American Financial Group Inc (AFG) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Second Quarter 2005 Earnings Results Conference Call for American Financial Group. My name Michelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode.

[Operator Instructions].

At this time, I would like to turn the presentation over to your host, Mr. Keith Jensen, Senior Vice President. Please proceed sir.

Thank you. Good morning and welcome to American Financial Group's 2005 second quarter earnings conference call. I'm joined today by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial group. If you're viewing with webcast from our website 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 and are based on estimates, assumptions, and projections which management believes are reasonable but by their nature are 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-Kand and the quarterly report on Form 10-Q. We do not promise to update such forward-looking statements to reflect the 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, the effects of accounting changes, discontinued operations, and certain non-recurring 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 under the New York Stock Exchange.

I'll now turn the remainder of 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 second quarter results for American Financial Group, as well as for our 82% owned subsidiary, Great American Financial Resources, yesterday afternoon. Similar to the first quarter, our businesses continue their profitable trend and results for this quarter were again ahead of expectations.

Our 2005 second quarter net earnings were $1.04 per share, $0.29 above the 2004 second quarter, due to higher earnings in the insurance operations and a higher realized gains on sales of investments. Our second quarter core earnings from insurance operations were $0.91 per share, 21% higher than the 2004 period. Underwriting profit and profit in cash on the insurance operations was nearly $30 million higher than in the same quarter in 2004.

Please turn to the webcast slide4 and I'll discuss the property and casualty specialty group results. Property and casualty specialty group reported a combined ratio of 89.4% for the 2005 second quarter, 4.6 points better than the 2004 period. Through the first half of this year, the group's underwriting profit is $39 million higher than the 2004 period. We're very pleased with these outstanding results. The specialty groups gross written premiums in the 2005 second quarter were 5% lower than the same period a year ago reflecting the effects of a softer pricing environment.

We said repeatedly that we're willing to sacrifice volume for profits. In this environment we continue to focus on maintaining underwriting discipline. However, net written premiums grew 4%, due to continued reductions in premiums ceded under reinsurance agreements. With our strong capital position and profitable results, we think it is wise to continue to use similar capital to retain more of the business return in this current environment.

Our overall average rates in the2005 second quarter were up slightly, about 1% compared to the second quarter of 2004. We continued to get rate increases within certain of our transportation operations, and some casualty businesses, which were offset by rate decreases in our excess property, D&O, and California Workers' Comp businesses. Now, I will discuss our second quarter results on slide 5 as well as the first 6 months of 2005 on slide 6 for each of our specialty business groups.

Our Property and Transportation businesses continued to generate outstanding underwriting results with a combined ratio of 80.9%, 3.7 points better than the 2004 second quarter. The improvement was driven primarily by higher underwriting profits in the marine and agricultural businesses. Gross written premiums declined about 7% in the 2005 second quarter, compared to the same period a year ago, reflecting the impact of lower commodity prices earlier in the year, which were used to determine crop insurance coverages. Also, lower volume resulting from competitive pricing in the excess property insurance operations contributed to the premium decline.

However, through the first half of the year gross premiums were 2% above the 2004 period due to strong volume growth within the transportation and in the marine businesses during the 2005 first quarter. The growth in net written premiums reflects to attract our decision not to reinsure as much of our business, principally within the Inland Marine and Crop Insurance operations. I am pleased that our specialty and casualty group is meeting our expectation for meaningful improvements. They generated a solid underwriting profit for the second quarter, driven largely by lower and favorable development in the executive and professional liability operations and strong underwriting profits within our excess and surplus and targeted market lines.

It is ratifying to see that this group's overall underwriting profits through the first half of the year is 22% higher than the 2004 period. Due to the softer pricing environment similar to our commercial casualty markets, we are maintaining ready adequacy and thus limiting and in some cases reducing premium levels, particularly in the excess and surplus lines in order to achieve appropriate levels of profit.

Consequently, gross written premiums are lower through the first half of the year compared to the 2004 period. The specialty financial group continues to be disappointing. The group is the only one reporting underwriting losses this year. Its combined ratio has increased in the three and 6-month period of 2005 due to larger losses in the residual value business, which is resulted from greater than expected loss frequency. These losses are somewhat offset by profitable results and our Fidelity and Prime, trade credit, and financial institutions businesses.

As expected, premiums declined in 2005 second quarter compared to a year earlier as growth in the fidelity and claim operations was more than offset by a slowdown in maturity Operations and reductions and other parts of the lender services operations. The deterioration in the residual value results has caused us to revise our expectations of the timing of our return to profitability for this group. We now expect that this group will not achieve underwriting profit until late of 2006.

Our California workers' compensation business continues to generate excellent underwriting profits, resulting from the improving claims environment resulting from workers' compensation performance. As a result, this improved claims position we have recently filed for a 25% decrease in base rates effective June 30, 2005. This is a benefit to our insured as a direct effect of the recent reform of legislation.

We believe that our current rates are adequate to provide strong returns. Despite rate increases of about 11% in the 2005 second quarter and 9% for the first half of the year, gross written premiums still grew more than 2% and 5% in those respective periods over the comparable periods last year due to strong volume growth.

Now let's review our annuity supplemental and life insurance group managed by Great American Financial Resources. This will be referenced on slide 7. As in the 2005 first quarter, core net operating earnings for the 2005 second quarter were above the 2004 second quarter. This is the eighth consecutive quarter that this group's operating earnings have exceeded the comparable prior-year period.

For the first 6 months of 2005, these earnings were about 18% higher than the same period a year ago, reflecting improved results in each business lines. Statutory premiums for the 2005 second quarter were slightly below the 2004 second quarter, resulting primarily from lower sales of single premium annuities, partially offset by an increase in supplemental insurance premiums. However, statutory premiums for the first half of the year were 14% higher than in the prior year period as a result of increased sales of single premium annuities, including approximately $100 million of fixed annuities from and policyholders of an unaffiliated company in rehabilitation we chose to transfer their funds to us in the 2005 first quarter.

The supplemental insurance operations produced excellent results. Our fixed annuity operations continue to improve. This group's operating performance demonstrates the strength of its business lines and the benefit from operational improvements and cost efficiencies put into place over the last several years. We believe this group is well positioned to pursue growth opportunities both internally and through acquisitions. We are pleased that the group has continued its solid earnings growth trend.

I would like to cover a few issues that may impact the company's earnings in the latter part of this year as well as some key aspects of our strategic focus and outlook on slides 8 and 9. We announced that we completed the sale of our coal interest in Illinois generating an after-tax gain of approximately $19 million, or 25% per share. That will be recorded in the third quarter. We are also pursuing additional sales of our remainder coal interests in Ohio and Pennsylvania.

As previously indicated, the property and casualty group is undertaking a current review of its asbestos and environmental exposures, which is expected to be concluded by the end of the year. At the same time, Great American Financial Resources will conduct a review of environmental liabilities associated with its former manufacturing operations. As of June 30, 2005, the property and casualty group's A&E reserves were 326.3 million, net of reinsurance recoverables, and Great American Financial Resources reserve the liability of its former manufacturing operations with $6 million.

In the third quarter of last year, our earnings were impacted by after-tax losses of approximately $23 million or $0.30 per share, resulting from 4 hurricanes, which affected the southeastern part of the US. Based on information available at this time, we currently estimate that losses in net reinsurance from Hurricane Dennis and Emily, which will be recorded in the 2005 third quarter will be less than $1 million.

Our operations will continue to focus on specialty niche markets within the insurance industry. We continue to look for opportunities to add to our existing specialty property and casualty and annuity supplemental and life insurance business. As many of you know, last week we announced that we had entered into discussions with Farmers Alliance Mutual Insurance Company about acquiring the multi crop in Crop Insurance businesses written through Farmers Crop Insurance Alliance. This potential acquisition would provide an opportunity for us to expand one of our very profitable businesses where we have a strong market presence and significant experience and expertise.

The discussions are ongoing and we are in the process of performing our due diligence. In addition, any acquisition would be subject to completion of due diligence in appropriate regulatory approvals. We will maintain rate adequacy and continue to limit premium growth as necessary to achieve appropriate profits and expect our overall gross written premiums to be down modestly this year. We now project net premium growth to be between 8 and 10%. We expect underwriting profits of our specialty operations for the remainder of 2005 to be higher than the 2004 period, with continued strong operating underwriting performance in our California Workers' Comp and Property and Transportation businesses, as well as continuing improvement in our specialty casualty groups.

Absent adverse changes in mortality or in the stock and bond markets, our annuity supplemental life insurance operations should continue to generate higher operating earnings in 2005 compared to 2004. As a result of our stronger than expected results in through the first half of the year we have increased our core earnings guidance to be between $3.40 and $3.70 per share. That does exclude the effects of the coal sale previously mentioned. The spread in our guidance is primarily due to the variability results possible in our crop business. We will continue to monitor this guidance through the rest of the year.

I look forward to reporting our progress throughout the rest of the year. Now we'd like to open the lines for any questions. Thank you.

[Operator Instructions].

Our first question comes from the line of Abe Charles of Mac & Group (ph). Please proceed.

Congratulations, Carl on a great, great quarter. I have asked this question before, I would like to know what are actual book values including everything, like our real estate and other coal properties we might have?

Book value at the end of the quarter Abe, was $23.82 a share. When you say including the real- estate-- I'm sorry, that was the book for Great American Financial Resources. The book value for AFG is $33.12 a share. When you say including coal and real estate to the extent they have a carrying value, that would be included the $33.12 a share. Our estimate of unrealized appreciation of our real estate properties would be an additional between 148, and 216 a share, so that I would add another $2.00 to $3.00 a share to that number.

Okay. Is there any potential for increase in our dividends or stock buyback now that our debt is less than 30%?

I think that is something that as our debt to total capital against to below 28%, which is what our goal is, then that might be something we might review again. Then again, we think it is really smart to deploy capital towards transactions like the potential Farmers Mutual alliance transaction and to grow businesses that have very good returns also. I think that is something we will continue to evaluate, but the 2 key factors are the potential to deploy additional capital towards great businesses, and getting the debt to total capital under 28%.

Have we increased our guidance for next year?

We don't have any guidance out for next year at this point.

I see, some of the analysts are estimating lower than this year. Any comment on that?

I think it is premature. We haven't put any guidance out and do not plan to at this point.

Thank you very much. Congratulations again.

[Operator Instructions].

Our next question comes from the line of Sam Hoffman of Omega. Please proceed.

A couple of questions on reserves and capital. First, how much adverse development and favorable developments did you have in the quarter and then what lines did it come on?

Sam, the adverse development during the quarter was about $10 million, primarily in the specialty casualty. All the other groups had minor amounts of positive and negative, but primarily the 10 million came out of specialty.

A couple of questions on capital. How much cash did you have as a holding company at the end of the second quarter?

About $100 million.

And what is the timing for the completion of the asbestos review and potential increase in the dividend?

Let me address the asbestos review. I think Carl address the dividend increase in response to the previous question. The asbestos review has just begun. Our expectation is that it will certainly be complete by year-end. I would expect in the late third quarter, early fourth quarter.

In with the dividend increase, if it happens, happened right after that? I guess the question is really is that when you would make a decision to increase or not?

It certainly would be an opportunity to reevaluate our current dividend policy. Again, as I mentioned to Abe, the other considerations were debt to capital and where it is projected to be, and whether we continue to have opportunities to deploy capital towards greater returning businesses.

Speaking of that, how should we model the impact of the potential acquisition? How much premium could you be acquiring? What margin is there? How much capital would it consume?

It may be a little premature as we are in the middle of due diligence right now. I think is to move forward at the appropriate time, we will probably have some more details in the future about that.

Can you give us a ballpark? Are we talking like 50 million a premium or 500 million a premium? The numbers were quite large, but I was unclear if those are the actual numbers that you had actually picked up?

The Company writes half a billion dollars in gross premiums. There are other factors involved as to how much we feel that we will retain out of that. Again, as we complete due diligence and at the appropriate time, we will probably have further details on that.

It would seem to be quite a significant acquisition.

I think it is an acquisition that has great strategic value, and we view it as a meaningful opportunity. So, we would agree with that.

My last question is again excluding acquisition as that happens, if you grow premiums - net premiums, let's sat 5%, roughly, going into 2006, how much excess capital do you generate pre year if you grow in the mid single-digit pace?

I think that is something that probably would not be appropriate for us to disclose at this point, because it involves modeling and projections into the next couple of years which we have not taken position on at this time.

Okay. Even if we're talking about this year, would you say that the excess capital that you generate is roughly equivalent to net income, or is it a little bit less because you have to grow reserves? How should I think about it?

I think it would be a little bit less than net income because we are involved in refinancing some of the businesses that we currently have. When you look out into the next couple of years you'll see that there are some debt refinancing that are due, and at this point capital could be applied there as well.

Okay, terrific. Thanks.

[Operator Instructions].

We have no questions in the queue at this time. I would like to turn the presentation back over to Mr. Jensen for closing remarks.

Thank you very much, and thank you for joining us for our second quarter conference call. We look forward to reporting further developments on the things that we talked about and reporting our third quarter results. Thank you.

Ladies and gentlemen thank you for your participation in today's conference call. This does conclude today's presentation and you may now disconnect. Good day.