dollars for you, but curious if you can share whether your thoughts have changed on that business.

Brian Hertzman (CFO)

I assume you're referring to the Innovative Markets business where we talked about having the.

Charlie Lederer (VP of Equity Research)

Yeah. I misspoke. I said alternative. Yeah. Sorry. Innovative Markets, the IP business.

Brian Hertzman (CFO)

In that business, we're evaluating the opportunities there. Some of the particular programs that have those losses are things that we're no longer offering new coverages in.

Charlie Lederer (VP of Equity Research)

Okay. Thank you.

Brian Hertzman (CFO)

Charlie, while we have you on your question earlier about prior year development in the specialty casualty, I think it's important also when you're looking at that to put it in context of where we're coming from in those results. So when you look at the businesses that we had some adverse development in, those are still very profitable businesses for us. For example, for the full year 2023, most of our more social inflation-exposed businesses had a calendar year underwriting profit despite some of the noise there.

And only one of them had a return on equity that wasn't double digits. In fact, when we look at our excess and surplus businesses overall, all three of those had calendar year ROEs above 20% in 2023. I thought it might be just good to remember when you're thinking about some of the lumps in prior year development that those are in businesses that are generally very profitable over a long number of years.

Charlie Lederer (VP of Equity Research)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Michael Zaremski of BMO. Your question, please, Michael.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Oh, great. Thanks. Just a quick follow-up probably for Craig, but on the real estate returns, I guess I probably should know this, but I don't think we all fully appreciate it. Is it a mark-to-market there, or how does that work? I think we appreciate how private equity works and sometimes a lag and how the private equity firms mark that, which I think are third parties. But can you remind us how the marks are created on your real estate portfolio? Thanks.

Craig Lindner (Co-CEO)

Sure. It is similar to the private equity investments in that the general partners in our multifamily investments review the valuation on a quarterly basis and mark them to market on a quarterly basis.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. Got it. So the interest rate, so it's so just as a follow-up, could there be historically, has there been more volatility on the PE or the real estate if there's a way to kind of just high-level size up whether we should maybe be thinking about there maybe there can be some lumpy quarters that actually come from real estate, whereas I thought it usually came from private equity?

Craig Lindner (Co-CEO)

Yeah. I mean, if you look over a long period of time, actually, the multifamily returns have been very predictable. We obviously have been in a somewhat unusual environment here the last 6-9 months with a very large increase in interest rates. The operating income of the multifamily properties continues very strong. We're very pleased with the performance, but cap rates have moved up because of an increase in interest rates.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. That's all I have. Appreciate it.

Operator (participant)

Thank you. I would now like to turn the conference back to Diane Weidner for closing remarks. Madam?

Diane P. Weidner (VP of Investor Relations)

Thank you all for joining us today. As we discussed our first quarter results, we look forward to talking to you again next quarter and hope you all have a great day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.