American Financial Group Inc (AFG) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2004 American Financial Group's Earnings Conference Call. My name is Megan and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We'll be facilitating a question and answer session towards the end of today's conference. If at any time during the call you require assistance, please press "star" followed by "zero" and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's conference, Mr. Keith Jensen, Senior Vice President of American Financial. Please proceed sir.

Thank you. Good morning and welcome to American Financial Group's 2004 fourth quarter earnings release conference call. I'm joined this morning by Carl Lindner the Third, and Craig Lindner, Co-CEOs of American Financial Group. If you're viewing the webcast from our website, you can follow along with a slide presentation if you'd like. Certain statements made during this call are not historical facts and may be considered forward-looking statements.

They're based on estimates, assumptions, and projections which management believes are reasonable but by their nature subject to risks and uncertainties. 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 discussed or identified from time to time in AFG's filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K and the quarterly report on Form 10-q. We do no promise to update such forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements.

Many investors and analysts focus on core earnings of companies, setting aside items that are not considered to be part of ongoing operations, such as net realized gains or losses on investments, effective accounting changes, discontinued operations, and certain nonrecurring items. As such, the core earnings of our insurance operations for various periods will be discussed during this call, including the results of Great American Financial Resources, our 82% owned subsidiary listed on the New York Stock Exchange. Now, I'm pleased to turn the call over to Carl Lindner the Third, Co-Chief Executive Officer of American Financial Group to discuss our results.

Carl Lindner, III: Good morning. Craig and I thank you for joining us. Earlier this morning we released the 2004 fourth quarter and full year results for the American Financial Group, as well as for 82% owned subsidiary Great American Financial Resources.

I'd like to start by saying that I'm pleased with what we were able to accomplish in 2004. Our underlying business was profitable and grew in line with our expectations. We had a few surprises, but overall we had a very successful year and our 2004 core earnings were within the guidance we've provided to you a year ago. The continuing improvement in our insurance operations was a key factor in AFG's stock price rise of 18% during 2004. We continue to provide appropriate levels of capital to support the growth of our specialty commercial businesses, and we further strengthen our balance sheet and improved our financial flexibility.

Selling our Provident Financial Group shares in the National City merger generated a gain of a $1.80 per share and provided additional liquidity. We issued about 2.7 million shares of AFG common stock and sold another 1.4 million AFG shares held by a subsidiary, raising over $120 million of cash. The IPO of our National Interstate subsidiary, which began during 2004, was successfully completed last month, raising nearly $41 million of capital for the continued growth of that business. Since we didn't sell any of our National Interstate shares, AFG has retained a 54% voting and ownership interest in the newly public company.

Our credit facilities were successfully updated during 2004, a $300 million line of credit for AFG and another $150 million for Great American Financial Resources. We completed the sale of Transport Insurance Company, which further reduced our asbestos and environmental exposures, as well as some old commercial liabilities. At December 31st, 2004, shareholders' equity, excluding unrealized gains on our bond portfolio increased 18% over yearend 2003 and our debt to capital ratio improved to about 31% from nearly 35% at the end of 2003.

We substantially reduced exposure to troubled reinsures through commutations with Trenwick, Converium, Yearling (ph) and Constellation. Following these computations, are reinsurance recoverable from troubled insurers was less than 2% of statutory surplus at yearend. This week, we completed an agreement, which eliminated our remaining exposures from this troubled companies.

Let me move on to fourth quarter highlights. Our 2004 fourth quarter net earnings were $1.23 per share, a $1.45 cents per share lower than the 2003 fourth quarter. However, the 2003 quarter included a $1.90 per share of tax benefits related to AFG's merger with a subsidiary. Our fourth quarter core earnings, operating earnings per share were 88 cents per share, 35% higher than the 2003 period, reflecting significant improvement in our insurance operations.

The Property Casualty Specialty Group reported an underwriting profit of nearly $55 million in the 2004 fourth quarter with a combined ratio of 89.9%, 6.2 points better than the 2003 period. Specialty Group's gross written premiums grew 4% in the 2004 quarter compared to 2003. Solid volume growth and rate increases in certain of our commercial casualty businesses were offset by the effect of smaller rate increases in other operations.

Our net written premium growth of 22% reflected the underlying business growth combined with our decision not to reinsure as much of our business. We did achieve rate increases averaging about 2% during the quarter. We continue to experience rate decreases in our excess property, D&O and California Workers' comp businesses. Our crop, Equine, California's worker's compensation, and Mid-continent casualty businesses generated very solid volume growth.

Turning to our specialty business groups, I'll discuss our fourth quarter on slide 6 and full year on slide 7. The Property and Transportation businesses generated strong gross and net premium growth driven by volume growth in our crop, equine, and transportation businesses. Net premiums were 36% higher than the 2003 quarter, primarily reflecting greater premium retention under our physical damage closure agreement.

This group achieved outstanding underwriting profits in 2004. The combined ratio for 2004 quarter was nearly 38 points better than the same period a year ago, largely due to exceptionally strong profitability in our crop insurance business. Crop prices and yields of our insurers held very well during the 2004 fourth quarter. Also, the underwriting margins of nearly all the other business units in this group improved and we had strong underwriting profits.

I was disappointed with the overall results of our specialty casualty business in the fourth quarter, primarily due to additional unfavorable prior year development within our executive liability operations and a business in a run off. However, our excess and surplus lines business, general liability, and targeted markets businesses generated solid underwriting profits for the year.

For the 2004 fourth quarter, this group's gross and net written premiums declined from the 2003 period, reflecting the effect of a moderating rate environment on pricing and underwriting decisions. However, for the full year, gross and net written premiums grew 3% and 9% over 2003.

Specialty Financial Groups underwriting results were disappointing. Continuing residual value losses, the commutation of a reinsurance agreement and unfavorable prior year development in our surety and fidelity operations adversely affected the 2004 fourth quarter results. However, our surety, fidelity, and trade credit operations generated very solid underwriting profits for the full year 2004.

The growth in gross written premiums of the Specially Financial Group continued to come from the operation that provides collateral protection in the financial institutions. That operations growth and reversal of seeded premium resulting from the commutation of the reinsurance arrangement mentioned earlier contributed to the significant increase in this group's net written premiums for the quarter and full year.

California Comp business continued to generate solid underwriting profit with a combined ratio of 84% for the 2004 fourth quarter. Gross written premiums for the 2004 fourth quarter grew 23% over the 2003 period, due primarily to an increase in policy count. This business ended 2004 with a combined ratio 2.5 points better than 03. Our claims results continued benefit from California's reform legislation, resulting in rate decreases on our renewal business averaging about 8% during the 2004 fourth quarter.

Now, let's review our Annuity, Supplemental, and Life Insurance Group managed by Great American Financial Resources. Core net operating earnings for the 2004 fourth quarter and full year were 33% and 28% higher than 2003 periods, reflecting improved results in each business line. This group also reported record net earnings of nearly $102 million, which included a gain on the sale of their Provident shares and the National City merger.

2004 fourth quarter and full year statutory premiums were approximately 8% below the comparable 2003 periods resulting primarily from lower sales and single premium annuities, partly offset by an increase in 403b annuities and supplemental insurance premiums. This group continued to maintain its pricing targets and commission and interest crediting discipline during a period of low interest rates while we continue to achieve appropriate returns on our new business.

Reflecting on 2004 full year results on slide 9, AFG's record net earnings for the full year of $4.81 per share reflects significant improvement in our core insurance operating earnings and the effect of the gain on the sale of our Provident shares in the National City merger. Our 2004 core operating earnings of $2.88 per share was 66 cents above 2003 and included record earnings for our crop insurance offset by hurricane losses and charges associated with commutations and several reinsurance agreements.

Specialty group reported a combined ratio of 94.1 including 1.8 points for the hurricane losses compared to 96% in 2003, an improvement of nearly 2 points in line with our 2004 objectives. Specialty group's gross written premiums grew 12% over 2003, resulting from rate increases and volume growth in certain businesses and net written premiums grew 20% as a result of retaining more of profitable businesses.

Rate increases continue to moderate after 3 years of strong growth that still met our objective of an average increase of 6% in 2004. The core net operating earnings of the Annuity, Supplemental, and Life Group exceeded the 2003 year results by 28% within the guidance we previously provided. This business has continued to operate effectively in a challenging interest rate environment.

Now, I would like to talk about the AFG outlook. In 2005, we expect continued solid net written premium growth in our Property and Transportation businesses and modest growth in the specialty financial and California Workers' Comp businesses. Our specialty casualty business is expected to experience a modest decline due to the softening access and surplus lines mortgage. Our California Workers' Comp and property and transportation should continue their strong underwriting performance in 2005.

While our specialty casualty and specialty financial groups are expected to show improvement over 2004. We do expect strong growth in our annuity, supplemental, and life insurance operations. We have recognized gains on real estate in the past and will continue to consider selective sales of real estate assets during 2005. And our core -- 2005 core earnings guidance remains between $3.15 and $3.40 per share. I really look forward to reporting our progress to the rest of this year. Now, we would like to open the lines for any questions.

Thank you sir. Ladies and gentlemen, if you wish to ask a question, please press "star" followed by "one" on your touchtone telephone. If you question has been answered, or if you wish to withdraw your question, please press "star" followed by "two." You may press "star" once again. We will wait one moment to compile the list of questions. And your first question comes from the line of Charles Gates, CSFB.

Hey, good morning.

Hi Charlie.

On the first page of your news release, you indicated rate increases averaged 2% for the 2004 fourth quarter. I interpret that to mean your entire book of business?

That's correct.

What would you be thinking for 2005?

I think there on another page in our release, I think, we said we expect little change in pricing in '05.

Okay.

So pretty flattish, not much change either way.

And part of the explanation for that is that some of your specialty business is that you don't have many competitors like the horse mortality business?

Yes. That would be a good example. We have a lot fewer competitors. We think our pricing should be stable there. And should continue to afford us an opportunity to grow the business.

Can you tell me -- I read the paragraph in the news release with regard to Specialty Financial, but I'm looking at your slide #, I guess it's 6, can you go through again basically what contributes to the erosion and results there? And what your assessment is at this point?

Sure, there were a couple of things that contributed to the erosion in the specialty financial on a year-over-year basis. One was that we had some adverse development in our bond and surety that was in 9 to 10 range, and we had in addition a commutation of a reinsurance agreement that in the specialty Financial Group was about $12 million in the fourth quarter. And those two things were what drove the erosion from prior results.

Mr. Lindner went through how you had basically commuted many programs with problem reinsures. I don't know Constellation, but I know that Converium is a much different company than Trenwick. How did you interpret what is a troubled property casualty reinsurance company?

Carl Lindner, III: Charlie, this is Carl. Basically the ones we considered trouble were Converium, Trenwick, Girling and Constellation, that's our definition. But we categorize those companies as potentially being difficulty in paying long term.

My one final question and then I'll let others guys ask questions. I didn't understand what contributed to the awesome results from an underwriting standpoint in property and transportation.

We had a record crop government mobile payroll year.

How does that work?

Basically, we are ensuring for different perils on our -- in crops, corn, soybeans, and many other types of crops.

Are you the agent on that or do you actually take the risk?

No, we share the risk with the US government.

Okay. So my crop is destroyed by something so I would then come to you and you would provide me with some benefit?

That's correct. And depending on how much we take of a given area or given exposure by the government, we can share part of that as well as us taking part. And we do have reinsurance in place that limits -- puts some limits on our losses also. So it's a combination of those three factors.

What kind of an underwriting result did you have?

We had a fabulous underwriting result. We probably had close to $45 million profit, probably double any other year that we've had for a long time.

That profit, Charlie, isn't in the quarter, that's the full year.

On what kind of sales is that?

About 400 million gross.

And what kind of net?

Because of the structure some underwriting agreements, the net is relatively low.

So it's just an awesome result?

Again, the other way that you might look at it though while we also had hurricane losses that pretty much -- you know, the two fairly well washed. Probably the incremental additional crop profit washed fairly close within maybe $5 million to $10 million of the hurricane losses.

Thank you.

And your next question comes from the line of Jason Eyre (ph) from Law Equity (ph).

Good afternoon. A couple of questions for you. Number one, can you sort of address this in your comments, but can address if there's any finite risks reinsurance relationships that could be significant to us? Then my second question was regarding book value, can you give us a tangible number? I know you guys have a lot of appreciated real estate that you not appreciated in your book value, can you maybe give us the effect of that?

Sure let me take those. The finite risk, we do not have anything significant in finite risk arena. Tangible book value per-share, let me give you a couple of data points. Book value per share excluding our bond gains, which is kind of where we look at it so that we don't have it fluctuating with the movements and general interest rate is 29.35 at the end of the quarter. And our goodwill is about 170, so that would be about $2.25 per share. So rough and dirty, you'd looking at about $27 a share. I don't have that exact number on tangible right in front of me.

It's around 27, Ken. And you ask a third question, and I have to write it down.

Regarding your real estate, I know, you own a lot of appreciative real estate that haven't appreciated on the books, if you give us an idea of what effect that would have?

That's correct, we do. And basically, the real estate is in a couple of trenches, one is in income producing real estate. Our estimate on that is that we would be between 130 million and 200 million of unrealized gains in the income producing real estate and that's really keying off a range of multiples applied there to your cash flow.

We have some non income producing land that we estimate is probably in the $20 million to $25 million range and then we hold New York city air rights, Grand Central terminal air rights which we estimate to be in the $50 million to $60 million range. So all in the real estate we would expect to be somewhere in the $160 million to $270 million range of unrealized value.

And so that is not in that tangible book number?

That's correct, it is not.

Okay. And last question, I had the great pleasure of speaking with your father and he has clearly purchased a tremendous amount of stock here. Can you give us a comment on why he's has such a big hold already purchasing so much more stock? And maybe why we haven't seen other officers or directors step up and buy along with him?

That would -- I don't want to speak for my father, but I can tell you that he is a real believer that our stock is a great value trading at right around book value, not including the real estate.

Yes. And any reason why we haven't seen other officers or directors step up and also make purchases?

I think it's fair to say we are very substantial shareholders already...

I think that's probably fair to say.

...for the ownership of the company.

Sure.

Okay. Thanks very much and nice quarter.

Thank you.

Once again ladies and gentlemen, that is "star" "one" if you wish to ask a question. And there are no further questions at this time.

We express our appreciation to you for joining us today and we look forward to reporting at the end of the first quarter. Thank you very much.

Thank you for your participation in today's conference. This includes the presentation and you may now disconnect. Have a good day.

(CONFERENCE CALL CONCLUDED)