American Financial Group Inc (AFG) 2002 Q2 法說會逐字稿

Good day, and welcome to the American Financial Group second quarter 2002 earnings results conference call. Today's call is being recorded. With us today we have Carl H. Lindner, III, Co-President of American Financial Group, Craig Lindner, also Co-President of American Financial Group, Keith Simpson, Vice President, and Chuck Shepherd, Chief Operating Officer of Great American Financial Resources. At this time, I would like to turn the call over to Keith Benson. Please go ahead, sir.

Good morning, and welcome to the American Financial Group, 2002 second quarter earnings results conference call. If you're viewing the web cast from our web site, you can follow along with the slide presentation if you'd like. Certain statements made during the course of this call may be considered forward-looking statements and are based on estimates, assumptions and projections which management believes are reasonable but by their nature inherently uncertain. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Examples of such forward-looking statements include statements related to the company's expectations concerning market and other conditions, future premiums, revenues, earnings and investment activities, expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims, rate increases, improved loss experienced expected expense savings resulting from recent initiatives. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including but not limited to changes in economic conditions, including interest rates, performance of securities markets, the availability of capital, regulatory actions, change in the legal environment, judicial decisions and rulings, tax changes, levels of catastrophes and other major losses, the actual amount of liabilities associated with certain asbestos and environmental related insurance claims, adequacy of loss reserves, availability of reinsurance and the ability of reinsurers to pay their obligations, competitive pressures, including the ability to obtain rate increases, driving patterns and other changes in market conditions that could affect AFG's insurance operations. With that being said, it's my pleasure to introduce Carl Lindner, III, Co-President of American Financial Group.

Good morning, and thank you for joining us. We released our 2002 second quarter results earlier this morning. I plan to make a few initial remarks, and then we'll open the lines for questions. I'm pleased with our second quarter results and our solid operating performance thus far this year. These results reflect our continued progress in achieving our overall objectives for the year. Our insurance operations continue to maintain their pricing and underwriting focus, and we're getting even greater rate increases in many of our markets than we'd expected to at the beginning of the year. We've demonstrated consistent earnings improvement over the last several quarters. This morning, we reported second quarter operating results of 62 cents per share, which exceeded the consensus of analyst's estimates and are considerably higher than last year's second quarter operating results. Property and casualty groups combined ratio was 101.1. That was an improvement of 4.8 points, compared to the 2001 second quarter and .3 points better than the 2002 first quarter. We experienced no significant catastrophe losses in the quarter. Overall, gross written premiums were 16.5% above the 2001 second quarter. We continue to see growth in businesses that exhibit the strongest profit potential. Net written premiums were 1% lower than last year's quarter, primarily impacted by increases in the level of reinsurance as compared to the previous year. Net realized gains of $13.1 million from actual sales of securities were more than offset by $42 million of impairment losses and our fixed income portfolio, primarily related to the deterioration in the market value of certain investments in the telecommunication industry. Our specialty group continues to represent about 60% of our total net written premiums. The group reported an underwriting profit for the third consecutive quarter with a combined ratio of 98. That's 3.3 points better than the 2001 second quarter of 101.3. It's also a half point improvement over the first quarter of 2002. We continue to benefit from the favorable conditions in the market, coupled with their own pricing and underwriting decisions. Our rate increases for the first half of this year averaged about 30%. The majority of our ongoing business units achieved underwriting profit. The specialty groups gross written premiums were about 22% over last year's second quarter. The majority of our ongoing business units had growth in excess of 20% over last year. Net written premiums were comparable to last year's second quarter and are being affected by strong growth in a number of our businesses offset by the effects of the following actions. We increased the levels of reinsurance particularly in our crop and program businesses. There was a discontinuance of certain lines of business in '01, particularly the sale of our Japanese business, and we're using more stringent underwriting in certain of our ongoing businesses in recognition of the unique changes and the risks associated with their markets. California worker's comp. directors and officers liability would be some examples. We think that it's prudent to keep our powder dry in these businesses at this stage of the cycle. We believe as pricing and terms continue to improve that there would be good growth opportunities particularly moving forward later this year and into '03. This group has performed well historically, and I expect continuing strengthening to be reached in this segment during the remainder of 2002 and probably into '04. Our personal group represents the other 40% of our property and casualty premiums. As in the past several quarters, underwriting results improved in the second quarter. The combined ratio of 101.1 is ten points better than the 2001 second quarter and one point better than the 2002 first quarter. For the third consecutive quarter, business written through the agency channels achieved in the underwriting profit reporting a combined ratio of 98.2. We expect that our rate actions will continue that trend in 2002 and into the next year. Rate increases were about 8% through the first six months of the year. Personal group's gross written premiums were up about 7% over the 2001 second quarter and the premium levels for the first two quarters are up over the latter part of 2001. We're pleased with this growth. This group's net written premiums were down 2.8% versus last year's quarter, reflecting effects of changes in our quota share agreements. In 2001 second quarter we were exceeding 80% of the physical damage exposures, which was changed to 90% in the 2001 third quarter. Also, one of the specialty auto companies was not included in the reinsurance agreements until the third quarter of 2001. Therefore, we're seeing a greater portion of our premium than in the 2001 period. This premium was about $82 million for the 2002 quarter. statutory premiums for the second quarter were up 18% over the 2001 second quarter due to strong growth in fixed annuities. Pre-tax operating earnings for the 2002 quarter were below last year's quarter. Favorable results in the fixed annuity and supplemental health businesses were more than offset by the effect of the declines in the equity markets on the variability business and the adverse mortality in the life insurance operations. Overall, this group continues to produce steady earnings and strong returns in a very competitive market. Let me talk about a summary and outlook here. I continue to be very pleased with the underwriting profit in our specialty line. I believe that the specialty group will continue to show solid growth in underwriting profit during the remainder of the year and through next year. I'm also pleased with the steady improvement in our personal alliance group results over the past four quarters, and continue to believe that the entire group will achieve an underwriting profit in the fourth quarter this year. We've remained committed to our pricing and strong underwriting discipline and believe our underwriting results reflect that. We expect average rate increases for specialty to be about 30% for all of 2002, and we believe we'll have meaningful increases through '03 and into '04. Rate increases in our auto business should be about 10% for the year. We plan to continue to grow our annuity and life businesses. I look forward to reporting our progress for the remainder of the year. Thank you, and we'd be 00:10:16 happy to open things up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star followed by the digit one. We will proceed in the order that you do signal us and we will take as many questions as time permits. Again, if you would like to ask a question, please press star one, and we will pause for a moment to assemble the roster. And we will take our first question from Charles Gates can Credit Suisse First Boston.

Good morning. You indicated that auto insurance rates, I believe, rose 8% during the first half and you thought that for the year they might approximate ten or did I misunderstand that?

That's correct. We're taking our biggest part of our increases this year in the first part of the year.

Second question, you said that basically the auto insurance sold through independent agents produced underwriting profits?

Yes.

What are you excluding? You bought a small direct response company several years ago. You also have the business down in Mexico.

Yes. The main thing we're excluding there is the direct business that we purchased.

Okay. Could you comment on how important is the republic indemnity as a portion of sales roughly and what kind of profitability you're seeing there?

Keith, do you know roughly what percent?

It would be about 9% of our total written premium, and the profitability there has certainly improved dramatically. We've been able to report some underwriting profits, though we've not disclosed the specific amounts.

Well, what's the book value per share in number in the news release?

Book value per share is 23-50.

Okay, and to that, I should add both the GFRI, one, and two, the real estate.

The basis in our real estate currently, and this is in our hotel and apartment properties, is about $160 million. We're showing an annual cash flow of about $25 million. So as we've said in the past, if you were to take a multiple of ten, that would be indicative of about 250 million of value versus the 160 carry-in value. With respect to our other real estate in the New York, these would be the noncurrent real estate holdings. We estimate unrealized gains probably in the $100 million gain. GFRI is currently trading a little bit below its carrying value. It would be an unrealized loss probably in the 80 to 90 million range.

But basically the real pickup, doing your analysis, would be about $190 million pre-tax?

Rough and dirty, yes.

I should let somebody else ask questions.

Again, if you would like to ask a question, please press star one. Next question from Brian Wright with Bear Stearns.

Good morning, a question on the retention going forward. Should we expect the current level of seatings to continue for the rest of '02?

I think that's a reasonable expectation.

Secondly, do you have the paid losses for the quarter?

Yes, I do. Let me just look. Paid losses for the quarter, $447 million.

And one more. How often do you look at the guaranteed minimum death benefits in the life policy on a quarterly basis or annual, or how often is that?

We look at it on a quarterly basis?

Anything further, Mr. Wright?

That's it, thank you.

Okay, great. As a final reminder, if you would like to ask a question, please press star one. Moving on to Charles Gates of Credit Suisse First Boston.

Two questions. Question number one, what kind of rate increases are you putting into effect in California compensation?

Our prices are really increasing. We took about 19 - we had about 19% increase in the first half of the year, and it's a little bit early. We don't have our final July, but with the rate increase that was put into effect, you know, in the industry in July, I think it was, you know, some 10% or so, our early indications are that our rates are actually moving up about 30% in July, and it would be my expectation that we'll see that level of rate increase to year-end. So the trend in worker's comp., even after a couple years of double digit price increases that we've had with this rate increase in July, our indications are that our increases are moving up. The other thing that's happening in the home market there is that the state fund, I think, is under a lot of pressure, no doubt. I think there's still a possibility of a major dislocation with that one market, and what we're seeing is a different attitude pricing wise, you know, mid-year. Where the state fund used to be 30 to 40% off of us, we're seeing that they're more like 15 to 20%, and we might expect that to change more.

You said, I believe, that you were keeping your powder dry, specific to DNL. What does that mean and would you elaborate on how you diversified business, so we think with the renewal increases we're taking and the way we're postured, we think that we've been pretty smart. I think when I say keep the powder dry, in this environment where you've seen financial statements, you know, with a lot of surprises on the Fortune 1000, 500 companies in particular, where initially we thought that 50 to 100% rate increases looked pretty dog-gone attractive, we'd think it would be smart to at least sit through August 14th and see if there's any additional, you know, types of balance sheet adjustments or changes and now possibly for, you know, some industries and some amenities, maybe even through this year's 10-K, you know, period, and then revisit it. So it's something we're kind of revisiting. We are growing on a gross premium basis very healthy there, but it's mainly renewal increases, but before we jump back into the Fortune 500 or Thousand, even with the rate increases the way they're looking, we'd like to be more confident that we understand the exposures as good as we can. Going into '03, we think probably there probably would be better opportunities as rates and terms improve and you know, there's greater clarity on the financial statements.

What portion of the auto book of business is now nonstandard auto?

Fill is the biggest part of it. I think Keith, what would it be, maybe 85, 90%?

Yes, somewhere in there.

Basically, is your thought with regard to the reinsurance program for the personal lines business to ultimately move to retain more of that risk or how does that work, sir?

Certainly. You know, it's a potential objective there. We've been able to reallocate capital to the faster, more capital-consuming specialty lines of business through the quota share as pricing and terms improve. Even though we've used more in reinsurance in the auto and really on some of the specialty lines, so as pricing and terms improve further, we're going to have a great reservoir of growth just from taking more business net if we want to going forward. You know, if there weren't capital limitations going forward, so that's the exciting part of it.

You had a good quarter. Congratulations. I'll let somebody else ask a question.

I think we have one more question in the queue.

Rob Maina with Schneider Capital has a question.

Good morning,. I just have a couple of questions. Again, on the retained percentage on the specialty business, which it looks like you seated about 40% in the quarter versus about 28% in the prior year, I was just, and I know it varies by line, but I was just wondering if you could estimate roughly how much of the increase in seated premium is just buying more coverage versus higher cost of reinsurance? That's the first one, and then the second one, I was just wondering if you could comment a little bit on the tax rate that seemed to be a little lower in the quarter and maybe help us out with the run rate there.

I may comment on the reinsurance in the quarter. One of the lines of business that we decided to use more reinsurance on was our crop, our multiperil crop hail business, which a good bit of the industry takes that approach, too. We're able to retain, you know, the biggest piece of the economics while giving ourselves some protection against volatility, which that business has some, you know, you can have years where there's more volatility than others. So we think it was a good economic decision, as well as managing our capital smartly, and that business is heavier in the second and third quarter on the premium side, and I think that there was, you know, a little more impact from that. Also, we've also chosen to keep our powder dry and keep maybe a little bit more cautious on the remaining program business that we write. We like the increase in the prices and terms on that business, though we just thought it was prudent to, you know, to share the risk some and be a bit more conservative in our approach, and I believe in the second quarter, there was an adjustment that impacted for the full year in the second quarter. Keith, you want to try to put the, address the numerics part of that?

Sure. I think, Rob, the other part of your question was around rate increases and the reinsurance covers, and I suspect like others in our industry, we're seeing a huge variability, although in some lines from single digit kinds of rate increases to in some, as much as 50 to 60% rate increase. I think in general as we look at it on kind of a weighted average basis, we're in the 15 to 25% overall rate increase. So as you look at the proportions seated, that's going to be a piece of it but you need to lay that into the context of our top line also taking rate of similar orders of magnitude, so I don't think that's a major driver. I think the major driver is probably the things that Carl was talking about. With respect to your question around taxes, if you look at our six-month tax rate, I'd just refer you back to the first quarter, where we had some significant tax benefits due to the settlement and conclusion of some tax issues that had previously been outstanding. In this quarter the tax rate's about 29.5. That's probably a little bit lower than the normal run rate. I'd look for a normal run rate in the low 30s.

Okay, thanks.

I think that's all our questions, so we thank you for joining us and look forward to reporting our continuing progress as the year goes on.

That concludes today's conference. Thank you for your participation and you may now disconnect.