CINCINNATI, Oct. 26 /PRNewswire-FirstCall/ -- American Financial
Group, Inc. (NYSE:AFG) Nasdaq today reported a net loss of $26.4
million ($.34 per share) in the 2005 third quarter, reflecting the
effect of an after-tax charge of $121.6 million ($1.55 per share)
resulting from strengthening reserves for asbestos and other
environmental exposures ("A&E") within AFG's run-off
operations. Core earnings from operations (described below) were
$88.6 million ($1.13 per share) for the third quarter of 2005 and
included an after- tax gain of $20.1 million ($.26 per share) from
the previously announced sale of Illinois coal reserves. Excluding
the effect of the coal property sale, the 2005 third quarter core
earnings of $68.5 million ($.87 per share) were 72% above last
year's third quarter results of $39.7 million ($.53 per share).
This increase reflects primarily improved underwriting results
within the specialty property and casualty insurance ("P&C")
operations which reported a combined ratio of 93.3%, 6.1 points
better than the 2004 period. The 2005 results include $26.0 million
($.33 per share) of after-tax losses from hurricanes Katrina and
Rita compared to $22.8 million ($.30 per share) of hurricane losses
in the 2004 period. (Logo:
http://www.newscom.com/cgi-bin/prnh/20041208/CLW086LOGO) Core
earnings from operations for the first nine months of 2005,
excluding the coal property sale, were $209.6 million ($2.68 per
share), compared to $148.8 million ($2.00 per share) for the 2004
period. The P&C specialty insurance operations reported a
combined ratio of 91.8% for the 2005 nine- month period, an
improvement of 3.8 points compared to the 2004 period. AFG's net
earnings for the three and nine month periods of 2004 were $138.2
million ($1.85 per share) and $267.3 million ($3.58 per share),
respectively, including an after-tax gain of $134 million ($1.80
per share) relating to the sale of Provident Financial Group shares
in its merger with National City Corporation. The 2004 results were
reduced by an after-tax charge of $33.8 million ($.45 per share) to
increase environmental reserves related to a predecessor's
historical railroad operations. Details of the financial results
may be found in the accompanying schedules. AFG presents "Core
earnings from operations", a non-GAAP financial measure commonly
used in the insurance industry, as a useful measure in addition to
the presentation of net earnings. Many investors and analysts focus
on this non-GAAP measure which sets aside items that may not be
indicative of core operations, such as net realized gains (losses)
on investments, discontinued operations (including the A&E
charge discussed above), cumulative effect of accounting changes
and other non-recurring items. AFG believes that excluding the
impact of these items is useful in analyzing operating trends. A
reconciliation of this non-GAAP measure to net earnings is included
in the accompanying summary of earnings. The company continues to
focus on increasing shareholders' equity through sales of certain
real estate assets. In addition to the recently completed sale of
coal property, the company has a definitive agreement to sell its
remaining coal interests in Ohio and Pennsylvania. An after-tax
gain of approximately $17 million is expected to be recorded in the
2005 fourth quarter for this sale. Furthermore, on October 13,
2005, the company completed the sale of the Driskill Hotel in
Austin, Texas. The company expects to recognize an after-tax gain
of approximately $9 million, after transaction costs and the
write-off of certain deferred annuity acquisition costs associated
with the gain recognition. This gain will be included in the
company's results in the fourth quarter of 2005. Craig Lindner
commented, "The hotel and coal property sales confirm our belief
that there is significant unrecognized appreciation in a number of
our real estate investments." Management now expects 2005 core
earnings, excluding the benefits from the sales of coal properties
and the Driskill Hotel, the A&E charges and any write-off of
deferred acquisition costs discussed in the following Business
Segment Results, to be between $3.55 and $3.70 per share. It is
premature to assess the magnitude of potential losses from
Hurricane Wilma. Management's previous guidance was between $3.40
and $3.70 per share. Looking forward, the company expects core
earnings in 2006 to be between $3.70 and $4.00 per share. Business
Segment Results The P&C specialty insurance operations
generated an underwriting profit of $43.1 million in the 2005 third
quarter, substantially higher than the same quarter last year. The
impact of hurricane losses on the combined ratio was about 6 points
in both periods. Gross written premiums for the 2005 quarter were
approximately 2% lower than the same period a year ago. While
certain specialty operations experienced solid volume growth,
overall premium levels for the specialty insurance operations
continued to be impacted by the moderating rate environment.
Overall average rates in the 2005 third quarter were down slightly
compared to the same period a year earlier. Net written premiums
for the 2005 quarter were 23% above the 2004 period, primarily
reflecting increased retention of premiums in the crop insurance
business. The Specialty Insurance Group's underwriting profit for
the first nine months of 2005 was $146.9 million, $78.8 million
higher than the 2004 period. For the 2005 nine month period, gross
written premiums were slightly lower than the same period a year
earlier while net written premiums were about 13% higher. Further
details of the P&C Specialty operations may be found in the
accompanying schedules. "Our sympathies continue to go out to those
who have been affected by the recent hurricanes," stated Carl
Lindner III. "As we previously announced, Hurricane Katrina
impacted our Specialty Group's underwriting results for the 2005
third quarter, and we experienced some additional losses from
Hurricane Rita, but to a much lesser extent. The majority of the
losses affected our Property and Transportation and Specialty
Financial businesses. However, the overall net losses from these
two hurricanes were somewhat comparable to our experience with the
four hurricanes that hit the Southeast last year. Due to the risk
selection strategy we've been following for several years, we have
experienced remarkably modest underwriting impact from some of the
worst hurricane seasons on record. "We are excited about the
acquisition of Farmers Crop Insurance Alliance which closed on
September 30, 2005. This acquisition supports our strategy of
building specialty insurance businesses and provides an opportunity
to expand one of our very profitable businesses where we have
significant experience and unique expertise. As part of our
organization, Farmers is continuing to do business in all states
where it currently operates and to support its customers' insurance
needs." The Property and Transportation businesses reported a
combined ratio of 98.1% for the 2005 third quarter, including 10.8
points for the effect of hurricane losses. The combined ratio for
the comparable 2004 period was 99.5% and included 16.6 points of
hurricane losses. Excluding the effect of hurricanes in both years,
the combined ratio for the 2005 quarter was 4.4 points higher than
in the 2004 third quarter, reflecting primarily the exceptionally
strong profitability reported by the crop insurance business in the
2004 period. Gross written premiums for the three and nine month
periods of 2005 were 6% and 2%, respectively, below the same 2004
periods, resulting primarily from the effect of lower commodity
prices earlier in the year which were used to establish crop
insurance coverages and lower volume resulting from competitive
pricing within the excess property insurance operations. These
decreases were partially offset by strong volume growth in the
transportation businesses. Net written premiums for the 2005 three
and nine month periods grew 69% and 39%, respectively, over the
2004 periods due primarily to considerably lower premiums ceded
under reinsurance agreements principally within the crop insurance
and inland marine operations. This group's combined ratio for the
first nine months of 2005 was comparable to the 2004 period,
excluding the effects of hurricane losses in both periods. The
California Workers' Compensation business continued to report
strong profitability, reflecting the benefit of the improving
claims environment resulting from the workers' compensation reforms
enacted in California. As expected, gross written premiums for the
2005 quarter were about 4% below the 2004 quarter resulting from
the lower rate environment. Through the first nine months of 2005,
gross written premiums grew 2% compared to the 2004 period as solid
volume growth and retention more than offset the lower rates. Rate
decreases in California, which are responsive to the improving
claims environment, averaged about 26% for the 2005 third quarter
and 14% through September 30, 2005. The company continues to
believe that the current rates are adequate to continue to generate
favorable returns. The Specialty Casualty group reported excellent
results for the 2005 third quarter with a combined ratio of 89.4%,
9.3 points better than the comparable 2004 period. This significant
improvement is the result of a substantial decrease in unfavorable
development within the executive and professional liability
operations. In addition, the excess and surplus and targeted
markets businesses continued to generate strong underwriting
profits. For the first nine months of the year, this group's
underwriting profit was $33.7 million, more than double the amount
in the 2004 period. For the 2005 three and nine month periods,
gross written premiums were 1% and 3%, respectively, below the 2004
periods, reflecting lower volume resulting from softer pricing in
many of the commercial casualty markets. The Specialty Financial
group's combined ratio in the third quarter of 2005 included 7.1
points from hurricane losses compared to 2.9 points in the 2004
third quarter. The group's results also continue to be impacted by
underwriting losses in the residual value business partly offset by
the ongoing strong profitability of the fidelity and crime and
financial institutions operations. Gross written premiums for the
2005 third quarter were 16% above the 2004 period as a result of
increases in the profitable fidelity and crime and leased equipment
lines. Gross written premiums for the first nine months of 2005
were 7% higher than in the 2004 period, including growth in the
dealer services and fidelity and crime businesses in the 2005 first
quarter. Despite the strong profitability in the lines mentioned,
the overall group is not targeted to return to profitability until
late 2006 as a result of the slower than expected recovery in our
residual value business. The Annuity, Supplemental Insurance and
Life Group reported core net operating earnings of $22.7 million
for the 2005 third quarter compared to $21.1 million for the 2004
third quarter. Core net operating earnings for the first nine
months of 2005 were $60.8 million, 14% above the comparable 2004
period, reflecting improved results in this group's annuity and
supplemental insurance lines of business. Statutory premiums of
$906 million for the first nine months of 2005 were 7% higher than
in the same period a year ago as a result of increased sales of
single premium annuities. Single premium annuity sales in 2005
include approximately $100 million of fixed annuity premiums from
policyholders of an unaffiliated company in rehabilitation who
chose to transfer their funds to the company in the 2005 first
quarter. Statutory premiums were about 6% lower in the third
quarter of 2005 compared to the same period in 2004, primarily
reflecting lower single premium fixed annuity sales, partially
offset by higher sales in the supplemental insurance lines. In the
fourth quarter of each year, this group performs a comprehensive
review of its major actuarial assumptions, including management's
expectation of long-term reinvestment rates. If the current
interest rate environment persists through the end of the year, the
company may be required to write-off deferred acquisition costs
related to its fixed annuity operations. Any such write-off is not
expected to have a material impact on the company's liquidity or
operations. A reconciliation of this group's "core net operating
earnings", a non-GAAP measure, to net income as well as further
details may also be found in the earnings release issued today by
Great American Financial Resources, Inc. (NYSE:GFR). AFG owns 82%
of GFR common stock and a proportional share of its earnings is
included in AFG's results. Asbestos and Environmental Reserve
Charge AFG recently completed a previously announced comprehensive
study of its asbestos and environmental exposures relating to the
run-off operations of its P&C group. AFG has undertaken
periodic reviews of its A&E reserves with the aid of a
respected outside actuarial firm and specialty outside counsel. As
a result of its study, AFG recorded a 2005 third quarter pre-tax
charge of $179 million, net of reinsurance recoverables. This
charge resulted in an increase in asbestos reserves of $124 million
and environmental and other mass tort reserves of $55 million. At
September 30, 2005, AFG's A&E reserves were $475 million, net
of reinsurance recoverables. At that date, AFG's three year
survival ratio was 21.8 times paid losses for the asbestos reserves
and 13.2 times paid losses for the total A&E reserves (16.8 and
10.6 times paid losses, respectively, excluding amounts associated
with the 2003 settlement of asbestos related coverage litigation
for A.P. Green Industries). This study reviewed open and closed
A&E claims at June 30, 2005. With respect to asbestos, it
considered non-products exposure, paid claims history, the pattern
of new claims, settlements and projected development. As has been
observed by others, the asbestos legal climate remains very
difficult to predict. While some progress has been made in state
asbestos tort reform, that progress has been somewhat offset by
increased claims costs, increased defense costs, the assertion of
non-products theories and an increasing number of claims against
small to mid-sized insureds. The primary driver of the increase in
AFG's asbestos reserves is the use by outside actuaries of evolving
methodologies, including developing parameters for estimating loss
adjustment expenses and reducing reliance on extrapolation
techniques. In addition, they have refined their procedure for
estimating the potential exposure due under both products and non
products claims. In the actuaries' view, this refined approach has
increased the company's indicated ultimate losses. The estimates of
industry ultimate losses and AFG's historic premium market share
have not changed since the 2001 study. In addition, there has been
no significant change in AFG's payment patterns. In the 2005 study,
the actuaries are giving additional weight to claims associated
with peripheral defendants. While no single claim presents an
unduly large exposure, the increase in the number of claims notices
from peripheral defendants has increased the projections of future
defense cost and loss exposure. While tort reform is helping in
some jurisdictions, the legal climate in many jurisdictions
continues to deteriorate, with larger verdict values being
experienced. Expanding coverage interpretations by some courts also
has led to increased exposure to some policies in certain
jurisdictions. With respect to the environmental claims, the study
considered projected exposure at both National Priorities List
(NPL) sites and non-NPL sites, historic payment patterns, patterns
of new claims, settlements and projected development. The increase
in environmental reserves is primarily due to an increase in clean
up costs at certain sites above prior expectations and a recent
unexpected increase in the number of new accounts that have been
reported to the company. In addition, projected development on a
handful of accounts exceeded estimates in the previous 2001 study.
This strengthening places AFG at a reserve level that is among the
industry's strongest when measured by traditional three year
survival ratio measurements. The company has sufficient capital to
address this reserve strengthening without having to raise
additional funds. Furthermore, its financial leverage remains below
30% and is expected to meet management's goal of 28% in the near
future. Management projects continuing strong liquidity and expects
to have in excess of $100 million in parent company cash at year-
end. Establishing reserves for A&E claims relating to policies
and participations in reinsurance treaties and former operations is
subject to uncertainties that are significantly greater than those
presented by other types of claims. Estimating ultimate liability
for asbestos claims presents a unique and difficult challenge to
the insurance industry due to, among other things, inconsistent
court decisions, an increase in bankruptcy filings as a result of
asbestos-related liabilities, novel theories of coverage, and
judicial interpretations that often expand theories of recovery and
broaden the scope of coverage. The casualty insurance industry is
engaged in extensive litigation over these coverage and liability
issues as the volume and severity of claims against asbestos
defendants continue to increase. While management believes that
AFG's reserves for A&E claims are a reasonable estimate of
ultimate liability for such claims, actual results may vary
materially from the amounts currently recorded due to the
difficulty in predicting the number of future claims, the impact of
recent bankruptcy filings, and unresolved issues such as whether
coverage exists, whether policies are subject to aggregate limits
on coverage, whether claims are to be allocated among triggered
policies and implicated years, and whether claimants who exhibit no
signs of illness will be successful in pursuing their claims. About
American Financial Group, Inc. 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, supplemental
insurance and life 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 and
their effect on future premiums, revenues, earnings and investment
activities; recoverability of asset values; expected losses and the
adequacy of reserves for asbestos, environmental pollution and mass
tort claims; rate increases and improved loss experience. 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, the
availability of capital, regulatory actions and changes in the
legal environment affecting AFG or its customers, tax law changes,
levels of natural catastrophes, terrorist activities, including any
nuclear, biological, chemical or radiological events, incidents of
war and other major losses, development of insurance loss reserves
and other reserves, particularly with respect to amounts associated
with asbestos and environmental claims, availability of reinsurance
and ability of reinsurers to pay their obligations, trends in
mortality and morbidity, competitive pressures, including the
ability to obtain rate increases, and changes in debt and claims
paying ratings. Conference Call The company will hold a conference
call to discuss 2005 third quarter results at 11:30 a.m. (ET)
today. Toll-free telephone access will be available by dialing
866-271-6130 (International dial in 617-213-8894). Please dial in
five to ten minutes prior to the scheduled start time of the call.
A replay of the call will also be available at around 1:30 p.m.
(ET) today until 8:00 p.m. on November 2, 2005. To listen to the
replay, dial 888- 286-8010 (International dial in 617-801-6888) and
provide the confirmation code 37646325. The conference call will
also be broadcast over the Internet. To listen to the call via the
Internet, go to AFG's website, http://www.afginc.com/, and follow
the instructions at the Webcast link within the Investor Relations
section. (Financial summaries follow) This earnings release and
additional Financial Supplements are available in the Investor
Relations section of AFG's web site: http://www.afginc.com/.
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES SUMMARY OF EARNINGS
(In Millions, Except Per Share Data) Three months ended Nine months
ended September 30, September 30, 2005 2004 2005 2004 Operating
revenues $1,082.1 $ 926.6 $2,991.5 $2,656.0 Costs and expenses
936.3 867.2 2,621.1 2,433.6 145.8 59.4 370.4 222.4 Related income
taxes 57.2 19.7 140.7 73.6 Core earnings from operations (a) 88.6
39.7 229.7 148.8 Other items, net of tax: Realized investment gains
6.6 140.2(b) 14.7 163.4(b) A&E charges (c) (121.6) (33.8)
(121.6) (33.8) Other - (4.1) (4.7) (5.5) Cumulative effect of
accounting changes(d) - (3.8) - (5.6) Net earnings $ (26.4) $ 138.2
$118.1 $267.3 Diluted Earnings (Loss) per Common Share: Core from
operations (a) $1.13 $.53 $2.94 $2.00 Realized investment gains .08
1.87(b) .18 2.19(b) A&E charges (c) (1.55) (.45) (1.55) (.46)
Other - (.05) (.06) (.07) Cumulative effect of accounting
changes(d) - (.05) - (.08) Net earnings $(.34) $1.85 $1.51 $3.58
Average number of Diluted Shares 78.7 74.8 78.3 74.6 a) Reflects
2005 3rd quarter losses from hurricanes of $26.0 million ($.33 per
share) and a gain of $20.1 million ($.26 per share) on the sale of
coal property and 2004 3rd quarter losses of $22.8 million ($.30
per share) from four hurricanes. Core earnings from operations,
excluding coal sale $68.5 $39.7 $209.6 $148.8 Core earnings per
share $.87 $.53 $2.68 $2.00 b) Includes $134 million ($1.80 per
share) gain on the Provident Financial Group investment related to
the merger with National City. c) Includes 2005 charges of $116.5
million ($1.49 per share) for the P&C A&E loss reserve
strengthening and $5.1 million ($.06 per share) for environmental
reserve strengthening related to a subsidiary's former
manufacturing operations, and a 2004 charge for the settlement of
environmental litigation related to a predecessor's historical
railroad operations. d) Reflects the implementation of an
accounting change in the third quarter related to utilizing the
equity method of accounting for investments in limited liability
companies as required by EITF 03-16, and in the first quarter
related to long duration contracts mandated by Statement of
Position 03-1. September 30, December 31, Selected Balance Sheet
Data: 2005 2004 Total Cash and Investments $16,254 $15,637
Long-term Debt $ 1,017 $ 1,029 Payable to Subsidiary Trusts
(Issuers of Preferred Securities) $78 $78 Shareholders' Equity $
2,403 $ 2,431 Book Value Per Share $ 31.02 $ 31.72 Book Value Per
Share (Excluding unrealized gains on fixed maturities) $ 30.21
$29.35 Common Shares Outstanding 77.5 76.6 AMERICAN FINANCIAL
GROUP, INC. P&C SPECIALTY GROUP UNDERWRITING RESULTS (In
Millions) Three months Nine Months ended Pct. ended Pct. September
30, Change September 30, Change 2005 2004 2005 2004 Gross written
premiums $1,080 $1,106 (2%) $2,826 $2,849 (1%) Net written premiums
$692 $560 23% $1,900 $1,686 13% Ratios (GAAP): Loss & LAE ratio
65.4% 72.3% 63.8% 66.4% Expense ratio 27.8% 26.9% 27.9% 29.0%
Policyholder dividend ratio .1% .2% .1% .2% Combined Ratio (a)
93.3% 99.4% 91.8% 95.6% Supplemental: Gross Written Premiums:
Property & Transportation $497 $528 (6%) $1,087 $1,106 (2%)
Specialty Casualty 360 364 (1%) 1,081 1,116 (3%) Specialty
Financial 133 115 16% 368 343 7% California Workers' Compensation
94 97 (4%) 290 284 2% Other (4) 2 n/a - - n/a $1,080 $1,106 (2%)
$2,826 $2,849 (1%) Net Written Premiums: Property &
Transportation $291 $172 69% $729 $525 39% Specialty Casualty 192
190 1% 567 582 (2%) Specialty Financial 108 91 18% 295 277 6%
California Workers' Compensation 85 87 (4%) 261 252 3% Other 16 20
(17%) 48 50 (4%) $692 $560 23% $1,900 $1,686 13% Combined Ratio
(GAAP): Property & Transportation 98.1% 99.5% 88.7% 90.0%
Specialty Casualty 89.4% 98.7% 93.9% 97.4% Specialty Financial
110.1% 105.2% 107.8% 102.5% California Workers' Compensation 66.7%
89.7% 75.5% 91.5% Aggregate Specialty Group 93.3% 99.4% 91.8% 95.6%
(a) Excludes discontinued operations. For the three and nine month
periods, includes 6.2 points and 2.3 points, respectively for the
effect of losses from hurricanes in 2005, and 6.4 points and 2.3
points, respectively, for the effect of losses from hurricanes in
2004. Supplemental Notes: 1. Property & Transportation includes
primarily physical damage and liability coverage for buses, trucks
and recreational vehicles, inland and ocean marine,
agricultural-related products and other property coverages. The
combined ratio includes the effect of hurricane losses for the 2005
three and ninth month periods of 10.8 points and 4.6 points,
respectively, and for the 2004 three and nine month periods of 16.6
points and 6.3 points, respectively. 2. Specialty Casualty includes
primarily excess and surplus, general liability, executive and
professional liability and customized programs for small to
mid-sized businesses. 3. Specialty Financial includes risk
management insurance programs for lending and leasing institutions,
surety and fidelity products and trade credit insurance. The
combined ratio includes the effect of hurricane losses for the 2005
three and ninth month periods of 7.1 points and 2.4 points,
respectively, and for the 2004 three and nine month periods of 2.9
points and .9 points, respectively. 4. California Workers'
Compensation consists of a subsidiary that writes workers'
compensation insurance primarily in the state of California. 5.
Other includes an internal reinsurance facility and discontinued
lines. http://www.newscom.com/cgi-bin/prnh/20041208/CLW086LOGO
http://photoarchive.ap.org/ DATASOURCE: American Financial Group,
Inc. CONTACT: Anne N. Watson, Vice President-Investor Relations of
American Financial Group, Inc., +1-513-579-6652 Web site:
http://www.afginc.com/ http://www.greatamericaninsurance.com/
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