Form 8-K dated May 1, 2003
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported): May 1, 2003
AMERICAN FINANCIAL
GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
Ohio
|
(State or other
jurisdiction
of
incorporation)
|
|
1-13653
|
|
31-1544320
|
| (Commission File No.)
|
|
(IRS Employer
Identification No.)
|
One East Fourth
Street, Cincinnati, Ohio 45202
(Address
of principal executive offices) (Zip Code)
(513) 579-2121
(Registrant's telephone number, including area code)
TABLE OF CONTENTS
Item
7. Financial Statements and Exhibits.
Item
9. Regulation FD Disclosure (Information Furnished in this Item is Being
Furnished under Items 9 and 12).
SIGNATURE
INDEX
TO EXHIBITS
EXHIBIT 99.1
Item 7. Financial
Statements and Exhibits.
| (a) |
Financial
statements of business acquired. Not applicable. |
| (b) |
Pro forma financial information. Not applicable. |
| Exhibit No.
|
Description
|
| 99.1
|
Press releases, dated as of April 30, 2003 relating to American
Financial Group, Inc.‘s Board of
Directors and May 1, 2003,
reporting American Financial Group, Inc. fiscal first quarter results
for the period ended March 31, 2003.
|
| 99.2
|
Written transcript, including slides, of webcast held on May 1, 2003.
|
Item 9. Regulation
FD Disclosure (Information Furnished in this Item is Being Furnished Under Items 9 and
12).
In accordance
with SEC Release Nos. 33-8176 and 33-8216, the information contained in the press release
dated as of May 1, 2003 and in the related exhibit is being furnished under Item 12.
On April
30, 2003, American Financial Group, Inc. (“AFG”) reported that it proposes to
have a majority of the number of its Board of Directors independent of management. On May
1, 2003, AFG reported its fiscal first quarter results for the period ending March 31,
2003. A copy of the press releases issued by AFG on April 30, 2003 and May 1, 2003 are
furnished herewith as Exhibit 99.1 and are incorporated herein by reference.
On May 1, 2003, AFG hosted a webcast
announcing its financial results for the quarter ended March 31, 2002. A transcript of
this webcast, including copies of the slides used in the webcast presentation, is
attached as Exhibit 99.2.
The information in this report,
including the exhibits hereto, shall not be deemed to be “filed” for purposes
of Section 18 of the Securities Exchange Act of 1934, or incorporated by reference into
any filing under the Securities Act of 1933.
1
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly authorized.
|
AMERICAN FINANCIAL GROUP, INC.
|
Date: May 2, 2003
|
By:/s/Fred J. Runk
Fred J. Runk
Senior Vice President and Treasurer
|
INDEX TO EXHIBITS
| 99.1 |
Press releases, dated as of April 30, 2003 relating to American Financial Group,
Inc.‘s Board of Directors and May 1, 2003, reporting American Financial Group, Inc.
fiscal first quarter results for the period ended March 31, 2003. |
| 99.2 |
Written transcript, including slides, of webcast held on May 1, 2003. |
Exhibit 99.1
AFG PROPOSES TO
HAVE A MAJORITY OF INDEPENDENT DIRECTORS
Cincinnati,
Ohio - April 30, 2003 - American Financial Group, Inc. (“AFG”) today announced
changes to its Board of Directors to create a board that is composed of a majority of
independent directors. Keith E. Lindner, a director and Co-President of the Company since
1995, has decided not to stand for reelection at the annual shareholders meeting in June.
AFG has proposed that this position, along with a newly added board spot, be filled with
independent directors. Assuming the election of the new nominees, William A. Shutzer and
Terry S. Jacobs, AFG’s Board will have nine members, five of whom are fully
independent of management, and will be in full compliance with expected NYSE rules on
board membership.
After
serving AFG and its affiliated companies in an executive capacity for more than 20 years,
Keith E. Lindner will step down to pursue other interests. In a statement, Mr. Keith
Lindner explained, “I have been greatly blessed to have worked with my father and
brothers for so long at AFG. As a supportive shareholder to the efforts of my family and
AFG’s management team to build value for shareholders, I now also look forward to
the available time that I will have to pursue a continuation of my investment career and
continued involvement in some of the family involved Christian charitable activities.”
William
A. Shutzer has been nominated for election to the Company’s Board of Directors at this
year’s Annual Meeting. Mr. Shutzer has been a Managing Director at Lehman Bros.
since October 2000. Prior to that, Mr. Shutzer was a Partner of Thomas Weisel Partners
and an executive of Furman Selz, each investment bankers. He has been a director of
Tiffany & Co., PracticeWorks, Inc and Blount Inc. Commenting on the nomination, Carl H.
Lindner, Chairman and Chief Executive Officer, said, “We are fortunate to add to the
Board an individual with such extensive industry and financial experience and who is able
to provide a Wall Street perspective to the Company.”
Terry
S. Jacobs has also been nominated for election to the Company’s Board of Directors
at this year’s Annual Meeting. Mr. Jacobs has been Chairman of the Board, Chief
Executive Officer, Treasurer and a director of Regent Communications, Inc. since its
incorporation in 1996. Mr. Jacobs has served as a principal executive officer of various
radio broadcasting companies for over 20 years. For several years in the late 1970‘s,
Mr. Jacobs was a director and senior vice president of Great American Insurance Company.
Mr. Jacobs currently serves as a director of National Grange Mutual Insurance Company and
of Capital Title Group, Inc. “Over the past 25 years, Terry has developed great
experience as a hands-on operating executive and has stayed abreast of the developments
in the property and casualty insurance industry. He will be an exceptional addition to
AFG as it continues to focus on specialized commercial products for businesses,” Carl
H. Lindner stated.
Through the operations of Great American Insurance Group, AFG is engaged
primarily in property and casualty insurance, focusing on specialized commercial
products for businesses, and in the sale of annuities, life and supplemental
health insurance products.
Contact: Anne N. Watson
Vice President
(513) 579-6652
|
Web Site: www.GreatAmericanInsurance.com
www.amfnl.com
|
American
Financial Group Announces First Quarter Results
Cincinnati, Ohio – May 1, 2003 - American Financial Group, Inc. (NYSE: AFG)
today reported net earnings for the 2003 first quarter of $25.1 million ($.36
per share). These results include (i) an after-tax loss of $25.6 million on the
sale of 61% of Infinity Property and Casualty Corporation in a February initial
public offering, and (ii) a tax benefit of $5.5 million ($.08 per share) related
to the Company’s basis in Infinity stock. AFG’s net earnings for last year’s
first quarter were $1.4 million ($.02 per share).
Many investors and analysts focus on “core earnings” of companies, setting
aside items which are not considered to be part of the ongoing earnings of the
company. Core earnings from insurance operations, which exclude the effects of
certain items, were $43.8 million ($.63 per share) for the first quarter of
2003, within the range of analyst estimates. Such earnings include $1.4 million
of investee earnings from Infinity following the initial public offering in mid
February. Reported core earnings from insurance operations for the previous
year’s first quarter were $36.9 million ($.53 per share). The improvement was
due to significantly improved underwriting results in the property and casualty
insurance (“P&C”) operations, partially offset by lower investment income.
Details of the financial results may be found in the accompanying schedules.
On April 17, the company announced a proposal to merge with its subsidiary,
American Financial Corporation (AFC). This merger would result in the conversion
of AFC’s publicly traded preferred stock to AFG common equity. In addition, the
merger would eliminate the deferred tax liabilities associated with AFC’s
holding of AFG stock. Assuming that the proposed transaction is completed, these
changes are expected to result in a 12% to 15% increase in AFG shareholders’
equity. The company hopes to complete the merger in the third quarter of 2003.
Carl H. Lindner, AFG Chairman and Chief Executive Officer stated, “We are
pleased with the continuing positive trend in our operating results. It reflects
the effects of our ongoing rate actions and our focus on allocating capital to
those businesses with the greatest profit potential. Also, our recently
announced proposal to merge American Financial Corporation with American
Financial Group will, if approved, not only simplify our holding company
structure but it supports our commitment to further improve our financial
leverage. This transaction, when completed, will reduce our debt to capital
ratio by more than four points. We continue to be optimistic about our
opportunities in the insurance markets and remain comfortable with our
previously announced 2003 estimate of $2.50 to $2.65 in core earnings.”
Business Segment
Results
The P&C Group
generated an underwriting profit of $14.4 million in the 2003
first quarter, an improvement of $23.7 million over the same period a year ago.
The group’s combined ratio was 97.4% compared to 101.4% in the 2002 first
quarter. The group’s premiums and underwriting results included the personal
lines operations of Infinity through the date of sale in mid-February 2003. As a
result of the Infinity transaction and the recently announced completion of the
sale of AFG’s direct personal auto insurance business, the ongoing operations of
the P&C Group will consist primarily of the specialty commercial operations
managed by the Specialty Group.
The
Specialty Group reported an underwriting profit of $9.5 million for the 2003
first quarter with a combined ratio of 97.9%, an improvement of .6 points over the 2002
first quarter. The group’s underwriting results for the 2003 quarter included
approximately $5.1 million, or 1.2 points, of losses from severe weather compared to about
$2.6 million, or .7 points, in the 2002 period. The Group’s gross written premiums
for the 2003 quarter grew approximately 20% compared with the 2002 period, reflecting the
effect of continuing rate increases and volume growth in most of its businesses. The
Group’s net written premiums were about 14% higher compared to the 2002 period,
reflecting the timing impact of premiums ceded under certain reinsurance agreements. Rate
increases in the specialty operations averaged approximately 27% for the first quarter of
2003.
The Personal Group, which included Infinity’s underwriting results through
mid-February 2003, also generated an underwriting profit of $5.2 million in the
2003 first quarter. The group’s combined ratio of 95.5% improved 6.6 points
compared with the 2002 quarter, reflecting the continuing positive effects of
the rate and re-underwriting actions implemented over the last several years and
more recent expense benefits from consolidating business functions.
Carl H. Lindner III, AFG Co-President and head of the P&C Group commented:
“Our results this quarter were in line with our overall objectives for the year.
This is the sixth consecutive quarter that our Specialty Group has generated a
solid underwriting profit. The underlying business growth of our specialty
businesses remains very strong and we continue to benefit from ongoing rate
increases in the commercial markets. During this first quarter, over half of our
business units achieved gross premium growth in excess of 20 percent and
substantially all of our continuing business lines generated an underwriting
profit. I expect that the markets in which we compete will continue to
experience upward pricing momentum through 2003 and into 2004.”
Mr. Lindner continued, “In
addition, our operating results benefited from
the improvement in the personal auto business’ underwriting margins. I am also
pleased that the market seems to be recognizing the value of the Infinity
businesses. Yesterday, Infinity’s stock price closed at $21.10 per share, up 32%
since the initial public offering in mid-February.”
“Going forward, we are well positioned as a niche player in the specialty
commercial markets. I am optimistic about our ability to capitalize on the
opportunities in this market. We remain focused on maintaining pricing
discipline and further improving our underwriting margins.”
Statutory premiums of the Annuity, Life and Health insurance operations for
the 2003 first quarter were 12% higher than the 2002 period, reflecting the
addition of several new fixed annuity agents and products. The net operating
earnings of $13.6 million for the first quarter of 2003 were below the 2002
period of $17.6 million due primarily to a decline in investment income
resulting from the low interest rate environment that began during 2002. If
interest rates remain at current levels, this group’s pre-tax core earnings for
the entire year of 2003 should approximate those of 2002. An increase in
interest rates from current levels should have a positive effect on life and
annuity results. Further details may also be found in the earnings release
issued today by Great American Financial Resources, Inc. (NYSE:GFR). AFG owns
83% of GFR common stock and a proportional share of its earnings is included in
AFG results.
Through the operations of the Great American Insurance Group, AFG is
engaged primarily in property and casualty insurance, focusing on specialized
commercial products for businesses, and in the sale of retirement annuities,
life and supplemental health insurance products.
Forward Looking
Statements
This press release contains certain statements that may be deemed to be
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements in this press release not dealing with historical results are
forward-looking and are based on estimates, assumptions and projections.
Examples of such forward looking statements include statements relating to: the
Company’s expectations concerning market and other conditions, future premiums,
revenues, earnings and investment activities; expected losses and the adequacy
of reserves for asbestos, environmental pollution and mass tort claims; rate
increases, improved loss experience and expected expense savings resulting from
other recent initiatives.
Actual results could differ materially from those expected by AFG depending
on certain factors including but not limited to: the unpredictability of
possible future litigation if certain settlements do not become effective,
changes in economic conditions including interest rates, performance of
securities markets, and the availability of capital, regulatory actions, changes
in legal environment, judicial decisions and rulings, tax law changes, levels of
catastrophes and other major losses, the actual amount of liabilities associated
with certain asbestos and environmental related insurance claims, adequacy of
loss reserves, availability of reinsurance and ability of reinsurers to pay
their obligations, competitive pressures, including the ability to obtain rate
increases, driving patterns and other changes in market conditions that could
affect AFG’s insurance operations.
Conference Call
The company will hold a conference call to discuss 2003 first quarter
results at 11:00 a.m. (ET) today. Toll-free telephone access will be available
by dialing 1-800-810-0924. Please dial in 5 to 10 minutes prior to the scheduled
start time of the call. A replay of the call will also be available at around
2:00 p.m. (ET) today until 8:00 p.m. on May 8, 2003. To listen to the replay,
dial 1-888-203-1112 and provide the confirmation code 292634. The conference
call will also be broadcast over the Internet. To listen to the call via the
Internet, go to AFG’s website, www.amfnl.com, and follow the instructions at the
Webcast link.
Contact: Anne N. Watson
Vice President-Investor Relations
(513) 579-6652
|
Web Sites: www.amfnl.com
www.GreatAmericanInsurance.com
|
(Financial summaries
follow)
This earnings release and additional Financial Supplements are
available at AFG’s web site: www.amfnl.com.
AMERICAN FINANCIAL
GROUP, INC. AND SUBSIDIARIES
SUMMARY OF EARNINGS
(In Millions,
Except Per Share Data)
| |
Three months ended
March 31,
|
| |
2003
|
2002
|
| Operating revenues |
|
|
$ | 876.2 |
|
$ | 942.9 |
|
| Costs and expenses | | |
| 811.4 |
|
| 885.1 |
|
|
| |
| |
| | | |
| 64.8 |
|
| 57.8 |
|
| Related income taxes | | |
| 22.4 |
|
| 20.9 |
|
|
| |
| |
| Earnings from consolidated insurance operations | | |
| 42.4 |
|
| 36.9 |
|
| Net investee earnings from Infinity | | |
| 1.4 |
|
| -- |
|
|
| |
| |
| Core earnings from insurance operations | | |
| 43.8 |
|
| 36.9 |
|
| Other items, net of tax: | | |
| Special tax benefits (1) | | |
| 5.5 |
|
| 16.0 |
|
| Realized investment gains (losses) | | |
| (23.3 |
) |
| (8.4 |
) |
| Net losses from non-insurance investees | | |
| (.9 |
) |
| (2.7 |
) |
| Cumulative effect of accounting change(2) | | |
| -- |
|
| (40.4 |
) |
|
| |
| |
| Net earnings | | |
$ | 25.1 |
|
$ | 1.4 |
|
|
| |
| |
| Diluted Earnings (Loss) per Common Share: | | |
| Core from insurance operations | | |
$ | .63 |
|
$ | .53 |
|
| Special tax benefits (1) | | |
| .08 |
|
| .24 |
|
| Realized investment gains (losses) | | |
| (.34 |
) |
| (.12 |
) |
| Non-insurance investees | | |
| (.01 |
) |
| (.04 |
) |
| Cumulative effect of accounting change(2) | | |
| -- |
|
| (.59 |
) |
|
| |
| |
| Net earnings | | |
$ | .36 |
|
$ | .02 |
|
|
| |
| |
| Average number of Diluted Shares | | |
| 69.4 |
|
| 69.0 |
|
| (1) |
Reflects tax benefits in the 2003 period relating to the Company’s
basis in Infinity Stock and a tax benefit in the 2002 period
for the reversal of previously accrued amounts due to the resolution
of certain tax matters. |
| (2) |
Reflects the 2002 implementation of Statement of Financial Accounting
Standards No. 142 relating to the transitional goodwill
impairment test. |
AMERICAN FINANCIAL
GROUP, INC.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
UNDERWRITING
RESULTS BY BUSINESS SEGMENT
(In Millions)
| |
Three months ended
March 31,
|
|
2003
|
2002
|
| Property and Casualty Insurance |
|
|
| |
|
| |
|
| Operations: | | |
| Gross written premiums | | |
$ | 858 |
|
$ | 911 |
|
|
| |
| |
| Net written premiums | | |
$ | 557 |
|
$ | 643 |
|
|
| |
| |
| Ratios (GAAP): | | |
| Loss & LAE ratio | | |
| 68.6 |
% |
| 73.3 |
% |
| Expense ratio | | |
| 28.7 |
% |
| 27.8 |
% |
| Policyholder dividend ratio | | |
| .1 |
% |
| .3 |
% |
|
| |
| |
| Combined Ratio (a) | | |
| 97.4 |
% |
| 101.4 |
% |
|
| |
| |
| Business Segment Data: | | |
| Specialty: | | |
| Gross written premiums | | |
| 677 |
|
$ | 563 |
|
|
| |
| |
| Net written premiums | | |
| 439 |
|
$ | 387 |
|
|
| |
| |
| Ratios (GAAP): | | |
| Loss & LAE ratio | | |
| 64.9 |
% |
| 66.8 |
% |
| Expense ratio | | |
| 32.8 |
% |
| 31.1 |
% |
| Policyholder dividend ratio | | |
| 0.2 |
% |
| .6 |
% |
|
| |
| |
| Combined Ratio | | |
| 97.9 |
% |
| 98.5 |
% |
|
| |
| |
| Personal:(b) | | |
| Gross written premiums | | |
| 181 |
|
$ | 347 |
|
|
| |
| |
| Net written premiums | | |
| 118 |
|
$ | 256 |
|
|
| |
| |
| Ratios (GAAP): | | |
| Loss & LAE ratio | | |
| 82.0 |
% |
| 79.0 |
% |
| Expense ratio | | |
| 13.5 |
% |
| 23.1 |
% |
|
| |
| |
| Combined Ratio | | |
| 95.5 |
% |
| 102.1 |
% |
|
| |
| |
Loss & LAE and Expense ratio
comparisons were impacted by the automobile physical damage reinsurance agreement. The
following excludes the effect of this agreement:
| Loss & LAE ratio |
|
76.2 |
% |
76.8 |
% |
| Expense ratio | |
20.1 |
% |
24.9 |
% |
|
| |
| |
| Combined Ratio | |
96.3 |
% |
101.7 |
% |
|
| |
| |
(a)
Includes other discontinued lines.
(b)
Includes Infinity Property and Casualty results through mid-February 2003.
Exhibit 99.1
AMERICAN FINANCIAL
GROUP
Moderator: Keith Jensen
May 1, 2003
10:00 a.m. CT
| Operator: |
Good
day, everyone. And welcome to the American Financial Group's earnings results conference
call. Today's call is being recorded. |
| |
With us
today, we have Carl H. Lindner, III, Co-President of American Financial Group, Craig
Lindner, Co-President of American Financial Group, and Keith Jensen, Senior Vice
President of American Financial Group. |
| |
At this
time for opening remarks and introductions, I’d like to turn the call over to Mr.
Keith Jensen. Please go ahead, sir. |
| Keith Jensen: |
Thank you. Good morning and welcome to the American Financial Group 2003 first
quarter earnings results conference call. If you are viewing
the webcast on our web site, you can follow along with the slide
presentation if you like. |
| |
Certain statements
may be made during the course of this call that may be considered forward-forward-looking
statements and are based on estimates, assumptions and projections, which management
believes are reasonable but by their nature, inherently uncertain. The Private Securities
Litigation Reform Act of 1959 provides a safe harbor forward-looking statements. Examples
of such forward-looking statements include statements relating to the company’s
expectations concerning market and other conditions, future premiums, revenues, earnings
and investment activities, expected losses and the adequacy of reserves for asbestos and
environmental pollution and mass tort claims, rate increase, improved loss experience and
expected expense savings resulting from other recent initiatives. |
| |
Actual results
could differ materially from those contained in or implied by such forward-
forward-looking statements for a variety of factors, including, but not limited to, the
un unpredictability of possible future litigation related to a pending asbestos
settlement, changes in economic conditions, including interest rates, performance of
securities markets and availability of capital, regulatory actions, changes in the legal
environment environment; judicial decisions and rulings; tax law changes; levels of
catastrophes and other majors losses; the actual amount of liabilities associated with
certain asbestos and environmental-related insurance claims, adequacy of loss reserves,
availability of reinsurance and the ability of reinsurers to pay their obligations,
competitive pressures including the ability to obtain rate increases, driving patterns
and other changes in market conditions that could affect AFGs insured operations. |
| |
That said,
I’d like to highlight just a couple of recent announcements that we’ve made. On
April 17, we announced a proposed merger of American Financial Group with our wholly
owned subsidiary, American Financial Corporation. This merger will streamline our
organization structure and combines two tax consolidation groups. It will strengthen our
balance sheet and Carl will comment on that later. |
| |
In addition,
yesterday we announced a change in American Financial Group’s Board of Directors.
Keith Lindner announced that he will no longer serve as a Director and Co-President of
the company and he is being replaced on the board by two outside directors, Bill Shutzer,
a Managing Director at Lehman Brothers and Terry Jacobs, the CEO of Regent
Communications. |
| |
The result
of these changes will be that the majority of our board will be composed of independent
directors. Our operating management, however, will remain unchanged. Carl Lindner III
will continue to serve as the head of Property and casualty businesses and Craig Lindner
as head of the life and annuity businesses. Over time, we’ll continue to streamline
the company and focus on corporate governance issues of this type. It’s now my
pleasure to introduce Carl Lindner III, Co-President of American Financial Group to
discuss first quarter results. |
| Carl H.
Lindner III: |
Good morning. Thank you for joining us. We released our 2003 first quarter
results earlier this morning. I’d like to make a few initial remarks and then we’ll
open the lines for questions. We’ve demonstrated consistent improvement in our core
earnings from insurance operation over the past couple of years. And I’m pleased
with the overall results in the first quarter, which follow our increasing earnings
pattern over the past several quarters. These positive results are consistent with our
previously discussed expectations that are in line with our objectives for 2003. |
| |
Let me
touch on first quarter highlights. Our first quarter core earnings operating results were
$.63 cents per share, in line with the range of analyst estimates and significantly
higher than last year’s first quarter results. Our net earnings of 36 cents per
share include an after-tax charge of 37 cents per share, from the loss on the Infinity
public offering, partly offset by a tax benefit of eight cents per share related to the
company’s basis in Infinity. Even though we were disappointed with the initial
offering price of Infinity, it’s gratifying to see that the market seems to be
recognizing the value of the Infinity businesses. It’s stock price closed at $21.10
yesterday, up about 32 percent since the IPO in mid-February. |
| |
Also last
week, we announced the completion of the sale of our Direct Personal Auto Business. In
the first quarter, our Property and Casualty Group achieved a solid underwriting profit
with a combined ratio of 97.4, an improvement of four points and nearly $24 million over
last year’s first quarter. |
| |
First quarter
premiums and underwriting results included Infinity’s personal lines operations, up
until the IPO in mid-February. |
| |
Since our
ongoing Property and Casualties operations will be focused on specialty commercial
products and services for businesses, discussion of the specialty groups operations feels
most meaningful. So what’s — so we want to talk about Special Group. Specialty
group reported a solid underwriting profit for the 6th consecutive quarter with a
combined ratio of 97.9. This was over a half point improvement compared to the 2002 first
quarter and a little better than the 2002 fourth quarter. The 2003 quarter was impacted
by just over half a point or about $2.5 million of higher losses from severe weather, as
compared to a year ago. |
| |
Most of
our continuing lines of businesses generated an under underwriting profit during the
quarter. The underlying business growth of our specialty businesses remains strong and we
continue to benefit from ongoing rate increases in the commercial markets. Specialty
Groups, gross written premiums grew about 20 percent in the 2003 quarter over the ‘02
quarter. |
| |
Over half
of our business units achieved gross written premium growth in excess of 20 percent. We
saw a particularly strong growth in our Excess and Surplus Lines business, our D&O
business,our Agribusiness, our Mid-continent Casualty and Great American Custom subs and
the Surety and (Fidelity) businesses. |
| |
And we’re
also optimistic about the profitable growth opportunities in our California Workers Comp.
business. Rate increases in the first quarter averaged approximately 27 percent. We
continue to utilize reinsurance arrangements that we believe are priced properly as an
efficient use of capital, as well as to cushion our risk exposure. |
| |
The Specialty
Groups net written premiums for the 2003 quarter were about 14 percent higher than the
prior year’s first quarter, reflecting increased sessions of premium in the 2003
quarter. Rate momentum in our Specialty businesses is continuing and we believe it will
continue into ‘03 and into 04 and we’ll continue to have good growth
opportunities for the foreseeable future. |
| |
Let me
just touch on the Personal Group combined ratio. Personal Group achieved an underwriting
profit in the first quarter of ‘03 with a combined ratio of 95.5, 6.6 point
improvement over a year ago. These results included Infinity’s operations through
mid- mid-February and reflect the rate and re-underwriting actions that has have been
taken over last several years, as well as their more recent expense reductions from
consolidating business functions. Infinity held their first earnings conference call
yesterday morning. If you weren’t able to hear it, replay is available at Infinity’s
web site. |
| |
Let’s
move on to the first quarter highlights in the Annuities, Life and Health Group. Turning
to this group, our statutory premiums for the first quarter were up 12 percent over the
‘02 first quarter, primarily due to the addition of several new fixed annuity agents
and products. Pretax operating earnings for the ‘03 first quarter where lower than
‘02, primarily due to lower investment income, reflecting the lower interest rate
environment. If interest rates remain at current levels, we expect this group’s
pretax core earnings for the entire year of ‘03 to approximate those of ‘02. An
increase in interest rates from current levels should have a positive effect on the life
and annuity results. |
| |
Let me
talk a little bit about the merger of American Financial Corporation and American
Financial Group. We’ve previously announced this merger, which will simplify our
corporate structure. We exchanged our AFC preferred stock for AFG common, and would
eliminate deferred taxes associated with the AFG holding of AFC. Completion is subject to
the negotiation of specific terms, approval of the board of directors of each company,
and receipt of American Financial Corp. shareholders’ approval. |
| |
We hope
to complete the merger in the third quarter of this year. It will result in a 12 to 15
percent increase in shareholders equity and will decrease our debt to capital ratio by
more than four points. This is consistent with our objective to improve the company’s
financial leverage. |
| |
In summary,
and looking forward, we continue to be very pleased with the operating results of our
Specialty operations. We have a solid management team in place running our various
business lines with strong expertise and a variety of niche markets. We have very solid
market positions in many of our business lines, and I’m optimistic about our ongoing
prospects for continuing growth and profitability. We continue to expect meaningful price
increases in the commercial markets, and we’re going to continue to target average
rate increases of 25 percent for ‘03. We’ll continue to focus on cost
reductions and our annuity and life businesses and on improving their operating earnings.
Based on our results in this first quarter and our view of the remaining quarters, we
remain comfortable with our core earnings guidance of $2.50 to $2.65 per share. I look
forward to reporting our progress for the remainder of year. Thanks. |
| |
And we’d
like to open the lines up for questions. |
| Operator: |
Thank
you. The question and answer session will be conducted electronically. If you would like
to ask a question, please do so by pressing the star key followed by the digit one on
your touch-tone telephone. If you are using a speaker phone phone, please make sure your
mute function is turned off to allow your signal to reach our equipment. That’s star
one if you would like to ask your question and we’ll pause just for a moment. |
| |
We’ll
take our first question from Jay Cohen with Merrill Lynch. |
| Jay Cohen: |
Good morning, everyone everybody. |
| Jay Cohen: |
I
have three questions. Let me start with the easiest. Book value per share at the end of
the quarter. Do you know where that was? |
| Keith Jensen: |
$24.81,
Jay. |
| Jay Cohen: |
$24.81
- -- that's on a reported basis? |
| Jay Cohen: |
Second
question, probably also a quick one, the merger that should take place maybe two separate
questions related to it. First, any charges related to it that will occur, and then
secondly, have you been in discussion with the rating agencies about this merger and have
they given you any feedback on it? |
| Keith Jensen: |
There are no charges in connection with the merger, other than the charges that will be
associated with a special committee that’s working on the valuation of the AFC
preferred shares. That’ll be pretty nominal in relation to the transaction as a
whole. |
| Keith Jensen: |
We have had discussions with some but not all of the rating agencies yet. We will
complete that process today and to date it has been favorable. Each of the rating
agencies have expressed interest or concern over time about the issue of financial
leverage, and they obviously are pleased to see the leverage going down significantly. |
| Jay Cohen: |
Great.
And the last question, if you could update us on what the mix
of business looks like within the Specialty business. |
| Keith Jensen: |
Sure.
When we look at the mix, it's primarily consistent with where we've been in the past.
It is the largest line of business that we have is our Excess
and Surplus. That'll be about 18 percent of the business.
That's been a rapidly growing area of business. Our second largest is California
Workers Comp. at about 14 percent. Inland and Ocean Marine,
about 13 percent, and then we go down into a variety of
things, each less than 10 percent of the business, but we have
the same types of business that we have had traditionally.
There has really not been any substantial change since our last reporting. |
| Jay Cohen: |
Great.
Thanks a lot. |
| Operator: |
We'll
take our next question from Charles Gates with Credit Suisse First Boston. |
| Charles Gates: |
Hey,
congratulations on a great quarter. Three questions. Question number one, could one of
you elaborate on the trends that you see in the California
workers compensation business? |
| Carl H.
Lindner III: |
Sure. Sure, this is Carl. We like the California Workers Comp. outlook
today. We feel that our Republic Indemnity subsidiary has one of the best management
teams in that business. We see great opportunities. We’ve made solid underwriting
profits in ‘02 and in the first quarter of ‘03. We’re beginning to take
advantage of the opportunities. For the first time. Our premiums grew in the first
quarter some 13 percent. Our new business EAP is up about 83 percent in the quarter.
Frankly,
we could write probably about as much business as we want, but we’re, you know,
picking and choosing what we think are best opportunities and we want to continue to
improve our margins and keep looking. But we’re very excited about, you know, the
growth opportunities there, and we’re beginning to take advantage of them. The rate
increase — what’s really interesting, Charlie, is after three years of double
digit rate increases in this market, the rate increase momentum is actually increasing.
We
achieved in excess of 30 percent in price increase in the first quarter of ‘03, and
those are higher levels than what we were achieving last year. So, with the state funds in
check, with their premiums being forced down, commissions up, and pricing up, we just
heard recently that (Everest Reid) who has no reinsurance on their workers comp business
has decide decided that they are going to cap their business at a half billion dollars.
Again, this is — I’m getting it secondhand. We’re trying to check it out
and see if its right. And company like Cypress and a few others who have gotten more
conservative. So we like the market dynamics we had — we renewed our excess cover in
the first quarter, and we got ((inaudible)) terrorism included in our 90 excess of 10, so
we’re last year we didn’t have terrorism (coverage), this year, we do. We think
that’s a good development.
We
still see claims costs, particularly medical costs, still going up double digit plus. We
still feel there’s a need for reform in the state, or employers there are going to
continue to see, you know, those continued types of increases. And, you know, we’re
watching the impact of the benefit bill closely, but we’ve been pricing very
aggressively and so far, we just haven’t seen, you know, much impact in that.
Our
indemnity severity increased about seven percent last year and, you know continues in
around that area. The medical severity, as I mentioned, continues at a double digit pace
in that, and frequency is kind of in a stable type of mode today. So, we’re very
excited with our opportunities and the outlook for California comp. |
| Charles Gates: |
Could you extend or talk about the dynamics of your Excess and Surplus lines business?
Roughly what portion of the sales does E & S currently represent and then could you
speak to what you see there? |
| Carl H. Lindner III: |
Yes, Charlie. Roughly 18 percent, which today it is the largest segment of
business. We — again, I think we have one of the best management teams in place in
the business. They know how — they’ve been through two other previous tight
markets market scenarios, cycles, so they know what they are doing. There is good growth
opportunities, good profit opportunities right now. The business is doing very well, and
the true E & S part of the business really began to climb last year and that
continues. So, we’re very excited about our prospects for that part of the business. |
| Charles Gates: |
Thank you. The only other question, the book value number that Keith provided, that
excludes basically the off-balance sheet real estate asset… |
| Keith Jensen: |
Correct,
it does. It does include, however, about $300 million of unrealized gains that are in
shareholder's equity related to the portfolio. |
| Charles Gates: |
The $300 million is pretax?
|
| Keith Jensen: |
That’s after tax. |
| Operator: |
We'll
take our next question from Arthur Winston with Pilot Advisors. |
| Arthur Winston: |
I
wanted to, as a shareholder, thank you for the changes in corporate governance. They are
very good for the public shareholders. My first -- I have two
questions.
My
first question is, could you describe, if you can, quantify, it might be tough, the
capital positions of each of your two main businesses, and their ability to upstream money
to the holding company to pay the dividend to the shareholders and also to pay, you know,
the interest and finance the debt? |
| Keith Jensen: |
Sure. If I start with the Great American Insurance, which is the Property and Casualties
holding company that — not holding company, but insurance company, which also holds
our interest in Great American Financial Resources, there is about $1.5 billion of
capital. We are managing that to a capital adequacy target of about 142 percent of the
Standard & Poor’s cap adequacy model.
Our
expectation this year, Arthur, is actually with the growth opportunities that we will not
be upstreaming dividends, but rather that we will be adding marginally to the capital of
that business. We’ve done that through the proceeds through the Infinity sale and
also through the contribution of the Infinity note that we hold. That’s a business
that — it has a strong capital position from a regulatory perspective, but it’s
not our intent to up upstream dividends. If you look at our Life and Annuity business,
Great American life has about $500 million of capital and surplus and is in a position
where it could upstream about $70 million of dividends without regulatory approval, but
like the other businesses, we expect that we will maintain the capital in that business by
and large, to support the continuing growth of the business. |
| Arthur Winston: |
Is
the 140 percent including a double decker of the Great American in that to make it more
favorable? Or is that possible? |
| Keith Jensen: |
Help me understand … |
| Arthur Winston: |
In
other words to, get to the 140 percent, which you said was 140 percent more than the
adequacy that the commissioners need or want, does that include putting in the annuity
company as part of the capital? |
| Keith Jensen: |
OK,
I understand the question. First of all, the 140 percent is not a regulatory requirement.
That’s in excess of the Standard & Poor’s cap adequacy model which is far
more constricted than the regulatory requirement. We are a multiple of, I think three to
3.5 times the minimum regulatory requirement. When we calculate the capital effect of the
holding of Great American financial resource, that gets a severe haircut in the Standard
& Poor’s model so there is about 107 million of capital provided in excess of
the cap and surplus of GAFRI but not the full value from a marked perspective. |
| Arthur Winston: |
OK.
And right now, the Annuity company, it's not growing fast enough to really chew up
capital, it's sort of financing itself as we speak? |
| Carl H.
Lindner III: |
That is correct. |
| Arthur Winston: |
And
my last question is, why some of these corporate governance moves which are very good,
why in the year 2003 as to opposed in the past or in the
future? |
| Keith Jensen: |
Well
— I think — we think they are positive moves for the company for shareholders.
I think with some of the things that are in front of the New York Stock Exchange, we
figure we would be more proactive rather than, you know, wait for those changes in that,
and we’re very interested in increasing shareholder value. So naturally, we want to
do, you know, move in a direction and take actions that will do that. |
| Arthur Winston: |
Thank you very much. |
| Operator: |
We'll
take our next question from Bob Maton with Schneider Capital. |
| Bob Matson: |
Good
morning. I have a couple of questions on the Specialty lines. I was just wondering if you
could talk about whether there was any prior accident year development in the quarter and
kind of where the accident year was and then what the outlook is for reserve development
for the course of the year. |
| Keith Jensen: |
Sure,
Rob, I’ll do that. We did have some development during the quarter. It was primarily
focused in our Home Builders business that we have been in the process of exiting for the
last year and a half. We had a marginal amount in our D & O and in our Lender
Services services. It was probably in the range of about $12 million.
If
you look at our accident year combined ratio, that accident year combined ratio for the
Specialty business is in the low 90s. So, the spread between those two is obviously a
result of the prior year development as well as I think we’ve disclosed that we had
cap losses of $5 million in the first quarter. |
| Bob Maton: |
OK.
And then also on the Specialty lines, the expense ratio was up a little bit
year-over-year. Was there anything unusual in the quarter
or... |
| Keith Jensen: |
Yes,
I think what begins to happen is post Infinity, the expense ratio, will look like the
Specialty business overall in the company, but there is some overhead that the company
has with less premium per the Infinity IPO, that (we) think temporarily may push it up
some, but with the growth in the Specialty premium projected as it is, and with us
looking to also adjust back our expenses, we don’t think that’s a big issue
going forward. |
| Bob Maton: |
OK.
And then my last one is just, we can maybe do this off line or in the queue or whatever,
but I think with that month and a half of Infinity that’s included, there is pieces
of that and several of the other line items in the income statement, other than
underwriting profit which you have broken out. Is that something that you could help us
with the pieces on, so that we can kind of get a better run rate going forward? |
| Keith Jensen: |
Yes.
I think if you look at Infinity, one of the sources that you would have obviously is they
have issued their financial statements yesterday or issued their press release yesterday.
We had a half of a quarter. That result, if you go down be below underwriting, which you
do have, that was about seven to 7.5 million of investment income effect. And then there
was about — I think beyond that, we’d probably need to do some disclosure in
our Q. But if you take the 7.5 million of investment income, that would be the other big
piece. |
| Bob Maton: |
OK.
And then just one more detail on the Infinity equity earnings piece, what would be the
tax rate, if we're just taking the Infinity numbers and
applying your percentage. Would you have an additional layer of
tax there or... |
| Keith Jensen: |
We
would have an additional layer of tax at a 35 percent rate. |
| Bob Maton: |
OK.
OK. Thanks. |
| Operator: |
We'll
take our next question from Abe Schloss with Maxim Group. |
| Ab Schloss: |
Good
morning; if you include real estate, what would book value be approximately? |
| Keith Jensen: |
Book
value would increase by about $2.75 to $3. |
| Ab Schloss: |
On that basis, with the merger of the subsidiary AFC — the book value would
increase 15 percent approximately? Could you give us an approximate book value figure
after that merger takes place? |
| Keith Jensen: |
Jensen: Let me do it excluding the real estate piece that I just described, if you add the
effect of the merger of AFC and AFG, you would be in a $2.25 to $2.75 range of increased book
value. |
| Ab Schloss: |
Aside
from the real estate? |
| Keith Jensen: |
Aside
from the real estate. |
| Ab Schloss: |
OK.
One other question. In view of the fact that our stock is selling below book value at
less than nine times current earnings with a solid balance
sheet, asbestos claims largely out of the way, and with the
reduced debt, why doesn't the company buy back its own shares? |
| Keith Jensen: |
I
think it’s a practical matter, we’re in a position where — with rating
agencies, regulators and the public markets, we’ve made commitments as to our degree
of leverage, and we need to maintain capital in the businesses to take advantage of the
markets that are available to us right now, so buying back shares would cause us to
violate those leverage ratios that are part of what our commitment has been in relation
to the ratings we hold. |
| Ab Schloss: |
Well,
it's a great buy. I think the stock is a great buy buy, but thank you very much. |
| Operator: |
Once
again, you had if you would like to ask a question, press star one on the touch-tone
phone. We'll take a follow-up with Jay Cohen from Merrill
Lynch. |
| Jay Cohen: |
Just
to clarify a couple of answers. When you mention the mentioned the real estate, I assume
you mean extra value, hidden value in the real estate if it
was mark to market? |
| Keith Jensen: |
That's
right, Jay. We've got hotels and apartment buildings cash flow off of those of about $25
million a year. Depending on what multiple you want to use,
we figure those would be in the $80 million to $100 million
unrecognized.
And,
in addition to that, we have some non-producing real estate, the largest of which our
Grand Central Station air rights, were we think there is probably another $85 to 3$90
million. So in the range of $170 to maybe $200 million of unrecognized and unrecorded
gains. That’s where we’re coming from on that. |
| Jay Cohen: |
OK.
And with the merger, the numbers you gave, the $2.25 to $2.75, I assume you mean in millions
of dollars? |
| Keith Jensen: |
Jensen: No. That was in per share. The millions of dollars would be in the 210, 260 range
of an increase in equity. The reason that doesn’t translate directly into earnings
per share, you need to remember that part of, it about $70 million would be the conversion
of the AFC preferred stock into AFG equity where there would be in fact, additional shares
issued of AFG equity. |
| Jay Cohen: |
So with the additional equity you get in, and even with the additional shares that will
be converted, you’re saying on a per share basis, book value should go up by $2.25,
to $2.75 per share. |
| Keith Jensen: |
Correct.
That's what we're saying. |
| Jay Cohen: |
OK.
Thanks a lot. |
| Operator: |
It
appears there are no further questions at this time. I'd like to turn the call back over
to you for any additional or closing remarks. |
| Keith Jensen: |
Thank
you very much. We appreciate your interest and your questions and look forward reporting
to you at the end of the second quarter. |
| Operator: |
Once
again, that does conclude today's conference. We thank you for your participation. You
may disconnect at this time. |
END
