American Financial Group Inc (AFG) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to this American Financial Group third quarter 2002 earnings results conference call. With us today we have Mr. Carl H. Lindner, III, Co-President of American Financial Group; Mr. Craig Lindner, Co-President of American Financial Group; Mr. Keith Jensen (ph), Senior Vice President of American Financial Group; and Chuck Shaffer (ph), Chief Operating Officer of Great American Financial Resources.

At this time, for opening remarks, I'd like to turn the call over to Mr. Keith Jensen. Please go ahead.

Thank you. Good afternoon, and welcome to the American Financial Group 2002 third quarter earnings results conference call. If you're viewing the Webcast from our Web site, you'll be able to follow along with the slide presentation, if you'd like.

Certain statements may be made during the course of this call that may be considered forward-looking statements and are based on estimates, assumptions, 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 such forward-looking statements. Examples include statements relating 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 experience, and 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, availability of capital, regulatory issues, changes in the legal environment, judicial decisions and rulings, tax law 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 ability of reinsurers to pay their obligations, competitive pressures, including the ability to obtain rate increases, driving patterns and other changes in the market conditions that could affect the company's operations.

With that being said, I'd like to introduce Carl Lindner, III to discuss the financial results.

Good afternoon, and thank you for joining us. I plan to make a few initial remarks and then we'll open the lines for questions.

We released our 2002 third quarter results earlier this morning. I am pleased to report we again achieved very solid operating results for the quarter. This morning, we reported third quarter operating results of 62 cents per share, which were in line with the range of analysts' estimates and significantly higher than last year's third quarter operating results.

The property and casualty group achieved an underwriting profit with a combined ratio of 99.6, a 4.4 point improvement compared with the 2001 third quarter and 1.5 points better than the 2002 second quarter. We had minimal catastrophe losses in the quarter. Overall gross written premiums were 18% above 2001 third quarter, due to the strong growth in our specialty businesses, somewhat offset by some decline in the personal lines business.

Net written premiums were up about 14% compared to last year's quarter, and continue to be impacted by increases in the level of reinsurance as compared to the previous year. Net realized gains of $22.2 million, primarily from actual sales of securities, were more than offset by $29.2 million of impairment losses in our fixed income portfolio, and a $7 million loss related to the previously announced agreement to transfer the renewal rights of an AFG insurance subsidiary's New Jersey personal automobile insurance business.

Let me talk about Specialty for a minute. I'm very pleased with our Specialty group's performance. During the first nine months of the year, the Specialty group's premiums represent over 65% of our property and casualty group premiums. The group reported an underwriting profit for the fourth consecutive quarter with a combined ratio of 98.8, three points better than the 2001 third quarter of 101.8, which excluded the impact of the World Trade Center attack, and was up slightly from the 2002 second quarter. The majority of our ongoing business units reported underwriting profits.

We continue to benefit from significant rate increases in many of our commercial casualty markets. Our rate increases for the first nine months of 2002 averaged over 30%. The specialty group's gross written premiums grew about 30% over last year's third quarter. Through September of this year, the majority of our ongoing business units generated premium growth in excess of 20% compared to the same period last year.

Net written premiums for the quarter were about 14% above last year's third quarter, and are being impacted by increased levels of reinsurance, primarily -- or particularly in our crop and program businesses.

Even with these favorable market conditions, we continue to be prudent in our risk selection, and remain committed to rational pricing and underwriting decisions. We believe that there will be good growth opportunities at the end of 2003, as pricing and terms continue to improve.

Let me talk about our Personal group business. Our Personal group represents about one-third of our property and casualty premiums. The group provides primarily personal automobile insurance with an emphasis on non-standard auto insurance. The group's underwriting results for the third quarter were considerably better than the prior year period. The combined ratio of 101.2 was 6.5 points better than the 2002 third quarter and comparable to the 2002 second quarter.

For the fourth consecutive quarter, business written through the agency channels achieved an underwriting profit, and through September, this business reported a combined ratio of about 98%. Rate increases through the first nine months of 2002 have been around 10%. The Personal group's gross written premiums for the quarter declined about 5% compared to the 2001 third quarter, reflecting our intentional reductions in new business volume and certain less-profitable markets.

In addition, our decision to curtail direct marketing efforts affected new business volume in the direct channel. This group's net written premiums were down approximately 20% versus last year's quarter, reflecting an additional change in our quota share agreements. A physical damage (ph) quota share agreement was expanded to include the agency business of Great American's personal lines division. Therefore, we're ceding a greater portion of our premium than in the 2001 period.

Ceded premiums under the agreements was nearly $130 million for the 2002 quarter versus about $100 million in the 2001 period. The group continues to make good progress on consolidating the product management, sales, claims, and technology operations in order to further lower operating costs. And during the third quarter, we announced that, effective September 9th, we're no longer writing new personal auto insurance in New Jersey, and we won't renew business in 2003.

Let me turn to our annuity life and health group. Statutory premiums for the third quarter were up 21% over the 2001 third quarter due to strong growth in fixed annuities. Pretax operating earnings for the 2002 third quarter were below last year's quarter, primarily due to the effect of declines in the equity markets on the variable annuity business. During the third quarter, we took a charge of about $3 million due to these declines.

Also, the results of the life operations reflected the effects of adverse mortality compared to the 2001 quarter. The group continues to experience more favorable results in the fixed annuity and supplemental health businesses. Overall, this group continues to produce steady earnings and good returns in a very competitive market.

Let me summarize and give an outlook. I continue to be very pleased with the underwriting profit in our specialty operations. 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 group underwriting results over the past four quarters.

We remain committed to our pricing and strong underwriting discipline and believe our underwriting results reflect that. We expect average rate increases for Specialty to be in excess of 30% for all 2002, and we continue to believe that meaningful price increases in the commercial casualty markets will continue through 2003.

Rate increases in our auto business should be slightly above 10% for the year. And we expect our annuity and life business will continue to generate solid operating earnings.

I look forward to reporting our progress for the remainder of the year.

On another note related to our proposed public offering, as you're probably aware, last month we announced our intention to offer 70% of our interest in our agency-based personal lines (ph) insurance business through a public offering. We have filed a registration statement with the SEC, so I can't discuss or answer questions relating to the proposed public company, Infinity (ph) Property and Casualty Corporation. However, our rationale for proposing this transaction is to simplify AFG's insurance operations, focus on specialty commercial lines, and to provide both the specialty commercial and personal lines businesses with additional capital. It will also enable us to reduce our debt levels and maintain financial flexibility while allowing AFG to participate in the personal lines (ph) results.

Thank you for joining us. We'll turn it over to questions.

Thank you, gentlemen. Today's question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone phone. Again, star 1 to ask your question. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment.

We'll pause just a moment to assemble the roster.

We'll go first to Michael Smith (ph) at Bear Stearns.

Good morning -- good afternoon, rather. Both segments showed higher loss ratios on the quarter than they do on the nine months. Given where rates have gone, why would this be?

Keith, do you want to address the personal part?

Sure. On the personal lines, Mike, that's driven in part by the physical damage quota share, where we've added in the great American Preferred and Standard lines. The quota share for physical damage is ceding a line of business that has a lower combined -- or lower loss ratio than the personal lines as a whole, and so you'll also notice a decrease in the underwriting expense dealing with personal lines because of the sliding ceding commission.

Right.

So that's the personal lines side.

And on the specialty lines, Mike, I think each quarter, you know, has kind of -- has -- is a little bit different and will move around. We're pleased with the price increases we're getting, and we like the momentum and the improving results. But, you know, the quarters will be somewhat different. Probably in our -- they reflect a little bit of maybe some slight difference in crop hail (ph) profitability, you know, in the last half of this year than previous years also. And, you know, there's -- as with a lot of others, we have had some development, you know, in the specialty lines that varies quarter to quarter also.

Okay. The very last table you have on your press release that describes the loss and expense ratio comparisons impacting -- or excluding the automobile physical damage ...

Yes.

... is that for the total company or just the personal lines?

That's personal lines only.

Okay. Thank you. That's all I have.

We'll go next to John Schneider (ph) at Pemco Equity Advisors.

Hello. Regarding your annuity business, a lot of your peers are experiencing DAC and guaranteed death benefit hits. I just wondered where you stood on those counts (ph).

On the third quarter, we did take a $3 million hit related to a DAC write-off. If you're asking the excess death benefit enforced (ph) number at the end of the third quarter, that was approximately $250 million.

And do you see -- I guess the first question is, how big is variable annuities relative to fixed annuities?

The fixed annuity business is by far the larger part of our company. We've only written variable annuities for -- you know, for the last three or four years. In total - separate account total account value in force in the variable business is $630 million.

So you just don't have the exposure that others have in the variable annuities?

Certainly compared to most of the industry, the mix between variables and fixed is, you know, quite a bit lower for us, compared to the average life and annuity company.

Thank you.

Again, ladies and gentlemen, it is star 1 for your questions.

Gentlemen, we have no other questions at this time, I'll turn it back to you for additional or closing remarks.

Thank you very much. We appreciate everyone joining us today, and we'll look forward to reporting our year-end results. Thank you.

Ladies and gentlemen, thank you for your participation in American Financial Group's third quarter earnings conference call. This does conclude our call for today, and you may disconnect at this time.