American Financial Group Inc (AFG) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the American Financial Group third quarter 2003 earnings results conference call. Today's call is being recorded. With us today we have Carl Lindner, III, co-president, Craig Lindner, co-president, and Mr. Keith Jensen, Senior Vice President at this time, I would like to turn the call to review the compete worksheet. Please go ahead, sir.

Good morning and welcome to the American Financial Group 2003 third quarter earnings results conference call. If you're viewing the web cost from our web site you can follow along with the slide presentation. Certainly statements made during this call are not historical facts, and may be considered forward-looking statements. And are based on estimates, assumptions and projections which management believes are reasonable but by their nature subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. The factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discuss and identified from time to time in having a filing with the Securities and Exchange Commission, including the annual report on Form 10-K and the quarterly report on Form 10-Q. We do not promise to update forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements.

During the third quarter we filed an amended registration statement with the SEC which has not yet become effective increasing the amount under our existing shelf to 600 million dollar. This replenishes the amount available that's been used in previous offering and will enable the company to sufficiently issue equity, debt and other capital securities. These securities may not be sold nor may offers to buy the accepted prior to the time the registration statement becomes effective. The press release shall not constitute an offer to sell, or the solicitation of 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.

We have no immediate plans to offer securities under this registration statement. Also, Great American Great American Financial Resources recently announced its intent to issue $100 million of 30 year bonds, which will be used to repay outstanding amounts under its bank line of credits. A shelf registration related to the securities that GAFRI intends to sell has been filed and declared effective by the SEC. This offering was announced yesterday and will be made only by means of a prospective, including a prospective supplement forming a part of an effective registration statement.

That is he said, I'm pleased to turn the I'm over to to Carl Lindner, III, co-president of American Financial Group.

Good morning on thank you for joining us. Now, we released the 2003 third quarter results earlier this morning, we'll open the lines for questions after my initial comments.

I'm pleased to report that we again achieved very solid operating results for the quarter in line with our expectations, our third quarter net earnings were 59 cents per share which included 20 cents per share of realized gains. We do then to take opportunistic gains from the sale of certain securities. As of September 30, the pre-tax net unrealized gain on our bond portfolio was $492 million, and $157 million on our equity securities. Even though the amount on the bon portfolio declines from the second, due to changes in interest rates, we continue to have significant unrealized gains in our investment portfolio.

Our third quarter net earnings also included a charge at public our California workers' comp. company which resulted from settlement of place. This litigation was brought in late 1994 by several medical providers, alleging antitrust violations by California workers comp insurers including republic. Recent pretrial rulings significantly impaired our defense. We considered the risk and rewards of the trial as well as the potential exposure and additional cost to appeal an adverse trial verdict, and in light of the risks resulting from the rules we concluded that a settlement was in our best interest. Our third quarter core operating earnings were .73 per share, and included a $6.5 million after-tax reserve reduction related to the recently enacted workers comp legislation, and our 38% share in in tint solid earnings for the 2003 third quarter which were reported yesterday. The market has continued to recognize infinity's value as its stock price continued to rise during the third quarter.

At September 30, the market value of our investment in infinity exceed our book basis by over $50 million. I'm proud of the infinity management team, they're doing a great job. For the 2003 third quarter, our property and casualty group reported an underwriting profit of just over $20 million, up 17 1/2 million dollars over the 2002 period. The overall group's combined ratio is 95.8. The results included $3.8 million less than one point of losses from severe weather. We were fortunate to have minimal exposure from Hurricane Isabel. Overall, the property and casualty group's gross and net written premiums to the third quarter are below the 2002 period, resulting from the sales of our personal lines businesses earlier this year.

Let me talk and turn my attention to our specialty group. Specialty group reported a solid underwriting profit for the 8th consecutive quarter with a combined ratio of 94.8. This was a four point improvement compared to the 2002 third quarter, and included 2.2 points of favorable impact from the workers comp legislation that I previously mentioned. Most of our businesses continue their trend as strong rate increase and solid underwriting profits during the quarter.

We continue to see the group's 2002 and 2003 accident years combined ratio developing at around 90%. We have continued to experience some adverse development, about eight point in the quarter, this development is emerging principally from our D&O home builders, general liability and bond businesses. We continue to capitalize on new business opportunities and lines such as crop insurance, transportation, excess and surplus lines business, inland marine, D&O and California comp.

Our California workers comp business continues to report solid underwriting profits reflecting their pricing and underwriting discipline. This continues to be a challenging business, though. We believe the recent legislation is a good first step to needed workers comp reform.

Specialty group's gross written premiums grew about 20% in 2003 third quarter, over the '02 third quarter. Large part of our growth stems from the rate action we've been taking. Rate increases through September 30 averaged around 22%, and were about 19% in the third quarter.

Pricing momentum has continued on the casualty side which represents about 70% of our property and casualty business. The growth in the special group's net written premiums was about 10% over the prior year's second quarter. And the difference between the gross and net written premium growth reflects the impact of changes in the reinsurance agreements in the latter part of '02.

This group's overall performance continues to be in line with our objectives for '03, and I expect it will benefit further from continuing rate momentum through the end of this year, and into '04.

Now, I'd like to talk about our annuity life and health group. This group's core net operating earnings for the 2003 third quarter was about 23% higher than the '02 period resulting from improvements in the life and supplemental health insurance and variable annuity operations. These improvements more than offset the spread narrowing in the fixed annuity business. Statutory premiums for the third quarter were 26% below the '02 period, primarily due to lower annuity sales. In this historically low interest rate investment, this group is maintaining its pricing targets and commission and interest crediting discipline in order to improve their profitability.

Great American Financial Resources raised about $60 million from its rights offering, $25 million was used to further strengthen the capital of its insurance operations, and $30 million was used to pay down their line of credit. We do believe the fundamentals of the annuity industry are continuing to improve, and that the recent interest rate and stock market rebound, along with the significant improvement in the group's cost structure, will allow us to achieve appropriate returns on new business.

We were pleased last week that both Moody's and Standard & Poor's' affirmed the ratings of GAFRI. Standard & Poor's' changed the outlook to stable. And Moody's indicated that they expect the outlook to be stable on completion of the debt offering.

In summary, and in focusing on our outlook, we have announced an agreement to sell Transport Insurance Company and in a active company with runoff insurance liabilities, it's asbestos and environmental reserves represent about 12% of our total A & E reserves. Even though we expect to report an after-tax loss on the sale of around $30 million we believe this transaction further simplifies our organization and brings certainty to some very old claims. I am pleased with the consistently strong underwriting profits and gross written premium growth of our ongoing specialty operations.

This morning, we also announced you are intention to sell our remaining interest in Infinity. This will provide capital to fuel anticipated double-digit specialty growth going forward. It will also help us to reduce our financial leverage as we've said we would do. We feel this also further simplifies the AFG story. Let me take a moment and say I am proud of Jim Gober and his management team, the results to date are outstanding and are continuing to improve.

Looking towards rate increases for the rest of this year, we're targeting average rate increases in our specialty business of 15% for the fourth quarter of '03, and we see taking additional increases in '04. We expect continued operating earnings improvement in our annuity and life group and we'll continue to improve its cost structure and maintain pricing discipline. Our leverage is improving, overall, and we expect further reductions in our debt-to-capital ratio.

I continue to be optimistic about our ongoing prospects for growth and profitability, and we remain comfortable with our core earnings guidance of $2.10 to $2.30 per share this year and we expect our core earnings for 2004 to be in the range of $2.75 to $3 per share. I look forward to reporting our progress for the remainder of the year.

With that, we'd be happy to open up for questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing star followed by 1 on your touch-tone telephone. If you are using a speaker phone please make sure the mute function is turned off to allow your signal to reach our equipment. Once again, please press star followed by 1 to ask your question.

We'll pause for just a moment.

And we'll take a question from Robert Madden with Schneider Capital.

Good morning.

Good morning.

I had a couple of questions. One was on the California workers comp situation. You had a benefit in the quarter there, I'm wondering if you could tell us roughly, you know, what that was as a percentage of your total California comp reserves, and then also, if you have any thoughts on, I guess there was another announcement from Garamendi ast week about some of the additional reforms they hope to get through there and whether you think those would also have a further benefit for you?

Hi Rob, this is Carl.

The $10 million is roughly 2%, and we basically looked at that number, you know, as being achieved due to medical savings from fee schedules, limits placed on chiropractic and physical therapy treatments, as well as on the repeal of the primary treating physician presumption. You know, we had a pretty broad range and we chose a number that was closer to the lower part of the range, and we want to wait and see how the reform actually, you know, kicks in. But we feel good about this first reform bill as being a good first step. We do feel, as you kind of implied, that some additional things would be good also.

I'm probably not that close to Garamendi's recent type of comments. We would be more -- we served on a task force with the new governor-elect, you know, Arnold, and as we helped him put together his five-step plan we support the governor's five-step plan that he laid out there, I'm not sure if you're familiar with that or not, but it went along like this. We want to impose evidence-base standards for medical treatment by implementing objective and enforceable medical utilization guidelines that are based on the best medical evidence, including a scientifically tested medical necessity standard for care. That would be the first item.

Partnering with the private sector, you know, kind of a second item there by incorporating tools and techniques employed by the private health sector such as incentives for employers to contract with private health plans offering broad and well-established provider networks. To expand the range of provider alternatives offered to employees. Including utilization of an employee's pre-existing primary care physician. Insuring network care from inception through claim conclusion. And providing dispute resolution through independent medical review panels accompanied by rights of appeal.

A third item was to reduce excessive disability costs by using AMA guidelines for rating disabilities, and providing injured workers with access to an efficient dispute resolution process on temporary disability claims. Fourth item was eliminating unnecessary cost due to litigation, fraud and abuse by implementing independent medical review panels staffed by experienced and independent physicians who can use evidence-based standards to resolve disputes, including an appeals process regarding medical services peer review, service utilization, and quality assurance. This would fall under the division of workers' compensation with further judicial review with respect to to other issues. As a part of this, our governor-elect will point new management to the DWC and introduce systems to better data -- keep better data records.

His fifth one which I'll be careful about commenting on was re-evaluating the state comp fund. Let me just say this: We feel the state -- that the reserve problem that they have needs to be dealt with, and that the state compensation fund should remain a market of last resort. So that would be -- you know, we're firmly behind and support the governor's five-step plan there, and we do feel that a second round of reform is necessary.

Okay. Thanks a lot. And I just had one other question on the '04 guidance number. I'm just trying to reconcile the, you know, the run rate on the combined ratio which you've been talking for a while now about being around 90, and you know, still getting very strong rate increases, and you know, if I assume for '04 that the life and health area gets, you know, continues to improve, as you mentioned, in my model I'm getting 96, 97 combined to get to that $2.75 to $3 range. And I guess I'm just having trouble reconciling that with where you're running currently.

Well, our current calendar year is 96 through nine months for our specialty group, then I think you mention -- I said in the low -- around 90 is our accident year combined ratio, which doesn't reflect the prior year's development. It's when you -- you know, which adds on to, you know, your accident year to get close to your calendar year number. So the calendar year number is fairly close to, you know, today to the numbers you're saying you're focussed on. The 90 is really an accident year number that I was focusing on earlier.

Okay.

Are there any big issues with the reserves or with the current operating environment that you think will have a big impact on, you know, where in the range you might fall or where whether you're above or below that range?

We hoped as we get farther away from some of the earlier accident years that we would have less development. You know, we feel our overall reserve position is solid today, but we have had, you know, some continued development from prior years. We'd hoped that, you know, we'd see less of that.

Okay. And then my last one was just whether Keith might have either the paid loss or the operating cash flow number for the quarter?

I do. Paid losses for the quarter were $300 million year to date $932.

Okay. All right, thanks a lot.

All right.

And as a reminder, to ask your question press star followed by the digit one. We'll move on to Andrew Kim with Trans America.

Sorry, thanks, my question's been answered.

At this time, there are no further questions.

All right. That being the case, we would express appreciation to you for joining us this morning and we'll look forward to reporting our year-end result in three months. Good-bye.

And that would conclude today's conference call, thank you for your participation.