American Financial Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

American Financial Group, Inc. (

AFG

)

Q4 2011 Earnings Call

February 2, 2012, 11:30 a.m. ET

Executives

Keith Jensen – SVP

Carl Henry Lindner – Co-President and Co-CEO

Craig Lindner – Co-CEO

Analysts

Ryan Burns – Macquarie

Jeffrey Cohen – BofA/Merrill Lynch

Rob Bothman – Capital Returns

Matthew Rohrmann – Keefe Bruyette & Woods

Presentation

Operator

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Good morning. My name is Tina and I will be your conference operator today. At this time, I would like to welcome everyone to the American Financial Group 2011 Fourth Quarter and full-year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Keith Jensen, you may begin.

Keith Jensen

Thank you. Good morning, and welcome to American Financial Group’s 2011 year-end earnings conference call. I’m joined this morning by Carl Lindner III, and Craig Lindner, Co-CEOs of American Financial Group. If you’re viewing the webcast from our website, you can follow along with the slide presentation if you’d 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, which could cause actual results and/or financial condition 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 reports 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.

Core net operating earnings is a non-GAAP financial measure, which sets aside significant items that are generally not considered part of ongoing operations. These include net realized gains or losses on investments, the effect of accounting changes, discontinued operations, significant asbestos and environmental charges, and certain other non-recurring items.

AFG believes this non-GAAP measure to be a useful for analysts and investors analyzing the ongoing operating trends, and will be discussed for various periods during this call. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

Now, I’m pleased to turn the call over to Carl Lindner III, to discuss our results.

Carl Henry Lindner

Good morning, and thank you, for joining us. We released our 2011 fourth quarter and full-year results yesterday afternoon. Despite a challenging year for the entire insurance industry, Craig and I are pleased to finish the year with solid profitability.

Core net operating earnings for the fourth quarter were up $0.03 a share from the comparable 2010 period. Full-year Core net operating earnings per share were $3.53 per share in line with our guidance. With estimated insured catastrophe losses for the industry, toping $100 billion, we’re pleased that our catastrophe losses were only 2 points in our combined ratio for the year, and actually were lower than CAT losses recorded in 2010.

In addition, we acknowledge the impact that the continued low interest rate environment has had across all of our businesses. At the very least, these economic conditions, plus the continued global economy uncertainty, require that our underwriting and product pricing continue to be highly focused.

We thank God and our talented management team and employees for a successful year and for the financial strength that positions us to take advantage of opportunities going forward.

I am assuming all participants on today’s call reviewed our earnings release and supplemental materials posted on the website. I’ll review a few highlights and focus today’s discussion on key issues. I’ll also briefly discuss our outlook for 2012.

Let’s start by looking at our 2011 results, summarized on slides three through five of the webcast. Net earnings per share were $1.10 for the quarter, including realized gains of $0.32 and a noncore charge of $0.28, representing a valuation allowance on deferred tax assets associated with losses in our Lloyd Syndicate.

Full-year earnings per share were $3.33, realized gains were $0.45 per share included gains from sales of a portion of a remaining interest in the risk analytics during the year.

Core net operating earnings for the fourth quarter were $106 million or $1.06 per share compared to the prior year’s results of $111 million or $1.03 per share. Core net operating earnings per share for the year were 10% less than our 2010 results.

Lower underwriting profit, lower investment income, in specialty property, casualty operations, partially offset by increased earnings in our Annuity and Supplemental operations, and the effect of our share repurchases.

Core operating return on equity for 2011 was approximately 9%. Annualized average return on equity on a comparable basis over a five-year period was approximately 13%.

Now one of our important strategic objectives is to deploy our access capital in a way that enhances shareholder value. We repurchased 9.3 million shares of our common stock during 2011 at an average price of $33.93 per share, or approximately 90% of year-end 2011 tangible book value per share.

During the year, we’ve returned capital to shareholders through $316 million in share repurchases and $68 million in dividends. We feel this remains an effective means of increasing shareholder values.

As of February 1, 2012, there are approximately 3 million shares remaining under our repurchase authorization. Management intends to recommend an increase in this authorization at the next board meeting. In addition to share repurchases and dividends, we continue to seek other alternatives for the deployment of our capital. We’ll invest excess capital and healthy profitable organic growth, by introducing new products and services. We’re also always looking for opportunities to expand our specialty niche businesses through startups or acquisitions where it makes sense.

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