American Financial Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

American Financial Group Inc. (AFG)

Q1 2012 Earnings Call

May 1, 2012 11:30 am ET

Executives

Diane Weidner - AVP, IR

Carl Lindner III - Co-Chief Executive Officer/President and Director

Craig Lindner - Co-Chief Executive Officer/President and Director

Analysts

Matthew Rohrmann - KBW

Ryan Byrnes - Macquarie

Jay Cohen - Bank of America-Merrill Lynch

Presentation

Operator

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 2012 first quarter 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.

Ms. Weidner, you may begin your conference.

Diane Weidner

Good morning and welcome to American Financial Group’s first quarter 2012 earnings results conference call. I’m joined this morning by Carl Lindner III, and Craig Lindner, Co-CEOs of American Financial Group. If you’re viewing a webcast from our website, you can follow along with the slide presentation if you 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 are subject to risks and uncertainties. The factors which could cause actual results and/or financial conditions 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 to be part of ongoing operations such as net realized gains or losses on investments; effects of certain accounting changes; discontinued operations; significant asbestos and environmental charges; and certain non-recurring items.

AFG believes this non-GAAP measure to be a useful tool for analysts and investors in analyzing 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 Lindner III

Good morning, and thank you, for joining us. We released our 2012 first quarter results yesterday afternoon and are pleased with another quarter of strong operating earnings in our Specialty Property and Casualty and Annuity and Supplemental businesses. I am assuming that the participants on today's call reviewed our earnings release and the supplemental materials posted on our website.

I am going to review a few highlights and focus today's discussion on key issues. I will also briefly discuss our outlook for 2012. Let's start by looking at our first quarter results summarized on slide three and four of the webcast.

Prior year financials result have been adjusted to reflect the impact of the adoption of a new FASB standard regarding the accounting for costs associated with acquiring insurance contracts. This resulted in a reduction in AFG’s December 31, 2011 shareholders equity of approximately a $134 million which is about 3%.

Net earnings were a $1.14 per share for the quarter including realized gains of $0.28 per share primarily from the sale of a portion of our remaining interest in Verisk Analytics. Core net operating earnings for the quarter were $85 million or $0.86 per share compared to the prior year's result of $91 million or $0.85 per share.

Our profit in our Annuity and Supplemental Group was more than offset by lower underwriting profit in our Specialty Property and Casualty operations and lower Property and Casualty investment income. Both periods reflect the affect of share repurchases. Our annualized core operating return on equity was approximately 9%.

We have continued to deploy our excess capital in ways to enhance shareholder value. We repurchased a 1.5 million shares of our common stock during the first quarter at an average price of $37.91 per share or approximately 95% at March 31, 2012 book value per share. As of April 30, 2012, there are approximately 6.5 million shares remaining under our repurchase authorization.

In addition to share repurchases and dividends we continue to seek other alternatives for deployment with excess capital. We have invested excess capital when we see potential for healthy profitable organic growth and by introducing new products and services. And we are always looking for opportunities to expand our Specialty niche business through start ups or acquisitions, where it made sense.

As you will see on slide 4, AFG’s book value per share excluding appropriated retained earnings and unrealized gains and losses on fixed maturities increased 4% during the quarter to $40.07. Tangible book value on a comparable basis was $37.69 at March 31, 2012.

Our capital adequacy, financial condition and liquidity remained strong and are key areas of focus for us. We’ve maintained sufficient capital on our insurance businesses to support our operations at a level such that capital adequacy is not a matter of concern to the rating agencies. We are pleased that during the first quarter A.M. Best changed the outlook on several grade American Property and Casualty companies from stable to positive.

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