American Financial Group Inc (AFG) 2004 Q3 法說會逐字稿

Please clearly state your full name followed by the found key good day ladies and gentlemen, and welcome to the third quarter 2004 American financial group conference call. My name is Sean and I will be the coordinator for today. At this time all participants are in a listen-only mode.

We will be facility a question and answer session following today's presence. If at any time during this call you require assistance. Please dial star followed by zero and a coordinator will assistant you. At this time I would like to introduce the presenters on today's conference. First is Mr. Carl Lindner III Co-President followed by Craig Lindner, also Co-President and your host Mr. Keith Jensen Senior Vice-President of American financial group. Please go ahead, sir

Thank you very much. Good morning and welcome to American Financial Groups'04 third quarter earning result conference call. If you are viewing webcast from our website you can follow along with the slide presentation if you like.

Certain statements made during the call are not historical facts and may be considered forward-looking statement and based on estimates assumptions and projection which management believes are reasonable but by their nature subject to risks and uncertainties. The factors which could cause actually results to different materially from those suggest by such forward-looking statements include but are not limited to those discussed or identified from time to time in A F G's filings with the SEC commission. Including the annul report on Form 10-K and quearltly reports and 10-Q.

We do not promise updates as forward-looking statements to reflect actual results or changes in assumptions or other factors that could effect these statements. Many investor and analysts focus on core earnings of companies Setting a side items that are not considered to be part of ongoing operations. Such as net realized gains or losses on investment.

Effective accounting changes discontinued operations and certain nonrecurring items. As such the core earnings of our insurance operations from various periods will be discussed during the call. Including the results of great American Financial Resources. Our 82% owned subsidiaries that is listed on the New York State stock exchange. Now pleased to turn the call over to Carl LIndner III Co-President of American Financial Group to discuss the results

Good morning. Thank you for joining us. I would like to make a few initial comments and then we will open the line for questions. Earlier this morning we released our '04 third quarter results for American Financial Group as well as for 82% owned subsidiary great American Financial resources our '04 net earnings for $2.30 per share up $1.71per share over the '03 third quarter.

The '04 results included a gain of $1.80 per share relating to sell of Provident Financial Group share and its margin with National City '03 results were inpacked by a charge of 33 cents per share related to litigation settlement within the property casualty operations. A third quarter core operating earnings were 53 cents per share down from the 2003 period as well as the first two quarters of this year. Decrease reflects 30-cent per share of weather related losses resulting from four hurricanes which effected the southeastern part of the United States. As you know the season has been one of the worse on record with these four hurricanes hitting at a time period in about six weeks.

This is first time Florida has experiences four hurricanes in one season. 2003, third quarter results included only four-cent per share of losses from severer weather. Excluding the impact of these losses core earnings for the 2004 quarter were higher than the 2003 period. Core operating earnings for the first nine months '04 Including the unusual storm losses are 28% above the comparable 2003 period. We continue to strengthen a balance sheet through capital growth

Share holders equity excluding unrealized bond gain of September 30th as increased 11% from year-end 2003. In our debt to capital ratio improved over 32% at the end of the third quarter. We move on to the specialty group results. Property and casualty profit for the '04 third quarter, with the combined ratio of 99.4%. Which included 6.4. related to the hurricane losses. '03 third quarter combined 94.8 included less than a point for severe weather losses.

Adjusting for effects of such losses the combined ratio for '04 quarter was a point better than the '03 period. Specialty group gross written premiums Grew 10% in the '04 quarter compared to the '03 period. We achieved rate increases averaging about 4% during the quarter. Even though pricing is moderated on an over all basis from last year. We are still getting solid increases in some of our commercial [inaudible] markets.

We are experiencing rate decreases in our property D and O, excess and surplus and California comp businesses. We are also continue to see good volume growth in the majorities of our businesses. Net written premium growth during the '04 third quarter, was less than gross written premium growth reflecting the impact of the significant growth in our crop business which currently seeds about 95% of the premiums. We do expect net premium growth for the year as a whole to exceed gross and growth premiums due to the reliance on insurance in 2004.

Turning to the specialty business groups. I want to discuss both the third quarter results and slide five as well as first nine months of 2004 in slide six. Property and transportation businesses continue to report strong gross and net premium growing during the '04 third quarter, this group absorbed the majority of the hurricane losses in the'04 third quarter. Combined ratio increase by16.6 points due to the storms apart from these unusual losses these businesses continue to generate strong under write profits in the 2004, quarter partly due to lower prior year development compared to the 2003, quarter.

Net written premiums are speciality casualty businesses for 2004 third quarter were up 5 percent over the '03 period and group reported under writing profits consist with the first half of the year. Under writing results were dampened by 20 million dollars of adverse development within the executive liability operation and a business in runoff. Our excess in surplus. General liability and targeted markets continue to generate very solid underwriting profits during the quarter. Combined ratio for this group of businesses for the first nine months of 2004 was 97.4. 3 point better than the comparable Better than the 2003 period.

Specialty financial groups under writting result for the 2004 quarter were adversely effected by the hurricane losses within the lender services operations increasing the combined ratio by nearly three-point. Even with the unusual hurricane losses, the combined ratio to the '04 nine month period is over 5 points better than the '03 due to improved results in our lender services operation Fidelity and foreign credit operations continue to generate solid under writing profits. This group net premiums declined about 9% compared to the 2003 period due to a slow down in volume growth and lower rate increases. For the first nine months of the year net premiums threaten increased to 22% resulting from growth in the operation that provides collateral protection for financial institution

California Worker comp business continues to generate strong under writing profit 89.7 for the third, quarter. Lower combined ratio for the 2003, quarter includes a 14.3. benefit for the reserve reduction related to California Worker Comp legislation is a act of last year. For the 2004 nine months period. This business is combined ratios comperable to the last year. Net written premiums through 27% over the 2003, quarter and nine month period due to rate increase implemented in "03 as well as volume growing. As a result of the recently enacted worker's comp reform in California and market conditions.

We he experienced rate decreases in our renewal business averaging 12% during the third quarter of '04. Reflecting the positive effecties of the legislation and improving claims environment. Now, let me review our annuity supplemental life insurance group. This group's coorodinated operating earnings for the '04 third quarter were higher than the 2003 period results mainly from improved results from the life supplemental insurance operations. Statutory premiums for the '04 third quarter were 10% higher than the 2003 period resulting primarily from higher fixed annuity sales.

This group continues to maintain its pricing targets and commission and interested crediting discipline during a period of low interest rates. In August, great American Financial Resources successfully replace its existing unsecure credit agreement which was maturing at the end of '04 for the new $150 million four year facility. This group's gap equity, statutory capital and debt to capital ratios are at the strongest levels in the history. We are continuing to achieve appropriate returns on new business and expect this group's core net operating earnings for 04, to exceed '03 by 25 to 30%. In summary and talking about our outlook, our property and casualty specialty groups third quarter results were effected by a unusual unsuspected hurricane activity.

However, this group has experience strong written premium growth and solid under writing profits to the first nine months of this year. Rate increases continue to moderate. For the first nine months of the year rates increased about 8%. We now expect our average rate increases to be around 6% for the whole year. We expect continued strong under writing results in the fourth quarter. And 2005 we expect our California worker's compensation and property and transportation businesses to continue their strong underwriting performance. Our specialty casualty results are expected to show meaningful improvement. Specialty financial results could be about the same as '04. We expect a report double-digit growth for the '04 fourth quarter, reflecting greater premium retention as well as continuing rate and volume increases.

In 2005, we expect continuing solid growth. [inaudible] In part additional reduction conceded property and transportation business. We expect modest growth in the other three groups. The annuity supplemental and life insurance operations is generating a higher level of operation earnings and we look for continuing improvement in the operations. As a result of the hurricane losses, our 2004 core earnings guidance has been revised and is now between $2.70 and $2.85 per share. We expect 2005 core earnings of about $3.15 and $3.40 per share. I look forward to reporting our progress throughout the rest of the year.

Lately we have had a number of inquiries regarding the highly publicize charges filed one week ago by the New York attorney general against Mark Matt. We have not received any subpoena or information request at this time. We reviewed the allegations in the complaint against Morris and to be prudent have begun an internal review of our business arrangement with those Broker that are being investigated While the internal investigation will be ongoing at this time we found no evidence of bid ringing or tying arrangements that are the subject of State of New York's complaint.

Those practices are against company policy and we won't tolerate such unethical behavior. Preliminarily, we can report that the vast majority of the business is not placed through the brokers that are subject to the investigation. For instance, in 2004, about 13% of our business was placed through those brokers understand investigation and during the last five years, commission paid to the brokers understand similar agreements averages less than $5 million dollars per year. At this point I would like to open the lines for any questions. Thank you

Ladies and gentlemen, at this time if you wish to ask a question please dial star followed by one on your touch tone telephone star one for any question and It will be taken in the order received Peter Wade with SEC capital. Please go ahead

Good afternoon. It's morning still out there IF you looked at your relationships with the worker's comp Brokers' in California. I know historically you had gotten good business out there. Is there any kind of contingent relationship or commission relationship that we should be concerned about [inaudible] going after that stuff?

I think right now we are investigating this businesses and that we certainly if there is anything material that develops, we would you know, disclose that at the appropriate time.

You don't know whether or not you have arrangements with these guys

As far as you know, in our initial look at of the agreements of the type that are being investigated right now, the P S A's we are not aware of any. At this point

Great. Just for clarification, when you guys got rid of I B C C that does business in California as well you did not provide an indemnity to them correct

That's correct

Your next question comes from Jay Cohen with Merrill Lynch

Good morning. It is morning here as well. Two questions. The first is can you give us the book value per share excluding unrealized gains, so it is a numbers question. And secondly, I guess the 6% expectation for price increases this year, Carl, is that, I want to understand the trajectory of what you had been thinking before and where it is now and cha kind of changes you saw from a competitive standpoint.

Yea, I think pricing is moderated, quarter by quarter, I think that in this latest quarter, our pricing increases were only 4% which I think my implication if we are 8% onto year ended or year-to-date, we are projecting more in the line of 6%. for the whole year. When we look back and at the amount of price increase achieved. So I think what the implication there is probably pricing and the fourth quarter will continue along the same lines of what it is now in the lower single digits, in type of area.

Jay, your other question was with respect to book value. Book value excluding bond gains is 28.66 at the end of the quarter

Great. One last question. Your balance sheet is obviously has been strengthened pretty significantly over the past three years. Your stock is trading, you know around book value, any plans to buy back stock What kind of flexibility is the question, do you have to repurchase shares at the current prices.

I think there is not a current plan to do any stock buy back in terms of flexibility. We are obviously in a position where of our liquidity and cash position is stronger than it was a couple of years ago. As we indicated to the market a number of times, we have an intermediate to long term objective to have a debt to cap in the 30% range. We are getting close to that at 32 but that would still be a priority for us

Great. Thank you.

I want to remind you dial star 1 for any questions. Gentlemen, I am showing no further questions at this time. I'll turn it back to you.

Thank you very much. We appreciate your joining us for the call, and we look forward to reporting to you at the year-end. Have a good day.