AFG Posts $30 Million Q2 Profit

Cincinnati-based carrier American Financial Group Inc. reported second-quarter net earnings of of $30.5 million (44 cents per share).

The results included an after-tax charge of $28.5 million (41 cents per share) for the effect of a previously announced arbitration decision relating to an AFG insurance subsidiary’s share of a 1995 property claim, and a $6.7 million (10 cents per share) charge representing AFG’s portion of a charge recorded within the fixed annuity operations related to the negative effect of lower interest rates.

These charges were partly offset by net realized gains of $16.1 million (23 cents per share). AFG’s net earnings for last year’s second quarter were $12.1 million (17 cents per share) which included net realized losses of $28.3 million (42 cents per share).

Core earnings from insurance operations were $15.1 million (22 cents per share) for the second quarter of 2003 and included the above-mentioned charges and $3.1 million of investee earnings from Infinity Property and Casualty Corp. Reported core earnings from insurance operations for the previous year’s second quarter were $42.8 million (62 cents per share).

Excluding the above-mentioned charges, the results for the 2003 second quarter were 18 percent above the 2002 period primarily due to improved underwriting margins in the specialty businesses within the property/casualty insurance operations, partially offset by lower investment income.

The combined ratio of the P&C Group for the 2003 second quarter, before adding 10.6 points for the above-mentioned charge, was 96.5 percent compared to 101.1 percent for the same period a year ago.

The group’s premiums and underwriting results for the 2003 second quarter included AFG’s direct auto insurance companies through the date of their sale at the end of April.

The Specialty Group reported an underwriting profit for the 2003 second quarter with a combined ratio of 95.7 percent, an improvement of 2.3 points over the 2002 second quarter. The Group’s gross written premiums for the 2003 quarter grew approximately 24 percent compared with the 2002 period, reflecting the effect of continuing rate increases in most of its businesses. The Group’s net written premiums grew at a lower rate of 14 percent over the 2002 period, primarily due to a reinsurance agreement put into place in the 2002 fourth quarter.

AFG’s net earnings for the first half of 2003 were $55.6 million (80 cents per share) compared to $13.5 million (19 cents per share) for the same 2002 period. Core earnings from insurance operations for the first half of 2003 were $58.9 million (84 cents per share), including the charges for the arbitration decision and annuity operations, compared to $79.7 million ($1.15) for the 2002 period.

Excluding these charges, the underlying operating earnings for the first half of 2003 were about 18 percent higher than the 2002 period.

The combined ratio of AFG’s P&C Group for the first six months of 2003, before a 4.6 point charge for the arbitration decision, was 96.9 percent compared to 101.4 percent in the 2002 period. The Specialty Group’s combined ratio for the 2003 period was 96.8 percent; its gross written premiums increased about 22 percent over the 2002 period while net written premiums for this same period were only 14 percent higher due to certain reinsurance agreements mentioned above.

In other AFG news, Standard & Poor’s Ratings Services assigned its preliminary “BBB” senior debt, “BBB-” subordinated debt and “BB+” preferred stock ratings to the company’s recently filed $600 million universal shelf based on its good business position in its specialty property/casualty and life/annuity niche markets, improving operating results over the last 18 months, and strong capital adequacy.

Partially offsetting these factors is diminished earnings diversification at AFG following the IPO of its personal lines business in February 2003, poor historical operating performance, and adequate financial flexibility.

S&P also said that it assigned its ‘BBB’ senior debt rating to AFG’s 30-year, $175 million senior convertible notes, which were issued in June 2003.

In addition, S&P also affirmed all its other ratings on AFG and AFG’s subsidiaries. The outlook on all these companies is negative.

The negative outlook on AFG reflects the group’s historical difficulty in achieving consistently strong operating results as well as its relatively high financial leverage and low historical fixed-charge coverage. The current ratings are based on the expectation that 2003 operating results will be strong. Standard & Poor’s also expects that there will not be any further material charges or reserve development reported by the group in the second half of 2003 or in 2004.