American Financial Group Earnings Call Insights: Reserve Releases and Current Loss Cost Inflation

American Financial Group Inc (NYSE:AFG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Reserve Releases

Stein – Macquarie: Yeah. It’s (Stein) calling on behalf of Amit. My first question is embedded in the guidance you say there are some items that are excluded, I was wondering do you include any implicit benefit of reserve releases in that 2013 guidance?

S. Craig Lindner – Co-CEO, President and Director: No, we do not.

Stein – Macquarie: You do no, okay. Then also looking forward to…

Carl H. Lindner III – Co-CEO, President and Director: Yeah, this is Carl. Our guidance would include our estimates of favorable reserve releases in this year.

Stein – Macquarie: But looking at the 2012 reserve release is sort of indicative of what might be included in that guidance for 2013?

Keith A. Jensen – SVP and CFO: We don’t really give any guidance on that. We feel good about our overall reserves and we baked in favorable reserve items into our earnings.

Stein – Macquarie: Then my next question relates to capital management looking forward for 2013, you mentioned sort of the excess capital but you have over rating agencies requirements. Would you expect the return to shareholders over 2013 to be more than 2012 with $400 million good benchmark to look after that number?

Carl H. Lindner III – Co-CEO, President and Director: We haven’t really defined any guidance or any specific number going forward into this year. Generally we have been opportunistic purchasers of our stock, when it’s been an attractive values to book value and it also is based off of our opportunities for growth and for startups and acquisitions during the year.

Current Loss Cost Inflation

Ryan Byrnes – Langen McAlenney: Just wanted to just drill down a little bit on I guess current loss cost inflation especially vis-a-vis seeing 4% to 6% rate increase in 2013, just wanted to see what kind of delta you guys are seeing or expecting?

Carl H. Lindner III – Co-CEO, President and Director: I think 2% to 3% overall probably – generally our loss cost trends have been pretty.

Keith A. Jensen – SVP and CFO: It varies by line, but even in California comp, I think we are even seeing kind of low single-digit inflation there. So, I think a fair assessment would be kind of 2 to 3 percentage overall.

Ryan Byrnes – Langen McAlenney: So, then with the rate increases obviously getting the earned part through, but you should be experiencing kind of underlying I guess margin expansion with the rate increases outpacing loss inflation, is that the right way to think about it?

Carl H. Lindner III – Co-CEO, President and Director: We think as they get churn through, it should have a positive impact.

Ryan Byrnes – Langen McAlenney: Then so I guess along those lines, especially in the Property and Transportation combined ratio guidance. It seems I guess the range is a little elevated compared to previous years, I guess excluding 2012. Just wanted to get your thoughts there? Are you guys increasing your lost estimates on crop there or is there anything interesting going on there, that I’m missing?

Carl H. Lindner III – Co-CEO, President and Director: I don’t think so. I think the because of the changes in the government really in the crop insurance program over the years, the margins are probably tighter in that business than what they have been maybe over the past five years in that. So, I think it probably reflects that. We’ve had – it seems like the whole industry has had a lot more in the way of catastrophe claims also. Things that conviction type storms things, so when we look at our guidance, I think that’s kind of reflect in that also.

Ryan Byrnes – Langen McAlenney: Then it’s my last question is with your crop insurance I think it’s a multi-year deal just want to see when that expires or if you can say that and then, obviously because it sounds like a bunch of reinsurers are wanting to write more crop reinsurance especially in 2013, just wanted to get your thoughts on…

Carl H. Lindner III – Co-CEO, President and Director: Keith, I think, it’s always up in this next — over the next 12 months or something?

Keith A. Jensen – SVP and CFO: Yeah, it is, its next year.