Diane Weidner - Assistance VP, IR Carl Lindner III - Co-CEO Craig Lindner - Co-CEO Jeff Consolino - EVP and CFO.

Jay Cohen - Bank of America Amit Kumar - Macquarie.

Good day, ladies and gentlemen, and welcome to the American Financial Group Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a remainder, this conference call is being recorded.

I would now like to turn this conference call to Ms. Diane Weidner, Assistance Vice President of Investor Relations. Ma’am you may begin..

Thank you. Good morning and welcome to American Financial Group’s first quarter 2017 earnings results conference call. I’m joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group and Jeff Consolino, AFG’s EVP and Chief Financial Officer.

Our press release, investor supplement and webcast representation are posted on AFG’s website; these materials will be referenced in portions of the call. Before I turn the discussion over to Carl, I’d like to draw your attention to the notes on Slide 2 of our webcast.

Certain statements made during this call may be considered forward looking statements as defined under the private Security Litigation Reform Act of 1995. These statements are not guarantees of future performance.

Investors should consider the risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found on in AFG’s filings with the Securities and Exchange Commission which are also available on our website.

We may include references to core net operating earnings, a non-GAAP financial measure in our remarks or in response to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

And finally if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy such that it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I’m pleased to turn the call over to Carl Lindner III to discuss our results..

Good morning. We released our 2017 first quarter yesterday afternoon. Please turn to Slide 3 of the webcast slides for an overview. AFG’s results to a establish new first quarter records for earnings. And we are very pleased to reiterate-port core earnings per share of $1.69 share of 35% increase in the prior year period.

Improved results were attributable to higher operating earnings and profit and casualty segment and significantly higher year-over-year operating earnings in our annuity segment. First quarter annualized core operating return on equity was 13.1% for 2017 compared to 10.3% in ‘16.

Net earnings per diluted share were $1.72 per share which also established the new first quarter record for AFG. These results include $0.03 per share and non-core net realized gains on securities.

Craig and I are very pleased that the diversity of our business has enabled us to produce overall consistent strong operating results while also identifying opportunities to grow business in a meaningful way. We thank God, our talented management team and our great employees for helping us to achieve these results.

Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG’s financial future. We announced yesterday that our Board of Directors declared a special cash dividend of $1.50 per share of American Financial Group common stock payable in late May.

We will evaluate our excess capital position again in the second half of 2017. Strong operating profitability, superior investment performance and effective capital management resulted in growth and adjusted book value plus dividends of 42.18 per share during the quarter, a increase of 4%.

We are maintaining our 2017 core operating expenses guidance for AFG in the range of $6.20 and $6.70 per share. Craig and I’ll discuss our guidance for each segment of business later in the call. Our earnings guidance for 2017 assumes no change in the corporate tax rate of 35%.

We are encouraged by what we believe to be favorable tax reform proposals, standing from both the Trump Administration and Congress Republicans advocating a lower corporate tax rate.

And as I mentioned last quarter, we would like to see a level plan field for domestic insurers to compete with our short companies operating with an unfair tax advantage. Now please turn to Slides 4 and 5 of the webcast, which include an overview of results and our specialty property and casualty operations.

Beginning on Slide 4, you will see that gross and net written premiums increased 7% and 5% respectively in the 2017 first quarter, compared to the same quarter a year earlier. Property and casualty operating earnings were up $11 million compared to the prior year period.

Higher P&C and investment income and lower other expenses more than offset lower specialty property and casualty underwriting profit.

Other expenses were lower year-over-year primarily as a result of our first quarter 2000 gain on a sale hotel property and also non-controlling interest related to national interest rate recorded in the first quarter of last-year. First quarter underwriting profit was down 8% from the prior-year period.

Higher underwriting profit in a Property and Transportation Group was more than offset by lower underwriting profit in our specialty casualty and specialty financial groups.

First quarter 2017, combined ratio of 92.2 was about one point higher than 2016 first quarter, and included 2.8 points of favorable prior years reserve development and 0.7 seven tens of losses.

Despite in for first quarter catastrophe losses that were the highest in over 20 years I’m pleased that our CAT losses were in mind with AFG’s historical averages for this time of-year. Overall, renewal pricing in our Specialty Property and Casualty Group was flat during the first quarter. AFG’s overall loss ratio trend continues to be about 2%.

Given the diversity of our Specialty Property and Casualty Group businesses we have some areas that are running higher such as commercial auto liability, which is closer to 4% and we’ve seen increases in severity in our de novo book.

Even with the trends we are seeing we remain pleased with the overall results in our D&O business and improvement in National Interstate results. Although we’re not seeing any discernible overall trends in severity stemming from more active our patent -- friendly judiciary from time to time, we do see some anecdotal instances and inflated values.

We’re hopeful that new administrations digital appointments may help to mitigate the potential for an increase in late emerging service severity over time, at least in the federal courts. Now, I’d like to turn to Slide 5 to review few highlights from each of our Specialty Property and Casualty Group business groups.

Our Property and Transportation Group reported first quarter underwriting profitability of $43 million compared to $32 million in the prior-year period. Higher underwriting profits in our agricultural and transportation businesses contributed to these results.

We are pleased with the performance of National Interstate following the closing of merger transaction in the fourth quarter of last-year. National Interstate first quarter combined ratio improved points to 96.2% with no adverse result development in the quarter. And there’s a great deal of disruption in the commercial auto space right now.

We believe there could be some opportunities as we see some more competitors retrench. Catastrophe losses in this group were $5 million in the first quarter of 2017 compared to $6 million last-year -- last year’s first quarter.

First quarter 2017-gross and net written premiums in this group were 5% and 4% higher, respectively, than the comparable prior-year period. The growth in gross written premiums is primarily attributable to our transportation, property and inland Marine and Singapore branch operations.

Overall renewal rates in this group increased 3% in the first quarter of 2017. With most of our price increases coming from commercial auto and non-crop agribusiness operations. Although, National Interstate is achieving double-digit increases in its traditional passenger and commercial auto lines of business.

Renewal rates in captive in workers compensation businesses tempered those increases, resulting in an overall increase in renewal rates for national interstate of about 6% in the first quarter. Specialty Casualty Group reported first quarter underwriting profitability of $15 million compared to $29 million in the prior-year period.

Higher profitability and our workers compensation business and slightly improved year-over-year results in neon were more than offset by lower year-over-year profitability in our targeted markets, executive liability, and excess and surplus lines businesses. We continue to be very pleased with a strong profitability and our workers comp businesses.

Catastrophe losses for this group were $1 million in both the first quarters of ‘17 and ‘16. Gross and net written premiums for the first quarter of ‘17 were up 7% and 4%, respectively, compared to the same period in ‘16.

Higher premiums in our workers compensation businesses, primarily the result of rate increases in the state of Florida, and higher premiums in our targeted market businesses were partially offset by lower premiums in our Excess and Surplus Lines operations.

The decline in excess and surplus premiums were primarily the result of tougher underwriting standards and pricing related to our New York contractors business. Renewal pricing for this group was flat during the first quarter. Renewal rate increases nearly offset pricing decreases that continued in our other workers compensation businesses.

Underwriting profit and our Specialty Financial Group was $22 million in the first quarter compared to $23 million in last year’s first quarter.

Slight decrease was driven primarily by lower underwriting profitability in our financial institutions business, which was partially offset by higher underwriting profits in our fidelity and surety businesses. The businesses in this group contingent to achieve excellent underwriting margins.

First quarter ‘17 gross and net written premiums were up 12% and 13%, respectively, when compared period, primarily as a result of higher premiums in our financial institutions and surety businesses. Our renewal pricing in this group was down approximately 4% for the quarter, primarily the result of decreases in our financial institutions business.

Regulatory pressure, new competition from existing players and new entrance are contributing to tougher pricing in our lender placed mortgage property insurance books. Now please turn to Slide 6, for some review of our 2017 outlook for the Specialty Property and Casualty Group operations.

You will see that we continue to expect a combined ratio between 92% and 94%. We now expect growth in net written premiums to be in the range of 3% to 7% for the property and casualty specialty group overall, up from a range of 2% to 6%, we previously estimated.

Now taking a look at each sub segment, we continued to estimate a combined ratio in the range of 91% to 95% in our Property and Transportation Group. We now expect growth in net written premiums to be in the range of 2% to 6% and increase from the range of 0% to 3% previously estimated.

Higher commodity prices and organic growth in our crop operations were factors in raising our premium expectations for this group. Our Specialty Casualty Group is expected to produce a combined ratio in the range of 94% to 96% and growth in net written premiums in the range of 5% to 9% consistent with the prior estimate.

And we continue to estimate a combined ratio in our Specialty Financial Group in the range of 84% to 88%. Based on the results through the first three months, net written premiums are expected to grow by 2% to 6%, which is up from our original estimate of flat to up 4%.

We continue to expect overall property and casualty renewal pricing to be flat to up 1%. Additionally, we expect our property and casualty investment income to grow by 2% slightly lower than previous estimate. I’ll now turn the discussion over to Craig who would review the results in our annuity segment and AFG’s investment performance..

Thank you, Carl. I’ll start with a review of our annuity results for the first quarter beginning on Slide 7. The annuity segment reported $96 million in pretax operating earnings in the 2017 first quarter compared to $53 million in the first quarter of 2016, an increase of 81% year-over-year.

Under fair value accounting, variances from expectations of certain items, such as projected interest rates, hedge cost and surrenders, as well as changes in the stock market, have an impact on the accounting for fixed indexed annuities.

Although, these accounting adjustments have been recognized through AFG’s recorded core earnings, many of these adjustments are not economic in nature but rather impact the timing of reported results.

During the first quarter of 2017, the benefit of a higher stock market was offset by slightly lower interest rates resulting at a $2 million unfavorable impact to annuity operating earnings. In comparison, during the first quarter of 2016, a significant decrease in interest rates was in an unfavorable impact on earnings of $31 million.

Annuity earnings before the impact of fair value accounting were $98 million in the first quarter of 2017 compared to $84 million in the first quarter of 2016, an increase of 17%. AFG’s first quarter 2017 earnings and spreads benefited from the positive impact of certain investments required to be mark-to-market through earnings.

In addition, as you’ll see on Slide 8, AFG’s quarterly average annuity investments and reserves grew by approximately 11% and 12%, respectively, year-over-year. The benefit of this growth was partially offset by the run-off of higher yielding investments.

AFG’s Annuity segment reported statutory premiums of $1.3 billion in the first quarter of 2017, virtually unchanged from the first quarter of 2016. Higher premiums in the financial institutions channel more than offset lower premiums in the retail channel.

By comparison, premiums reported in the first quarter of 2016 reflected an uptick in sales, which occurred in advance of the effective date of rate decreases announced in early 2016.

We believe that our contingent strong premium production in 2017, reflects new products, additional staffing, and increased market shares within the existing financial institutions, offset in part by uncertainty about the effective date of the Department of Labor rule.

Additional information can also be found in AFG’s quarterly investor supplement posted on our website. Now please turn to Slide 9 for summary of the 2017 outlook for the Annuity segment.

We expect 2017 earnings before fair value accounting for indexed annuities to be in the range of $380 million to $400 million an increase from $375 million to $395 million previously estimated. Our forecast assumes modest increase in interest rate and the stock market.

We continue to estimate full year 2017 pretax annuity operating earnings will be in the range of $375 million to $395 million, an increase from $368 million reported in 2016. Large changes and interest rates and over the stock is compared to our expectations quickly to additional positive or negative impacts on the Annuity segments results.

We now expect the premiums for the full year of 2017 will be flat to up 10% from the $4.4 billion sold in 2016 an increase from our original estimate of flat to down 10%.

On April 4, 2017, the Department of Labor release a rule delaying the April 10, 2017 applicability date of the Fiduciary Rule to June 9, 2017, and further delayed certain requirements until January 1, 2018.

As a result, insurance only agents will be able to continue selling fixed-indexed annuities through the end of 2017, provided the agent acts in the customer’s best interest and receives only reasonable compensation.

The 2017 premium production I just mentioned anticipates the DOL rule becomes effective in its current form with certain parts the coming effective in June 2017 and a balanced becoming effective on January 1, 2018.

While AFG’s management continues to believe the adjustment required at the company and its distribution partners to comply with the rule will impact premiums, we do not believe the new rule will have a material impact on AFG’s results of operations.

We believe that our business model, which we adopted many years ago, positions us well in a changing regulatory environment. Now please turn to Slide 11 for a few highlights regarding our $43 billion investment portfolio.

AFG recorded first quarter 2017 net realized gains on securities of $2 million after-tax and after DAC, compared to net realized losses of $10 million in the comparable prior year period. As of March 31, 2017, unrealized gains on fixed maturities weighed $384 million after-tax and after DAC an unrealized gains on equities were $145 million after-tax.

In addition, in March of 2017, AFG sold a hotel property recognizing an after-tax gain of $7 million on the sale. This gain is recorded in other income and included in the specialty P&C core operating earnings.

As you see on Slide 12, our portfolio continues to be high quality with 89% of our fixed maturity portfolio rated investment grade and 98% without NAIC designation of one or two, the two highest categories.

We provided additional detailed information on the various segments of our investment portfolio in the Quarterly Investor Supplement on our website. I will now turn the discussion over to Jeff will ramp up our comments with an overview of our consolidated first quarter 2017 results and share a few comments about capital and liquidity..

Thank you, Craig. And good morning, on this very busy day for earnings conference call. Line 13 close together the earning takers Carl and Craig share with you. We are very pleased with the year-over-year growth and proud for keeping a record for AFG first quarter.

Slide 14, provides a reconciliation of core net operating earnings to net earnings attributable to shareholders. Let me turn to Slide 15. AFG’s adjusted book value per share was $54.98 as of March 31, 2017. As of the same date, adjusted tangible book value per share was $52.34.

Our capital adequacy, financial condition and liquidity remains strong, and we maintain sufficient capital in our insurance businesses to meet our commitments to the rating agencies. Our excess capital has grown into approximately $1.1 billion at March 31, 2017.

Our strong excess capital position and the absence of share repurchases during the quarter underlie our decision to pay $1.50 per share special dividend in the second quarter. The special dividend is payable on May 25, to shareholders of record on May 15. The aggregate dollar amount and a special dividend will be approximately $132 million.

The special dividend is in addition to the company’s regular quarterly cash dividend of $0.3125 per share, which was paid in late April. The payment of the special dividend we announced with our first quarter results will not preclude AFG’s consideration of special dividend later on this-year.

In other words, should our capital position and projected uses of capital justified, we remain open to special dividend later in 2017 in the absence of the significant transactions.

We returned $27 million to our shareholders through regular dividend during the quarter and approximately $4.1 million shares under our repurchase authorization as of May 1, 2017. As a reminder, we do plan to hold approximately $200 million to $300 million of dry powder to maintain flexibility for opportunity that may arise.

We will review all opportunities for deployment capital on a regular basis. On Slide 16, you’ll find a single page summary of our 2017 core earnings guidance. Let me remind you, AFG’s expected 2017 core operating results exclude non-core items such as realized investment gains and losses and other significant items.

That may not be indicative of ongoing operations. Now I’d now like to open the line for any questions..

[Operator Instructions] Our first question comes from the line of Jay Cohen from Bank of America. Sir your line is now open..

Two questions.

One, under the favorable development that we saw in the Property and Transportation segment, is that largely related to the crop business, true-up from 2016 growing year?.

Hi Jay this is Jeff. Certainly, the crop division was a meaningful contributor to that amount. But even excluding that we did see favorable development across the other business unit to make up our Property and Transportation Division..

Got it.

And then the second question, I guess on capital management, should we think about these special dividend sort of in lieu of your historic buybacks in other words the stock having appreciated and given evaluation, it’s more efficient or effective to give back money just through special dividends?.

This is Carl. Every year it’s a little different. We tried to what we think the highest and best and most effective use, right or wrong or otherwise. We thought that $1.50 special dividend in the first quarter was effective way to manage our capital return excess capital to the shareholders.

I think as I said in the past, when our capital gets at $1 billion or above or excess capital gets at $1 billion or above, we get more proactive and how we view things. So every year it’s a little different. Some years are heavier on acquisition side versus others. So each year is a different in a little different mix..

Our next question comes from the line of Amit Kumar with Macquarie. Your line is now open..

Just a quick follow-up questions. And I did miss the opening remarks. So if this has been discussed, so you tell me to look into the transcript. Number one, on the pricing discussion. I know you mentioned the average rates in the slide show.

Did you talk about that in a bit more detail in terms of what you’re seeing on the pricing versus lost cost trend on the segmental basis?.

It’s a question whether our overall loss ratio tends or ....

Yes, the pricing the renewal pricing by segments and lost cost trends?.

Okay. Overall, our pricing is pretty flat. Overall, when you look at the group, our overall loss ratio trend is about 2%. What that’s lost cause offset by exposure change if you look over our old book in that.

If you look at business by business, we generate where we think we need rate, we’re taking it in the Property and Transportation part of our business. We got about 3% in rate and certain parts of that segment like National Interstate, where we -- because of the commercial auto liability lost cost trends.

Our loss ratio trend in National Interstate, Jeff would be roughly 4% to 5%..

Yes, it will be 4% Carl..

Yes, around 4%. So and the commercial auto liability in the passenger side and our traditional transportation business we’re getting double-digit increases in that part of our business for instance. It’s just offset a little bit by our captive business and our workers comp business, we’re not getting a lot of rates.

So the combination of the two for National Interstate put us at about 6% in the first quarter. So I think most of that rate increase in the specialty Property and Transportation was focused on National Interstate and in that part of our business.

Specialty Casualty business, the rates were pretty flat workers comp at Florida workers comp rates are up, as we expect it and it’s offset -- those are offset a little bit by rate declines in our California workers comp business, and some rate declines in our strategic comp part of the business.

And when you put all that together, our workers comp rates were flattish to down just a little bit in that. So the good news is when you look at the California trends, the industry and our accident year combined ratios for the previous year’s keep improving some. So naturally, that means good things generally on that front.

So in the specialty financial part of our business rates were down 4% that’s primarily -- there’s a number of larger state regulators that feel that the lender place property rates in that part of our business or excessive and there has been some regulatory actions. I think -- you’ve seen that some of the commentary from insurance other companies.

So we’ve had some adjustments in rates on our lender placed mortgage property business that is the main thing behind the 4% decline in rate there. Lost cost trends, are really pretty denying when you look at the specialty financial part of our business in that.

In our business model, when our lender place property, I think part of that great decline is soft and by how we do business, where we have sliding scales commission, where at the walking out for instance, if the loss ratio is higher the commission gets adjusted.

So in our case, not all of a decline in rate goes takes away from the bottom line if you understand what I’m saying..

Yes. Makes sense. The only of the question that I have is I guess going back to Jay’s question on the special dividend. If I understood the opening remarks correctly, potentially or hypothetically we’re talking about a Q4 time line or is that a Q3 timeline.

I just wanted to be short year and are you talking about what is we actually talking about?.

I think last half of the year. We generally -- we get into the third quarter some time. The no -- we start to get an idea what are next year’s business plan is, what type of acquisition activity we have on our plate and some idea on our model excess capital. So we’ll see where we are and will take another look at it in the last half..

This is Jeff. Just go back over history we have paid a fourth quarter special dividend in each of the last five years. So I don’t think we want to commit ourselves to any one particular course of action on special dividend. But that has been the pattern over the last five years..

Got it. The final question I have is I’ll stop after this I think this call will be complete without asking you about your agriculture book. I haven’t seen anything out there, which would raise concern maybe you can give a quick update and then I’ll stop. .

Sure. This is Carl. It’s really early when we start seeing that. I think overall, we remain optimistic so far, but what you’re seeing in that. There has been in a few places the spring planting progress made a little bit slow, it’s about on par if you look a five year average.

The excess rainfall over the weekend will pride away thing to the Mississippi Valley a little bit. There is some freezing temperatures in Kansas, Oklahoma and Texas and some -- but we don’t expect significant damage from that. So when you look at the conditions, I think it’s early but it seems to be okay.

The other thing is commodity prices the other factor in revenue product is commodity prices or behaving. Others may -- if you look at the spring, discovery prices that generally slight decreases from the spring discovery prices when you look at corn and soybeans.

So when you put those two perspectives together, I think we are optimistic at ‘17 should be a solid year so far..

I would be remiss if would -- one thing that did change in our Property and Transportation guidance one of the drivers is we went from thinking that our crop business was going to be flattish to maybe down a little bit. Now we expect are crop premiums to be up around 9%.

So that was kind of a positive change in our respective and what happened there was there is a year-on-year change to base rate there was a positive change on the volatility factors and commodity prices from the previous spring in year discovery prices were up 3% on corn and up 15% on soybeans. So all those things changed our perspective..

[Operator Instructions] And our next question comes from the line of Jay Cohen with Bank of America. Sir, your line is now open. .

Just a follow up. Other property-casualty earnings obviously, that number was a bit better than had been running. Real estate gain help even if you take that out that number was a gain quite a bit better. Anything else unusual in there, one.

And then secondly, without National Interstate, can you guys give any sort of range for what we should expect that number to be?.

Jay this is Jeff Consolino. I’m very pleased you were able to answer a part of your question on that line item other income expense for property and casualty insurance is also, where we have historically have recorded National Interstate minority interest and that’s no longer going to teach you going forward.

So I wouldn’t call that unusual because it’s going to be the norm going forward. I would think your adjusted for the real estate gains in that line item and the absence of National Interstate minority interest being recorded there. That would be so-called the new normal for that line item..

And I’m showing no further questions and I would like to turn call back over to Diane Weidner for any further remarks..

Thank you, all for joining us this morning to discuss our first quarter results. This now conclude today’s call..

Ladies and gentlemen, thank you, for participating in this conference. This conclude today’s program. You may now disconnect. Everyone have a great day..