American Financial Group Inc (AFG) 2003 Q2 法說會逐字稿

Good day and welcome to this American Financial Group second-quarter 2003 earnings results conference call. Today's call is being reported. With us today, we have Carl H. Lindner III, Co-president of American Financial Group; Craig Lindner, Co-president of American Financial Group and Keith Jensen, Senior Vice President of American Financial Group. At this time for opening remarks, I'd like to turn the call over to Mr. Keith Jensen.

Good morning and welcome to the American Financial Group's 2003 second quarter earnings results conference call. If you're viewing the webcast from our website, 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 adequacy of reserves for asbestos, environmental pollution mass tort claims; rate increases, improved loss experience and expected expense savings resulting from other 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, the unpredictability of possible future litigation related to a pending asbestos settlement, changes in economic conditions, including interest rates, performance of securities markets and availability of capital; regulatory actions, changes in the legal apartment, 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 market conditions that could affect AFG's insurance operations.

This quarter, we have recently filed a registration statement with the Securities and Exchange Commission which is not yet effective relating to the previously announced proposal to merge American Financial Corporation and American Financial Group. Under this agreement, the AFC Series J preferred shareholders will receive $25 per share of AFG's stock and an amount equal to accrued dividends which will be paid in American Financial Group's stock from the last dividend payment date to the data of merger. In addition, American Financial Resources earnings release earlier today announced that it filed a registration statement, which has not yet become effective, related to its anticipated rights offering of approximately $50 million. The proceeds from the offering will be used to pay down debt and provide additional capital for its life insurance subsidiaries. These securities may not be sold nor may offers to buy be except prior to the time their registration statements become effective. Nothing in this conference call shall constitute an offer to sell or the solicitation or an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities law of any such state. That having been said, I'm pleased to turn the call over to Carl Lindner III, Co-president of American Financial Group.

Good morning and thank you for joining us. We just released our 2003 second quarter results earlier this morning. We will open the lines for questions after some initial comments. I'm pleased with the results in the second quarter of our ongoing specialty commercial insurance operations. However, these positive results were adversely affected by the impact of an arbitration decision resulting from Great American Insurance Company's share of a 1995 property fire and business interruption claim relating to the discontinued participation in a multi-insurer pool. We were disappointed with the outcome of this arbitration as were several other insurers. As we announced in May, the after-tax charge was $28.5 million, or 41 cents a share. Our results also included a $6.7 million after-tax charge, or 10 cents a share representing AFG's 82 percent interest in the charges recorded by Great American Financial Resources related to the negative effect of lower interest rates on the fixed annuity operations.

Our results benefited from our 38 percent share in Infinity's solid earnings for the 2003 second quarter, which we reported yesterday. Also, Infinity repaid our $55 million promissory note in July after its successful closing of a $200 million credit facility. I am pleased that the markets continue to recognize Infinity's value with the rising trend in its stock price during the second quarter.

At June 30, the market value of our investment in Findi (ph ) exceeded our book basis by about $20 million. More recently, the stock has been trading a little bit above $26 per share, about 65 percent higher than the IPO price. I think these results reinforce our sound strategy for both the personal lines and specialty commercial lines operations, which prompted the Infinity transaction.

Let talk about second quarter highlights here for a minute. Our second quarter net earnings were 44 cents per share, which included the arbitration and fixed annuity charges, as well as 23 cents per share of realized gains. We have been taking some opportunistic gains from sales of certain securities. As of June 30th, the pre-tax net unrealized gain on our bond portfolio, $649 million and $145 million on our equity securities. Though with the recent changes in interest rates, the amount on the bond portfolio will have declined, but we continue to have significant unrealized gains.

Our second quarter core operating earnings were 22 cents per share, including the arbitration and fixed annuity charges. Excluding those charges, core earnings from our underlying insurance operations were above the 2002 second quarter by nearly 18 percent. Excluding 10.6 points for the arbitration charge, our property and casualty group reported a combined ratio of 96.5 in the 2003 second quarter. These results also included the direct auto insurance companies until they were sold at the end of April, as well as our two small remaining personal lines operations, one operating in Mexico and the other in Oklahoma.

Let's talk about our specialty group. The specialty group reported a solid underwriting profit for the seventh consecutive quarter with a combined ratio of 95.7. This was a 2.3 point improvement, compared to the 2002 second quarter. A list of our ongoing lines of business continued their trend of solid underwriting profit during the quarter. The groups' underwriting results included about 9 points of adverse development, primarily related to the 99 and 2000 accident years. We continue to see the groups' '02 and '03 accident years developing in the low 90's. We continue to benefited from the favorable conditions in the commercial markets, coupled with our own strong rate increases and underwriting decisions. We have also capitalized on new business growth opportunities in many lines, such as excess and surplus, inland marine, D&O, California comp, transportation and crop insurance. We continue to see positive results in our California workers comp business, reflecting our rate actions and underwriting discipline.

This continues to be a challenging business that we are cautiously optimistic that this business will continue to meet those challenges. We believe also that reform is needed to ensure the availability of coverage to businesses in California. Something has to be done. Specialty group's gross written premiums grew about 24 percent in the '03 second quarter over the '02 second quarter. Over half of our continuing business units achieved gross premium growth in excess of 20 percent. Rate increases through the first half of '03 averaged about 25 percent, which is on top of rate increases that average 30 percent in the first half of '02. And when you look quarter by quarter, the average rate increases for the '03 second quarter were 23 percent versus 27 percent in the first quarter of '03. Even though we are seeing some price softening in the property lines, pricing power continues on the casualty side, which makes up about 70 percent of our property in casualty business.

The growth in the specialty group's net written premiums for the 2003 quarter was about 14 percent over the prior year's second quarter, reflecting primarily the impact of changes in a reinsurance agreement that were put into place during the fourth quarter of last year. This group continues to perform well and I expect continuing rate momentum through '03 and into '04.

Let's talk about some highlights on the annuity, life and health group. Statutory premiums for the second quarter were up 10 percent over the same '02 period, primarily due to the edition of several new fixed annuity agents and products. Pretax operating earnings for the '03 second quarter were lower than the '02 period, primarily due to lower spread income and a charge related to the negative effect of low-interest rate on the fixed annuity operations. This charge reflects adjustments to certain balance sheet items, including deferred policy acquisition costs that are calculated in part on estimated future spreads on the company's block of in-force (ph) fixed annuities. Based on the current interest rate environment, we don't anticipate any additional material write-offs in the foreseeable future. We believe the fundamentals of the annuity industry have improved significantly, even before the recent rise in interest rates.

Let me talk about our convertible notes offering. In June, we closed the sale of our senior convertible note offering, resulting in proceeds to the company of approximately $185 million. Roughly $102 million of those proceeds were used to pay off our revolving bank line. The remainder is being used to provide capital to support our insurance operations and for other corporate purposes.

In summary and giving an outlook, we continue to be very pleased with the improving operating results of our ongoing specialty operations. We have a strong expertise in a variety of niche markets and we maintained solid market positions in many of our business lines. We're still targeting average rate increases of 20 percent for the remainder of '03. I continue to be optimistic about our ongoing prospects for growth and profitability. We will be diligent on cost reductions and pricing discipline in our annuity and life businesses and on improving their operating earnings. We expect improvement in our leverage profile. We continue to remain comfortable with our core earnings guidance of $2.10-$2.30 per share. I will look forward to reporting our progress for the remainder of the year. At this point, I'd like to open it up for questions.

(Caller Instructions). Arthur Winston, Pilot Advisors.

I have two questions. My first one -- will these -- I guess three questions. Will these higher interest rates help in any way, the profitability of Great America, or are these rates not the right rates going up?

The increase that we have seen in rates here recently have really helped with the profitability of the business for us and all fixed annuity. It's really a combination of a couple of things have significantly improved the outlook for the fixed annuity business, a combination of an increase in interest rates, lower costs, including lower commissions and insurance department approval of a sub3 percent guaranteed minimal crediting rate have really greatly improved the returns and prospects for the fixed annuity business.

Will it show up before this year over -- will we have to wait until next year for it to show up in the results?

We are at registration right now, and I guess it would be prudent for me to maybe not comment on that.

Two more questions, if it's okay with you guys.

I might just mention on the property casualty side, a sustained increase in rates also, has a positive impact going forward in the property casualty side of the business on the (indiscernible).

You're saying higher rates help the profitability of property casualty?

Sure.

My next question is -- was there some adverse development talked about in the press release? And if there was, could you expand upon it?

During the quarter, we did have some adverse development. It was primarily concentrated in two of our lines at business, in our D&O and in our bonds arena, primarily in the '99 and 2000 accident year. We're continuing to see very strong results in those lines, as well as our other businesses in the '02 and so far '03.

What you said very quickly is that you had adverse -- the claims came in for '99 developed more bigger for '99, 2000, in bonds and (indiscernible)?

D&O, yes.

But no more claims for the policies written in 2000 and 2001, they didn't have (ph), it was just the other ones?

It's '01, '02, '03 -- we've not seen that adverse development. Those are relatively immature years and we have looked at them carefully, we don't believe there is adverse development at this point.

How much was the reserve increase for this stuff?

As we indicated in the press release, it was about 36 million. About two-thirds of it was comps traded in those two businesses.

That's a big number. Next question -- there is a rights offering for Great America going on -- did I misinterpret that?

No, you have that -- that's the registration statement that Craig was referring to.

That means that our company, American Financial, is going to buy into it, right?

That's correct.

How much does that cost?

The rights offering is for 50 million and Great America owns 82 percent, so a little bit north 40 million.

So we put $40 million in. Okay, thank you very much.

Jay Cohen, Merrill Lynch & Co.

I guess I want to try to get at what the accident year combined ratio was in the quarter. I have been dealing with other companies this morning, so forgive me. But I guess ex the arbitration award, you were somewhere in the mid 90s?

That's correct.

And you had about -- was it 9 points of adverse development prior year?

Correct.

So that gets you down more to the mid to high 80s, and yet you're saying you're pretty comfortable in the low 90s. If you reported in the mid 80s this quarter, why are you saying mid to low 90s? Was there something unusually good in this quarter from an accident year standpoint?

Not really. I think we're just in a position where you're early in the process and you're taking your initial look and we don't want to get overly aggressive in terms of projection of where we're likely to be.

But you booked a low loss ratio to quarter.

We've clearly booked what we believe to be correct, and if you look at the quarter's accident year, then your analysis is correct. The development we are experiencing is a '99 and 2000 event, not a 2003 event.

So when you said that the combined ratio in the low 90s, that includes -- that's calendar year?

Correct.

That's it for now. (indiscernible) another question. Thanks.

Charlie Gates, Credit Suisse First Boston.

My first question in follow-up to one of Art's questions, I thought, was you said that the reserve development was in D&O and bonds. By bonds, you mean our what you call I believe fidelity, credit and surety?

Yes.

Okay. My second question. I know one of you opined that you were in registration. Maybe this is an inappropriate question -- can you suggest the possible timing of the merger?

I think our expectation is that we will go through the registration and we would hope by the end of the third quarter to have the merger consummated. Worst-case, it would be early to mid fourth-quarter.

I'm sorry -- worst-case?

Early to mid fourth-quarter.

Okay. Do you have a book value per share number? If it was in there, I apologize because I missed it.

That is about $26.90, Charlie.

$26.90 -- what was it?

Remember that that's including the unrealized gains, and so you've had a substantial amount of unrealized gains that are in the balance sheet at quarter end. If you take the unrealized gains out, it turns to about $20.70.

Okay, but once again, that basically -- so that would incorporate the benefit of the Infinity depreciating to some extent by --

No, because Infinity is dealt with on an equity accounting basis. So it's a bond portfolio appreciating.

So the $26.90 I would have to add to the $26.90 one, real estate, two, Infinity and, three, the merger. What am I missing?

What you are missing is that subsequent to June 30th with the run-up in interest rates, there would be a substantial decline in the unrealized on the bond portfolio.

But other than that, basically my logic --

Yes.

Okay.

Carl points out to me (indiscernible) you'd need to deal with the Gaffery (ph) you'd probably have an unrealized loss in the $50-$60 million range on Gaffery (ph).

What is the approximate duration of the property casualty bond portfolio at the end of the quarter? If it was in there, I apologize. It's not in there. It would be in the neighborhood of 3-3.5 years, Charlie. This will be my last question at this time. Could one of you elaborate on California comp and some of the cost currents? For example, recently, I think Mr. Berkeley of W.R. Berkley opined on their conference call -- they were trying to build the California comp business, and clearly, I guess that's one of the thrusts of Everest Re (ph). But could you elaborate on how that marketplace is evolving?

I would be happy to, Charlie. This is Carl. I think the state fund clearly is in turmoil still, with a wrestling match going on between the insurance department and their management over a potential billion-dollar plus reserve deficiency. They are clearly in check, their pricing has continued to go up, their commissions are being dropped. And from our vantage point over the past 9-12 months, we have been taking that business from them and the kind of accounts we want, versus having lost a lot for four years prior to that. Everest Re has capped out at $0.5 billion, unless there is some change in that.

Even some companies like Zenith and Cypress, they're not quite as aggressive as what they have been in the past. You have a couple of new entrants here and there, and there are some of the national companies -- Crumb and Forster, Safeco, St. Paul -- seem to be writing some business. There is some competition coming from Fremont, Preferred Employers and a few smaller companies, more on the small side of the market, but I would categorize the workers comp market in California as tight. We could -- we are basically getting an opportunity to pick and choose and continue to price very strongly. This market -- let's just talk pricing. This market is one market where price momentum is continuing to increase. Too, we have 23 percent rate. First quarter, we got about 34 percent; the second quarter, we got 41 percent. And we feel we are probably going to get 40 percent for the rest of the year, believe it or not.

I'm sorry. The rate increases for the first and second quarter of this year were?

34 percent in the first quarter, 41 percent in the second quarter, and we think we're going to achieve 40 percent for the rest of the year.

This is my last question. What kind of underwriting results are you now reporting in that area?

We're reporting a small underwriting profit in '02 and this year. As I've said in the past, we feel we have the best California workers comp management team out there. We're seeing good opportunities right now. Another thing that is going to happen in our company, our growth is beginning to accelerate some. Our net written premium growth accelerated to about 26 percent in the second quarter versus a lower amount in the first quarter. Pricing still is the main driver of that growth, though we have seen our new business policy count up 10 percent or so, so we like the momentum. I think the thing that we're managing very carefully on the claims cost side, we're still seeing the need for benefit reform. We are still seeing claims cost going up double-digit plus and we are trying our best to continue to reflect that in our claims reserving philosophy in that. So on the one hand, you have things like pharmaceuticals and multiple surgeries continuing to force up the cost side. So this business definitely continues to need a higher rate of increase just to keep up with inflation. But we like the opportunities, we like the way we're positioned and we think we're going to continue to be one of the few companies that will be able to take advantage of things.

Thank you.

Ernie Jacob, Longnook (ph) Capital Management.

Good morning, Carl. I was wondering if you could give us some sense of what sort of return on equity you expect today's commercial insurance prices to produce for the company?

Midteens plus.

And I take we ought to see that in the numbers later this year and into '04?

I think we continue to be optimistic about continued improvements in our business going into '04 and that based off of our pricing trends in that. So we feel good about them.

Okay, thank you.

Sean Reid (ph), Citi Group.

Hi. You mentioned in your prepared remarks about improving your leverage profile. Do you have targets for that level at this point?

I think with this preferred J (ph) conversion and other things that we have been doing, by year end, we should be in the 35-36 percent debt to total -- debt plus toppers (ph) to total capital range. And I think long term, we really as we have strong retained earnings and as we continue to unlock some of our unrecognized values, that we would be shooting more for towards 30 or lower. It might be important just to clarify that -- as we look at leverage, we look at that as debt plus our trust preferreds, divided by capital, excluding unrealized gains or losses on the bond portfolio. So obviously, to the extent there is unrealized gains or losses, the absolute leverage might be lower than that.

Thank you. One quick follow-up. What does your holding company liquidity situation look like at this point?

The line of credit is fully paid down and we closed the quarter with about $34 million of cash and investments at the parent company and in the month of July, as Carl said, we received $55 million from the monetization of the Infinity note.

Thank you very much.

Marvin Weinstock, Maxim Group.

Good morning. Just a clarification on the book value. After the merger, or maybe on a pro forma basis, you gave the figure of 26.90. Is that after the merger, or is that before the merger? And what would the real estate properties add into that?

With respect to projection for postmerger, because we are in registration, I'm advised that we should not respond to that. With respect to the unrealized in the real estate properties, our current view, including our apartments, hotels, the New York City air rights (ph) and some undeveloped property, would be in the 180 range, plus or minus.

Is that $1.80 or $180 million?

$180 million.

$180 million. And there is no pro forma figure for the book value in the registration statement?

There is information on that in the registration statements. I'm advised that we should refer people to that registration statement.

Thank you.

Bob Madden, Schneider Capital.

Thank you. Good morning. I just had a couple questions. One was -- I was wondering whether you had an operating cash flow number for the quarter?

I don't have that right front of me. I have the paid losses, but I do not have the operating cash flow in front of me.

Okay, what were the paid losses?

Paid losses on the quarter were 298, which includes the payment of the arbitration settlements that would cause them to be usually high in the quarter.

The second question was -- it looked like the tax range was fairly low in the quarter. I know IPCC talked about moving some investments into the muni area yesterday. Was that part of what happened there, or were there are other factors?

There's actually two things, Rob. That's one of them, although that is probably the smaller of the two. But you should expect our tax rate to drop a bit on an ongoing basis because of the realignment of our portfolio into munis. Our expectation would be that that might be at the current levels, a couple of million dollars a quarter difference in the tax from what the statutory calculation would lead you to. The other item that affected it this quarter is that, as we do each quarter, we did a revaluation of our deferred income taxes and there were a couple of situations that had changed, in terms of the tax profile. And so there is probably 1.5-2.0 million effect from those changes.

Okay. And then my next one was -- on the specialty book, there was a pretty big drop sequentially from the first quarter in the net earned premium, and you have been growing the net written on a pretty steady basis for the last several quarters. I was just wondering if there's any explanation for the drop there, whether you have added some more reinsurance or just what might have been driving that and kind of what the expectation would be going forward there?

Probably a couple of things. Number one, as you know, in December, we put a fair amount of reinsurance on the books, and that is in the process of running out. But we also, in the second quarter, renewed the inland marine and truck physical damage quota share. And so we picked up -- the unearned premium was part of that session, and so that had a negative effect on the earned premium in the quarter.

Okay. Do you know about how much the onetime piece of that would be so that we can kind of?

In orders of magnitude, I'd think of it in 25-30 million range.

Okay. The last one. Someone earlier asked about the investment duration that I thank you said was 3-3.5 years. Is that a big change from what it would have been 6-12 months ago?

I think that response was with respect to the property and casualty portfolio, and that is not a dramatic change from what it would have been 6-12 months ago. It would be a longer duration in the life and annuity business.

So the only material change on the P&C side in the investment portfolio would be shifting a little more into munis?

That's right. If you look at the investment income for the property and casualty on a sequential basis, you see the effect of having sent about 1.2 billion of investments out with the Infinity transaction, and then you see the effects of new money rates over the past year having moved downward by a little bit more than 100 basis points, which obviously with the change in interest rates, we would expect sequentially for that to reverse.

Okay, great. Thank you very much.

Lavonne Von Redden (ph), Hockey (ph) Capital.

I guess I was looking for a little point of clarification. Earlier, I think it would Carl who mentioned that the state fund had been kind of decreasing commissions and some of these other things as it relates to workers comp. Your expectations for growth in the workers comp business going forward -- is that going to be more predicated on business being seated (ph) by the state fund, or do you think it's going to be more of a function of pricing?

I think it's going to be some of both. I think there's half a chance that the state fund may end up a much smaller entity going forward than what it is currently if things don't change in that, kind of as what happened with the insurance department's approach with a few other insurers where they were capped or whether they were forced to write less business. But again, the overall competitiveness of the market is such that we just have lots of opportunities, not loads of new entrants, new capital jumping into that market. Everybody's being very cautious. If you don't have a claims team that understands that and an underwriting team that knows the accounts, it can be a very difficult market. That is why I feel good about our team. They know most of the business in the state and we have a claims team that probably has got to be one of the best in the state.

Part of what I was questioning was the ability to continue to raise prices going forward. I think Everest Re in their call said that they were getting some resistance to their latest price increase, which I guess for the full year, the price increase has been pretty substantial?

Everest Re has carved out a niche along a very small end of the market, so they may be -- where we have been in small to medium-sized and in some large accounts in that. So they could be seeing on a very small end of the market, slightly something different. But I think the California rate bureau has just filed for another 12 percent rate increase that they are looking to be approved for this January, January of '04. So that certainly does not seem like that's a price decline indicator. That would be that the industry needs more.

Final question is -- profitability I think you said you're mildly profitable in that business in '01 and '02. Given the size of the rate increases you've talked about earlier and today, and even with the I guess the claim costs rising double digits, it would seem that the rate of profitability in those businesses should be substantial going forward?

There has been substantial improvement. And when I said mild (ph) (indiscernible) solid underwriting profit, that does not mean that returns on equity aren't very good. At a two or three point underwriting profit in California workers comp, the returns are midteen plus, probably 15-20 percent, depending on what kind of accounts you're writing (ph) and that so don't misunderstand me. Returns are good when you are making a solid underwriting profit like that in this business. And as you said we feel good about -- when you add more price even with claims costs increasing, we feel that there should be an opportunity to continue to improve margins.

Last question so I can kind of frame this, do you think at some point in the near future the rate of change of the price increases has to moderate?

Sure. There is no doubt that it has to but you know something, I would have said that last year and I would have been the last person to tell you that I would have thought there would be -- we would be getting 40 percent in the business this year, but I think that speaks to the tightness of this market and just the state funds condition, which I feel is just going to continue to lend instability. When you take a look over 3.5 years prices have gone up 182 percent, so that's tells you where competition had taken the business to but it also tells you that there has been significant price improvement. The claims costs there is really a need for claims benefit reform. The claims costs need to moderate long-term for everybody for the businesses there in California as well as for those that insure them. It is just going to be a tough environment and that means capping, costs, putting controls on things like people that do accupuncture, chiropractor, massage therapy things have gotten out of control.

Excellent and I appreciate the commentary.

(Caller Instructions). Jay Cohen, Merrill Lynch & Co.

On the reserve adverse development in the quarter, you mentioned bonds. Are these commercial surety bonds? Is it a credit issue that is hurting that business?

This is primarily promotional security bonds. There is not a single event that as we look across the seven or eight circumstances that drove this; it is primarily commercial surety and contract performance bonds.

Okay. Included in -- you mentioned that surety bond and D&O was about two-thirds of the adverse development. In the other third, is there any residual value business? And if yes, how do you feel about those reserves now?

No, there's not adverse development in the residual value in the quarter.

Okay. One other last follow-up. You mentioned that your debt to capital -- you look at it ex-unrealized gains. I guess I'm just not sure -- how do the rating agencies look at that? Do they look at it the same way?

They really look at it both ways, but the majority of the conversation with the rating agencies in recent times has evolved to a coverage discussion.

I see.

As a practical matter Jay, we have looked at it as we've discussed it with the rating agencies, excluding the unrealized gains for the last five or six years because we recognize that interest rate fluctuations can make that number bounce all over the place. And if in general we're holding for the long-term on the securities, that is really not a reasonable measure of the leverage of the organization.

Okay. Fair enough.

Let me just address residual value. If you were to ask me what businesses are not up to expectations right now, that is one of the primary businesses is the small book, about $35 million. And we do the business a little bit different. Most of our programs are written with trusts, using trusts or deductibles, so the insured shares risk with us. But we have reduced our writings down to a smaller number of what we think are long-term profitable accounts. But the business has clearly been a drag on our calendar year results last year, this year and probably will impact a little bit of '04. So that is a business that is not up to our expectations, so I didn't want you to be -- to give you the wrong impression.

But it is a relatively small business at this point?

Yes.

Great, thanks a lot.

Charles Gates, Credit Suisse First Boston.

My first question -- you gave us the book value as of June 30. Do you have an approximate impact on that book value of the rise in interest rates?

We don't have that right at our fingertips here. We obviously know that there has been an impact, but we do not have that quantified right now.

My second question -- could one of you go through the key trends in your exits and surplus lines business?

Yes. I can talk about that a little bit, Charlie. Our business, our excess and surplus lines businesses is made up of our number of different entities, including our excess liability entities. Business continues to grow the first six months of the year roughly 27 percent. So we still have healthy growth there, there still seems to be opportunities. We have carved out a niche a number of years ago in nursing home liability in certain states that we think that don't have the same legal exposures, some of the tougher ones. And that has been a core of that business, as well as traditional E&S business, particularly the past 12-18 months. We continue to see good opportunities there and good profitability.

Thank you.

Arthur Winston, Pilot Advisors.

I was wondering if the earnings guidance, if you learned 210-230, should I subtract 84 cents from the core insurance operations for the first half, and that is what your earnings guidance is for the second half?

Yes, that is a fair assumption.

So it's about 75 cents a quarter or 70 cents a quarter, something in that neighborhood?

I think your calculation is a little bit high. If we take 210 minus the 84, divide that by 2, you are about 63 cents at the low end.

Okay, good. One other question. In making up this -- in projecting out this guidance, are you assuming that the profitability of the annuity and the life insurance business of Great American goes up very much, or has most of it come about from gains in property casualty?

I cannot comment on that, other than the guidance that we give in the news release, given that we're in registration right now. We did give some guidance in the news release, the Great American Financial Resources, for this calendar year.

Is there a prospectus on this transaction?

Yes there is.

How could I get one?

Go to the SEC website or the Great American Financial Resources Web site.

Will do. Thanks.

At this time, we have no more questions in our queue. Mr. Jensen, I'd like to turn the call back to you for concluding remarks.

Thank you very much. We appreciate all of you joining us today, we appreciate the opportunity to respond to your questions and we will look forward to speaking with you as we release the third quarter results.

This concludes today's American Financial Group conference call. We thank you for your participation.

(CONFERENCE CALL CONCLUDED)