American Financial Group Inc (AFG) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter one 2005 American Financial Group's call. My name is Audrey and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Carl H. Lindner, Chief Executive Officer and Mr. Craig Lindner, Chief Executive Officer and Mr. Keith Jensen, Senior Vice President. Mr. Jensen, you may proceed sir.

Thank you. Good morning and welcome to American Financial Group's 2005 first-quarter earnings results conference call. If you're viewing the webcast from our Web site, you can follow along with the slide presentation if you would like. Certain 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 factors which could cost 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 quarterly report on Form 10-Q. We do not 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 have focused on core earnings of companies, setting aside items that are not considered to be a part of ongoing operations, such as net realized gains or losses on investments, effects of 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 which is listed on the New York Stock Exchange.

Now I'm pleased to turn the call over to Carl Lindner III, Co-Chief Executive Officer of American Financial Group, to discuss our results.

Good morning and thank you for joining us. We released the 2005 first-quarter results for American Financial Group as well as for our 82% owned subsidiary, Great American Financial Resources, yesterday afternoon. In short, our growth and earnings exceeded our expectations. We're off to a great start towards meeting our objectives for the year.

We are not revising our earnings guidance for the year at this point because it's still early. In our business, surprises can happen. For example, our Crop business had great strong profits in 2004 but can be highly variable from year to year. Our 2005 first quarter net earnings were $0.81 per share, lower than the 2004 first quarter due to some realized losses on sales and investments in the 2005 quarter versus considerable realized gains last year.

Our first quarter core operating earnings were $0.90 per share, 25% higher than the 2004 period. Underwriting profit in our Property and Casualty Insurance operations was $12 million higher than the same quarter in 2004 and net written premiums grew 10%.

Let's talk about the Property and Casualty Group results; that would be on slide 4. The Property and Casualty Specialty Group reported a combined ratio of 92.1% for the 2005 quarter, 1.2 points better than the 2004 period. The Specialty Group's gross written premiums grew 6% in the 2005 quarter compared to the same period a year ago. Solid volume growth in our Transportation, Specialty Financial and Workers' Compensation businesses fueled this growth in the first quarter. Our net written premium growth of 10% reflected growth in the underlying businesses and the effect of our decision not to re-insure as much as our business in 2005. We believe it's prudent to deploy additional capital to retain more of the business written in the current environment.

Our overall rates in the 2005 quarter were about the same (technical difficulty) first quarter of 2004. We continued to get rate increases within our Transportation, Agricultural and most other Casualty businesses, which were offset by rate decreases in our Excess Property, D&O and California Worker's Comp businesses.

Now turning to slide 5, I will discuss the first quarter results for each of our specialty business groups. Our Property and Transportation businesses continued to generate outstanding underwriting results with a combined ratio of 82.8%. Nearly every business line in this group generated a higher underwriting profit than in the 2004 first quarter. The Transportation and Marine businesses drove the strong gross premium growth and higher growth in net written premiums reflects greater premium retention, principally within the Inland Marine operations.

I would point out that Crop business results are not known or recorded until the latter half of the year. Last year, they were a major contributor to this business groups.

I am pleased that our Specialty Casualty Group generated a solid underwriting profit for the quarter (technical difficulty) driven largely by continuing exceptional results within our Excess and Surplus Lines business. This group's results were impacted however by approximately $13 million of unfavorable development in the Executive and Professional Liability operations. Its gross written premium showed a modest decline as expected from the 2004 period.

The Specialty Financial Group is the only one reporting an underwriting loss for the 2005 first quarter. However, its combined ratio improved significantly compared to the 2004 fourth quarter. Our Fidelity and Crime Unit, a start-up operation seven years ago, has a great underwriting track record and generated an outstanding underwriting profit in the first quarter. Also, our Trade Credit and Collateral Protection businesses continued to generate very solid underwriting profits in the 2005 quarter. However, these favorable results were more than offset by underwriting losses within our Residual Value business and unfavorable prior-year development in our Surety operations. As previously indicated, premium growth of the Specialty Financial Group moderated in the 2005 first quarter. Growth in the Dealer Services and Fidelity and Crime operations were partly offset by a slowdown in the Surety Operations and reductions in the other parts of the Lender's Services operations.

Our California Worker's Comp business, operated by Republic Indemnity, is a turnaround story that resulted from appropriate rate adjustments and much-needed regulatory reform over the past few years. California's reform legislation allows us to benefit our policyholders by providing coverage at lower rates and at the same time still achieve appropriate profitability. Republic's one of the few California specialty worker's comp carriers that survived the disastrous operating period of 1995 to 2000, returning to underwriting profitability in 2001. This group was diligent through the tough times and positioned themselves to be opportunistic as the market conditions improves. As a result, they now generate solid underwriting profits that allow them to achieve appropriate returns and to recover some of the losses incurred during 1995 to 2000.

Despite rate decreases of about 7% in the 2005 first quarter, gross written premiums grew 8% over the 2004 first quarter due to solid volume growth.

Now let's turn to our Annuity, Supplemental and Life Insurance Group, managed by Great American Financial Resources that you can find on the webcast on slide 6. Core net operating earnings for the 2005 first quarter were higher than the 2004 period, reflecting improved results in each business line. Statutory premiums for the 2005 quarter were 34% above the 2004 first quarter, resulting primarily from single premium fixed annuity sales, including approximately $100 million of fixed annuities from policyholders of an unaffiliated company in rehabilitation who chose to transfer their funds to us.

Supplemental Insurance Operations continue to generate excellent results. Fixed Annuity Operations continue to improve resulting from some moderation and a historically low level of interest rates over the last two years. This group continues to benefit from operational improvements and cost efficiencies put into place over the last several years. We're pleased that the group has continued its strong earnings growth trend.

Let me give you an update on Spitzer (ph) matters. In December of last year, we announced that Great American Insurance Company as well as several other insurers had received a subpoena from the New York Attorney General's office requesting information concerning our business practices in writing legal malpractice insurance. The inquiry was broad in scope, we've submitted and continue to submit documents to the Attorney General in response to the inquiry and have received no additional inquiries as a result of the information we provided thus far. Also, our internal investigation following previously disclosed inquiries relating to broker relationships from state regulators is substantially completed. We have made previous disclosures about two policies requested by Marsh McLennan.

Our outlook, I would like to conclude with some key aspects of our strategic focus and outlook. Our operations will continue to focus on specialty niche markets within the insurance industry. We continue to seek opportunities to add on to our existing specialty property and casualty and annuity and supplemental insurance businesses and we will maintain rate adequacy and limit premium growth if necessary to achieve appropriate profits. Expect net premium growth of 10% or more this year.

The underwriting profit of our specialty operations is expected to increase in 2005 over 2004 with continued strong underwriting performance in our California Workers Comp and Property and Transportation businesses and improvement in our Specialty, Casualty and Specialty Financial Groups. We expect premium growth and operating earnings improvement in our Annuity, Supplemental and Life Insurance Operations. We continue our plans to reduce corporate overhead. Because it's early in the year and due to the variability in our Crop business, we are re-affirming our 2005 quarter earnings guidance of $3.15 to $3.40 per share. We look (technical difficulty) progress through the rest of this year. Now we would like to open the lines for any questions. Thank you.

(Operator Instructions) Charles Gates.

The one question I had, what is the status of the review of the reserves for asbestos and environmental liability?

Charlie, we have not yet begun that. As you know, we announced in the third quarter that during the course of 2005, it is our expectation that we would undertake that review. That will happen in the mid to latter part of this year.

So perhaps when you report third quarter results, you might have the product of that review?

Perhaps, though we haven't set a specific time line at this point.

So once again, it's going to be in the latter part of this year that you begin the analysis?

Yes. We expect to announce the results in the latter part of the year.

Thank you very much.

Charlie, one of the considerations is potential federal legislation here, which is right now, is right in the grips of maybe either happening or not.

Do you think that's going to happen, or to what extent do you think that will impact the situation?

We are generally supportive of the bill that's being forwarded and we're optimistic that there could be a pretty good chance that something may happen. So I think that's one thing we're very closely watching right now.

Congratulations on the results.

(Operator Instructions) Sam Hoffman.

Can you comment on reserves, changes in the quarter, releases and strengthenings?

Keith, you want to address that?

Sure. There were no unusual releases or strengthenings. We did have adverse development, as Carl indicated, of about 13 million in our D&O and Professional Liability lines. Overall, we had adverse development of 10 million. So if you take the rest of the businesses combined, it had about a $3 million positive result during the first quarter. Other than that, there were no unusual strengthenings or releases.

Okay, thanks.

(Operator Instructions). Mr. Jensen, at this time, there are no questions in the queue, sir.

Thank you very much and thank you all for joining us for this conference call and we look forward to reporting our second quarter results. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.